<PAGE>
MORTGAGE
ADVANTUS MORTGAGE SECURITIES FUND, INC.
ANNUAL REPORT TO SHAREHOLDERS DATED SEPTEMBER 30, 2000
[LOGO]
ADVANTUS-TM-
FAMILY OF FUNDS
FIXED
INCOME
[BACKGROUND GRAPHIC OF MONEY]
<PAGE>
ADVANTUS MORTGAGE SECURITIES FUND
TABLE OF CONTENTS
<TABLE>
<S> <C>
PERFORMANCE UPDATE 2
INVESTMENTS IN SECURITIES 9
STATEMENT OF ASSETS AND
LIABILITIES 12
STATEMENT OF OPERATIONS 13
STATEMENTS OF CHANGES IN NET
ASSETS 14
NOTES TO FINANCIAL STATEMENTS 15
INDEPENDENT AUDITORS' REPORT 20
FEDERAL INCOME TAX INFORMATION 21
SHAREHOLDER VOTING RESULTS 23
SHAREHOLDER SERVICES 24
</TABLE>
<PAGE>
LETTER FROM THE PRESIDENT [PHOTO]
Dear Shareholder:
All signs point to a soft landing in progress while the U.S. economy continues
to slow. The pressure on the Federal Reserve to further increase short-term
rates has diminished considerably. The Fed's earlier series of tightenings
appears to have successfully curbed the country's run-away growth. Inflation
remains in check; all in all, we continue to have a healthy backdrop for our
country's capital markets.
In the stock market, companies such as Intel and new economy leaders have seen
some dramatic corrections this quarter. This was a sideways correction for many,
downward for companies that disappointed investors. Value, real estate, and
small stocks' relative performance has improved this quarter. The market has
broadened, demonstrating that investors have acquired an increased appetite for
stocks other than large cap growth. We anticipate that the stock market will
remain volatile throughout the year and into next year. Equity investors should
adjust their expectations and not expect double-digit returns as the norm. We
expect positive returns for equities for the next 12 to 18 months, with above
average earnings growth.
Within the fixed income universe, corporate bonds have been the weakest
performing fixed income sector in 2000. An inverted yield curve (i.e., short-
term bonds have higher yields than long-term bonds), several Fed tightening
moves, increased event risk and equity market volatility have all negatively
impacted corporate bond performance this year. Mortgage-backed securities were
the top performer for the year followed by the government sector. We believe
that upcoming quarters will be a favorable environment for bonds.
We are continually watchful of economic and political events and circumstances
that would likely affect our new President. Significant political unrest,
military buildups, and violence in other countries may test the
President-elect's mettle. A strong Administration increases the odds that our
peace dividend will continue.
We advise investors to consider adding fixed income, value stocks and an
international component to their portfolio. As we've said before, we advise you
to stay well diversified and avoid big bets when the market environment is
uncertain.
Sincerely,
/s/ William N. Westhoff
William N. Westhoff
President, Advantus Funds
<PAGE>
ADVANTUS MORTGAGE SECURITIES FUND
PERFORMANCE UPDATE
[PHOTO]
KENT WEBER, CFA
PORTFOLIO MANAGER
The Advantus Mortgage Securities Fund is a mutual fund designed for investors
seeking a high level of current income consistent with prudent investment risk.
The Fund hopes to achieve its income objective by investing primarily in a
diversified portfolio of mortgage-related securities.
- Dividends declared daily and paid monthly.
- Capital gains distributions paid annually.
PERFORMANCE OVERVIEW
The performance of the Advantus Mortgage Securities Fund for the year ended
September 30, 2000 was as follows for the three classes of shares currently
outstanding:
<TABLE>
<S> <C>
CLASS A.......................... 7.70 PERCENT*
CLASS B.......................... 6.90 PERCENT*
CLASS C.......................... 6.89 PERCENT*
</TABLE>
This compares favorably to our peer group, Lipper U.S. Mortgage Funds, which
earned 6.40 percent*, and the Fund's benchmark, the Lehman Mortgage Index**,
which earned 7.43 percent*.
PERFORMANCE ANALYSIS
MARKET ANALYSIS
It's truly rare that at this point in the business cycle you would see
accelerating growth, rising productivity and declining Treasury supply unite to
create such dramatic challenges, as well as opportunities, for both debt issuers
and investors. Treasury yields have been on a roller coaster ride all year.
First, the Federal Reserve drove short-term interest rates up 1.25 percent.
Second, long-term interest rates first rose .50 percent then fell 1.0 percent.
Third, yield premiums on spread products (mortgage, corporate and agency)
bounced around as they climbed higher.
Consumers continued to do what they seem to do best - consume. This, in turn,
caused investors to grow increasingly uptight about the prospects of a
heavy-handed Federal Reserve in the face of liquidity challenged markets. With
Treasury supply falling, the yield curve proceeded into inverted territory and
spreads widened. Relative value measurements using benchmark Treasury securities
became less meaningful and investors were forced to search for new relative
value tools of measurement.
Ultimately, the power exerted by the shape of the yield curve, increased demand
for government guaranteed securities and the temperamental behavior of credit
markets dramatically influenced performance. At different points in time, each
of these themes single handedly segregated winning and losing sectors.
SECTOR ANALYSIS
When the ride finally stopped the mortgage market had enjoyed a nice run up in
value as its returns outpaced all other fixed income asset classes. The
commercial mortgage market was actually first in line with the residential
mortgage market close behind. The dual out-performance of the mortgage markets
in general was shaped by the following factors:
- Solid credit fundamentals and liquidity.
- High incremental income.
2
<PAGE>
- A market that remained strapped into a low supply/benign pre-pay
environment.
- Continued steepening of the yield curve as rates rallied.
- Selective tightening of yield premiums over Treasuries.
Among the non-index mortgage sectors, prime quality residential and commercial
assets were the top performers and for good reasons - real estate fundamentals
remain strong and the higher quality sectors have yet to exhibit the weakness
observed in corporate bonds or in the non-prime time mortgage sectors like home
equity and manufactured housing. Investors have been reasonably discriminate in
their credit assessments and are not punishing the general mortgage market for
the bad behavior of some of its distant cousins. In many respects, mortgages are
able to offer a more stable ride for those investors seeking shelter from
volatile spread sectors, or wanting to purchase more excitement and yield than
available in Treasuries.
HOLDING ANALYSIS
The decisions that proved to matter the most were the broad allocation decisions
between Ginnie Mae's and Conventional (Fannie Mae and Freddie Mac) 30-year and
15-year maturity, non-agency prime and sub-prime residential, and multi-tenant
and single-tenant retail commercial securities.
As for the Fund, being under weighed in Ginnie Mae pass-throughs initially
hindered our relative performance. However, being long duration, over weighed in
both 30-year securities and non-agency prime quality residential and commercial
mortgage securities more than made up this difference which enhanced relative
performance while reducing Fund volatility.
Investing in mortgage securities is more than just capturing high levels of
income, it is also about opportunity for capital gains through relative value
management. Our opportunistic fixed income strategy continues to employ that
philosophy. Tactically owning non-index mortgage sectors improves the breadth
and depth of our asset allocation decisions and works to strengthen our security
selection process. These virtues which include prudent diversification and
active management go a long way toward creating shareholder value.
*Historical performance is not an indication of future performance. These
performance results do not reflect the impact of Class A's maximum 4.5 percent
front-end sales charge or Class B's maximum 5 percent contingent deferred sales
charge. Investment returns and principal values will fluctuate so that shares
upon redemption may be worth more or less than their original cost.
**The Lehman Brothers Mortgage-Backed Securities Index is an unmanaged benchmark
composite which includes all fixed-rate securities backed by mortgage pools of
the Government National Mortgage Association (GNMA), Federal Home Loan Mortgage
Corporation (FHLMC) and Federal National Mortgage Association (FNMA).
3
<PAGE>
As of September 30, 2000, the Fund carried the following characteristics
relative to its Index:
<TABLE>
<CAPTION>
PORFOLIO INDEX
---------- ----------
<S> <C> <C>
Effective Duration (interest rate risk): 4.14 years 4.0 years
Negative Convexity (prepayment risk): -.50 -.80
Average Rating (credit risk): AA AAA
</TABLE>
OUTLOOK
The Federal Reserve's crusade to slow growth to achieve a soft-landing (no
recession) appears to be succeeding. Recent economic data suggests that consumer
demand is easing as industrial production plateaus. These events are leading
investors to conclude that short-term rates and inflation will peak around
current levels.
Overall, we do not anticipate much change in the interest rate environment near
term. However, longer term we do expect volatility to subside, the yield curve
to become more positively sloped, and credit issues to remain more company than
sector specific. These issues will remain front and center, but less of the
driving force they have been.
In this environment, mortgages remain an attractive asset class capable of
delivering competitive returns. The mortgage market continues to offer investors
an opportunity to participate in higher yields, high credit quality, excellent
liquidity, and insulation from the type of event risk challenging other markets.
These are the corner stones of what should make the mortgage market one of the
more attractive fixed income asset classes over the next twelve months.
4
<PAGE>
COMPARISON OF CHANGE IN VALUE OF A HYPOTHETICAL $10,000
INVESTMENT IN ADVANTUS MORTGAGE SECURITIES FUND, LEHMAN BROTHERS MORTGAGE-BACKED
SECURITIES INDEX AND CONSUMER PRICE INDEX
On the following three charts you can see how the total return for each of the
three classes of shares of the Advantus Mortgage Securities Fund compared to the
Lehman Brothers Mortgage-Backed Securities Index and the Consumer Price Index.
The lines in the Class A graph represent the cumulative total return of a
hypothetical $10,000 investment made on September 30, 1990 through
September 30, 2000. The lines in the Class B and Class C graphs represent the
cumulative total return of a hypothetical $10,000 investment made on the
inception date of Class B and Class C shares (August 19, 1994 and March 1, 1995,
respectively) through September 30, 2000.
CLASS A
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN:
<S> <C>
Class A:
One year 2.85%
Five year 5.76%
Ten year 7.35%
</TABLE>
<TABLE>
<CAPTION>
(THOUSANDS)
LEHMAN BROTHERS
MORTGAGE-BACKED
CLASS A CPI SECURITIES INDEX
<S> <C> <C> <C>
3/31/90 $10,000 $10,000 $10,000
9/30/90 $9,655 $10,068 $10,113
9/30/91 $11,201 $10,362 $11,824
9/30/92 $12,119 $10,694 $12,788
9/30/93 $13,504 $10,981 $13,797
9/30/94 $12,917 $11,313 $13,577
9/30/95 $14,665 $11,562 $15,412
9/30/96 $15,373 $11,909 $16,307
9/30/97 $16,967 $12,174 $17,943
9/30/98 $18,449 $12,347 $19,491
9/30/99 $18,866 $12,672 $19,931
9/30/00 $20,316 $13,102 $21,414
</TABLE>
CLASS B
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN:
<S> <C>
Class B:
One year 1.90%
Five year 5.73%
Since inception (8/19/94) 6.80%
</TABLE>
<TABLE>
<CAPTION>
(THOUSANDS)
LEHMAN BROTHERS
MORTGAGE-BACKED
CLASS B CPI SECURITIES INDEX
<S> <C> <C> <C>
8/19/94 $10,000 $10,000 $10,000
9/30/94 $9,928 $10,067 $9,874
9/30/95 $10,742 $10,289 $11,209
9/30/96 $11,297 $10,598 $11,859
9/30/97 $12,521 $10,833 $13,049
9/30/98 $13,633 $10,987 $14,175
9/30/99 $13,841 $11,276 $14,495
9/30/00 $14,956 $11,659 $15,573
</TABLE>
5
<PAGE>
CLASS C
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN:
<S> <C>
Class C:
One year 6.89%
Five year 5.97%
Since inception (3/1/95) 6.77%
</TABLE>
<TABLE>
<CAPTION>
(THOUSANDS)
LEHMAN BROTHERS
MORTGAGE-BACKED
CLASS C CPI SECURITIES INDEX
<S> <C> <C> <C>
3/1/95 $10,000 $10,000 $10,000
9/30/95 $10,791 $10,146 $10,793
9/30/96 $11,230 $10,450 $11,419
9/30/97 $12,314 $10,682 $12,565
9/30/98 $13,290 $10,834 $13,649
9/30/99 $13,489 $11,119 $13,957
9/30/00 $14,418 $11,497 $14,995
</TABLE>
The preceding charts are useful because they provide you with more information
about your investments. There are limitations, however. An index may reflect the
performance of securities that the Fund may not hold. Also, the index does not
deduct sales charges, investment advisory fees and other fund expenses, whereas
your Fund does. Performance presented for the Fund reflects the deduction of the
maximum 4.5 percent front-end sales charge for Class A and the maximum
applicable contingent deferred sales charge for Class B shares. Sales charges
pay for your financial professional's investment advice. Individuals cannot
invest in the index itself, nor can they invest in any fund which seeks to track
the performance of the index without incurring some charges and expenses.
Historical performance is not an indication of future performance. Investment
returns and principal values will fluctuate so that shares upon redemption may
be worth more or less than their original cost.
6
<PAGE>
TEN LARGEST BOND HOLDINGS
<TABLE>
<CAPTION>
MARKET % OF BOND
COMPANY VALUE PORTFOLIO
------- ------------ ---------
<S> <C> <C>
Countrywide Funding Corporation -
7.000%, 06/25/24.................................. $ 2,100,127 4.4%
Federal National Mortgage Association -
6.500%, 05/01/28.................................. 1,697,197 3.5%
Chase Mortgage Finance Corporation -
6.750%, 11/25/24.................................. 1,603,924 3.3%
Residential Accredit Loans, Inc. -
7.000%, 10/25/27.................................. 1,543,259 3.2%
Chase Mortgage Finance Corporation -
6.750%, 02/25/25.................................. 1,450,629 3.0%
Securitized Asset Sales, Inc.-144A Issue -
6.808%, 11/28/23.................................. 1,368,528 2.9%
Asset Securitization Corporation -
9.150%, 08/13/29.................................. 1,391,950 2.9%
Prudential Home Mortgage Securities -
6.500%, 10/25/23.................................. 1,288,250 2.7%
Fortress CBO Investments I Limited -
7.850%, 07/25/38.................................. 1,273,037 2.7%
Prudential Home Mortgage Security Company -
6.995%, 04/28/24.................................. 1,234,936 2.6%
----------- ----
$14,951,837 31.2%
=========== ====
</TABLE>
7
<PAGE>
PRUDENT SECTOR DIVERSIFICATION
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Non-Agency Prime Residential MBS 52.6%
Cash and Other Assets/Liabilities 2.1%
GNMA 12.7%
FNMA 7.3%
Preferred Stock 1.0%
FHLMC 2.4%
Vendee Mortgage Trust 3.2%
Other Agency Obligations 2.2%
Non-Agency Commercial MBS 14.1%
Non-Agency Subprime Residential MBS 2.4%
</TABLE>
SOLID LIQUIDITY
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Cash and Other Assets/Liabilities 2.1%
Preferred Stock 1.0%
Liquid 144A Issues 6.6%
Illiquid 144A Issues and
Other Private Placement Illiquid Issues 10.3%
Public Issues 80.0%
</TABLE>
HIGH QUALITY ASSETS
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
AAA Rated 35.9%
AA Rated 12.8%
A Rated 21.0%
BBB Rated 27.2%
Cash and Other Assets/Liabilities 2.1%
Preferred Stock 1.0%
</TABLE>
8
<PAGE>
ADVANTUS MORTGAGE SECURITIES FUND
INVESTMENTS IN SECURITIES
SEPTEMBER 30, 2000
(Percentages of each investment category relate to total net assets.)
<TABLE>
<CAPTION>
MARKET
PRINCIPAL COUPON MATURITY VALUE(A)
--------- ------- ---------- -----------
<C> <S> <C> <C> <C>
LONG-TERM DEBT SECURITIES (96.9%)
U.S. GOVERNMENT AND AGENCIES OBLIGATIONS (27.8%)
Federal Home Loan Mortgage Corporation (FHLMC) (2.4%)
$ 436,552 ................................................. 6.500% 12/01/23 $ 420,168
248,567 ................................................. 7.500% 04/01/30 248,398
500,000 ................................................. 7.500% 09/01/30 499,661
-----------
1,168,227
-----------
Federal National Mortgage Association (FNMA) (7.3%)
1,766,195 ................................................. 6.500% 05/01/28 1,697,197
672,101 ................................................. 6.500% 10/01/28 647,245
522,409 ................................................. 7.000% 02/01/29 514,519
443,108 ................................................. 7.500% 12/01/29 442,617
329,518 ................................................. 7.500% 04/01/30 328,986
-----------
3,630,564
-----------
Government National Mortgage Association (GNMA) (12.7%)
555,347 ................................................. 6.500% 11/15/28 535,327
1,165,429 ................................................. 6.500% 03/15/29 1,123,391
469,986 ................................................. 6.500% 03/15/29 453,033
895,863 ................................................. 6.500% 03/15/29 863,549
362,335 ................................................. 7.000% 03/15/29 357,155
379,590 ................................................. 7.000% 04/15/29 374,163
398,739 ................................................. 7.500% 08/15/29 400,198
983,132 ................................................. 7.500% 09/15/29 986,731
294,747 ................................................. 7.500% 12/15/29 295,826
845,148 ................................................. 7.875% 05/15/17 883,146
-----------
6,272,519
-----------
Vendee Mortgage Trust (3.2%)
1,010,804 (c).............................................. 7.208% 02/15/25 1,004,032
596,780 (c).............................................. 7.793% 02/15/25 604,752
-----------
1,608,784
-----------
Other Agency Obligations (2.2%)
243,669 Collateralized Mortgage Trust.................... 5.000% 07/01/18 226,456
832,000 Pleasant Hill California......................... 7.950% 09/20/15 849,896
-----------
1,076,352
-----------
Total U.S. government and agencies obligations (cost: $13,826,568).... 13,756,446
-----------
OTHER MORTGAGE-BACKED SECURITIES (69.1%)
Non-Agency Sub-Prime Residential Mortgage-Backed Securities (2.4%)
781,721 Banco Hipotecario Nacional 144A Issue (b)(d)..... 7.540% 05/31/17 722,490
491,657 Banco Hipotecario Nacional 144A Issue (b)(d)..... 7.916% 07/25/09 466,932
-----------
1,189,422
-----------
</TABLE>
See accompanying notes to investments in securities.
9
<PAGE>
ADVANTUS MORTGAGE SECURITIES FUND
INVESTMENTS IN SECURITIES - CONTINUED
<TABLE>
<CAPTION>
MARKET
PRINCIPAL COUPON MATURITY VALUE(A)
----------------------------------------------------------------------- ---------- -----------
OTHER MORTGAGE-BACKED SECURITIES--CONTINUED
<C> <S> <C> <C> <C>
Non-Agency Commercial Mortgage-Backed Securities (14.1%)
$ - Asset Securitization Corporation (e)............. 9.150% 08/13/29 $ 1,391,950
1,000,000 Covance, Inc..................................... 6.250% 12/01/22 986,346
1,350,000 Fortress CBO Investments I Limited-144A Issue
(d)............................................. 7.850% 07/25/38 1,273,037
1,000,000 Nomura Asset Securities Corporation.............. 7.709% 04/13/36 1,014,883
750,000 Nomura Asset Securities Corporation.............. 7.919% 04/13/36 760,318
205,382 Park Avenue Finance Corporation-144A
Issue (f)....................................... 7.580% 05/12/07 207,649
1,483,274 Securitized Asset Sales, Inc.-144A Issue (f)..... 6.808% 11/28/23 1,368,528
-----------
7,002,711
-----------
Non-Agency Prime Residential Mortgage-Backed Securities (52.6%)
1,246,509 Bear Stearns Mortgage Securities, Inc............ 6.750% 04/30/30 1,192,647
687,930 Bear Stearns Mortgage Securities, Inc............ 8.000% 11/25/29 686,086
1,509,924 Chase Mortgage Finance Corporation............... 6.750% 02/25/25 1,450,629
1,090,559 Chase Mortgage Finance Corporation-144A
Issue (f)....................................... 6.676% 03/28/25 1,033,327
1,667,923 Chase Mortgage Finance Corporation............... 6.750% 11/25/24 1,603,924
823,736 Countrywide Funding Corporation.................. 6.625% 02/25/24 774,032
1,240,685 Countrywide Funding Corporation.................. 7.250% 02/25/28 1,181,666
2,250,000 Countrywide Funding Corporation.................. 7.000% 06/25/24 2,100,127
1,150,000 CSFB Finance Company-144A Issue (d).............. 10.000% 11/15/05 989,000
1,262,906 DLJ Mortgage Acceptance Corporation.............. 6.750% 01/25/24 1,178,695
451,076 FBS Mortgage Corporation (d)..................... 7.280% 06/25/23 409,857
318,793 First Union Corporation.......................... 6.987% 09/25/26 304,556
699,784 GE Capital Mortgage Services,
Inc.-144A Issue (f)............................. 6.000% 11/25/08 643,185
482,453 GE Capital Mortgage Services, Inc................ 6.000% 04/25/09 464,249
391,522 GE Capital Mortgage Services, Inc................ 6.750% 11/25/28 358,348
1,234,521 GE Capital Mortgage Services, Inc................ 7.000% 03/25/26 1,192,214
677,556 GE Capital Mortgage Services, Inc................ 6.750% 09/25/12 633,867
602,594 Norwest Mortgage, Inc............................ 7.500% 12/25/26 577,201
996,292 Paine Webber Mortgage Acceptance Corporation..... 6.936% 02/25/24 945,052
558,705 Paine Webber Mortgage Acceptance Corporation..... 8.125% 07/25/09 553,962
1,101,767 Prudential Home Mortgage Securities.............. 6.050% 04/25/24 1,030,306
1,334,739 Prudential Home Mortgage Securities.............. 6.500% 10/25/23 1,288,250
1,253,658 Prudential Home Mortgage Securities.............. 6.500% 04/25/26 1,174,903
1,303,308 Prudential Home Mortgage Securities-144A
Issue (d)....................................... 6.995% 04/28/24 1,234,936
1,674,652 Residential Funding Mtg Sec...................... 7.000% 10/25/27 1,543,259
702,874 Residential Funding Mtg Sec...................... 7.000% 05/25/12 688,184
489,212 Residential Funding Mortgage..................... 7.250% 07/25/11 482,691
301,400 Wyoming Community Development Authority.......... 6.850% 06/01/10 300,523
-----------
26,015,676
-----------
Total other mortgage-backed securities (cost: $34,295,761)............ 34,207,809
-----------
Total long-term debt securities (cost: $48,122,329)................... 47,964,255
-----------
</TABLE>
See accompanying notes to investments in securities.
10
<PAGE>
ADVANTUS MORTGAGE SECURITIES FUND
INVESTMENTS IN SECURITIES - CONTINUED
<TABLE>
<CAPTION>
MARKET
SHARES VALUE(A)
------ -----------
<C> <S> <C>
PREFERRED STOCK (1.0%)
FINANCIAL (1.0%)
Real Estate Investment Trust (1.0%)
11,000 Duke Realty Investments, Inc. - 7.99%............ $ 479,532
-----------
Total preferred stock (cost: $550,000)........... 479,532
-----------
SHORT-TERM SECURITIES (.9%)
456,132 Federated Money Market Obligations Trust - Prime
Obligation Fund, current rate 6.460%............
456,132
-----------
Total short-term securities (cost: $456,132)..... 456,132
-----------
Total investments in securities
(cost: $49,128,461)(g).......................... $48,899,919
===========
</TABLE>
Notes to Investments in Securities
-----------------------------------
(a) Securities are valued by procedures described in note 2 to the financial
statements.
(b) The Fund held 2.4% of net assets in foreign securities as of September 30,
2000.
(c) Represents a debt security with a weighted average net pass-through rate
which varies based on the pool of underlying collateral. The rate disclosed
is the rate in effect at September 30, 2000.
(d) Represents ownership in an illiquid security, which has not been registered
with the Securities and Exchange Commission under the Securities Act of
1933. (See note 6 to the financial statements.) Information concerning the
illiquid securities held at September 30, 2000, which includes acquisition
date and cost, is as follows:
<TABLE>
<CAPTION>
ACQUISITION
SECURITY: DATE COST
--------- ----------- ---------------
<S> <C> <C>
Banco Hipotecario Nacional 144A 5/18/2000 $ 704,892
Issue*...............................
Banco Hipotecario Nacional 144A various 407,513
Issue*...............................
Prudential Home Mortgage Security 8/24/2000 1,210,447
Company 144A Issue*..................
Fortress CBO Investments I Limited 144A 7/26/2000 1,244,531
Issue*...............................
CSFB Finance Company 144A Issue*....... various 1,145,969
FBS Mortgage Corporation............... 8/15/2000 408,647
---------------
$ 5,121,999
===============
</TABLE>
* A 144A Issue represents a security which has not been registered with the
Securities and Exchange Commission under the Securities Act of 1933.
(e) Interest-only security that entitles holders to receive only interest on the
underlying mortgages. The principal amount of the underlying pool represents
the notional amount on which current interest is calculated. The yield to
maturity of an interest-only security is sensitive to the rate of principal
payments on the underlying mortgage assets. The rate disclosed represents
the market yield based upon the current cost basis and estimated timing and
amount of future cash flows.
(f) Long term debt security sold within terms of a private placement memorandum
exempt from registration under Section 144A of the Securities Act of 1933 as
amended, and may be sold only to dealers in that program or other accredited
investors. These securities have been determined to be liquid under
guidelines established by the board of directors.
(g) At September 30, 2000 the cost of securities for federal income tax purposes
was $49,146,240. The aggregate unrealized appreciation and depreciation of
investments in securities based on this cost were:
<TABLE>
<S> <C>
Gross unrealized appreciation.......... $ 538,976
Gross unrealized depreciation.......... (785,297)
---------
Net unrealized depreciation............ $(246,321)
=========
</TABLE>
11
<PAGE>
ADVANTUS MORTGAGE SECURITIES FUND
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 2000
<TABLE>
<S> <C>
ASSETS
Investments in securities, at market value - see accompanying
schedule for detailed listing
(identified cost: $49,128,461).................................. $48,899,919
Cash in bank on demand deposit................................... 114,200
Receivable for Fund shares sold.................................. 231,575
Receivable for investment securities sold (including paydowns)... 78,293
Accrued interest receivable...................................... 340,028
Other receivable................................................. 259
-----------
Total assets................................................. 49,664,274
-----------
LIABILITIES
Payable for Fund shares redeemed................................. 68,716
Dividends payable to shareholders................................ 79,388
Payable to Adviser............................................... 6,531
-----------
Total liabilities............................................ 154,635
-----------
Net assets applicable to outstanding capital stock............... $49,509,639
===========
Represented by:
Capital stock - authorized 10 billion shares (Class A - 2
billion shares, Class B - 2 billion shares, Class C - 2 billion
shares and 4 billion shares unallocated) of $.01 par value..... $ 47,727
Additional paid-in capital..................................... 50,408,396
Excess distributions of net investment income.................. (79,388)
Accumulated net realized losses from investments............... (638,554)
Unrealized depreciation on investments......................... (228,542)
-----------
Total - representing net assets applicable to outstanding
capital stock................................................ $49,509,639
===========
Net assets applicable to outstanding Class A shares.............. $31,814,077
===========
Net assets applicable to outstanding Class B shares.............. $14,436,460
===========
Net assets applicable to outstanding Class C shares.............. $ 3,259,102
===========
Shares outstanding and net asset value per share:
Class A - Shares outstanding 3,068,925......................... $ 10.37
===========
Class B - Shares outstanding 1,389,638......................... $ 10.39
===========
Class C - Shares outstanding 314,208........................... $ 10.37
===========
</TABLE>
See accompanying notes to financial statements.
12
<PAGE>
ADVANTUS MORTGAGE SECURITIES FUND
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED SEPTEMBER 30, 2000
<TABLE>
<S> <C>
Investment income:
Interest....................................................... $ 3,750,998
Dividends...................................................... 35,514
-----------
Total investment income.................................... 3,786,512
-----------
Expenses (note 4):
Investment advisory fee........................................ 260,837
Rule 12b-1 - Class A........................................... 78,806
Rule 12b-1 - Class B........................................... 138,474
Rule 12b-1 - Class C........................................... 34,497
Administrative services fee.................................... 74,400
Transfer agent and shareholder services fees................... 53,709
Custodian fees................................................. 3,934
Auditing and accounting services............................... 23,457
Legal fees..................................................... 11,814
Directors' fees................................................ 868
Registration fees.............................................. 33,816
Printing and shareholder reports............................... 49,284
Insurance...................................................... 3,634
Other.......................................................... 6,831
-----------
Total expenses............................................. 774,361
-----------
Less fees and expenses waived or absorbed by Adviser........... (180,596)
-----------
Total net expenses......................................... 593,765
-----------
Investment income - net.................................... 3,192,747
-----------
Realized and unrealized gains (losses) on investments:
Net realized losses on investments (note 3).................... (104,813)
Net change in unrealized appreciation or depreciation on
investments.................................................. 395,573
-----------
Net gains on investments................................... 290,760
-----------
Net increase in net assets resulting from operations............. $ 3,483,507
===========
</TABLE>
See accompanying notes to financial statements.
13
<PAGE>
ADVANTUS MORTGAGE SECURITIES FUND
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED SEPTEMBER 30, 2000 AND 1999
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
Operations:
Investment income - net.............. $ 3,192,747 $ 3,027,139
Net realized losses on investments... (104,813) (65,331)
Net change in unrealized appreciation
or depreciation on investments..... 395,573 (1,911,573)
----------- -----------
Increase in net assets resulting
from operations................ 3,483,507 1,050,235
----------- -----------
Distributions to shareholders from net
investment income:
Class A............................ (2,143,078) (2,161,384)
Class B............................ (840,527) (697,922)
Class C............................ (207,848) (248,515)
Tax return of capital:
Class A............................ (45,216) (25,263)
Class B............................ (17,734) (8,157)
Class C............................ (4,385) (2,905)
----------- -----------
Total distributions.............. (3,258,788) (3,144,146)
----------- -----------
Capital share transactions (notes 4 and
5):
Proceeds from sales:
Class A............................ 4,645,542 6,839,761
Class B............................ 3,287,217 6,350,510
Class C............................ 1,361,749 4,626,359
Proceeds from issuance of shares as a
result of reinvested dividends:
Class A............................ 1,420,400 1,450,093
Class B............................ 700,621 583,352
Class C............................ 182,179 225,596
Payments for redemption of shares:
Class A............................ (8,007,790) (5,521,715)
Class B............................ (3,695,328) (2,457,525)
Class C............................ (3,408,777) (3,893,536)
----------- -----------
Increase (decrease) in net assets
from capital share
transactions................... (3,514,187) 8,202,895
----------- -----------
Total increase (decrease) in net
assets......................... (3,289,468) 6,108,984
Net assets at beginning of year........ 52,799,107 46,690,123
----------- -----------
Net assets at end of year (including
excess distributions of net
investment income of ($79,388) and
($80,682), respectively)............. $49,509,639 $52,799,107
=========== ===========
</TABLE>
See accompanying notes to financial statements.
14
<PAGE>
ADVANTUS MORTGAGE SECURITIES FUND
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(1) ORGANIZATION
The Advantus Mortgage Securities Fund, Inc. (the Fund) is registered under
the Investment Company Act of 1940 (as amended) as a diversified, open-end
management investment company. The Fund's investment objective is to seek a high
level of current income consistent with prudent investment risk.
The Fund currently issues three classes of shares: Class A, Class B and
Class C shares. Class A shares are sold subject to a front-end sales charge.
Class B shares are sold subject to a contingent deferred sales charge payable
upon redemption if redeemed within six years of purchase. Class C shares are
sold without either a front-end sales charge or a contingent deferred sales
charge. Both Class B and Class C shares are subject to a higher Rule 12b-1 fee
than Class A shares. Both Class B and Class C shares automatically convert to
Class A shares at net asset value after a specified holding period. Such holding
periods decline as the amount of the purchase increases and range from 28 to 84
months after purchase for Class B shares and 40 to 96 months after purchase for
Class C shares. All three classes of shares have identical voting, dividend,
liquidation and other rights and the same terms and conditions, except that the
level of Rule 12b-1 fees charged differs between Class A, Class B and Class C
shares. Income, expenses (other than Rule 12b-1 fees) and realized and
unrealized gains or losses are allocated to each class of shares based upon its
relative net assets.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies followed by the Fund are summarized as
follows:
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts in
the financial statements. Actual results could differ from those estimates.
INVESTMENTS IN SECURITIES
The Fund's net asset value is generally calculated as of the close of normal
trading on the New York Stock Exchange (typically 3:00 p.m. Central Time).
Investments in securities traded on a national exchange are valued at the last
sales price on that exchange prior to the time when assets are valued;
securities traded in the over-the-counter market and listed securities for which
no sale was reported on that date are valued on the basis of the last current
bid price, by an independent pricing service or at a price deemed best to
reflect fair value as quoted by dealers who make markets in these securities.
When market quotations are not readily available, securities are valued at fair
value as determined in good faith under procedures adopted by the Board of
Directors. Short-term securities are valued at market value.
Security transactions are accounted for on the date the securities are
purchased or sold. Realized gains and losses are calculated on the
identified-cost basis. Dividend income is recognized on the ex-dividend date and
interest income, including amortization of bond premium and discount computed on
a level yield basis, is accrued daily.
FEDERAL TAXES
The Fund's policy is to comply with the requirements of the Internal Revenue
Code applicable to regulated investment companies and to distribute all of its
taxable income to shareholders. Therefore, no income tax provision is required.
The Fund's policy is to make required minimum distributions prior to
December 31, in order to avoid federal excise tax.
15
<PAGE>
ADVANTUS MORTGAGE SECURITIES FUND
NOTES TO FINANCIAL STATEMENTS - CONTINUED
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
Net investment income (loss) and net realized gains (losses) may differ for
financial statement and tax purposes primarily because of temporary book-to-tax
differences. The character of distributions made during the year from net
investment income or net realized gains (losses) may differ from their ultimate
characterization for federal income tax purposes. Also, due to the timing of
dividend distributions, the fiscal year in which amounts are distributed may
differ from the year that the income or realized gains were recorded by the
Fund.
For federal income tax purposes, the Fund has a capital loss carryover in
the amount of $620,775 which, if not offset by subsequent capital gains, will
expire September 30, 2003 through 2009. It is unlikely the Board of Directors
will authorize a distribution of any net realized capital gain until the
available capital loss carryover has been offset or expires.
DISTRIBUTIONS TO SHAREHOLDERS
Dividends from net investment income are declared daily and paid monthly in
cash or reinvested in additional shares. Realized gains, if any, are paid
annually.
(3) INVESTMENT SECURITY TRANSACTIONS
For the year ended September 30, 2000, purchases of securities and proceeds
from sales, other than temporary investments in short-term securities,
aggregated $31,423,303 and $35,276,925, respectively.
(4) EXPENSES AND RELATED PARTY TRANSACTIONS
The Fund has an investment advisory agreement with Advantus Capital
Management, Inc. (Advantus Capital or the Adviser), a wholly-owned subsidiary of
Minnesota Life Insurance Company (Minnesota Life). Under the agreement, Advantus
Capital manages the Fund's assets and provides research, statistical and
advisory services and pays related office rental and executive expenses and
salaries. The Fund has engaged PFPC Global Fund Services to act as its transfer
agent, dividend disbursing agent and bears the expense of such services. Prior
to May 1, 2000, Advantus Capital paid the expense related to transfer agent
services. The fee for investment management and advisory services is based on
the average daily net assets of the Fund at the annual rate of .475 percent on
the first $1 billion in net assets, .46 percent on the next $1 billion and
.45 percent on net assets in excess of $2 billion. Prior to May 1, 2000, the fee
was charged at an annual rate of .575 percent.
The Fund has adopted separate Plans of Distribution applicable to Class A,
Class B and Class C shares, respectively, relating to the payment of certain
expenses pursuant to Rule 12b-1 under the Investment Company Act of 1940 (as
amended). The Fund pays fees to Ascend Financial Services, Inc. (Ascend), the
underwriter of the Fund and wholly-owned subsidiary of Advantus Capital, to be
used to pay certain expenses incurred in the distribution, promotion and
servicing of the Fund's shares. The Class A Plan provides for a service fee up
to .25 percent of average daily net assets of Class A shares. The Class B and
Class C Plans provide for a fee up to 1.00 percent of average daily net assets
of Class B and Class C shares, respectively. The Class B and Class C
1.00 percent fee is comprised of a .75 percent distribution fee and a
.25 percent service fee.
The Fund also bears certain other operating expenses including outside
directors' fees, custodian fees, registration fees, printing and shareholder
reporting fees, legal, auditing and accounting services fees and other
miscellaneous expenses.
The Fund has entered into a shareholder and administrative services
agreement with Minnesota Life Insurance Company (Minnesota Life). Under this
agreement, effective May 1, 2000, the Fund pays an administrative service fee
equal to $6,200 per month to Minnesota Life for accounting, legal and other
administrative services which Minnesota Life provides.
16
<PAGE>
ADVANTUS MORTGAGE SECURITIES FUND
NOTES TO FINANCIAL STATEMENTS - CONTINUED
(4) EXPENSES AND RELATED PARTY TRANSACTIONS - (CONTINUED)
Advantus Capital directly incurs and pays the above operating expenses and
the Fund in turn reimburses Advantus Capital. Under the Advisory Agreement,
Advantus Capital has contractually agreed to absorb all Fund costs and expenses
which exceed .95% of Class A average daily net assets, 1.70% of Class B average
daily net assets and 1.70% of Class C average daily net assets through the
fiscal year of the Fund ending September 30, 2001. During the year ended
September 30, 2000, Advantus Capital contractually agreed to absorb $180,596 in
expenses that were otherwise payable by the Fund.
Sales charges received by Ascend for distributing the Fund's three classes
of shares amounted to $73,738.
As of September 30, 2000, Minnesota Life and subsidiaries and the directors
and officers of the Fund as a whole owned 631,592 Class A shares which
represents 20.6 percent of the total outstanding Class A shares.
Legal fees were paid to a law firm of which the Fund's secretary is a
partner in the amount of $10,406.
(5) CAPITAL SHARE TRANSACTIONS
Transactions in shares for the year ended September 30, 2000 and 1999 were
as follows:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
------------------- ------------------- -------------------
2000 1999 2000 1999 2000 1999
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Sold..................................... 455,324 647,824 322,781 602,510 133,531 441,108
Issued for reinvested distributions...... 139,741 138,280 68,417 55,494 17,903 21,471
Redeemed................................. (788,446) (525,955) (362,776) (232,573) (334,413) (369,048)
-------- -------- -------- -------- -------- --------
(193,381) 260,149 28,422 425,431 (182,979) 93,531
======== ======== ======== ======== ======== ========
</TABLE>
(6) ILLIQUID SECURITIES
At September 30, 2000, investments in illiquid securities are limited to 15%
of net assets at the time of purchase. Securities are valued by procedures
described in note 2. The aggregate value of illiquid securities held by the Fund
at September 30, 2000 was $5,096,252 which represents 10.3% of net assets.
Pursant to guidelines adopted by the Fund's Board of Directors, certain
unregistered securities are determined to be liquid and are not included within
the percent limitations specified above.
17
<PAGE>
ADVANTUS MORTGAGE SECURITIES FUND
NOTES TO FINANCIAL STATEMENTS - CONTINUED
(7) FINANCIAL HIGHLIGHTS
Per share data for a share of capital stock and selected information for
each period are as follows:
<TABLE>
<CAPTION>
CLASS A
-------------------------------------------
YEAR ENDED SEPTEMBER 30,
-------------------------------------------
2000 1999 1998 1997 1996
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year..... $ 10.30 $ 10.75 $ 10.54 $ 10.23 $ 10.36
------- ------- ------- ------- -------
Income from investment operations:
Net investment income................ .69 .69 .64 .70 .62
Net gains (losses) on securities
(both realized and unrealized)..... .09 (.45) .25 .33 (.13)
------- ------- ------- ------- -------
Total from investment operations... .78 .24 .89 1.03 .49
------- ------- ------- ------- -------
Less distributions:
Dividends from net investment
income............................. (.70) (.68) (.65) (.72) (.62)
Tax return of capital................ (.01) (.01) (.03) -- --
------- ------- ------- ------- -------
Total distributions................ (.71) (.69) (.68) (.72) (.62)
------- ------- ------- ------- -------
Net asset value, end of year........... $ 10.37 $ 10.30 $ 10.75 $ 10.54 $ 10.23
======= ======= ======= ======= =======
Total return (a)....................... 7.70% 2.26% 8.73% 10.37% 4.83%
Net assets, end of year
(in thousands)....................... $31,814 $33,617 $32,268 $28,089 $23,692
Ratio of expenses to average daily net
assets (b)........................... .95% .95% .95% .95% 1.26%
Ratio of net investment income to
average daily net assets (b)......... 6.81% 6.29% 6.02% 6.77% 6.05%
Portfolio turnover rate (excluding
short-term securities)............... 64.7% 127.1% 152.5% 85.1% 125.2%
</TABLE>
------------
(a) Total return figures are based on a share outstanding throughout the period
and assume reinvestment of distributions at net asset value. Total return
figures do not reflect the impact of front-end or contingent deferred sales
charges. For periods less than one year, total return presented has not
been annualized.
(b) The Fund's Adviser and Distributor voluntarily waived or absorbed $180,596,
$125,275, $134,706, $121,780, and $35,718 in expenses for the year ended
September 30, 2000, 1999, 1998, 1997, and 1996, respectively. If Class A
shares had been charged for these expenses, the ratio of expenses to
average daily net assets would have been 1.32%, 1.21%, 1.29%, 1.37%, and
1.40%, respectively, and the ratio of net investment income to average
daily net assets would have been 6.44%, 6.03%, 5.68%, 6.35%, and 5.91%,
respectively. If Class B shares had been charged for these expenses, the
ratio of expenses to average daily net assets would have been 2.07%, 1.94%,
1.99%, 2.07%, and 2.09%, respectively, and the ratio of net investment
income to average daily net assets would have been 5.69%, 5.33%, 5.04%,
5.71%, and 5.30%, respectively. If Class C shares had been charged for
these expenses, the ratio of expenses to average daily net assets would
have been 2.07%, 1.94%, 1.99%, 2.07%, and 2.08%, respectively, and the
ratio of net investment income to average daily net assets would have been
5.69%, 5.34%, 5.11%, 5.74%, and 5.32%, respectively.
18
<PAGE>
ADVANTUS MORTGAGE SECURITIES FUND
NOTES TO FINANCIAL STATEMENTS - CONTINUED
<TABLE>
<CAPTION>
CLASS B
-----------------------------------------
YEAR ENDED SEPTEMBER 30,
-----------------------------------------
2000 1999 1998 1997 1996
------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year..... $ 10.33 $ 10.77 $ 10.56 $10.24 $10.37
------- ------- ------- ------ ------
Income from investment operations:
Net investment income................ .61 .61 .57 .63 .54
Net gains (losses) on securities
(both realized and unrealized)..... .08 (.44) .24 .33 (.13)
------- ------- ------- ------ ------
Total from investment operations... .69 .17 .81 .96 .41
------- ------- ------- ------ ------
Less distributions:
Dividends from net investment
income............................. (.62) (.60) (.57) (.64) (.54)
Tax return of capital................ (.01) (.01) (.03) -- --
------- ------- ------- ------ ------
Total distributions................ (.63) (.61) (.60) (.64) (.54)
------- ------- ------- ------ ------
Net asset value, end of year........... $ 10.39 $ 10.33 $ 10.77 $10.56 $10.24
======= ======= ======= ====== ======
Total return (a)....................... 6.90% 1.51% 7.92% 9.65% 4.06%
Net assets, end of year
(in thousands)....................... $14,436 $14,057 $10,079 $6,079 $3,375
Ratio of expenses to average daily net
assets (b)........................... 1.70% 1.70% 1.70% 1.70% 2.01%
Ratio of net investment income to
average daily net assets (b)......... 6.06% 5.57% 5.33% 6.08% 5.38%
Portfolio turnover rate (excluding
short-term securities)............... 64.7% 127.1% 152.5% 85.1% 125.2%
<CAPTION>
CLASS C
--------------------------------------
YEAR ENDED SEPTEMBER 30,
--------------------------------------
2000 1999 1998 1997 1996
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year..... $10.31 $10.76 $10.55 $10.23 $10.37
------ ------ ------ ------ ------
Income from investment operations:
Net investment income................ .61 .61 .57 .63 .54
Net gains (losses) on securities
(both realized and unrealized)..... .08 (.45) .24 .33 (.14)
------ ------ ------ ------ ------
Total from investment operations... .69 .16 .81 .96 .40
------ ------ ------ ------ ------
Less distributions:
Dividends from net investment
income............................. (.62) (.60) (.57) (.64) (.54)
Tax return of capital................ (.01) (.01) (.03) -- --
------ ------ ------ ------ ------
Total distributions................ (.63) (.61) (.60) (.64) (.54)
------ ------ ------ ------ ------
Net asset value, end of year........... $10.37 $10.31 $10.76 $10.55 $10.23
====== ====== ====== ====== ======
Total return (a)....................... 6.89% 1.50% 7.92% 9.66% 4.07%
Net assets, end of year
(in thousands)....................... $3,259 $5,126 $4,343 $2,187 $1,139
Ratio of expenses to average daily net
assets (b)........................... 1.70% 1.70% 1.70% 1.70% 2.01%
Ratio of net investment income to
average daily net assets (b)......... 6.06% 5.58% 5.40% 6.11% 5.39%
Portfolio turnover rate (excluding
short-term securities)............... 64.7% 127.1% 152.5% 85.1% 125.2%
</TABLE>
------------
(a) Total return figures are based on a share outstanding throughout the period
and assume reinvestment of distributions at net asset value. Total return
figures do not reflect the impact of front-end or contingent deferred sales
charges. For periods less than one year, total return presented has not
been annualized.
(b) The Fund's Adviser and Distributor voluntarily waived or absorbed $180,596,
$125,275, $134,706, $121,780, and $35,718 in expenses for the year ended
September 30, 2000, 1999, 1998, 1997, and 1996, respectively. If Class A
shares had been charged for these expenses, the ratio of expenses to
average daily net assets would have been 1.32%, 1.21%, 1.29%, 1.37%, and
1.40%, respectively, and the ratio of net investment income to average
daily net assets would have been 6.44%, 6.03%, 5.68%, 6.35%, and 5.91%,
respectively. If Class B shares had been charged for these expenses, the
ratio of expenses to average daily net assets would have been 2.07%, 1.94%,
1.99%, 2.07%, and 2.09%, respectively, and the ratio of net investment
income to average daily net assets would have been 5.69%, 5.33%, 5.04%,
5.71%, and 5.30%, respectively. If Class C shares had been charged for
these expenses, the ratio of expenses to average daily net assets would
have been 2.07%, 1.94%, 1.99%, 2.07%, and 2.08%, respectively, and the
ratio of net investment income to average daily net assets would have been
5.69%, 5.34%, 5.11%, 5.74%, and 5.32%, respectively.
19
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Advantus Mortgage Securities Fund, Inc.:
We have audited the accompanying statement of assets and liabilities,
including the schedule of investments in securities, of the Advantus Mortgage
Securities Fund, Inc. (the Fund) as of September 30, 2000 and the related
statement of operations for the year then ended, the statements of changes in
net assets for each of the years in the two-year period then ended and the
financial highlights for each of the years in the five-year period then ended.
These financial statements and the financial highlights are the responsibility
of the Fund's management. Our responsibility is to express an opinion on these
financial statements and the financial highlights based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements and the financial highlights are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. Our procedures included
confirmation of securities owned as of September 30, 2000, by correspondence
with the custodian. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and the financial highlights
referred to above present fairly, in all material respects, the financial
position of the Fund as of September 30, 2000 and the results of its operations,
changes in its net assets and the financial highlights for the periods stated in
the first paragraph above, in conformity with accounting principles generally
accepted in the United States of America.
KPMG LLP
Minneapolis, Minnesota
November 10, 2000
20
<PAGE>
ADVANTUS MORTGAGE SECURITIES FUND
FEDERAL INCOME TAX INFORMATION (UNAUDITED)
The following information for federal income tax purposes is presented as an
aid to shareholders in reporting the distributions paid by the Fund in the
fiscal year ended September 30, 2000. Dividends for the 2000 calendar year will
be reported to you on Form 1099-Div in late January 2001. Shareholders should
consult a tax adviser on how to report these distributions for state and local
purposes.
CLASS A
<TABLE>
<CAPTION>
PER
PAYABLE DATE SHARE
------------ --------
<S> <C>
Income distributions - taxable as dividend income, 1.1%
qualifying for deduction by corporations.
October 31, 1999............................................ .0518
November 30, 1999........................................... .0585
December 31, 1999........................................... .0544
January 31, 2000............................................ .0638
February 28, 2000........................................... .0587
March 31, 2000.............................................. .0581
April 30, 2000.............................................. .0573
May 31, 2000................................................ .0661
June 30, 2000............................................... .0618
July 31, 2000............................................... .0598
August 31, 2000............................................. .0567
September 30, 2000.......................................... .0598
------
* The total distribution of $.7068 includes a tax return of
capital of $.0146. $.7068*
======
</TABLE>
CLASS B
<TABLE>
<CAPTION>
PER
PAYABLE DATE SHARE
------------ --------
<S> <C>
Income distributions - taxable as dividend income, 1.1%
qualifying for deduction by corporations.
October 31, 1999............................................ .0454
November 30, 1999........................................... .0523
December 31, 1999........................................... .0481
January 31, 2000............................................ .0575
February 28, 2000........................................... .0528
March 31, 2000.............................................. .0518
April 30, 2000.............................................. .0511
May 31, 2000................................................ .0600
June 30, 2000............................................... .0557
July 31, 2000............................................... .0535
August 31, 2000............................................. .0503
September 30, 2000.......................................... .0534
------
* The total distribution of $.6319 includes a tax return of
capital of $.0131. $.6319*
======
</TABLE>
21
<PAGE>
ADVANTUS MORTGAGE SECURITIES FUND
FEDERAL INCOME TAX INFORMATION (UNAUDITED) - CONTINUED
CLASS C
<TABLE>
<CAPTION>
PER
PAYABLE DATE SHARE
------------ --------
<S> <C>
Income distributions - taxable as dividend income, 1.1%
qualifying for deduction by corporations.
October 31, 1999............................................ .0453
November 30, 1999........................................... .0522
December 31, 1999........................................... .0480
January 31, 2000............................................ .0574
February 28, 2000........................................... .0527
March 31, 2000.............................................. .0517
April 30, 2000.............................................. .0510
May 31, 2000................................................ .0598
June 30, 2000............................................... .0556
July 31, 2000............................................... .0534
August 31, 2000............................................. .0503
September 30, 2000.......................................... .0534
------
* The total distribution of $.6308 includes a tax return of
capital of $.0130. $.6308*
======
</TABLE>
22
<PAGE>
ADVANTUS MORTGAGE SECURITIES FUND
SHAREHOLDER VOTING RESULTS
On April 17, 2000, a special meeting of shareholders of Advantus Mortgage
Securities Fund, Inc. was held. Shareholders of record on February 28, 2000,
were entitled to vote on the proposals described below.
(1) To elect a Board of Directors as follows:
<TABLE>
<CAPTION>
VOTES VOTES
DIRECTOR FOR WITHHELD
-------- --------- --------
<S> <C> <C>
Charles E. Arner....................... 3,357,967 227,423
Ellen S. Berscheid..................... 3,359,527 225,863
Ralph D. Ebbott........................ 3,360,064 225,326
Frederick P. Feuerherm................. 3,360,064 225,326
William N. Westhoff.................... 3,355,400 229,990
</TABLE>
(2) To approve the elimination or modification of the following investment
policies for:
<TABLE>
<CAPTION>
VOTES VOTES VOTES
FOR AGAINST WITHHELD
--------- ------- --------
<S> <C> <C> <C> <C>
A. Modify policy regarding borrowing and the
issuance of senior securities.................... 2,529,582 31,065 270,685
B. Modify policy regarding concentration in a
particular industry.............................. 2,530,029 31,695 269,608
C. Modify policy regarding investments in real
estate and commodities........................... 2,523,056 38,736 269,540
D. Modify policy regarding lending.................. 2,526,259 34,500 270,572
E. Eliminate policy restricting the pledging of
assets........................................... 2,510,430 48,224 272,678
F. Eliminate policy restricting margin purchases and
short sales...................................... 2,511,750 48,565 271,017
G. Eliminate policy limiting investment in
restricted securities and other illiquid
assets........................................... 2,516,028 34,436 280,867
H. Eliminate diversification policy................. 2,518,562 34,045 278,725
I. Eliminate policy regarding investments in issuers
that have been in operation for less than
3 years.......................................... 2,519,634 32,699 278,999
J. Eliminate policy addressing potential conflicts
of interest...................................... 2,506,470 42,732 282,130
K. Eliminate policy prohibiting investing in
companies for control............................ 2,515,935 45,622 269,774
L. Eliminate policy restricting investments in other
investment companies............................. 2,517,645 44,047 269,640
</TABLE>
(3) To approve an amendment to the investment advisory agreement between the
Fund and Advantus Capital Management, Inc., as described in the proxy
statement
<TABLE>
<CAPTION>
VOTES VOTES VOTES
FOR AGAINST WITHHELD
--------- ------- --------
<S> <C> <C> <C>
2,511,078 36,940 283,314
</TABLE>
(4) To ratify the selection of KPMG LLP as independent public accountants for
the Fund
<TABLE>
<CAPTION>
VOTES VOTES VOTES
FOR AGAINST WITHHELD
--------- ------- ---------
<S> <C> <C> <C>
3,308,147 9,627 267,617
</TABLE>
23
<PAGE>
SHAREHOLDER SERVICES
The Advantus Family of Funds offers a variety of services that enhance your
ability to manage your assets. Check each Fund's prospectus for the details of
the services and any limitations that may apply.
EXCHANGE PRIVILEGES: You can move all or part of your investment dollars from
one fund to any other Advantus Fund you own (for identical registrations within
the same share class) at any time as your needs change. Exchanges are at the
then current net asset value (exchanges from the Advantus Money Market Fund will
incur the applicable sales charge, if not previously subjected to the charge).
Shareholders may make twelve exchanges each calendar year without incurring a
transaction charge. Thereafter, there will be a $7.50 transaction charge for
each additional exchange within the calendar year.
INCOME DISTRIBUTION FLEXIBILITY: You can have your fund dividends and other
distributions automatically reinvested with no sales charge, direct them from
one Advantus Fund to any other you own within the Fund family or, if you desire,
we'll pay you in cash.
SYSTEMATIC WITHDRAWAL PLAN: You can set up a plan to receive a check at
specified intervals from your fund account - subject to minimum guidelines.
Depending upon the performance of the underlying investment options, the value
may be worth more or less than the original amount invested when withdrawn.
DIRECT DIVIDEND DEPOSITS: At your request we will deposit your dividends or
systematic withdrawals directly into your checking or savings account instead of
sending you a check.
TELEPHONE EXCHANGE: You may move money from one Advantus account to any other
Advantus account you own (with identical registrations within the same share
class) just by calling our toll-free number. The Telephone Exchange privilege
will automatically be established unless otherwise indicated on the Account
Application. Telephone Exchange may be changed (added/deleted) at any time by
submitting a request in writing.
SYSTEMATIC EXCHANGE: You may move a set amount of money monthly or quarterly
from one Advantus Fund to another Advantus Fund (with identical registrations
within the same share class) to diversify your investment portfolio and take
advantage of "dollar-cost averaging".
AUTOMATIC PAYMENT OF INSURANCE PREMIUMS: You may automatically pay your
Minnesota Life insurance premiums from your Advantus Money Market account.
REDUCED SALES CHARGES: Letter of Intent, combined purchases with spouse,
children or single trust estates, and the Right of Accumulation make it possible
for you to reduce the sales charge, if any.
AUTOMATIC INVESTMENT PLAN: This special purchase plan enables you to open an
Advantus Fund account for as little as $25 and lower your average share cost
through "dollar-cost averaging." (Dollar-cost averaging does not assure a
profit, nor does it prevent loss in declining markets.) The Automatic Investment
Plan allows you to invest automatically monthly, semi-monthly or quarterly from
your checking or savings account.
IRAs, OTHER QUALIFIED PLANS: You can use the Advantus Family of Funds for your
Traditional, Roth or Education Individual Retirement Account or other qualified
plans including: SEP IRA's, SIMPLE IRA's, Profit Sharing, 401(k) Money Purchase
or Defined Benefit plans.
TELEPHONE REDEMPTION: You may call us and redeem shares over the phone. The
proceeds will be sent by check to the address of record for the account or wire
transferred to your bank of record for the account. Wire transfers are for
amounts over $500. The prevailing wire charge will be added to the withdrawal
amount. The Telephone Redemption privilege will automatically be established
unless otherwise indicated on the Account Application. Telephone Redemption may
be changed (added/deleted) at any time by submitting a request in writing. To
have the redemption automatically deposited into your checking account, please
send a voided check
24
<PAGE>
from your bank. Depending on the performance of the underlying investment
options, the value may be worth more or less than the original amount invested
upon redemption. Some limitations apply, please refer to the prospectus for
details.
ACCOUNT UPDATES: You'll receive written confirmation of every investment you
initiate and quarterly statements to help you track all of your Advantus Fund
investments and annual tax statements. Semi-annual and annual reports will
provide you with portfolio information, fund performance data and the current
investment outlook.
TOLL-FREE SERVICE LINE: For your convenience in obtaining information and
assistance directly from Advantus Shareholder Services, call 1-800-665-6005.
Advantus Account Representatives are available Monday through Friday from 7:30
a.m. to 5:15 p.m. Central Time. Our voice response system is available 24 hours,
seven days a week. This system allows you to access current net asset values,
account balances and recent account activity.
INTERNET ADDRESS: www.AdvantusFunds.com
HOW TO INVEST
You can invest in one or more of the eleven Advantus Funds through a local
Registered Representative of Ascend Financial Services, Inc., distributor of the
Funds. Contact your representative for information and a prospectus for any of
the Advantus Funds you are interested in. To find a Registered Representative
near you, call the toll-free service line (1-800-665-6005) or visit
www.AdvantusFunds.com.
MINIMUM INVESTMENTS: Your initial investment in any of the Advantus Funds can
be as small as $25 when you use our Automatic Investment Plan. Minimum lump-sum
initial investment is $250. Minimum subsequent investment is $25.
THE FUND'S MANAGER
Advantus Capital Management, Inc., investment adviser to the Fund, selects and
reviews the Fund's investments and provides executive and other personnel for
the Fund's management. (For the Advantus International Balanced Fund, Inc.,
Advantus Enterprise Fund, Inc., and Advantus Venture Fund, Inc. the sub-adviser,
Templeton Investment Counsel, Inc., Credit Suisse Asset Management, LLC, and
State Street Research & Management Company, respectively, selects the Fund's
investments.)
Advantus Capital Management, Inc. manages twelve mutual funds containing $3.7
billion in assets in addition to $11.5 billion in assets for other clients.
Advantus Capital's seasoned portfolio managers average more than 14 years of
investment experience.
ADVANTUS FAMILY OF FUNDS
Advantus Bond Fund
Advantus Horizon Fund
Advantus Spectrum Fund
Advantus Enterprise Fund
Advantus Cornerstone Fund
Advantus Money Market Fund
Advantus Mortgage Securities Fund
Advantus International Balanced Fund
Advantus Venture Fund
Advantus Index 500 Fund
Advantus Real Estate Securities Fund
25
<PAGE>
THIS REPORT HAS BEEN PREPARED FOR SHAREHOLDERS AND MAY BE DISTRIBUTED
TO OTHERS ONLY IF PRECEDED OR ACCOMPANIED BY A CURRENT PROSPECTUS.
READ THE PROSPECTUS CAREFULLY BEFORE YOU INVEST.
[ADVANTUS -TM- FAMILY OF FUNDS]
ASCEND FINANCIAL SERVICES, INC.,
SECURITIES DEALER, MEMBER NASD/SIPC
400 ROBERT STREET NORTH
ST. PAUL, MN 55101-2098
1-800-AFS-1838
(1-800-237-1838)
<PAGE>
<TABLE>
<S> <C>
ASCEND FINANCIAL SERVICES, INC. PRESORTED STANDARD
400 ROBERT STREET NORTH U.S. POSTAGE PAID
ST. PAUL, MN 55101-2098 ST. PAUL, MN
PERMIT NO. 3547
FORWARDING SERVICE REQUESTED
</TABLE>
F.48643 Rev. 11-2000
