STATEMENT OF ADDITIONAL INFORMATION
ADVANTUS HORIZON FUND, INC.
ADVANTUS SPECTRUM FUND, INC.
ADVANTUS MORTGAGE SECURITIES FUND, INC.
ADVANTUS MONEY MARKET FUND, INC.
ADVANTUS BOND FUND, INC.
ADVANTUS CORNERSTONE FUND, INC.
ADVANTUS ENTERPRISE FUND, INC.
ADVANTUS INTERNATIONAL BALANCED FUND, INC.
May 1, 2000
As Supplemented July 31, 2000
This Statement of Additional Information is not a prospectus. This Statement
of Additional Information relates to the separate Prospectuses dated May 1,
2000 and should be read in conjunction therewith.
Each Fund's audited Annual Report dated September 30, 1999, which either
accompanies this Statement of Additional Information or has previously been
provided to the investor to whom this Statement of Additional Information is
being sent, is incorporated herein by reference.
A copy of each Prospectus and Annual Report may be obtained by telephone from
Advantus Shareholder Services at (800) 665-6005 or by writing to the Funds at
Advantus Funds Group, P.O. Box 9767, Providence, Rhode Island 02940-5059.
TABLE OF CONTENTS
GENERAL INFORMATION AND HISTORY 5
INVESTMENT OBJECTIVES AND POLICIES 5
Equity Securities of Small Capitalization Companies 5
Debt and Money Market Securities - Advantus Multiple Class Funds 6
Low Rated Securities 7
Convertible Securities 8
Money Market Securities - Money Market Fund 9
U.S. Government Obligations 10
Obligations of Non-Domestic Banks 10
Variable Amount Master Demand Notes 10
Mortgage-Related Securities 11
U.S. Government Mortgage-Related Securities 12
Non-Governmental Mortgage-Related Securities 12
Collateralized Mortgage Obligations 13
Stripped Mortgage-Backed Securities 15
Asset-Backed and Stripped Asset-Backed Securities 16
Direct Investments in Mortgages - Whole Loans 17
Foreign Securities 17
Investments in Russia 19
Currency Exchange Transactions 21
Foreign Currency Hedging Transactions 22
Closed-End Investment Companies 23
Loans of Portfolio Securities 23
Restricted and Illiquid Securities 24
When-Issued Securities and Forward Commitments 24
Mortgage Dollar Rolls 26
Repurchase Agreements 27
Reverse Repurchase Agreements 27
Futures Contracts and Options on Futures Contracts 28
Options 31
Warrants 34
Warrants with Cash Extractions 34
Index Depositary Receipts 35
Short Sales Against the Box 35
Defensive Purposes 35
INVESTMENT RESTRICTIONS 36
Fundamental Restrictions 36
Non-Fundamental Restrictions 38
PORTFOLIO TURNOVER 39
DIRECTORS AND EXECUTIVE OFFICERS 40
DIRECTOR LIABILITY 42
INVESTMENT ADVISORY AND OTHER SERVICES 43
General 43
Control and Management of Advantus Capital and Ascend Financial 43
Investment Advisory Agreement 43
International Fund Sub-Adviser - Templeton Counsel 47
International Fund Investment Sub-Advisory Agreement - Templeton Counsel 48
Enterprise Fund Sub-Adviser - CSAM 48
Enterprise Fund Investment Sub-Advisory Agreement - CSAM 49
Code of Ethics 49
Distribution Agreement 49
Payment of Certain Distribution Expenses of the Funds 50
Transfer Agent and Administrative Services 54
MONEY MARKET FUND AMORTIZED COST METHOD OF PORTFOLIO VALUATION 55
PORTFOLIO TRANSACTIONS AND ALLOCATION OF BROKERAGE 56
Horizon Fund, Spectrum Fund, Cornerstone Fund and Enterprise Fund 56
Mortgage Securities Fund and Bond Fund 56
Money Market Fund 56
International Fund 57
Generally 57
CALCULATION OF PERFORMANCE DATA 60
Money Market Fund 60
Advantus Multiple Class Funds 60
CAPITAL STOCK AND OWNERSHIP OF SHARES 65
HOW TO BUY SHARES 66
SALES CHARGES 69
Class A Shares 69
Class B Shares 70
Class C Shares 72
Other Payments to Broker-Dealers 73
NET ASSET VALUE AND PUBLIC OFFERING PRICE 73
REDUCED SALES CHARGES 78
Right of Accumulation-Cumulative Purchase Discount 78
Letter of Intent 78
Combining Purchases 79
Group Purchases 79
Waiver of Sales Charges For Certain Sales of Class A Shares 79
EXCHANGE AND TRANSFER OF FUND SHARES 80
Systematic Exchange Plan 81
SHAREHOLDER SERVICES 81
Open Accounts 81
Automatic Investment Plan 81
Group Systematic Investment Plan 82
Retirement Plans Offering Tax Benefits 82
Systematic Withdrawal Plans 83
REDEMPTIONS 84
Signature Guarantee 85
Contingent Deferred Sales Charge 85
Telephone Redemption 86
Internet Redemption 86
Delay in Payment of Redemption Proceeds 86
Fund's Right to Redeem Small Accounts 86
Checkwriting 87
Automatic Premium Payments 87
Reinstatement Privilege 87
TELEPHONE TRANSACTIONS 88
INTERNET TRANSACTIONS 88
DISTRIBUTIONS AND TAX STATUS 89
Dividends and Capital Gains Distributions 89
Taxation - General 90
FINANCIAL STATEMENTS 92
APPENDIX A - MORTGAGE-RELATED SECURITIES A-1
Underlying Mortgages A-1
Liquidity and Marketability A-1
Average Life A-1
Yield Calculations A-2
APPENDIX B - BOND AND COMMERCIAL PAPER RATINGS B-1
Bond Ratings B-1
Commercial Paper Ratings B-2
APPENDIX C - FUTURES CONTRACTS C-1
Example of Futures Contract Sale C-1
Example of Futures Contract Purchase C-1
Tax Treatment C-2
GENERAL INFORMATION AND HISTORY
Advantus Horizon Fund, Inc. ("Horizon Fund"), Advantus Spectrum Fund,
Inc. ("Spectrum Fund"), Advantus Mortgage Securities Fund, Inc. ("Mortgage
Securities Fund"), Advantus Money Market Fund, Inc. ("Money Market Fund"),
Advantus Bond Fund, Inc. ("Bond Fund"), Advantus Cornerstone Fund, Inc.
("Cornerstone Fund"), Advantus Enterprise Fund, Inc. ("Enterprise Fund") and
Advantus International Balanced Fund, Inc. ("International Fund"),
collectively referred to as the "Funds," are open-end diversified management
investment companies, commonly called mutual funds. The Funds, together with
three other mutual funds which share the same investment adviser, are members
of a family of mutual funds known as the "Advantus Funds." Each of the
Advantus Funds, excluding Money Market Fund and Advantus Real Estate
Securities Fund, Inc. ("Real Estate Fund"), offers more than one class of
shares (the "Advantus Multiple Class Funds"). The Advantus Multiple Class
Funds currently offer three classes of shares (Class A, Class B and Class C).
Real Estate Fund currently offers one class of shares (Class A). Each class
is sold pursuant to different sales arrangements and bears different
expenses. The Funds are incorporated as Minnesota corporations. Horizon
Fund, Spectrum Fund, Mortgage Securities Fund and Money Market Fund were
incorporated in October 1984. Bond Fund was incorporated in January 1987,
and Cornerstone Fund, Enterprise Fund and International Fund were
incorporated in January 1994.
INVESTMENT OBJECTIVES AND POLICIES
The investment objectives and principal investment policies of each of
the Funds are set forth in the text of each Fund's Prospectus under
"Investing in the Fund - Investment Policies and Practices." This section
contains detailed descriptions of the investment policies of the Funds as
summarized in each Fund's Prospectus.
Equity Securities of Small Capitalization Companies
Enterprise Fund will primarily invest in equity securities issued by
small capitalization companies. Small capitalization companies may be in a
relatively early stage of development or may produce goods and services which
have favorable prospects for growth due to increasing demand or developing
markets. Frequently, such companies have a small management group and single
product or product-line expertise that may result in an enhanced
entrepreneurial spirit and greater focus which allow such firms to be
successful. The Fund's investment adviser believes that such companies may
develop into significant business enterprises and that an investment in such
companies offers a greater opportunity for capital appreciation than an
investment in larger more established entities. However, small
capitalization companies frequently retain a large part of their earnings for
research, development and investment in capital assets, so that the prospects
for immediate dividend income are limited.
While securities issued by smaller capitalization companies have
historically produced better market results than the securities of larger
issuers, there is no assurance that they will continue to do so or that the
Fund will invest specifically in those companies which produce those results.
Because of the risks involved, the Fund is not intended to constitute a
complete investment program.
Debt and Money Market Securities - Advantus Multiple Class Funds
Each of Horizon Fund, Spectrum Fund, Mortgage Securities Fund, Bond
Fund, Enterprise Fund, Cornerstone Fund, Enterprise Fund and International
Fund may invest in long, intermediate and short-term debt securities from
various industry classifications and money market instruments. Such
instruments may include the following:
Corporate obligations which at the time of purchase are rated within
the four highest grades assigned by Standard & Poor's Corporation
("S&P"), Moody's Investors Services, Inc. ("Moody's") or any other
national rating service, or, if not rated, are of equivalent investment
quality as determined by the Fund's investment adviser or sub-adviser,
as the case may be. To the extent that the Fund invests in securities
rated BBB or Baa by S&P or Moody's, respectively, it will be investing
in securities which have speculative elements. As an operating policy,
International Fund will not invest more than 5% of its assets in debt
securities rated BBB by S&P or Baa by Moody's. In addition, Spectrum
Fund, Bond Fund and Mortgage Securities Fund may also invest up to 10%
of their respective net assets in securities rated BB or Ba by S&P or
Moody's, respectively, and Cornerstone Fund may also invest up to 10%
of its net assets in securities (including convertible securities)
rated at least B- by S&P or by B3 by Moody's. See "Low Rated
Securities," below. For a description of the ratings used by Moody's
and S&P, see Appendix B ("Bond and Commercial Paper Ratings") below.
Obligations of, or guaranteed by, the U.S. Government, its agencies or
instrumentalities.
Debt obligations of banks.
Bond Fund may also purchase U.S. dollar denominated debt securities of
foreign governments and companies which are publicly traded in the United
States and rated within the four highest grades assigned by S&P or Moody's.
In addition to the instruments described above, which will generally be
long-term, but may be purchased by the Fund within one year of the date of a
security's maturity, the Fund may also purchase other high quality securities
including:
Obligations (including certificates of deposit and bankers acceptances)
of U.S. banks, savings and loan associations, savings banks which have
total assets (as of the date of their most recent annual financial
statements at the time of investment) of not less than $2,000,000,000;
U.S. dollar denominated obligations of Canadian chartered banks, London
branches of U.S. banks and U.S. branches or agencies of foreign banks
which meet the above-stated asset size; and obligations of any U.S.
banks, savings and loan associations and savings banks, regardless of
the amount of their total assets, provided that the amount of the
obligations purchased does not exceed $100,000 for any one U.S. bank,
savings and loan association or savings bank and the payment of the
principal is insured by the Federal Deposit Insurance Corporation or
the Federal Savings and Loan Insurance Corporation.
Obligations of the International Bank for Reconstruction and
Development.
Commercial paper (including variable amount master demand notes) issued
by U.S. corporations or affiliated foreign corporations and rated (or
guaranteed by a company whose commercial paper is rated) at the date of
investment Prime-1 by Moody's or A-1 by S&P or, if not rated by either
Moody's or S&P, issued by a corporation having an outstanding debt
issue rated Aa or better by Moody's or AA or better by S&P and, if
issued by an affiliated foreign corporation, such commercial paper (not
to exceed in the aggregate 10% of such Fund's (other than Mortgage
Securities Fund's) net assets) is U.S. dollar denominated and not
subject at the time of purchase to foreign tax withholding.
The Fund may also invest in securities which are unrated if the Fund's
investment adviser or sub-adviser, as the case may be, determines that such
securities are of equivalent investment quality to the rated securities
described above. In the case of "split-rated" securities, which result when
nationally-recognized rating agencies rate the security at different rating
levels (e.g., BBB by S&P and Ba by Moody's), it is the Fund's general policy
to classify such securities at the higher rating level where, in the judgment
of the Fund's investment adviser or sub-adviser, such classification
reasonably reflects the security's quality and risk.
The market value of debt securities generally varies in response to
changes in interest rates and the financial condition of each issuer. During
periods of declining interest rates, the value of debt securities generally
increases. Conversely, during periods of rising interest rates, the value of
such securities generally declines. These changes in market value will be
reflected in each Fund's net asset value.
These Funds may, however, acquire debt securities which, after
acquisition, are down-graded by the rating agencies to a rating which is
lower than the applicable minimum rating described above. In such an event
it is the Funds' general policy to dispose of such down-graded securities
except when, in the judgment of the Funds' investment adviser or sub-adviser,
it is to the Funds' advantage to continue to hold such securities. In no
event, however, will any Fund hold in excess of 5% of its net assets in
securities which have been down-graded subsequent to purchase where such
down-graded securities are not otherwise eligible for purchase by the Fund.
This 5% is in addition to securities which the Fund may otherwise purchase
under its usual investment policies.
Low Rated Securities
Spectrum Fund, Mortgage Securities Fund and Bond Fund may invest up to
10% of their respective net assets in corporate bonds and mortgage-related
securities, including convertible securities, which, at the time of
acquisition, are rated BB or Ba by S&P or Moody's, respectively, or rated at
a comparable level by another independent publicly-recognized rating agency,
or, if not rated, are of equivalent investment quality as determined by the
Fund's investment adviser or sub-adviser, as the case may be. Cornerstone
Fund may also invest up to 10% of its net asset in debt securities (including
convertible securities) which are rated at least B- by S&P or B3 by Moody's,
or rated at a comparable level by another independent publicly-recognized
rating agency, or, if not rated, are of equivalent investment quality as
determined by the Fund's investment adviser. Each of these Funds may also
hold an additional 5% of its net assets in securities rated below "investment
grade" (i.e. below BBB) where such securities were either investment grade or
eligible low rated securities at the time of purchase but subsequently down-
graded to a rating not otherwise eligible for purchase by the Fund (see "Debt
and Money Market Securities - Advantus Multiple Class Funds" above). Debt
securities rated below the four highest categories (i.e., below BBB) are not
considered investment grade obligations and are commonly called "junk bonds."
These securities are predominately speculative and present more credit risk
than investment grade obligations. Bonds rated below BBB are also regarded
as predominately speculative with respect to the issuer's continuing ability
to meet principal and interest payments.
Low rated and unrated debt securities generally involve greater
volatility of price and risk of principal and income, including the
possibility of default by, or bankruptcy of, the issuers of the securities.
In addition, the markets in which low rated and unrated debt securities are
traded are more limited than those in which higher rated securities are
traded. The existence of limited markets for particular securities may
diminish the Funds' ability to sell the securities at fair value either to
meet redemption requests or to respond to changes in the economy or in the
financial markets and could adversely affect and cause fluctuations in the
daily net asset value of the Funds' shares.
Adverse publicity and investor perceptions, whether or not based on
fundamental analysis, may decrease the values and liquidity of low rated debt
securities, especially in a thinly traded market. Analysis of the
creditworthiness of issuers of low rated debt securities may be more complex
than for issuers of higher rated securities, and the ability of the Funds to
achieve their respective investment objective may, to the extent of
investment in low rated debt securities, be more dependent upon such
creditworthiness analysis than would be the case if the Funds were investing
in higher rated securities.
Low rated debt securities may be more susceptible to real or perceived
adverse economic and competitive industry conditions than investment grade
securities. The prices of low rated debt securities have been found to be
less sensitive to interest rate changes than higher rated investments, but
more sensitive to adverse economic downturns or individual corporate
developments. A projection of an economic downturn or of a period of rising
interest rates, for example, could cause a decline in low rated debt
securities prices because the advent of a recession could lessen the ability
of a highly leveraged company to make principal and interest payments on its
debt securities. If the issuer of low rated debt securities defaults, the
Funds may incur additional expenses to seek recovery. The low rated bond
market is relatively new, and many of the outstanding low rated bonds have
not endured a major business recession.
Convertible Securities
Bond Fund, Spectrum Fund, Mortgage Securities Fund, Cornerstone Fund,
Enterprise Fund and Horizon Fund may invest in debt or preferred equity
securities convertible into or exchangeable for equity securities.
Traditionally, convertible securities have paid dividends or interest at
rates higher than common stocks but lower than non-convertible securities.
They generally participate in the appreciation or depreciation of the
underlying stock into which they are convertible, but to a lesser degree.
The total return and yield of lower quality (high yield/high risk)
convertible bonds can be expected to fluctuate more than the total return and
yield of higher quality, shorter-term bonds, but not as much as common
stocks. Enterprise Fund and Horizon Fund will each limit its purchase of
convertible debt securities to those that, at the time of purchase, are rated
at least BBB or Baa by S&P or Moody's, respectively, or it not rated by S&P
or Moody's, are of equivalent investment quality as determined by the Fund's
investment adviser or sub-adviser. Bond Fund, Spectrum Fund and Mortgage
Securities Fund will each limit its purchase of convertible debt securities
to those that, at the time of purchase, are rated at least BB or Ba by S&P or
Moody's, respectively, or if not rated by S&P or Moody's, are of equivalent
investment quality as determined by the Fund's investment adviser.
Cornerstone Fund will limit its purchase of convertible debt securities to
those that, at the time of purchase, are rated at least B- by S&P or B3 by
Moody's, or if not rated by S&P or Moody's, are of equivalent investment
quality as determined by the Fund's investment adviser. See "Low Rated
Securities," above.
Money Market Securities - Money Market Fund
Subject to the limitations under Rule 2a-7 of the Investment Company
Act of 1940 (as described in "Investment Restrictions - Money Market Fund"
below), Money Market Fund will invest in a managed portfolio of money market
instruments as follows:
Obligations issued or guaranteed as to principal or interest by the
U.S. Government, or any agency or authority controlled or supervised by and
acting as an instrumentality of the U.S. Government pursuant to authority
granted by Congress.
Obligations (including certificates of deposit and bankers acceptances)
of U.S. banks, savings and loan associations and savings banks which at
the date of the investment have total assets (as of the date of their
most recent annual financial statements) of not less than
$2,000,000,000; U.S. dollar denominated obligations of Canadian
chartered banks, London branches of U.S. banks, and U.S. branches or
agencies of foreign banks if such banks meet the above-stated asset
size; and obligations of any such U.S. banks, savings and loan
associations and savings banks, regardless of the amount of their total
assets, provided that the amount of the obligations does not exceed
$100,000 for any one U.S. bank, savings and loan association or savings
bank and the payment of the principal is insured by the Federal Deposit
Insurance Corporation.
Obligations of the International Bank for Reconstruction and
Development.
Commercial paper (including variable amount master demand notes) issued
by U.S. limited partnerships, corporations or affiliated foreign
corporations.
Other corporate debt obligations that at the time of issuance were
long-term securities, but that have remaining maturities of 397
calendar days or less.
Repurchase agreements with respect to any of the foregoing obligations.
By limiting the maturity of its investments as described above, the
Fund seeks to lessen the changes in the value of its assets caused by market
factors. The Fund intends to maintain a constant net asset value of $1.00
per share, but there can be no assurance it will be able to do
so.
U.S. Government Obligations
These obligations are bills, certificates of indebtedness, notes and
bonds issued or guaranteed as to principal or interest by the U.S. or by
agencies or authorities controlled or supervised by and acting as
instrumentalities of the U.S. Government established under the authority
granted by Congress. Bills, notes and bonds issued by the U.S. Treasury are
direct obligations of the U.S. Government and differ in their interest rates,
maturities and times of issuance. Securities issued or guaranteed by
agencies or authorities controlled or supervised by and acting as
instrumentalities of the U.S. Government established under authority granted
by Congress include but are not limited to, the Government National Mortgage
Association ("GNMA"), the Export-Import Bank, the Student Loan Marketing
Association, the U.S. Postal Service, the Tennessee Valley Authority, the
Bank for Cooperatives, the Farmers Home Administration, the Federal Home Loan
Bank, the Federal Financing Bank, the Federal Intermediate Credit Banks, the
Federal Land Banks, the Farm Credit Banks and the Federal National Mortgage
Association. Some obligations of U.S. Government agencies, authorities and
other instrumentalities are supported by the full faith and credit of the
U.S. Treasury, such as securities of the Government National Mortgage
Association and the Student Loan Marketing Association; others by the right
of the issuer to borrow from the U.S. Treasury, such as securities of the
Federal Financing Bank and the U.S. Postal Service; and others only by the
credit of the issuing agency, authority or other instrumentality, such as
securities of the Federal Home Loan Bank and the Federal National Mortgage
Association ("FNMA").
Obligations of Non-Domestic Banks
Money Market Fund and the Advantus Multiple Class Funds may invest in
obligations of Canadian chartered banks, London branches of U.S. banks, and
U.S. branches and agencies of foreign banks, which may involve somewhat
greater opportunity for income than the other money market instruments in
which such Funds invest, but may also involve investment risks in addition to
any risks associated with direct obligations of domestic banks. These
additional risks include future political and economic developments, the
possible imposition of withholding taxes on interest income payable on such
obligations, the possible seizure or nationalization of foreign deposits, the
possible establishment of exchange controls or the adoption of other
governmental restrictions, as well as market and other factors which may
affect the market for or the liquidity of such obligations. Generally,
Canadian chartered banks, London branches of U.S. banks, and U.S. branches
and agencies of foreign banks are subject to fewer U.S. regulatory
restrictions than those applicable to domestic banks, and London branches of
U.S. banks may be subject to less stringent reserve requirements than
domestic branches. Canadian chartered banks, U.S. branches and agencies of
foreign banks, and London branches of U.S. banks may provide less public
information than, and may not be subject to the same accounting, auditing and
financial recordkeeping standards as, domestic banks. The Fund will not
invest more than 25% of its total assets in obligations of Canadian chartered
banks, London branches of U.S. banks, and U.S. branches and agencies of
foreign banks.
Variable Amount Master Demand Notes
Money Market Fund may invest in variable amount master demand notes.
These instruments are short-term, unsecured promissory notes issued by
corporations to finance short-term credit needs. They allow the investment
of fluctuating amounts by the Fund at varying market rates of interest
pursuant to direct arrangements between Money Market Fund, as lender, and the
borrower. Variable amount master demand notes permit a series of short-term
borrowings under a single note. The lender has the right to increase the
amount under the note at any time up to the full amount provided by the note
agreement. Both the lender and the borrower have the right to reduce the
amount of outstanding indebtedness at any time. Because variable amount
master demand notes are direct lending arrangements between the lender and
borrower, it is not generally contemplated that such instruments will be
traded and there is no secondary market for the notes. Typically, agreements
relating to such notes provide that the lender shall not sell or otherwise
transfer the note without the borrower's consent. Thus, variable amount
master demand notes are illiquid assets. Such notes provide that the
interest rate on the amount outstanding varies on a daily basis depending
upon a stated short-term interest rate barometer. The Fund's investment
adviser will monitor the creditworthiness of the borrower throughout the term
of the variable amount master demand note.
Mortgage-Related Securities
Spectrum Fund, Bond Fund and Mortgage Securities Fund may invest in
mortgage-related securities (including securities which represent interests
in pools of mortgage loans) issued by government (some of which may be U.S.
Government agency issued or guaranteed securities as described herein) and
non-government entities such as banks, mortgage lenders or other financial
institutions. These securities may include both collateralized mortgage
obligations and stripped mortgage-backed securities. Mortgage loans are
originated and formed into pools by various organizations, including the
Government National Mortgage Association ("GNMA"), the Federal National
Mortgage Association ("FNMA"), the Federal Home Loan Mortgage Corporation
("FHLMC") and various private organizations including commercial banks and
other mortgage lenders. Payments on mortgage-related securities generally
consist of both principal and interest, with occasional repayments of
principal due to refinancings, foreclosures or certain other events. Some
mortgage-related securities, such as collateralized mortgage obligations,
make payments of both principal and interest at a variety of intervals.
Certain mortgage-related securities, such as GNMA securities, entitle the
holder to receive such payments, regardless of whether or not the mortgagor
makes loan payments; certain mortgage-related securities, such as FNMA
securities, guarantee the timely payment of interest and principal; certain
mortgage-related securities, such as FHLMC securities, guarantee the timely
payment of interest and ultimate collection of principal; and certain
mortgage-related securities contain no such guarantees but may offer higher
rates of return. No mortgage-related securities guarantee the Fund's yield
or the price of its shares.
Each Fund expects its investments in mortgage-related securities to be
primarily in high-grade mortgage-related securities either (a) issued by
GNMA, FNMA or FHLMC or other United States Government owned or sponsored
corporations or (b) rated A or better by S&P or Moody's, or rated at a
comparable level by another independent publicly-recognized rating agency,
or, if not rated, are of equivalent investment quality as determined by the
Fund's investment adviser or sub-adviser, as the case may be. The Fund may
invest in mortgage-related securities rated BBB or Baa by S&P or Moody's,
respectively, or rated at a comparable level by another independent publicly-
recognized rating agency, or, if not rated, are of equivalent investment
quality as determined by the Fund's investment adviser or sub-adviser, as the
case may be, when deemed by the Fund's investment adviser or sub-adviser to
be consistent with the Fund's respective objective. To the extent that the
Fund invests in securities rated BBB or Baa by S&P or Moody's, respectively,
it will be investing in securities which have speculative elements. Each
Fund may also invest up to 10% of its assets in mortgage-related securities
rated BB or Ba by S&P or Moody's, respectively, or rated at a comparable
level by another independent publicly-recognized rating agency, or, if not
rated, are of equivalent investment quality as determined by the Fund's
investment adviser or sub-adviser, as the case may be. See "Low Rated
Securities," above. Mortgage Securities Fund may not invest more than 35% of
its total assets in securities rated BBB or Baa or lower by S&P or Moody's,
respectively. For further information about the characteristics and risks of
mortgage-related securities, and for a description of the ratings used by
Moody's and S&P, see Appendix A and B ("Mortgage-Related Securities" and
"Bond and Commercial Paper Ratings") below.
U.S. Government Mortgage-Related Securities
A governmental (i.e., backed by the full faith and credit of the U.S.
Government) guarantor of mortgage-related securities is GNMA. GNMA is a
wholly-owned U.S. Government corporation within the Department of Housing and
Urban Development. GNMA is authorized to guarantee, with the full faith and
credit of the U.S. Government, the timely payment of principal and interest
on securities issued by institutions approved by GNMA (such as savings and
loan institutions, commercial banks and mortgage bankers) and backed by pools
of FHA-insured or VA-guaranteed mortgages.
Government-related (i.e., not backed by the full faith and credit of
the U.S. Government) guarantors include FNMA and FHLMC. FNMA is a
government-sponsored corporation owned entirely by private stockholders. It
is subject to general regulation by the Secretary of Housing and Urban
Development. FNMA purchases residential mortgages from a list of approved
seller/servicers which include state and federally-chartered savings and loan
associations, mutual savings banks, commercial banks and credit unions and
mortgage bankers. Pass-through securities issued by FNMA are guaranteed as
to timely payment of principal and interest by FNMA but are not backed by the
full faith and credit of the U.S. Government.
FHLMC is a corporate instrumentality of the U.S. Government and was
created by Congress in 1970 for the purpose of increasing the availability of
mortgage credit for residential housing. Its stock is publicly traded.
FHLMC issues Participation Certificates ("PCs") which represent interests in
mortgages from FHLMC's national portfolio. FHLMC guarantees the timely
payment of interest and principal on most PCs. There are some PCs, however,
on which FHLMC guarantees the timely payment of interest but only the
ultimate payment of principal. PCs are not backed by the full faith and
credit of the U.S. Government.
Non-Governmental Mortgage-Related Securities
Mortgage Securities Fund may invest in non-governmental mortgage-
related securities. Commercial banks, savings and loan institutions, private
mortgage insurance companies, mortgage bankers and other secondary market
issuers also create pass-through pools of conventional residential and
commercial mortgage loans. Such issuers may in addition be the originators
and servicers of the underlying mortgage loans as well as the guarantors of
the mortgage-related securities. Pools created by such non-governmental
issuers generally offer a higher rate of interest than government and
government-related pools because there are no direct or indirect government
guarantees of payments in the former pools. However, timely payment of
interest and principal of these pools is supported by various forms of
insurance, guarantees and credit enhancements, including individual loan,
title, pool and hazard insurance. The insurance and guarantees are issued by
government entities, private insurers and the mortgage poolers. Such
insurance and guarantees and the creditworthiness of the issuers thereof will
be considered in determining whether a mortgage-related security meets the
Fund's investment quality standards. There can be no assurance that the
private insurers can meet their obligations under the policies. The Fund may
buy mortgage-related securities without insurance or guarantees if through an
examination of the loan experience and practices of the poolers the Fund's
investment adviser determines that the securities meet the Fund's quality
standards. Although the market for such securities is becoming increasingly
liquid, securities issued by certain private organizations may not be readily
marketable. The Fund will not purchase mortgage-related securities or any
other assets which in its investment adviser's opinion are illiquid if, as a
result, more than 15% of the value of the Fund's net assets will be illiquid.
Collateralized Mortgage Obligations
Spectrum Fund, Bond Fund and Mortgage Securities Fund may invest in
collateralized mortgage obligations ("CMOs"), in which several different
series of bonds or certificates secured by pools of mortgage-backed
securities or mortgage loans, are issued. The series differ from each other
in terms of the priority rights which each has to receive cash flows with the
CMO from the underlying collateral. Each CMO series may also be issued in
multiple classes. Each class of a CMO series, often referred to as a
"tranche," is usually issued at a specific coupon rate and has a stated
maturity. The underlying security for the CMO may consist of mortgage-backed
securities issued or guaranteed by U.S. Government agencies or whole loans.
CMOs backed by U.S. Government agency securities retain the credit quality of
such agency securities and therefore present minimal credit risk. CMOs
backed by whole loans typically carry various forms of credit enhancements to
protect against credit losses and provide investment grade ratings. Unlike
traditional mortgage pass-through securities, which simply pass through
interest and principal on a pro rata basis as received, CMOs allocate the
principal and interest from the underlying mortgages among the several
classes or tranches of the CMO in many ways. All residential, and some
commercial, mortgage-related securities are subject to prepayment risk. A
CMO does not eliminate that risk, but, by establishing an order of priority
among the various tranches for the receipt and timing of principal payments,
it can reallocate that risk among the tranches. Therefore, the stream of
payments received by a CMO bondholder may differ dramatically from that
received by an investor holding a traditional pass-through security backed by
the same collateral.
In the traditional form of CMO, interest is paid currently on all
tranches but principal payments are applied sequentially to retire each
tranche in order of stated maturity. Traditional sequential payment CMOs
have evolved into numerous more flexible forms of CMO structures which can
vary frequency of payments, maturities, prepayment risk and performance
characteristics. The differences between these new types of CMOs relate
primarily to the manner in which each varies the amount and timing of
principal and interest received by each tranche from the underlying
collateral. Under all but the sequential payment structures, specific
tranches of CMOs have priority rights over other tranches with respect to the
amount and timing of cash flow from the underlying mortgages.
The primary risk associated with any mortgage security is the
uncertainty of the timing of cash flows; specifically, uncertainty about the
possibility of either the receipt of unanticipated principal in falling
interest rate environments (prepayment or call risk) or the failure to
receive anticipated principal in rising interest rate environments (extension
risk). In a CMO, that uncertainty may be allocated to a greater or lesser
degree to specific tranches depending on the relative cash flow priorities of
those tranches. By establishing priority rights to receive and reallocate
payments of prepaid principal, the higher priority tranches are able to offer
better call protection and extension protection relative to the lower
priority classes in the same CMO. For example, when insufficient principal
is received to make scheduled principal payments on all tranches, the higher
priority tranches receive their scheduled premium payments first and thus
bear less extension risk than lower priority tranches. Conversely, when
principal is received in excess of scheduled principal payments on all
tranches (call risk), the lower priority tranches are required to receive
such excess principal until they are retired and thus bear greater prepayment
risk than the higher priority tranches. Therefore, depending on the type of
CMO purchased, an investment may be subject to a greater or lesser risk of
prepayment, and experience a greater or lesser volatility in average life,
yield, duration and price, than other types of mortgage-related securities.
A CMO tranche may also have a coupon rate which resets periodically at a
specified increment over an index. These floating rate CMOs are typically
issued with lifetime caps on the level to which the floating coupon rate is
allowed to rise. The Fund may invest in such securities, usually subject to
a cap, provided such securities satisfy the same requirements regarding cash
flow priority applicable to the Fund's purchase of CMOs generally. CMOs are
typically traded over the counter rather than on centralized exchanges.
Because CMOs of the type purchased by the Fund tend to have relatively more
predictable yields and are relatively less volatile, they are also generally
more liquid than CMOs with greater prepayment risk and more volatile
performance profiles.
Spectrum Fund, Bond Fund and Mortgage Securities Fund may also purchase
CMOs known as "accrual" or "Z" bonds. An accrual or Z bond holder is not
entitled to receive cash payments until one or more other classes of the CMO
have been paid in full from payments on the mortgage loans underlying the
CMO. During the period in which cash payments are not being made on the Z
tranche, interest accrues on the Z tranche at a stated rate, and this accrued
interest is added to the amount of principal which is due to the holder of
the Z tranche. After the other classes have been paid in full, cash payments
are made on the Z tranche until its principal (including previously accrued
interest which was added to principal, as described above) and accrued
interest at the stated rate have been paid in full. Generally, the date upon
which cash payments begin to be made on a Z tranche depends on the rate at
which the mortgage loans underlying the CMO are prepaid, with a faster
prepayment rate resulting in an earlier commencement of cash payments on the
Z tranche. Like a zero coupon bond, during its accrual period the Z tranche
of a CMO has the advantage of eliminating the risk of reinvesting interest
payments at lower rates during a period of declining market interest rates.
At the same time, however, and also like a zero coupon bond, the market value
of a Z tranche can be expected to fluctuate more widely with changes in
market interest rates than would the market value of a tranche which pays
interest currently. Changes in market interest rates also can be expected to
influence prepayment rates on the mortgage loans underlying the CMO of which
a Z tranche is a part. As noted above, such changes in prepayment rates will
affect the date at which cash payments begin to be made on a Z tranche, and
therefore also will influence its market value. As an operating policy,
Spectrum Fund, Mortgage Securities Fund and Bond Fund will not purchase a Z
bond if the respective Fund's aggregate investment in Z bonds which are then
still in their accrual periods would exceed 20% of the Fund's total assets (Z
bonds which have begun to receive cash payments are not included for purposes
of this 20% limitation).
Spectrum Fund, Bond Fund and Mortgage Securities Fund may also invest
in inverse or reverse floating CMOs. Inverse or reverse floating CMOs
constitute a tranche of a CMO with a coupon rate that moves in the reverse
direction to an applicable index. Accordingly, the coupon rate will increase
as interest rates decrease. The Fund would be adversely affected, however,
by the purchase of such CMOs in the event of an increase in interest rates
since the coupon rate will decrease as interest rates increase, and, like
other mortgage-related securities, the value will decrease as interest rates
increase. Inverse or reverse floating rate CMOs are typically more volatile
than fixed or floating rate tranches of CMOs, and usually carry a lower cash
flow priority. As an operating policy, Spectrum Fund, Bond Fund and Mortgage
Securities Fund will treat inverse floating rate CMOs as illiquid and,
therefore, will limit its investments in such securities, together with all
other illiquid securities, to 15% of such Fund's net assets.
Stripped Mortgage-Backed Securities
Spectrum Fund, Bond Fund and Mortgage Securities Fund may invest in
stripped mortgage-backed securities. Stripped mortgage-backed securities
represent undivided ownership interests in a pool of mortgages, the cash flow
of which has been separated into its interest and principal components.
"IOs" (interest only securities) receive the interest portion of the cash
flow while "POs" (principal only securities) receive the principal portion.
Stripped mortgage-backed securities may be issued by U.S. Government agencies
or by private issuers. As interest rates rise and fall, the value of IOs
tends to move in the same direction as interest rates, unlike other mortgage-
backed securities (which tend to move in the opposite direction compared to
interest rates). Under the Internal Revenue Code of 1986, as amended, POs
may generate taxable income from the current accrual of original issue
discount, without a corresponding distribution of cash to the Fund.
The cash flows and yields on standard IO and PO classes are extremely
sensitive to the rate of principal payments (including prepayments) on the
related underlying mortgage assets. For example, a rapid or slow rate of
principal payments may have a material adverse effect on the performance and
prices of IOs or POs, respectively. If the underlying mortgage assets
experience greater than anticipated prepayments of principal, an investor may
fail to recoup fully its initial investment in an IO class of a stripped
mortgage-backed security, even if the IO class is rated AAA or Aaa or is
derived from a full faith and credit obligation (i.e., a GNMA). Conversely,
if the underlying mortgage assets experience slower than anticipated
prepayments of principal, the price on a PO class will be affected more
severely than would be the case with a traditional mortgage-backed security,
but unlike IOs, an investor will eventually recoup fully its initial
investment provided no default of the guarantor occurs. As an operating
policy, the Fund will limit its investments in IOs and POs to 15% of the
Fund's net assets, and will treat them as illiquid securities (which, in the
aggregate, may not exceed 15% of each Fund's net assets) except to the extent
such securities are deemed liquid by the Fund's adviser in accordance with
standards established by the Fund's Board of Directors. See "Restricted and
Illiquid Securities" below.
Asset-Backed and Stripped Asset-Backed Securities
Bond Fund, Spectrum Fund and Mortgage Securities Fund may invest in
asset-backed securities rated within the four highest grades assigned by
Moody's or S&P, or, if not rated, are of equivalent investment quality as
determined by the Fund's investment adviser. These securities usually
represent interests in pools of consumer loans (typically trade, credit card
or automobile receivables). The credit quality of most asset-backed
securities depends primarily on the credit quality of the assets underlying
such securities, how well the entity issuing the security is insulated from
the credit risk of the originator or any other affiliated entities, the
quality of the servicing of the receivables, and the amount and quality of
any credit support provided to the securities. The rate of principal payment
on asset-backed securities may depend on the rate of principal payments
received on the underlying assets which in turn may be affected by a variety
of economic and other factors. As a result, the yield on any asset-backed
security may be difficult to predict with precision and actual yield to
maturity may be more or less than the anticipated yield to maturity. Some
asset-backed transactions are structured with a "revolving period" during
which the principal balance of the asset-backed security is maintained at a
fixed level, followed by a period of rapid repayment. This structure is
intended to insulate holders of the asset-backed security from prepayment
risk to a significant extent. Asset-backed securities may be classified as
pass-through certificates or collateralized obligations.
Pass-through certificates are asset-backed securities which represent
an undivided fractional ownership interest in an underlying pool of assets.
Pass-through certificates usually provide for payments of principal and
interest received to be passed through to their holders, usually after
deduction for certain costs and expenses incurred in administering the pool.
Because pass-through certificates represent an ownership interest in the
underlying assets, the holders thereof bear directly the risk of any defaults
by the obligors on the underlying assets not covered by any credit support.
Asset-backed securities issued in the form of debt instruments, also
known as collateralized obligations, are generally issued as the debt of a
special purpose entity organized solely for the purpose of owning such assets
and issuing such debt. The assets collateralizing such asset-backed
securities are pledged to a trustee or custodian for the benefit of the
holders thereof. Such issuers generally hold no assets other than those
underlying the asset-backed securities and any credit support provided. As a
result, although payments on such asset-backed securities are obligations of
the issuers, in the event of defaults on the underlying assets not covered by
any credit support, the issuing entities are unlikely to have sufficient
assets to satisfy their obligations on the related asset-backed securities.
To lessen the effect of failures by obligors on underlying assets to
make payments, such securities may contain elements of credit support. Such
credit support falls into two classes: liquidity protection and protection
against ultimate default by an obligor on the underlying assets. Liquidity
protection refers to the provision of advances, generally by the entity
administering the pool of assets, to ensure that scheduled payments on the
underlying pool are made in a timely fashion. Protection against ultimate
default ensures ultimate payment of the obligations on at least a portion of
the assets in the pool. Such protection may be provided through guarantees,
insurance policies or letters of credit obtained from third parties, through
various means of structuring the transaction or through a combination of such
approaches.
Asset-backed securities may be stripped to create interest-only and
principal-only securities in the same manner as mortgage-backed securities.
See "Stripped Mortgage-Backed Securities," above. The value of asset-backed
IOs also tends to move in the same direction as changes in interest rates,
unlike other asset-backed (or mortgage-backed) securities, which tend to move
in the opposite direction compared to interest rates. As with stripped
mortgage-backed securities, the cash flows and yields on asset-backed IOs and
POs are also extremely sensitive to the rate of principal payments on the
related underlying assets. See "Stripped Mortgage-Backed Securities," above.
As an operating policy, the Fund will limit its investment in IOs and POs to
15% of the Fund's net assets, and will treat them as illiquid securities
(which, in the aggregate, may not exceed 15% of each Fund's net assets)
except to the extent such securities are deemed liquid by the Fund's adviser
in accordance with standards established by the Fund's Board of Directors.
See "Restricted and Illiquid Securities" below.
Direct Investments in Mortgages - Whole Loans
Mortgage Securities Fund may invest up to 10% of the value of its net
assets directly in mortgages securing residential or commercial real estate
(i.e., the Fund becomes the mortgagee). Such investments are not "mortgage-
related securities" as described above. They are normally available from
lending institutions which group together a number of mortgages for resale
(usually from 10 to 50 mortgages) and which act as servicing agent for the
purchaser with respect to, among other things, the receipt of principal and
interest payments. (Such investments are also referred to as "whole loans".)
The vendor of such mortgages receives a fee from Mortgage Securities Fund for
acting as servicing agent. The vendor does not provide any insurance or
guarantees covering the repayment of principal or interest on the mortgages.
Unlike pass-through securities, whole loans constitute direct investment in
mortgages inasmuch as Mortgage Securities Fund, rather than a financial
intermediary, becomes the mortgagee with respect to such loans purchased by
the Fund. At present, such investments are considered to be illiquid by the
Fund's investment adviser. Mortgage Securities Fund will invest in such
mortgages only if its investment adviser has determined through an
examination of the mortgage loans and their originators (which may include an
examination of such factors as percentage of family income dedicated to loan
service and the relationship between loan value and market value) that the
purchase of the mortgages should not represent a significant risk of loss to
the Fund.
Foreign Securities
Horizon Fund, Spectrum Fund, Enterprise Fund and Cornerstone Fund may
invest up to 10% of the market value of their respective total assets in
securities of foreign issuers which are not publicly traded in the U.S.
(Securities of foreign issuers which are publicly traded in the U.S., usually
in the form of sponsored American Depositary Receipts, are not subject to
this 10% limitation.) Bond Fund may also invest in debt securities issued by
foreign governments and companies provided that such securities are U.S.
dollar-denominated and publicly traded in the United States. In addition,
International Fund may invest in securities without limitation. Investing in
securities of foreign issuers may result in greater risk than that incurred
in investing in securities of domestic issuers. There is the possibility of
expropriation, nationalization or confiscatory taxation, taxation of income
earned in foreign nations or other taxes imposed with respect to investments
in foreign nations; foreign exchange controls (which may include suspension
of the ability to transfer currency from a given country), default in foreign
government securities, political or social instability or diplomatic
developments which could affect investments in securities of issuers in those
nations. In addition, in many countries there is less publicly available
information about issuers than is available in reports about companies in the
U.S. Foreign companies are not generally subject to uniform accounting,
auditing and financial reporting standards, and auditing practices and
requirements may not be comparable to those applicable to U.S. companies.
Further, the Fund may encounter difficulties or be unable to pursue legal
remedies and obtain judgments in foreign courts. Commission rates in foreign
countries, which are sometimes fixed rather than subject to negotiation as in
the U.S., are likely to be higher. Further, the settlement period of
securities transactions in foreign markets may be longer than in domestic
markets. In many foreign countries there is less government supervision and
regulation of business and industry practices, stock exchanges, brokers and
listed companies than in the U.S. The foreign securities markets of many of
the countries in which the Fund may invest may also be smaller, less liquid,
and subject to greater price volatility than those in the U.S. Also, some
countries may withhold portions of interest, dividends and gains at the
source. The Fund may also be unfavorably affected by fluctuations in the
relative rates of exchange between the currencies of different nations (i.e.,
when the currency being exchanged has decreased in value relative to the
currency being purchased). There are further risk considerations, including
possible losses through the holding of securities in domestic and foreign
custodial banks and depositories.
The countries of the European Monetary Union began the process of
converting their individual country currencies to the Euro on January 1,
1999. There is also a risk that the value of foreign securities of companies
located in EMU countries may decrease due to market volatility resulting from
the conversion of certain EMU country currencies to the Euro. It is not
possible to predict the impact of the Euro on the business or financial
condition of European issues or on the Fund. The transition and the
elimination of currency risk among EMU countries may change the economic
environment and behavior of investors, particularly in European markets. To
the extent the Fund holds non-U.S. dollar (Euro or other) denominated
securities, it will still be exposed to currency risk due to fluctuations in
those currencies versus the U.S. dollar.
Furthermore, International Fund may invest in securities issued by
governments, governmental agencies and companies located in developing market
countries. The Fund considers countries having developing markets to be all
countries that are generally considered to be developing or emerging
countries by the International Bank for Reconstruction and Development (more
commonly referred to as the World Bank) and the International Finance
Corporation, as well as countries that are classified by the United Nations
or otherwise regarded by their authorities as developing. Currently, the
countries not included in this category are Ireland, Spain, New Zealand,
Australia, the United Kingdom, Italy, the Netherlands, Belgium, Austria,
France, Canada, Germany, Denmark, the United States, Sweden, Finland, Norway,
Japan and Switzerland. In addition, developing market securities means (i)
securities of companies the principal securities trading market for which is
a developing market country, as defined above, (ii) securities, traded in any
market, of companies that derive 50% or more of their total revenue from
either goods or services produced in such developing market countries or
sales made in such developing market countries or (iii) securities of
companies organized under the laws of, and with a principal office in, a
developing market country. International Fund will at all times, except
during temporary defensive periods, maintain investments in at least three
countries having developing markets.
An ADR is sponsored if the original issuing company has selected a
single U.S. bank to serve as its U.S. depositary and transfer agent. This
relationship requires a deposit agreement which defines the rights and duties
of both the issuer and depositary. Companies that sponsor ADRs must also
provide their ADR investors with English translations of company information
made public in their own domiciled country. Sponsored ADR investors also
generally have the same voting rights as ordinary shareholders, barring any
unusual circumstances. ADRs which meet these requirements can be listed on
U.S. stock exchanges. Unsponsored ADRs are created at the initiative of a
broker or bank reacting to demand for a specific foreign stock. The broker
or bank purchases the underlying shares and deposits them in a depositary.
Unsponsored shares issued after 1983 are not eligible for U.S. stock exchange
listings. Furthermore, they do not generally include voting rights.
In addition, International Fund may invest in European Depositary
Receipts, which are receipts evidencing an arrangement with a European bank
similar to that for ADRs and which are designed for use in the European
securities markets. European Depository Receipts are not necessarily
denominated in the currency of the underlying security.
Investments in Russia
International Fund may invest in securities of Russian companies, which
involves risks and special considerations not typically associated with
investing in United States securities markets. Since the breakup of the
Soviet Union at the end of 1991, Russia has experienced dramatic political
and social change. The political system in Russia is emerging from a long
history of extensive state involvement in economic affairs. The country is
undergoing a rapid transition from a centrally-controlled command system to a
market-oriented, democratic model. The Fund may be affected unfavorably by
political or diplomatic developments, social instability, changes in
government policies, taxation and interest rates, currency repatriation
restrictions and other political and economic developments in the law or
regulations in Russia and, in particular, the risks of expropriation,
nationalization and confiscation of assets and changes in legislation
relating to foreign ownership.
The planned economy of the former Soviet Union was run with
qualitatively different objectives and assumptions from those prevalent in a
market system and Russian businesses do not have any recent history of
operating within a market-oriented economy. In general, relative to
companies operating in Western economies, companies in Russian are
characterized by a lack of: (i) management with experience of operating in a
market economy; (ii) modern technology; and, (iii) a sufficient capital base
with which to develop and expand their operations. It is unclear what will
be the future effect on Russian companies, if any, of Russia's continued
attempts to move toward a more market-oriented economy. Russia's economy has
experienced severe economic recession, if not depression, since 1990 during
which time the economy has been characterized by high rates of inflation,
high rates of unemployment, declining gross domestic product, deficit
government spending, and a devaluing currency. The economic reform program
has involved major disruptions and dislocations in various sectors of the
economy, and those problems have been exacerbated by growing liquidity
problems. Further, Russian presently receives significant financial
assistance from a number of countries through various programs. To the
extent these programs are reduced or eliminated in the future, Russian
economic development may be adversely impacted.
The Russian securities markets are substantially smaller, less liquid
and significantly more volatile than the securities markets in the United
States. In addition, there is little historical data on these securities
markets because they are of recent origin. A substantial proportion of
securities transactions in Russia are privately negotiated outside of stock
exchanges and over-the-counter markets. A limited number of issuers
represent a disproportionately large percentage of market capitalization and
trading volume. Although evolving rapidly, even the largest of Russia's
stock exchanges are not well developed compared to Western stock exchanges.
The actual volume of exchange-based trading in Russia is low and active on-
market trading generally occurs only in the shares of a few private
companies. Most secondary market trading of equity securities occurs through
over-the-counter trading facilitated by a growing number of licensed brokers.
Shares are traded on the over-the-counter market primarily by the management
of enterprises, investment funds, short-term speculators and foreign
investors. The securities of Russian companies are mostly traded over-the-
counter and, despite the large number of stock exchanges, there is still no
organized public market for such securities. This may increase the
difficulty of valuing the Fund's investments. No established secondary
markets may exist for many of the securities in which the Fund may invest.
Reduced secondary market liquidity may have an adverse effect on market price
and the Fund's ability to dispose of particular instruments when necessary to
meet its liquidity requirements or in response to specific economic events
such as a deterioration in the creditworthiness of the issuer. Reduced
secondary market liquidity for securities may also make it more difficult for
the Fund to obtain accurate market quotations for purposes of valuing its
portfolio and calculating its net asset value. Market quotations are
generally available on many emerging country securities only from a limited
number of dealers and may not necessarily represent firm bids of those
dealers or prices for actual sales.
Because of the recent formation of the securities markets as well as
the underdeveloped state of the banking and telecommunications systems,
settlement, clearing and registration transactions are subject to significant
risks not normally associated with investments in the United States and other
more developed markets. Ownership of shares (except where shares are held
through depositories that meet the requirements of the 1940 Act) is defined
according to entries in the company's share register and normally evidenced
by extracts from the register or in certain limited cases by formal share
certificates. However, there is not a central registration system and these
services are carried out by the companies themselves or by registrars located
throughout Russia. These registrars are not necessarily subject to effective
state supervision and its possible for the Fund to lose its registration
through fraud, negligence and even mere oversight. The laws and regulations
in Russia affecting Western investment business continue to evolve in an
unpredictable manner. Russian laws and regulations, particularly those
involving taxation, foreign investment and trade, title to property or
securities, and transfer of title, applicable to the Fund's activities are
relatively new and can change quickly and unpredictably in a manner far more
volatile than in the United States or other developed market economies.
Although basic commercial laws are in place, they are often unclear or
contradictory and subject to varying interpretation, and may at any time be
amended, modified, repealed or replaced in a manner adverse to the interest
of the Fund. There is still lacking a cohesive body of law and precedents
normally encountered in business environments. Foreign investment in Russian
companies is, in certain cases, legally restricted. Sometimes these
restrictions are contained in constitutional documents of an enterprise which
are not publicly available. Russian foreign investment legislation currently
guarantees the right of foreign investors to transfer abroad income received
on investments such as profits, dividends and interest payments. This right
is subject to settlement of all applicable taxes and duties. However, more
recent legislation governing currency regulation and control guarantees the
right to export interest, dividends and other income on investments, but does
not expressly permit the repatriation of capital from the realization of
investments. Current practice is to recognize the right to repatriation of
capital. Authorities currently do not attempt to restrict repatriation
beyond the extent of the earlier law. No guarantee can be made, however,
that amounts representing realization of capital of income will be capable of
being remitted. If, for any reason, the Fund were unable to distribute an
amount equal to substantially all of its investment company taxable income
(as defined for U.S. tax purposes) within applicable time periods, the Fund
would not qualify for the favorable U.S. federal income tax treatment
afforded to regulated investment companies, or, even if it did so qualify, it
might become liable for income and excise taxes on undistributed income.
Russian courts lack experience in commercial dispute resolution and
many of the procedural remedies for enforcement and protection of legal
rights typically found in Western jurisdictions are not available in Russia.
There remains uncertainty as to the extent to which local parties and
entities, including Russian state authorities, will recognize the contractual
and other rights of the parties with which they deal. Accordingly, there
will be difficulty and uncertainty in the Fund's ability to protect and
enforce its rights against Russian state and private entities. There is also
no assurance that the Russian courts will recognize or acknowledge that the
Fund has acquired title to any property or securities in which the Fund
invests, or that the Fund is the owner of any property or security held in
the name of a nominee which has acquired such property or security on behalf
of the Fund, because there is at present in Russia no reliable system or
legal framework regarding the registration of titles. There can be no
assurance that this difficulty in protecting and enforcing rights in Russia
will not have a material adverse effect on the Fund and its operations.
Difficulties are likely to be encountered enforcing judgments of foreign
courts within Russia or of Russian courts in foreign jurisdictions due to the
limited number of countries which have signed treaties for mutual recognition
of court judgments with Russia.
Currency Exchange Transactions
International Fund usually effects currency exchange transactions on a
spot (i.e. cash) basis at the spot rate prevailing in the foreign exchange
market. However, some price spread on currency exchange will be incurred
when the Fund converts assets from one currency to another. Further, the
Fund may be affected either unfavorably or favorably by fluctuations in the
relative rates of exchange between the currencies of different nations. For
example, in order to realize the value of a foreign investment, the Fund must
convert that value, as denominated in its foreign currency, into U.S. dollars
using the applicable currency exchange rate. The exchange rate represents
the current price of a U.S. dollar relative to that foreign currency; that
is, the amount of such foreign currency required to buy one U.S. dollar. If
the Fund holds a foreign security which has appreciated in value as measured
in the foreign currency, the level of appreciation actually realized by the
Fund may be reduced or even eliminated if the foreign currency has decreased
in value relative to the U.S. dollar subsequent to the date of purchase. In
such a circumstance, the cost of a U.S. dollar purchased with that foreign
currency has gone up and the same amount of foreign currency purchases fewer
dollars than at an earlier date.
Foreign Currency Hedging Transactions
Forward Exchange Contracts. International Fund has authority to deal
in forward foreign currency exchange contracts between currencies of the
different countries in which the Fund will invest as a hedge against possible
variations in the foreign exchange rate between these currencies. This is
accomplished through contractual agreements to purchase or sell a specified
currency at a specified future date and price set at the time of the
contract. Forward exchange contracts are individually negotiated and
privately traded by currency traders and their customers. The Fund's
dealings in forward foreign exchange contracts will be limited to hedging
involving either specific transactions or portfolio positions. Transaction
hedging is the purchase or sale of forward foreign currency with respect to
specific receivables or payables of the Fund arising from the purchase and
sale of portfolio securities, the sale and redemption of shares of the Fund,
or the payment of dividends and distributions by the Fund. Position hedging
is the sale of forward foreign exchange contracts with respect to portfolio
security positions denominated or quoted in such foreign currency. The Fund
will not engage in naked forward foreign exchange contracts.
In addition, when the Fund's investment sub-adviser believes that the
currency of a particular foreign country may suffer or enjoy a substantial
movement against another currency, it may enter into a forward contract to
sell or buy the amount of the former foreign currency, approximating the
value of some or all of the Fund's securities denominated in such foreign
currency. The projection of short-term currency market movement is extremely
difficult, and the successful execution of a short-term hedging strategy is
highly uncertain.
It is impossible to forecast with absolute precision the market value
of portfolio securities at the expiration of the contract. Accordingly, it
may be necessary for the Fund to purchase additional foreign currency on the
spot market (and bear the expense of such purchase) if the market value of
the security is less than the amount of foreign currency the Fund is
obligated to deliver and if a decision is made to sell the security and make
delivery of the foreign currency. Conversely, it may be necessary to sell on
the spot market some of the foreign currency received upon the sale of the
portfolio security if its market value exceeds the amount of foreign currency
the Fund is obligated to deliver.
If the Fund retains the portfolio security and engages in an offsetting
transaction, the Fund will incur a gain or a loss to the extent that there
has been movement in forward contract prices. If the Fund engages in an
offsetting transaction, it may subsequently enter into a new forward contract
to sell the foreign currency. Should forward prices decline during the
period between the Fund entering into a forward contract for the sale of a
foreign currency and the date it enters into an offsetting contract for the
purchase of the foreign currency, the Fund will realize a gain to the extent
the price of the currency it has agreed to sell exceeds the price of the
currency it has agreed to purchase. Should forward prices increase, the Fund
will suffer a loss to the extent the price of the currency it has agreed to
purchase exceeds the price of the currency it has agreed to sell.
Currency Futures Contracts. International Fund may also enter into
exchange-traded contracts for the purchase or sale for future delivery of
foreign currencies ("foreign currency futures"). This investment technique
will be used only to hedge against anticipated future changes in exchange
rates which otherwise might adversely affect the value of the Fund's
portfolio securities or adversely affect the prices of securities that the
Fund intends to purchase at a later date. The successful use of foreign
currency futures will usually depend on the ability of the Fund's investment
sub-adviser to forecast currency exchange rate movements correctly. Should
exchange rates move in an unexpected manner, the Fund may not achieve the
anticipated benefits of foreign currency futures or may realize losses.
Closed-End Investment Companies
Some countries, such as South Korea, Chile and India, have authorized
the formation of closed-end investment companies to facilitate indirect
foreign investment in their capital markets. In accordance with the
Investment Company Act of 1940, International Fund may invest up to 10% of
its total assets in securities of closed-end investment companies. This
restriction on investments in securities of closed-end investment companies
may limit opportunities for the International Fund to invest indirectly in
certain developing markets. Shares of certain closed-end investment
companies may at times be acquired only at market prices representing
premiums to their net asset values. If the International Fund acquires
shares of closed-end investment companies, shareholders would bear both their
proportionate share of expenses of the International Fund (including
management and advisory fees) and, indirectly, the expenses of such closed-
end investment companies.
Loans of Portfolio Securities
For the purpose of realizing additional income, Horizon Fund, Spectrum
Fund, Enterprise Fund, Cornerstone Fund, Mortgage Securities Fund, Money
Market Fund, Bond Fund and International Fund may make secured loans of
portfolio securities amounting to not more than one-third of their respective
total assets (which, for purposes of this limitation, will include the value
of collateral received in return for securities loaned). Collateral received
in connection with securities lending shall not be considered Fund assets,
however, for purposes of compliance with any requirement described in a
Fund's prospectus that the Fund invest a specified minimum percentage of its
assets in certain types of securities (e.g., securities of small companies).
Securities loans are made to broker-dealers or financial institutions
pursuant to agreements requiring that the loans be continuously secured by
collateral at least equal at all times to the value of the securities lent.
The collateral received will consist of cash, letters of credit or securities
issued or guaranteed by the U.S. Government, its agencies or
instrumentalities. While the securities are being lent, the Fund will
continue to receive the equivalent of the interest or dividends paid by the
issuer on the securities, as well as interest on the investment of the
collateral or a fee from the borrower. Although the Fund does not expect to
pay commissions or other front-end fees (including finders fees) in
connection with loans of securities (but in some cases may do so), a portion
of the additional income realized will be shared with the Fund's custodian
for arranging and administering such loans. The Fund has a right to call
each loan and obtain the securities on five business days' notice. The Fund
will not have the right to vote securities while they are being lent, but it
will call a loan in anticipation of any important vote. The risks in lending
portfolio securities, as with other extensions of secured credit, consist of
possible delay in receiving additional collateral or in the recovery of the
securities or possible loss of rights in the collateral should the borrower
fail financially. Loans will only be made to firms deemed by the Fund's
investment adviser or sub-adviser to be of good standing and to have
sufficient financial responsibility, and will not be made unless, in the
judgment of the Fund's investment adviser or sub-adviser, the consideration
to be earned from such loans would justify the risk. The creditworthiness of
entities to which the Fund makes loans of portfolio securities is monitored
by the Fund's investment adviser or sub-adviser throughout the term of each
loan.
Restricted and Illiquid Securities
Each Fund may invest up to 15% (10% in the case of Money Market Fund)
of its net assets in securities restricted as to disposition under the
federal securities laws or otherwise, or other illiquid assets. An
investment is generally deemed to be "illiquid" if it cannot be disposed of
within seven days in the ordinary course of business at approximately the
amount at which the investment company is valuing the investment.
"Restricted securities" are securities which were originally sold in private
placements and which have not been registered under the Securities Act of
1933 (the "1933 Act"). Such securities generally have been considered
illiquid by the staff of the Securities and Exchange Commission (the "SEC"),
since such securities may be resold only subject to statutory restrictions
and delays or if registered under the 1933 Act. Because of such
restrictions, the Fund may not be able to dispose of a block of restricted
securities for a substantial period of time or at prices as favorable as
those prevailing in the open market should like securities of an unrestricted
class of the same issuer be freely traded. The Fund may be required to bear
the expenses of registration of such restricted securities.
The SEC has acknowledged, however, that a market exists for certain
restricted securities (for example, securities qualifying for resale to
certain "qualified institutional buyers" pursuant to Rule 144A under the 1933
Act). Additionally, the Fund's investment adviser and sub-adviser believe
that a similar market exists for commercial paper issued pursuant to the
private placement exemption of Section 4(2) of the 1933 Act and for certain
interest-only and principal-only classes of mortgage-backed and asset-backed
securities. Each of the funds may invest without limitation in these forms
of restricted securities if such securities are deemed by the Fund's
investment adviser or sub-adviser to be liquid in accordance with standards
established by the Fund's Board of Directors. Under these guidelines, the
Fund's investment adviser or sub-adviser must consider (a) the frequency of
trades and quotes for the security, (b) the number of dealers willing to
purchase or sell the security and the number of other potential purchasers,
(c) dealer undertakings to make a market in the security, and (d) the nature
of the security and the nature of the marketplace trades (for example, the
time needed to dispose of the security, the method of soliciting offers and
the mechanics of transfer). At the present time, it is not possible to
predict with accuracy how the markets for certain restricted securities will
develop. Investing in such restricted securities could have the effect of
increasing the level of the Fund's illiquidity to the extent that qualified
purchasers of the securities become, for a time, uninterested in purchasing
these securities.
If through the appreciation of restricted securities or the
depreciation of unrestricted securities, the Fund is in a position where more
than 15% of its net assets are invested in restricted and other illiquid
securities, the Fund will take appropriate steps to protect liquidity.
When-Issued Securities and Forward Commitments
Mortgage Securities Fund, Spectrum Fund, Bond Fund and International
Fund may each purchase securities offered on a "when-issued" basis and may
purchase or sell securities on a "forward commitment" basis. When such
transactions are negotiated, the price, which is generally expressed in yield
terms, is fixed at the time the commitment is made, but delivery and payment
for the securities takes place at a later date. Normally, the settlement
date occurs within two months after the transaction, but delayed settlements
beyond two months may be negotiated. During the period between a commitment
to purchase by the Fund and settlement, no payment is made for the securities
purchased by the Fund and, thus, no interest accrues to the Fund from the
transaction.
The use of when-issued transactions and forward commitments enables the
Fund to hedge against anticipated changes in interest rates and prices. For
instance, in periods of rising interest rates and falling prices, the Fund
might sell securities in its portfolio on a forward commitment basis to limit
its exposure to falling prices. In periods of falling interest rates and
rising prices, the Fund might sell a security in its portfolio and purchase
the same or a similar security on a when-issued or forward commitment basis,
thereby fixing the purchase price to be paid on the settlement date at an
amount below that to which the Fund anticipates the market price of such
security to rise and, in the meantime, obtaining the benefit of investing the
proceeds of the sale of its portfolio security at currently higher cash
yields. Of course, the success of this strategy depends upon the ability of
the Fund's investment adviser or sub-adviser to correctly anticipate
increases and decreases in interest rates and prices of securities. If the
Fund's investment adviser or sub-adviser anticipates a rise in interest rates
and a decline in prices and, accordingly, the Fund sells securities on a
forward commitment basis in order to hedge against falling prices, but in
fact interest rates decline and prices rise, the Fund will have lost the
opportunity to profit from the price increase. If the investment adviser or
sub-adviser anticipates a decline in interest rates and a rise in prices,
and, accordingly, the Fund sells a security in its portfolio and purchases
the same or a similar security on a when-issued or forward commitment basis
in order to enjoy currently high cash yields, but in fact interest rates
increase and prices fall, the Fund will have lost the opportunity to profit
from investment of the proceeds of the sale of the security at the increased
interest rates. The likely effect of this hedging strategy, whether the
Fund's investment adviser or sub-adviser is correct or incorrect in its
prediction of interest rate and price movements, is to reduce the chances of
large capital gains or losses and thereby reduce the likelihood of wide
variations in the Fund's net asset value.
When-issued securities and forward commitments may be sold prior to the
settlement date, but, except for mortgage dollar roll transactions (as
discussed below), the Fund enters into when-issued and forward commitments
only with the intention of actually receiving or delivering the securities,
as the case may be. The Fund may hold a when-issued security or forward
commitment until the settlement date, even if the Fund will incur a loss upon
settlement. To facilitate transactions in when-issued securities and forward
commitments, the Fund's custodian bank maintains, in a separate account of
the Fund, liquid assets, such as cash, short-term securities and other liquid
securities (marked to the market daily), having a value equal to, or greater
than, any commitments to purchase securities on a when-issued or forward
commitment basis and, with respect to forward commitments to sell portfolio
securities of the Fund, the portfolio securities themselves. If the Fund,
however, chooses to dispose of the right to acquire a when-issued security
prior to its acquisition or dispose of its right to deliver or receive
against a forward commitment, it can incur a gain or loss. (At the time the
Fund makes the commitment to purchase or sell a security on a when-issued or
forward commitment basis, it records the transaction and reflects the value
of the security purchased or, if a sale, the proceeds to be received, in
determining its net asset value.)
The Fund may also enter into such transactions to generate incremental
income. In some instances, the third-party seller of when-issued or forward
commitment securities may determine prior to the settlement date that it will
be unable or unwilling to meet its existing transaction commitments without
borrowing securities. If advantageous from a yield perspective, the Fund
may, in that event, agree to resell its purchase commitment to the third-
party seller at the current market price on the date of sale and concurrently
enter into another purchase commitment for such securities at a later date.
As an inducement for the Fund to "roll over" its purchase commitment, the
Fund may receive a negotiated fee. These transactions, referred to as
"mortgage dollar rolls," are entered into without the intention of actually
acquiring securities. For a description of mortgage dollar rolls and the
Funds that may invest in such transactions, see " Mortgage Dollar Rolls"
below.
The purchase of securities on a when-issued or forward commitment basis
exposes the Fund to risk because the securities may decrease in value prior
to their delivery. Purchasing securities on a when-issued or forward
commitment basis involves the additional risk that the return available in
the market when the delivery takes place will be higher than that obtained in
the transaction itself. The Fund's purchase of securities on a when-issued
or forward commitment basis while remaining substantially fully invested
increases the amount of the Fund's assets that are subject to market risk to
an amount that is greater than the Fund's net asset value, which could result
in increased volatility of the price of the Fund's shares. No more than 30%
of the value of such Fund's (other than International Fund's) total assets
will be committed to when-issued or forward commitment transactions, and of
such 30%, no more than two-thirds (i.e., 20% of its total assets) may be
invested in mortgage dollar rolls. No more than 20% of the value of
International Fund's total assets will be committed to when-issued or forward
commitment transactions.
Mortgage Dollar Rolls
In connection with its ability to purchase securities on a when-issued
or forward commitment basis, Spectrum Fund, Bond Fund and Mortgage Securities
Fund may enter into mortgage "dollar rolls" in which the Fund sells
securities for delivery in the current month and simultaneously contracts
with the same counterparty to repurchase similar (same type, coupon and
maturity) but not identical securities on a specified future date. In a
mortgage dollar roll, the Fund gives up the right to receive principal and
interest paid on the securities sold. However, the Fund would benefit to the
extent of any difference between the price received for the securities sold
and the lower forward price for the future purchase plus any fee income
received. Unless such benefits exceed the income, capital appreciation and
gain or loss due to mortgage prepayments that would have been realized on the
securities sold as part of the mortgage dollar roll, the use of this
technique will diminish the investment performance of the Fund compared with
what such performance would have been without the use of mortgage dollar
rolls. The Fund will hold and maintain in a segregated account until the
settlement date cash or liquid securities in an amount equal to the forward
purchase price. The benefits derived from the use of mortgage dollar rolls
may depend upon the ability of the Fund's investment adviser to predict
correctly mortgage prepayments and interest rates. There is no assurance
that mortgage dollar rolls can be successfully employed. In addition, the
use of mortgage dollar rolls by the Fund while remaining substantially fully
invested increases the amount of the Fund's assets that are subject to market
risk to an amount that is greater than the Fund's net asset value, which
could result in increased volatility of the price of the Fund's shares.
For financial reporting and tax purposes, mortgage dollar rolls are
considered as two separate transactions: one involving the sale of a
security and a separate transaction involving a purchase. The Funds do not
currently intend to enter into mortgage dollar rolls that are accounted for
as a "financing" rather than as a separate sale and purchase transactions.
Repurchase Agreements
Horizon Fund, Spectrum Fund, Enterprise Fund, Cornerstone Fund, Money
Market Fund, Bond Fund and International Fund may enter into repurchase
agreements. Repurchase agreements are agreements by which the Fund purchases
a security and obtains a simultaneous commitment from the seller (a member
bank of the Federal Reserve System or, if permitted by law or regulation and
if the Board of Directors of the Fund has evaluated its creditworthiness
through adoption of standards of review or otherwise, a securities dealer) to
repurchase the security at an agreed upon price and date. The
creditworthiness of entities with whom the Fund enters into repurchase
agreements is monitored by the Fund's investment adviser or sub-adviser
throughout the term of the repurchase agreement. The resale price is in
excess of the purchase price and reflects an agreed upon market rate
unrelated to the coupon rate on the purchased security. Such transactions
afford the Fund the opportunity to earn a return on temporarily available
cash. The Fund's custodian, or a duly appointed subcustodian, holds the
securities underlying any repurchase agreement in a segregated account or
such securities may be part of the Federal Reserve Book Entry System. The
market value of the collateral underlying the repurchase agreement is
determined on each business day. If at any time the market value of the
collateral falls below the repurchase price of the repurchase agreement
(including any accrued interest), the Fund promptly receives additional
collateral, so that the total collateral is in an amount at least equal to
the repurchase price plus accrued interest. While the underlying security
may be a bill, certificate of indebtedness, note or bond issued by an agency,
authority or instrumentality of the U.S. Government, the obligation of the
seller is not guaranteed by the U.S. Government. In the event of a
bankruptcy or other default of a seller of a repurchase agreement, the Fund
could experience both delays in liquidating the underlying security and
losses, including: (a) possible decline in the value of the underlying
security during the period while the Fund seeks to enforce its rights
thereto; (b) possible subnormal levels of income and lack of access to income
during this period; and (c) expenses of enforcing its rights.
Reverse Repurchase Agreements
Spectrum Fund and Money Market Fund may also enter into reverse
repurchase agreements. Reverse repurchase agreements are the counterparts of
repurchase agreements, by which the Fund sells a security and agrees to
repurchase the security from the buyer at an agreed upon price and future
date. Because certain of the incidents of ownership of the security are
retained by the Fund, reverse repurchase agreements may be considered a form
of borrowing by the Fund from the buyer, collateralized by the security. The
Fund uses the proceeds of a reverse repurchase agreement to purchase other
money market securities either maturing, or under an agreement to resell, at
a date simultaneous with or prior to the expiration of the reverse repurchase
agreement. The Fund utilizes reverse repurchase agreements when the interest
income to be earned from investment of the proceeds of the reverse repurchase
transaction exceeds the interest expense of the transaction.
The use of reverse repurchase agreements by the Fund allows it to
leverage its portfolio. While leveraging offers the potential for increased
yield, it magnifies the risks associated with the Fund's investments and
reduces the stability of the Fund's net asset value per share. To limit this
risk, the Fund will not enter into a reverse repurchase agreement if all such
transactions, together with any money borrowed, exceed 5% of the Fund's net
assets. In addition, when entering into reverse repurchase agreements, the
Fund will deposit and maintain in a segregated account with its custodian
liquid assets, such as cash or cash equivalents and other appropriate short-
term securities and high grade debt obligations, in an amount equal to the
repurchase price (which shall include the interest expense of the
transaction). Moreover, the Money Market Fund will not enter into reverse
repurchase agreements if and to the extent such transactions would, as
determined by the Fund's investment adviser, materially increase the risk of
a significant deviation in the Fund's net asset value per share. See "Money
Market Fund Amortized Cost Method of Portfolio Valuation" below.
Futures Contracts and Options on Futures Contracts
Futures Contracts. Consistent with their investment objectives and
strategies, the Funds may enter into interest rate futures contracts, stock
index futures contracts and foreign currency futures contracts. (Unless
otherwise specified, interest rate futures contracts, stock index futures
contracts and foreign currency futures contracts are collectively referred to
as "futures contracts.")
A futures contract is a bilateral agreement providing for the purchase
and sale of a specified type and amount of a financial instrument or foreign
currency, or for the making and acceptance of a cash settlement, at a stated
time in the future for a fixed price. By its terms, a futures contract
provides for a specified settlement date on which, in the case of the
majority of interest rate and foreign currency futures contracts, the fixed
income securities or currency underlying the contract are delivered by the
seller and paid for by the purchaser, or on which, in the case of stock index
futures contracts and certain interest rate and foreign currency futures
contracts, the difference between the price at which the contract was entered
into and the contract's closing value is settled between the purchaser and
the seller in cash. Futures contracts differ from options in that they are
bilateral agreements, with both the purchaser and the seller equally
obligated to complete the transaction. Futures contracts call for settlement
only on the expiration date, and cannot be "exercised" at any other time
during their term.
Interest rate futures contracts currently are traded on a variety of
fixed income securities, including long-term U.S. Treasury Bonds, Treasury
Notes, Government National Mortgage Association modified pass-through
mortgage-backed securities, and U.S. Treasury Bills. In addition, interest
rate futures contracts include contracts on indexes of municipal securities.
Foreign currency futures contracts currently are traded on the British pound,
Canadian dollar, Japanese yen, Swiss franc, West German mark, and on
Eurodollar deposits.
Stock index futures contracts include contracts on the S&P 500 Index
and other broad-based stock market indexes, as well as contracts based on
narrower market indexes or indexes of securities of particular industry
groups. A stock index assigns relative values to the common stocks included
in the index and the index fluctuates with the value of the common stocks so
included. The parties to a stock index futures contract agree to make a cash
settlement on a specific future date in an amount determined by the value of
the stock index on the last trading day of the contract. The amount is a
specified dollar amount times the difference between the value of the index
on the last trading day and the value on the day the contract was struck.
Purchases or sales of stock index futures contracts are used to attempt
to protect current or intended stock investments from broad fluctuations in
stock prices. Interest rate and foreign currency futures contracts are
purchased or sold to attempt to hedge against the effects of interest or
exchange rate changes on a Fund's current or intended investments in fixed
income or foreign securities. In the event that an anticipated decrease in
the value of a Fund's securities occurs as a result of a general stock market
decline, a general increase in interest rates, or a decline in the dollar
value of foreign currencies in which portfolio securities are denominated,
the adverse effects of such changes may be offset, in whole or in part, by
gains on the sale of futures contracts. Conversely, the increased cost of a
Fund's securities to be acquired, caused by a general rise in the stock
market, a general decline in interest rates, or a rise in the dollar value of
foreign currencies, may be offset, in whole or in part, by gains on futures
contracts purchased by such Fund.
Although many futures contracts by their terms call for actual delivery
or acceptance of the financial instrument, in most cases the contracts are
closed out before the settlement date without the making or taking of
delivery. Closing out a short position is effected by purchasing a futures
contract for the same aggregate amount of the specific type of financial
instrument and the same delivery month. If the price of the initial sale of
the futures contract exceeds the price of the offsetting purchase, the seller
is paid the difference and realizes a gain. Conversely, if the price of the
offsetting purchase exceeds the price of the initial sale, the trader
realizes a loss. Similarly, the closing out of a long position is effected
by the purchaser entering into a futures contract sale. If the offsetting
sale price exceeds the purchase price, the purchaser realizes a gain and, if
the purchase price exceeds the offsetting sale price, the purchaser realizes
a loss.
The purchase or sale of a futures contract differs from the purchase or
sale of a security in that no purchase price is paid or received. Instead,
an amount of cash or cash equivalents, which varies but may be as low as 5%
or less of the value of the contract, must be deposited with the broker as
"initial margin." Subsequent payments to and from the broker, referred to as
"variation margin," are made on a daily basis as the value of the index or
instrument underlying the futures contract fluctuates, making positions in
the futures contracts more or less valuable, a process known as "marking to
the market."
U.S. futures contracts may be purchased or sold only on an exchange,
known as a "contract market," designated by the Commodity Futures Trading
Commission ("CFTC") for the trading of such contract, and only through a
registered futures commission merchant which is a member of such contract
market. A commission must be paid on each completed purchase and sale
transaction. The contract market clearing house guarantees the performance
of each party to a futures contract by in effect taking the opposite side of
such contract. At any time prior to the expiration of a futures contract, a
trader may elect to close out its position by taking an opposite position on
the contract market on which the position was entered into, subject to the
availability of a secondary market, which will operate to terminate the
initial position. At that time, a final determination of variation margin is
made and any loss experienced by the trader is required to be paid to the
contract market clearing house while any profit due to the trader must be
delivered to it. Futures contracts may also be traded on foreign exchanges.
Options on Futures Contracts. The Funds also may purchase and sell put
and call options on futures contracts and enter into closing transactions
with respect to such options to terminate existing positions. The Funds may
use such options on futures contracts in connection with their hedging
strategies in lieu of purchasing and writing options directly on the
underlying securities or purchasing and selling the underlying futures
contracts.
An option on a futures contract provides the holder with the right to
enter into a "long" position in the underlying futures contract, in the case
of a call option, or a "short" position in the underlying futures contract,
in the case of a put option, at a fixed exercise price up to a stated
expiration date or, in the case of certain options, on such date. Upon
exercise of the option by the holder, the contract market clearing house
establishes a corresponding short position for the writer of the option, in
the case of a call option, or a corresponding long position, in the case of a
put option. In the event that an option is exercised, the parties will be
subject to all the risks associated with the trading of futures contracts,
such as payment of variation margin deposits. In addition, the writer of an
option on a futures contract, unlike the holder, is subject to initial and
variation margin requirements on the option position.
A position in an option on a futures contract may be terminated by the
purchaser or the seller prior to expiration by affecting a closing purchase
or sale transaction, subject to the availability of a liquid secondary
market, which is the purchase or sale of an option of the same series (i.e.,
the same exercise price and expiration date) as the option previously
purchased or sold. The difference between the premiums paid and received
represents the trader's profit or loss on the transaction.
Options on futures contracts that are written or purchased by the Funds
on United States exchanges are traded on the same contract market as the
underlying futures contract and, like futures contracts, are subject to
regulation by the CFTC and the performance guarantee of the exchange clearing
house. In addition, options on futures contracts may be traded on foreign
exchanges.
Risks of Futures Contracts and Options on Futures Contracts. The use
of futures contracts and options on futures contracts will expose the Funds
to additional investment risks and transactions costs. Risks include:
? the risk that interest rates, securities prices or currency markets will
not move in the direction that the Fund's investment adviser or sub-
adviser anticipates;
? an imperfect correlation between the price of the instrument and movements
in the prices of any securities or currencies being hedged;
? the possible absence of a liquid secondary market for any particular
instrument and possible exchange imposed price fluctuation limits;
? leverage risk, which is the risk that adverse price movements in an
instrument can result in a loss substantially greater than a Fund's
initial investment in that instrument; and
? the risk that the counterparty to an instrument will fail to perform its
obligations.
Regulatory Matters. To the extent required to comply with applicable
Securities and Exchange Commission releases and staff positions, when
entering into futures contracts each Fund will maintain, in a segregated
account, cash or liquid securities equal to the value of such contracts.
The CFTC, a federal agency, regulates trading activity on the exchanges
pursuant to the Commodity Exchange Act, as amended. The CFTC requires the
registration of "commodity pool operators," defined as any person engaged in
a business which is of the nature of a company, syndicate or a similar form
of enterprise, and who, in connection therewith, solicits, accepts or
receives from others, funds, securities or property for the purpose of
trading in any commodity for future delivery on or subject to the rules of
any contract market. The CFTC has adopted Rule 4.5, which provides an
exclusion from the definition of commodity pool operator for any registered
investment company which meets the requirements of the Rule. Rule 4.5
requires, among other things, that an investment company wishing to avoid
commodity pool operator status use futures and options positions only (a) for
"bona fide hedging purposes" (as defined in CFTC regulations) or (b) for
other purposes so long as aggregate initial margins and premiums required in
connection with non-hedging positions do not exceed 5% of the liquidation
value of the investment company's portfolio. Any investment company wishing
to claim the exclusion provided in Rule 4.5 must file a notice of eligibility
with both the CFTC and the National Futures Association. Before engaging in
transactions involving interest rate futures contracts, the Funds will file
such notices and meet the requirements of Rule 4.5, or such other
requirements as the CFTC or its staff may from time to time issue, in order
to render registration as a commodity pool operator unnecessary.
For examples of futures contracts and their tax treatment, see Appendix
C to this Statement of Additional Information.
Options
Each Fund may write (i.e., sell) covered call and secured put options
and purchase and sell put and call options written by others. Each Fund will
limit the total market value of securities against which it may write call or
put options to 20% of its total assets. In addition, no Fund will commit
more than 5% of its total assets to premiums when purchasing put or call
options.
A put option gives the purchaser the right to sell a security or other
instrument to the writer of the option at a stated price during the term of
the option. A call option gives the purchaser the right to purchase a
security or other instrument from the writer of the option at a stated price
during the term of the option. Thus, if a Fund writes a call option on a
security, it becomes obligated during the term of the option to deliver the
security underlying the option upon payment of the exercise price. If a Fund
writes a put option, it becomes obligated during the term of the option to
purchase the security underlying the option at the exercise price if the
option is exercised.
Funds may use put and call options for a variety of purposes. For
example, if a portfolio manager wishes to hedge a security a Fund owns
against a decline in price, the manager may purchase a put option on the
underlying security; i.e., purchase the right to sell the security to a third
party at a stated price. If the underlying security then declines in price,
the manager can exercise the put option, thus limiting the amount of loss
resulting from the decline in price. Similarly, if the manager intends to
purchase a security at some date in the future, the manager may purchase a
call option on the security today in order to hedge against an increase in
its price before the intended purchase date. Put and call options also can
be used for speculative purposes. For example, if a portfolio manager
believes that the price of stocks generally is going to rise, the manager may
purchase a call option on a stock index, the components of which are
unrelated to the stocks held or intended to be purchased. Finally, a
portfolio manager may write options on securities owned in order to realize
additional income. Funds receive premiums from writing call or put options,
which they retain whether or not the options are exercised.
By writing a call option, a Fund might lose the potential for gain on
the underlying security while the option is open, and by writing a put option
a Fund might become obligated to purchase the underlying security for more
than its current market price upon exercise. If a Fund purchases a put or
call option, any loss to the Fund is limited to the premium paid for, and
transaction costs paid in connection with, the option.
Options on Securities. An option on a security provides the purchaser,
or "holder," with the right, but not the obligation, to purchase, in the case
of a "call" option, or sell, in the case of a "put" option, the security or
securities underlying the option, for a fixed exercise price up to a stated
expiration date or, in the case of certain options, on such date. The holder
pays a nonrefundable purchase price for the option, known as the "premium."
The maximum amount of risk the purchaser of the option assumes is equal to
the premium plus related transaction costs, although this entire amount may
be lost. The risk of the seller, or "writer," however, is potentially
unlimited, unless the option is "covered." A call option written by a Fund
is "covered" if the Fund owns the underlying security covered by the call or
has an absolute and immediate right to acquire that security without
additional cash consideration (or for additional cash consideration held in a
segregated account by its custodian) upon conversion or exchange of other
securities held in its portfolio. A call option is also covered if the Fund
holds a call on the same security and in the same principal amount as the
call written where the exercise price of the call held (a) is equal to or
less than the exercise price of the call written or (b) is greater than the
exercise price of the call written if the difference is maintained by the
Fund in cash and liquid securities in a segregated account with its
custodian. A put option written by a Fund is "covered" if the Fund maintains
cash and liquid securities with a value equal to the exercise price in a
segregated account with its custodian, or else holds a put on the same
security and in the same principal amount as the put written where the
exercise price of the put held is equal to or greater than the exercise price
of the put written. If the writer's obligation is not so covered, it is
subject to the risk of the full change in value of the underlying security
from the time the option is written until exercise.
Upon exercise of the option, the holder is required to pay the purchase
price of the underlying security, in the case of a call option, or to deliver
the security in return for the purchase price in the case of a put option.
Conversely, the writer is required to deliver the security, in the case of a
call option, or to purchase the security, in the case of a put option.
Options on securities which have been purchased or written may be closed out
prior to exercise or expiration by entering into an offsetting transaction on
the exchange on which the initial position was established, subject to the
availability of a liquid secondary market.
Options on securities and options on indexes of securities, discussed
below, are traded on national securities exchanges, such as the Chicago Board
Options Exchange and the New York Stock Exchange, which are regulated by the
SEC. The Options Clearing Corporation guarantees the performance of each
party to an exchange-traded option, by in effect taking the opposite side of
each such option. A holder or writer may engage in transactions in exchange-
traded options on securities and options on indexes of securities only
through a registered broker-dealer which is a member of the exchange on which
the option is traded.
In addition, options on securities and options on indexes of securities
may be traded on exchanges located outside the United States and over-the-
counter through financial institutions dealing in such options as well as the
underlying instruments. While exchange-traded options have a continuous
liquid market, over-the-counter options may not.
Options on Stock Indexes. In contrast to an option on a security, an
option on a stock index provides the holder with the right to make or receive
a cash settlement upon exercise of the option, rather than the right to
purchase or sell a security. The amount of this settlement is equal to (a)
the amount, if any, by which the fixed exercise price of the option exceeds
(in the case of a call) or is below (in the case of a put) the closing value
of the underlying index on the date of exercise, multiplied by (b) a fixed
"index multiplier." The purchaser of the option receives this cash
settlement amount if the closing level of the stock index on the day of
exercise is greater than, in the case of a call, or less than, in the case of
a put, the exercise price of the option. The writer of the option is
obligated, in return for the premium received, to make delivery of this
amount if the option is exercised. As in the case of options on securities,
the writer or holder may liquidate positions in stock index options prior to
exercise or expiration by entering into closing transactions on the exchange
on which such positions were established, subject to the availability of a
liquid secondary market.
A Fund will cover all options on stock indexes by owning securities
whose price changes, in the opinion of the Fund's adviser or sub-adviser, are
expected to be similar to those of the index, or in such other manner as may
be in accordance with the rules of the exchange on which the option is traded
and applicable laws and regulations. Nevertheless, where a Fund covers a
call option on a stock index through ownership of securities, such securities
may not match the composition of the index. In that event, the Fund will not
be fully covered and could be subject to risk of loss in the event of adverse
changes in the value of the index. The Funds will secure put options on
stock indexes by segregating assets equal to the option's exercise price, or
in such other manner as may be in accordance with the rules of the exchange
on which the option is traded and applicable laws and regulations.
The index underlying a stock option index may be a "broad-based" index,
such as the Standard & Poor's 500 Index or the New York Stock Exchange
Composite Index, the changes in value of which ordinarily will reflect
movements in the stock market in general. In contrast, certain options may
be based upon narrower market indexes, such as the Standard & Poor's 100
Index, or on indexes of securities of particular industry groups, such as
those of oil and gas or technology companies. A stock index assigns relative
values to the stocks included in the index and the index fluctuates with
changes in the market values of the stocks so included.
Warrants
Horizon Fund, Spectrum Fund, Enterprise Fund, Cornerstone Fund, Bond
Fund and International Fund may invest in warrants. Warrants are instruments
that allow investors to purchase underlying shares at a specified price
(exercise price) at a given future date. The market price of a warrant is
determined by market participants by the addition of two distinct components:
(1) the price of the underlying shares less the warrant's exercise price, and
(2) the warrant's premium that is attributed to volatility and leveraging
power. Warrants are pure speculation in that they have no voting rights, pay
no dividends and have no rights with respect to the assets of the corporation
issuing them. The prices of warrants do not necessarily move parallel to the
prices of the underlying securities.
It is not expected that Bond Fund will invest in common stocks or
equity securities other than warrants, but it may retain for reasonable
periods of time up to 5% of its total assets in common stocks acquired upon
conversion of debt securities or preferred stocks or upon exercise
of warrants.
Warrants with Cash Extractions
International Fund may also invest up to 5% of its assets in warrants
used in conjunction with the cash extraction method. If an investor wishes
to replicate an underlying share, the investor can use the warrant with cash
extraction method by purchasing warrants and holding cash. The cash
component would be determined by subtracting the market price of the warrant
from the underlying share price.
For example, ASSUME one share for company "Alpha" has a current share
price of $40 and issued warrants can be converted one for one share at an
exercise price of $31 exercisable two years from today. Also ASSUME that the
market price of the warrant is $10 ($40 - $31 + $1) because investors are
willing to pay a premium ($1) for previously stated reasons. If an investor
wanted to replicate an underlying share by engaging in a warrant with cash
extraction strategy, the amount of cash the investor would need to hold for
every warrant would be $30 ($40 - $10 = $30). A warrant with cash extraction
is, thus, simply a synthetically created quasi-convertible bond.
If an underlying share issues no or a low dividend and has an
associated warrant with a market price that is low relative to its share
price, a warrant with cash extraction may provide attractive cash yields and
minimize capital loss risk, provided the underlying share is also considered
a worthy investment. For example, ASSUME Alpha's share is an attractive
investment opportunity and its share pays no dividend. Given the information
regarding Alpha provided above, also ASSUME that short-term cash currently
yields 5% per year and that the investor plans to hold the investment at
least two years, barring significant near-term capital appreciation. If the
share price were to fall below $30, the warrant with cash extraction strategy
would yield a lower loss than the underlying share because an investor cannot
lose more than the purchase cost of the warrant (capital risk minimized).
The cash component for this strategy would yield $3.08 after two years
(compound interest). The total value of the underlying investment would be
$43.08 versus $40.00 for the non-yielding underlying share (attractive
yield). Finally, it is important to note that this strategy will not be
pursued if it is not economically more attractive than underlying shares.
Index Depositary Receipts
Cornerstone Fund, Enterprise Fund, Spectrum Fund and Horizon Fund may
each invest up to 10% of its total assets in one or more types of depositary
receipts ("DRs") as a means of tracking the performance of a designated stock
index while maintaining liquidity. No more than 5% of a Fund's total assets
may be invested in any one DR. The Fund may invest in S&P 500 Depositary
Receipts ("SPDRs"), which track the S&P 500 Index; S&P MidCap 400 Depositary
Receipts ("MidCap SPDRs"), which track the S&P MidCap 400 Index; and "Dow
Industrial Diamonds," which track the Dow Jones Industrial Average, or in
other DRs which track indexes, provided that such investments are consistent
with the Fund's investment objective as determined by the Fund's investment
adviser. Each of these securities represents shares of ownership of a long
term unit investment trust (a type of investment company) that holds all of
the stock included in the relevant underlying index.
DRs carry a price which equals a specified fraction of the value of the
designated index and are exchange traded. As with other equity transactions,
brokers charge a commission in connection with the purchase of DRs. In
addition, an asset management fee is charged in connection with the
underlying unit investment trust (which is in addition to the asset
management fee paid by the Fund).
Trading costs for DRs are somewhat higher than those for stock index
futures contracts, but, because DRs trade like other exchange-listed
equities, they represent a quick and convenient method of maximizing the use
of the Fund's assets to track the return of a particular stock index. DRs
share in the same market risks as other equity investments.
Short Sales Against the Box
Each Fund may sell securities "short against the box." Whereas a short
sale is the sale of a security the Fund does not own, a short sale is
"against the box" if, at all times during which the short position is open,
the Fund owns at least an equal amount of the securities sold short or other
securities convertible into or exchangeable without further consideration for
securities of the same issue as the securities sold short. Short sales
against the box are typically used by sophisticated investors to defer
recognition of capital gains or losses. The Funds have no present intention
to sell securities short in this fashion.
Defensive Purposes
The Funds may invest up to 20% of their respective net assets in cash
or cash items. In addition, for temporary or defensive purposes, the Funds
may invest in cash or cash items without limitation. The "cash items" in
which the Funds may invest, include short-term obligations such as rated
commercial paper and variable amount master demand notes; United States
dollar-denominated time and savings deposits (including certificates of
deposit); bankers' acceptances; obligations of the United States Government
or its agencies or instrumentalities; repurchase agreements collateralized by
eligible investments of a Fund; securities of other mutual funds which invest
primarily in debt obligations with remaining maturities of 13 months or less
(which investments also are subject to the advisory fee); and other similar
high-quality short-term United States dollar-denominated obligations. The
other mutual funds in which the Funds may so invest include money market
funds advised by the Fund's investment adviser.
INVESTMENT RESTRICTIONS
Each of the Funds is "diversified" as defined in the Investment Company
Act of 1940. This means that at least 75% of the value of the Fund's total
assets is represented by cash and cash items, government securities,
securities of other investment companies, and securities of other issuers,
which for purposes of this calculation, are limited in respect of any one
issuer to an amount not greater in value than 5% of the Fund's total assets
and to not more than 10% of the outstanding voting securities of such issuer.
The Money Market Fund is also subject to the investment restrictions of
Rule 2a-7 under the Investment Company Act of 1940, as amended (the "1940
Act"), in addition to its other policies and restrictions discussed below.
Pursuant to Rule 2a-7, the Fund is required to invest exclusively in
securities that mature within 397 days from the date of purchase and to
maintain an average weighted maturity of not more than 90 days. Rule 2a-7
also requires that all investments by the Fund be limited to United States
dollar-denominated investments that (a) present "minimal credit risk" and (b)
are at the time of acquisition "Eligible Securities." Eligible Securities
include, among others, securities that are rated by two Nationally Recognized
Statistical Rating Organizations ("NRSROs") in one of the two highest
categories for short-term debt obligations, such as A-1 or A-2 by S&P, or
Prime-1 or Prime-2 by Moody's.
Rule 2a-7 also requires, among other things, that the Money Market Fund
may not invest, other than in U.S. "Government securities" (as defined in the
1940 Act), (a) more than 5% of its total assets in Second Tier Securities
(i.e., Eligible Securities that are not rated by two NRSROs in the highest
category such as A-1 and Prime-1) and (b) more than the greater of 1% of its
total assets or $1,000,000 in Second Tier Securities of any one issuer. The
Fund's present practice is not to purchase any Second Tier Securities.
In addition to the foregoing limitations, each Fund is subject to
certain "fundamental" investment restrictions, described below, which may
not be changed without the vote of a "majority" of the Fund's outstanding
shares. As used in the applicable Prospectus and this Statement of
Additional Information, "majority" means the lesser of (i) 67% of a Fund's
outstanding shares present at a meeting of the holders if more than 50% of
the outstanding shares are present in person or by proxy or (ii) more than
50% of a Fund's outstanding shares. Each Fund is also subject to certain
other investment restrictions which are not fundamental and may be changed by
vote of the Board of Directors without further shareholder approval.
Fundamental Restrictions
1. Policy Regarding Borrowing and the Issuance of Senior Securities.
The Fund will not borrow money or issue senior securities, except
as permitted under the Investment Company Act of 1940, as
amended, and as interpreted or modified from time to time by any
regulatory authority having jurisdiction.
2. Policy Regarding Concentration in a Particular Industry.
Bond Fund, Cornerstone Fund, Enterprise Fund, Horizon Fund,
International Balanced Fund and Spectrum Fund.
The Fund will not concentrate its investments in a particular
industry. For purposes of this limitation, the U.S. Government,
and state or municipal governments and their political
subdivisions, are not considered members of any industry.
Whether the Fund is concentrating in an industry shall be
determined in accordance with the Investment Company Act of 1940,
as amended, and as interpreted or modified from time to time by
any regulatory authority having jurisdiction.
Money Market Fund.
The Fund will not concentrate its investments in a particular
industry. For purposes of this limitation, the U.S. Government,
and state or municipal governments and their political
subdivisions, are not considered members of any industry. In
addition, this limitation does not apply to investments in
domestic banks. Whether the Fund is concentrating in an industry
shall be determined in accordance with the Investment Company Act
of 1940, as amended, and as interpreted or modified from time to
time by any regulatory authority having jurisdiction.
Mortgage Securities Fund.
Under normal market conditions, the Fund will concentrate its
investments in the mortgage and mortgage-finance industry. The
Fund will not concentrate its investments in any other particular
industry. For purposes of this limitation, the U.S. Government,
and state or municipal governments and their political
subdivisions, are not considered members of any industry.
Whether the Fund is concentrating in an industry shall be
determined in accordance with the Investment Company Act of 1940,
as amended, and as interpreted or modified from time to time by
any regulatory authority having jurisdiction.
3. Policy Regarding Investments in Real Estate.
The Fund will not purchase or sell real estate unless acquired as
a result of ownership of securities or other instruments, but
this shall not prevent the Fund from investing in securities or
other instruments backed by real estate or interests therein or
in securities of companies that deal in real estate or mortgages.
4. Policy Regarding Investments in Commodities.
The Fund will not purchase physical commodities or contracts
relating to physical commodities.
5. Policy Regarding Lending.
The Fund may not make loans except as permitted under the
Investment Company Act of 1940, as amended, and as interpreted or
modified from time to time by any regulatory authority having
jurisdiction.
6. Policy Regarding Underwriting of Securities.
The Fund will not act as an underwriter of securities, except to
the extent that the Fund may be deemed to be an underwriter,
under the federal securities laws, in connection with the
disposition of portfolio securities.
Non-Fundamental Restrictions
7. The Fund will not acquire any new securities while borrowings,
including borrowings through reverse repurchase agreements,
exceed 5% of total assets.
8. The Fund will use futures contracts and options on futures
contracts only (a) for "bona fide hedging purposes" (as defined
in regulations of the Commodity Futures Trading Commission) or
(b) for other purposes so long as the aggregate initial margins
and premiums required in connection with non-hedging positions do
not exceed 5% of liquidation value of the Fund's portfolio.
9. The Fund may mortgage, pledge or hypothecate its assets only to
secure permitted borrowings. Collateral arrangements with
respect to futures contracts, options thereon and certain options
transactions are not considered pledges for purposes of this
limitation.
10. The Fund may not make short sales of securities, other than short
sales "against the box."
11. The Fund may not purchase securities on margin, but it may obtain
such short-term credits as may be necessary for the clearance of
securities transactions and it may make margin deposits in
connection with futures contracts.
12. The Fund will not invest more than 15% (10% in the case of Money
Market Fund) of its net assets in illiquid securities.
13. The total market value of securities against which the Fund may
write call or put options will not exceed 20% of the Fund's total
assets. In addition, the Fund will not commit more than 5% of
its total assets to premiums when purchasing put or call options.
With respect to each of the Funds, any investment policy set forth
under "Investing in the Fund - Investment Policies and Practices" in the
applicable Prospectus, under "Investment Objectives and Policies" above, or
any restriction set forth above which involves a maximum percentage of
securities or assets shall not be considered to be violated unless an excess
over the percentage occurs immediately after an acquisition of securities or
utilization of assets and results therefrom, or unless the Investment Company
Act of 1940 provides otherwise.
PORTFOLIO TURNOVER
Portfolio turnover is the ratio of the lesser of annual purchases or
sales of portfolio securities to the average monthly value of portfolio
securities, not including short-term securities. A 100% portfolio turnover
rate would occur, for example, if the lesser of the value of purchases or
sales of portfolio securities for a particular year were equal to the average
monthly value of the portfolio securities owned during such year.
Horizon Fund makes changes in its portfolio securities which are
considered advisable in light of market conditions. Frequent changes may
result in higher brokerage and other costs for the Fund. For the fiscal
years ended September 30, 1999 and 1998, the Fund's portfolio turnover rates
were 60.1% and 72.6%, respectively.
Spectrum Fund's objective and policies may cause the annual portfolio
turnover rate to be higher than the average turnover rate of other investment
companies. Accordingly, the Fund may have high brokerage and other costs. A
portfolio turnover rate that exceeds 100% is considered high and will result
in higher costs. For the fiscal years ended September 30, 1999 and 1998, the
Fund's portfolio turnover rates were 100.8% and 139.8%, respectively.
Mortgage Securities Fund's investment activities may result in the
Fund's engaging in a considerable amount of trading of securities held for
less than one year. Accordingly, it can be expected that the Fund will have
a higher turnover rate, and thus a higher incidence of brokerage and other
costs, than might be expected from investment companies which invest
substantially all of their funds on a long-term basis. A portfolio turnover
rate that exceeds 100% is considered high and will result in higher costs.
For the fiscal years ended September 30, 1999 and 1998, the Fund's portfolio
turnover rates were 127.1% and 152.5%, respectively.
Money Market Fund, consistent with its investment objective, attempts
to maximize yield through portfolio trading. This may involve selling
portfolio instruments and purchasing different instruments to take advantage
of disparities of yields in different segments of the high grade money market
or among particular instruments within the same segment of the market. As a
result, the Fund may have significant portfolio turnover. There usually are
no brokerage commissions paid by the Fund for such purchases since such
securities are purchased on a net basis. Since securities with maturities of
less than one year are excluded from required portfolio turnover rate
calculations, the Fund's portfolio turnover rate for reporting purposes is
zero.
Bond Fund makes changes in its portfolio securities which are
considered advisable in light of market conditions. Portfolio turnover rates
may vary greatly from year to year and within a particular year and may also
be affected by cash requirements for redemptions of Fund shares. Rate of
portfolio turnover is not a limiting factor, however, and particular holdings
may be sold at any time, if, in the opinion of the Fund's investment adviser,
such a sale is advisable. A portfolio turnover rate that exceeds 100% is
considered high and will result in higher costs. For the fiscal years ended
September 30, 1999 and 1998 the Fund's portfolio turnover rates were 211.9%
and 237.2%, respectively.
Cornerstone Fund and Enterprise Fund each make changes in their
portfolio securities which are considered advisable in light of market
conditions. Frequent changes may result in higher brokerage and other costs
for the Funds. Portfolio turnover rates may vary greatly from year to year
and within a particular year and may also be affected by cash requirements
for redemptions of Fund shares. Neither Fund emphasizes short-term trading
profits. For the fiscal years ended September 30, 1999 and 1998 Cornerstone
Fund's portfolio turnover rate was 78.7% and 114.4%, respectively. For the
fiscal years ended September 30, 1999 and 1998 Enterprise Fund's portfolio
turnover rate was 99.3% and 71.1%, respectively.
International Fund also makes changes in its portfolio securities which
are considered advisable in light of market conditions. The Fund does not
emphasize short-term trading profits. For the fiscal years ended September
30, 1999 and 1998, International Fund's portfolio turnover rate was 73.8% and
57.0%, respectively.
DIRECTORS AND EXECUTIVE OFFICERS
The names, addresses, principal occupations, and other affiliations of
directors and executive officers of each of the Funds are given below:
Position with Principal Occupation and other
Name and Address the Funds Affiliations (past 5 years)
William N. Westhoff* President and President, Treasurer and
Director,
Advantus Capital Director Advantus Capital Management,
Inc.;
Management, Inc. Senior Vice President and
Treasurer,
400 Robert Street North Minnesota Life Insurance
Company;
St. Paul, Minnesota 55101 Vice President and Director,
Robert Street Energy, Inc.;
President, MCM Funding 1997-1,
Inc.; President, MCM Funding
1998-1, Inc.; Senior Vice
President, Global Investments,
American Express Financial
Corporation, Minneapolis,
Minnesota, from August 1994 to
October 1997
Frederick P. Feuerherm* Vice President, Vice President, Assistant
Secretary and
Advantus Capital Director and Director, Advantus Capital
Management, Inc. Treasurer Management, Inc.; Vice
President,
400 Robert Street North Minnesota Life Insurance
Company;
St. Paul, Minnesota 55101 Vice President and Director,
MIMLIC Funding, Inc.; Vice
President and Assistant
Secretary, MCM Funding 1997-1,
Inc.; Vice President and
Assistant Secretary, MCM Funding
1998-1, Inc.
Ralph D. Ebbott Director Retired, Vice President and
Treasurer
409 Birchwood Avenue of Minnesota Mining and
White Bear Lake, Manufacturing Company
(industrial
Minnesota 55110 and consumer products) through
June 1989
Charles E. Arner Director Retired, Vice Chairman of The
First
E-1218 First National National Bank of Saint Paul from
Bank Building November 1983 through June 1984;
332 Minnesota Street Chairman and Chief Executive
Officer
St. Paul, Minnesota 55101 of The First National Bank of
Saint Paul from October 1980
through November 1983
Ellen S. Berscheid Director Regents' Professor of Psychology
at the
University of Minnesota University of Minnesota
N309 Elliott Hall
Minneapolis, Minnesota 55455
Michael J. Radmer Secretary Partner with the law firm of
Dorsey & Whitney LLP Dorsey & Whitney LLP
220 South Sixth Street
Minneapolis, Minnesota 55402
_________________________
* Denotes directors of the Funds who are "interested persons" (as defined
under the Investment Company Act of 1940) of the Funds.
_________________________
Legal fees and expenses are paid to the law firm of which Michael J.
Radmer is a partner. No compensation is paid by any of the Advantus Funds to
any of its officers or directors who is affiliated with Advantus Capital
Management, Inc. ("Advantus Capital"). Each director of the Funds who is not
affiliated with Advantus Capital also a director of the other five investment
companies of which Advantus Capital is the investment adviser (13 investment
companies in total -- the "Fund Complex"). As of the date hereof, such
directors receive compensation in connection with all such investment
companies which, in the aggregate, is equal to $8,000 per year and $2,000 per
meeting attended (and reimbursement of travel expenses to attend directors'
meetings). The portion of such compensation borne by any Fund is a pro rata
portion based on the ratio that such Fund's total net assets bears to the
total net assets of the Fund Complex. During the fiscal year ended September
30, 1998, each Director not affiliated with Advantus Capital or was
compensated by the funds in accordance with the following table:
Name of
Director
Aggregate
Compensation
from the
Funds(1)
Pension or
Retirement
Benefits
Accrued as
Part of Fund
Expenses
Estimated
Annual
Benefits Upon
Retirement
Total
Compensation
From Funds
and
Fund Complex
Paid to
Directors
Charles E.
Arner
$3,346.47
n/a
n/a
$20,000
Ellen S.
Berscheid
$3,346.47
n/a
n/a
$20,000
Ralph D.
Ebbott
$3,346.47
n/a
n/a
$20,000
(1) During the fiscal year ended September 30, 1999, each Director not
affiliated with Advantus Capital received $446.52 from Horizon Fund, $602.67
from Spectrum Fund, $309.39 from Mortgage Securities Fund, $288.23 from Money
Market Fund, $190.05 from Bond Fund, $297.11 from Enterprise Fund, $833.86
from Cornerstone Fund and $293.13 from International Fund.
As of September 30, 1999, the directors and executive officers of the
Funds did not own any shares of the Funds, except for William N. Westhoff who
owned less than 1% of the outstanding shares of Horizon Fund, Spectrum Fund,
Mortgage Securities Fund, Money Market Fund, Enterprise Fund and Cornerstone
Fund, Frederick P. Feuerherm who owned less than 1% of the outstanding shares
of Spectrum Fund, and Michael J. Radmer who owned less than 1% of the
outstanding shares of Spectrum Fund.
DIRECTOR LIABILITY
Under Minnesota law, the Board of Directors of each Fund owes certain
fiduciary duties to the Fund and to its shareholders. Minnesota law provides
that a director "shall discharge the duties of the position of director in
good faith, in a manner the director reasonably believes to be in the best
interest of the corporation, and with the care an ordinarily prudent person
in a like position would exercise under similar circumstances." Fiduciary
duties of a director of a Minnesota corporation include, therefore, both a
duty of "loyalty" (to act in good faith and act in a manner reasonably
believed to be in the best interests of the corporation) and a duty of "care"
(to act with the care an ordinarily prudent person in a like position would
exercise under similar circumstances). Minnesota law also authorizes
corporations to eliminate or limit the personal liability of a director to
the corporation or its shareholders for monetary damages for breach of the
fiduciary duty of "care." Minnesota law does not, however, permit a
corporation to eliminate or limit the liability of a director (i) for any
breach of the directors' duty of "loyalty" to the corporation or its
shareholders, (ii) for acts or omissions not in good faith or that involve
intentional misconduct or a knowing violation of law, (iii) for authorizing a
dividend, stock repurchase or redemption or other distribution in violation
of Minnesota law or for violation of certain provisions of Minnesota
securities laws, or (iv) for any transaction from which the director derived
an improper personal benefit. The Articles of Incorporation of each Fund
limit the liability of directors to the fullest extent permitted by Minnesota
statutes, except to the extent that such liability cannot be limited as
provided in the Investment Company Act of 1940 (which prohibits any
provisions which purport to limit the liability of directors arising from
such directors' willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of their role as directors).
Minnesota law does not eliminate the duty of "care" imposed upon a
director. It only authorizes a corporation to eliminate monetary liability
for violations of that duty. Minnesota law, further, does not permit
elimination or limitation of liability of "officers" to the corporation for
breach of their duties as officers (including the liability of directors who
serve as officers for breach of their duties as officers). Minnesota law
does not permit elimination or limitation of the availability of equitable
relief, such as injunctive or rescissionary relief. Further, Minnesota law
does not permit elimination or limitation of a director's liability under the
Securities Act of 1933 or the Securities Exchange Act of 1934, and it is
uncertain whether and to what extent the elimination of monetary liability
would extend to violations of duties imposed on directors by the Investment
Company Act of 1940 and the rules and regulations adopted under such Act.
INVESTMENT ADVISORY AND OTHER SERVICES
General
Advantus Capital Management, Inc. ("Advantus Capital") has been the
investment adviser and manager of each of the Funds since March 1, 1995.
Prior to that date the Funds' investment adviser was MIMLIC Asset Management
Company ("MIMLIC Management"), formerly the parent company of Advantus
Capital. Ascend Financial Services, Inc. ("Ascend Financial") acts as the
Funds' underwriter. Both Advantus Capital and Ascend Financial act as such
pursuant to written agreements that will be periodically considered for
approval by the directors or shareholders of the Fund. The address of both
Advantus Capital and Ascend Financial is 400 Robert Street North, St. Paul,
Minnesota 55101.
Control and Management of Advantus Capital and Ascend Financial
Advantus Capital was incorporated in Minnesota in June, 1994, and is a
wholly-owned subsidiary of Minnesota Life Insurance Company ("Minnesota
Life"). Minnesota Life is a third-tier subsidiary of a mutual insurance
holding company called Minnesota Mutual Companies, Inc. Minnesota Life was
organized in 1880, and has assets of more than $16.5 billion. Ascend
Financial is a subsidiary of Advantus Capital. William N. Westhoff,
President and a Director of each of the Funds, is President, Treasurer and
Director of Advantus Capital. Frederick P. Feuerherm, Vice President,
Treasurer and a Director of each of the Funds, is a Vice President, Assistant
Secretary and Director of Advantus Capital.
Investment Advisory Agreement
Advantus Capital acts as investment adviser and manager of the Funds
under Investment Advisory Agreements (the "Advisory Agreements") dated May 1,
2000 for each Fund, each of which Advisory Agreements was approved by
shareholders on April 17, 2000 in the case of the Cornerstone, Enterprise and
International Balanced Funds, and on April 28, 2000 in the case of the
Horizon, Spectrum, Mortgage Securities, Money Market and Bond Funds. The
Advisory Agreements were last approved by the Board of Directors of each Fund
(including a majority of the directors who are not parties to the contract,
or interested persons of any such party) on February 10, 2000. The Advisory
Agreements will terminate automatically in the event of their assignment. In
addition, each Advisory Agreement is terminable at any time, without penalty,
by the Board of Directors of the respective Fund or by vote of a majority of
the Fund's outstanding voting securities on not more than 60 days' written
notice to Advantus Capital, and by Advantus Capital on 60 days' written
notice to the Fund. Unless sooner terminated, each Advisory Agreement shall
continue in effect for more than two years after its execution only so long
as such continuance is specifically approved at least annually by either the
Board of Directors of the respective Fund or by a vote of a majority of the
outstanding voting securities, provided that in either event such continuance
is also approved by the vote of a majority of the directors who are not
parties to the Advisory Agreement, or interested persons of such parties,
cast in person at a meeting called for the purpose of voting on such
approval.
Pursuant to the Advisory Agreements each Fund pays Advantus Capital an
advisory fee equal on an annual basis to a percentage of that Fund's average
daily net assets as set forth in the following table:
Advisory Fee as Percentage
Fund Of Average Net Assets
Horizon Fund:
On the first $1 billion in assets .70%
On the next $1 billion in assets .65%
On all assets in excess of $2 billion .60%
Spectrum Fund:
On the first $1 billion in assets .50%
On the next $1 billion in assets .48%
On all assets in excess of $2 billion .46%
Mortgage Securities Fund:
On the first $1 billion in assets .475%
On the next $1 billion in assets .46%
On all assets in excess of $2 billion .45%
Money Market Fund:
On the first $500 million in assets .50%
On the next $500 million in assets .45%
On the next $1 billion in assets .425%
On all assets in excess of $2 billion .40%
Bond Fund:
On the first $250 million in assets .60%
On the next $250 million in assets .55%
On the next $500 million in assets .50%
On all assets in excess of $1 billion .45%
Cornerstone Fund:
On the first $500 million in assets .70%
On the next $500 million in assets .65%
On the next $1 billion in assets .60%
On all assets in excess of $2 billion .55%
Enterprise Fund:
On the first $1 billion in assets .70%
On the next $1 billion in assets .68%
On all assets in excess of $2 billion .66%
International Fund:
On the first $250 million in assets .70%
On the next $250 million in assets .65%
On the next $500 million in assets .60%
On all assets in excess of $1 billion .55%
Prior to May 1, 2000, each Fund paid Advantus Capital an advisory fee, in
accordance with its prior investment advisory agreement, equal on an annual
basis to a percentage of that Fund's average daily net assets as set forth in
the following table:
Advisory Fee Paid Prior to May 1, 2000 as Percentage
Fund of Average Net Assets
Horizon Fund .80%
Spectrum Fund .60%
Mortgage Securities Fund .575%
Money Market Fund .50%
Bond Fund .70%
Cornerstone Fund .80%
Enterprise Fund .80%
International Fund:
On the first $25 million in assets .95%
On the next $25 million in assets .80%
On the next $50 million in assets .75%
On all assets in excess of $100 million .65%
From the advisory fee received from Enterprise Fund, Advantus Capital
pays Credit Suisse Asset Management, LLC ("CSAM") a sub-advisory fee equal to
.65% of the first $500 million of Enterprise Fund's average daily net assets,
.60% on the next $500 million of assets, .50% on the next $1 billion of
assets, and .45% on all assets in excess of $2 billion. For purposes of
applying the preceding breakpoints, the assets of the Fund are combined with
all other assets sub-advised by CSAM for Advantus Capital, as determined on
March 31st, June 30th, September 30th and December 31st of each year, with
the percentage fee determined on such date being applicable to the following
period and applied back to the first dollar of Fund assets.
From the advisory fee received from International Fund, Advantus
Capital pays Templeton Investment Counsel, Inc. ("Templeton Counsel") a sub-
advisory fee equal to .70% on the first $25 million of International Fund's
average daily net assets, .55% on the next $25 million, .50% on the next $50
million, and .40% on all average daily net assets in excess of $100 million.
Solely for the purpose of establishing the appropriate breakpoints at which
the Fund's subadvisory fee shall be calculated, the breakpoints are based on
the aggregation of the monthly market value of any non-mutual fund account of
Minnesota Life or any affiliate thereof advised or subadvised by Templeton
Counsel or any advisory affiliate thereof as well as the average daily net
assets of any U.S. registered mutual fund advised by Advantus and sub-advised
by Templeton Counsel or any advisory affiliate thereof. For fee-stacking
purposes, the asset classes so managed with the highest fee schedules shall
be counted first as assets of this Fund in order to determine this Fund's
appropriate starting breakpoint when the following conditions are satisfied:
(i) Franklin Advisors, Inc. an affiliate of Templeton Counsel provides other
sub-advisory services to Advantus Capital, beginning on or after February 15,
2000, covering small company domestic equities in an amount in excess of $100
million; and (ii) Minnesota Life, the parent company of Advantus Capital,
offers as investment options in its registered variable insurance contracts
the Templeton Developing Markets Fund and any other two funds in the
Franklin/Templeton Variable Insurance Products Fund.
The fees paid by the Funds during the fiscal years ended September 30,
1999, 1998 and 1997 (before Advantus Capital's absorption of certain
expenses, described below) were as follows:
Fund 1999 1998 1997
Horizon Fund $646,511 $503,499 $369,628
Spectrum Fund 613,091 517,339 434,731
Mortgage Securities Fund 287,662 239,294 171,007
Money Market Fund 261,232 288,221 249,110
Bond Fund 207,779 187,219 154,304
Cornerstone Fund 1,005,217 1,091,329 726,045
Enterprise Fund 366,946 397,522 350,613
International Fund 499,749 515,264 436,431
For this fee, Advantus Capital acts as investment adviser and manager
for the Funds, or, in the case of Enterprise Fund and International Fund,
pays CSAM and Templeton Counsel, respectively, to serve as investment sub-
advisers. Effective May 1, 2000, each Fund pays its own transfer agent and
shareholder servicing expenses. Prior to that date, Advantus Capital paid
the transfer agent and shareholder servicing expenses for each Fund other
than Money Market Fund.
Under the Advisory Agreements, Advantus Capital furnishes the Funds
office space and all necessary office facilities, equipment and personnel for
servicing the investments of the Funds, and pays the salaries and fees of all
officers and directors of the Funds who are affiliated with Advantus Capital.
In addition, except to the extent that Ascend Financial receives Rule 12b-1
distribution fees (see "Payment of Certain Distribution Expenses of the
Funds" below), Ascend Financial bears all promotional expenses in connection
with the distribution of the Funds' shares, including paying for prospectuses
and statements of additional information for new shareholders, and
shareholder reports for new shareholders, and the costs of sales literature.
The Funds pay all other expenses not so expressly assumed.
Under the Advisory Agreements for each Fund other than Money Market
Fund, Advantus Capital has agreed to absorb all Fund costs and expenses which
exceed a specified percentage of the average daily net assets of each class
of share through the fiscal year of the Fund ending September 30, 2001, as
set forth in the following table:
Expenses Absorbed in Excess of
Specified Percentage of Average Net Assets
Fund Class A Class B Class C
Horizon Fund 1.35% 2.10% 2.10%
Spectrum Fund 1.12% 1.87% 1.87%
Mortgage Securities Fund .95% 1.70% 1.70%
Bond Fund 1.15% 1.90% 1.90%
Cornerstone Fund 1.24% 1.99% 1.99%
Enterprise Fund 1.38% 2.23% 2.23%
International Fund 1.62% 2.42% 2.42%
During the fiscal years ended September 30, 1999, 1998 and 1997
Advantus Capital voluntarily absorbed certain expenses of the Funds (which do
not include certain Rule 12b-1 fees waived by Ascend Financial) as set forth
below:
Fund 1999 1998 1997
Horizon Fund $ 0 $ 0 $ 0
Spectrum Fund 0 0 0
Mortgage Securities Fund 119,827 119,413 110,000
Money Market Fund 232,015 150,711 139,462
Bond Fund 112,547 101,242 96,058
Cornerstone Fund 0 0 0
Enterprise Fund 0 0 0
International Fund 0 92,869 46,576
International Fund Sub-Adviser - Templeton Counsel
Templeton Investment Counsel, Inc., (hereinafter "Templeton Counsel"),
a Florida corporation with principal offices at 500 East Broward Boulevard,
Fort Lauderdale, Florida 33394 has been retained under an investment sub-
advisory agreement to provide investment advice and, in general, to conduct
the management investment program of the International Fund, subject to the
general control of the Board of Directors of the Fund. Templeton Counsel is
an indirect, wholly-owned subsidiary of Templeton Worldwide, Inc., Fort
Lauderdale, Florida, which in turn is a wholly-owned subsidiary of Franklin
Resources, Inc. ("Franklin").
Franklin is a large, diversified financial services organization.
Through its operating subsidiaries, Franklin provides a variety of investment
products and services to institutions and individuals throughout the United
States and abroad. One of the country's largest mutual fund organizations,
Franklin's business includes the provision of management, administrative and
distribution services to the Franklin/Templeton Group of Funds, which is
distributed through a nationwide network of banks, broker-dealers, financial
planners and investment advisers. Franklin is headquartered in San Mateo,
California, and its common stock is listed on the New York Stock Exchange
under the ticker symbol BEN.
Certain clients of Templeton Counsel may have investment objectives and
policies similar to that of the International Fund. Templeton Counsel may,
from time to time make recommendations which result in the purchase or sale
of a particular security by its other clients simultaneously with Fund. If
transactions on behalf of more than one client during the same period
increase the demand for securities being purchased or the supply of
securities being sold, there may be an adverse effect on price. It is the
policy of Templeton Counsel to allocate advisory recommendations and the
placing of orders in a manner which is deemed equitable by Templeton Counsel
to the accounts involved, including the International Fund. When two or more
of the clients of Templeton Counsel (including the International Fund) are
purchasing the same security on a given day from the same broker-dealer, such
transactions may be averaged as to price.
International Fund Investment Sub-Advisory Agreement - Templeton Counsel
Templeton Counsel acts as an investment sub-adviser to the
International Fund under an Investment Sub-Advisory Agreement (the "Templeton
Agreement") with Advantus Capital dated March 1, 1995, approved by
shareholders of the Fund on February 14, 1995. The Templeton Agreement, as
amended, was last approved for continuance by the Board of Directors of the
Fund, including a majority of the Directors who are not a party to the
Templeton Agreement or interested persons of any such party, on February 10,
2000. The Templeton Agreement will terminate automatically upon the
termination of the Advisory Agreement and in the event of its assignment. In
addition, the Templeton Agreement is terminable at any time, without penalty,
by the Board of Directors of the Fund, by Advantus Capital or by a vote of
the majority of the International Fund's outstanding voting securities on 60
days' written notice to Templeton Counsel and by Templeton Counsel on 60
days' written notice to Advantus Capital. Unless sooner terminated, the
Templeton Agreement shall continue in effect from year to year if approved at
least annually by the Board of Directors of the Fund or by a vote of a
majority of the outstanding voting securities of the International Fund,
provided that in either event such continuance is also approved by the vote
of a majority of the directors who are not interested persons of any party to
the Templeton Agreement, cast in person at a meeting called for the purpose
of voting on such approval.
Enterprise Fund Sub-Adviser - CSAM
Credit Suisse Asset Management, LLC (CSAM) has been retained under an
investment sub-advisory agreement to provide investment advise and, in
general, to conduct the management of the Enterprise Fund, subject to the
general control of the Board of Directors of the Fund. CSAM is a registered
investment adviser under the Investment Advisers Act of 1940.
CSAM, located at 153 East 53rd Street, New York, New York 10022, serves
as an investment sub-adviser to the Enterprise Fund pursuant to a written
agreement. CSAM is an indirect wholly-owned U.S. subsidiary of Credit Suisse
Group ("Credit Suisse"). Credit Suisse is a global financial services
company, providing a comprehensive range of banking and insurance products.
Active on every continent and in all major financial centers, Credit Suisse
comprises five business units - Credit Suisse Asset Management, LLC (asset
management); Credit Suisse First Boston (investment banking); Credit Suisse
Private Banking (private banking); Credit Suisse (retail banking); and
Winterthur (insurance). Credit Suisse has approximately 62,000 people
worldwide. The principal business address of Credit Suisse if Paradeplatz 8,
CH 8070, Zurich, Switzerland. CSAM, formerly known as BEA Associates,
together with its predecessor firms, has been engaged in the investment
advisory business for over 60 years.
Enterprise Fund Investment Sub-Advisory Agreement - CSAM
CSAM acts as investment sub-adviser of the Enterprise Fund under an
Investment Sub-Advisory Agreement (the CSAM Agreement) with Advantus Capital
dated May 1, 2000, and approved by shareholders of the Fund on April 17,
2000. The CSAM Agreement was last approved for continuance by the Board of
Directors of the Fund, including a majority of the Directors who are not a
party to the CSAM Agreement or interest persons of any such party, on
February 10, 2000. Prior to May 1, 2000, the Enterprise Fund was managed
directly by Advantus Capital. The CSAM Agreement will terminated
automatically upon the termination of the Fund's Advisory Agreement and in
the event of its assignment. In addition, the CSAM Agreement is terminable
at any time, without penalty, by the Board of Directors of the Fund, by
Advantus Capital or by vote of a majority of the Fund's outstanding voting
securities on 60 days' written notice to CSAM, and by CSAM on 60 days'
written notice to Advantus Capital. Unless sooner terminated, the CSAM
Agreement shall continue in effect from year to year if approved at least
annually either by the Board of Directors of the Fund or by a vote of a
majority of the outstanding voting securities of the Fund, provided that in
either event such continuance is also approved by the vote of a majority of
the Directors who are not interested persons of any party to the CSAM
Agreement, cast in person at a meeting called for the purpose of voting on
such approval.
Code of Ethics
Advantus Capital, Ascend Financial and each of the Funds has adopted a
Code of Ethics in accordance with the Investment Company Act of 1940 and the
rules and regulations thereunder. The private investment activities of
personnel covered by the Code of Ethics are restricted in accordance with the
Code's provisions, but, subject to such provisions, personnel may invest in
securities, including securities that may be purchased or held by the Funds.
Distribution Agreement
Ascend Financial acts as the underwriter of the Funds' shares. The
Board of Directors of each Fund, on January 25, 2000, including a majority of
the directors who are not parties to the contract, or interested persons of
any such party, last approved the respective Fund's Distribution Agreement
with Ascend Financial (the "Distribution Agreements"), each dated October 22,
1998. During the fiscal years ended September 30, 1999, 1998 and 1997, the
commissions received by Ascend Financial under the Distribution Agreements,
except in the case of Money Market Fund (which does not provide for Ascend
Financial to receive a commission), with respect to shares of all classes
under the Distribution Agreements were as follows:
Fund 1999 1998 1997
Horizon Fund $187,561 $321,515 $269,005
Spectrum Fund 244,604 418,271 323,690
Mortgage Securities Fund 103,245 268,951 190,368
Bond Fund 69,196 166,299 132,436
Cornerstone Fund 81,278 488,199 671,121
Enterprise Fund 32,359 113,663 152,474
International Fund 47,616 225,967 325,230
During the same periods Ascend Financial retained from these commissions the
following amounts:
Fund 1999 1998 1997
Horizon Fund $26,961 $30,329 $26,045
Spectrum Fund 42,214 44,702 65,605
Mortgage Securities Fund 15,596 12,159 10,151
Bond Fund 6,279 10,115 6,770
Cornerstone Fund 8,432 34,703 42,739
Enterprise Fund 4,670 10,899 12,279
International Fund 4,725` 19,461 10,075
The remainder of these commissions was paid to registered representatives of
Ascend Financial or to broker-dealers who have selling agreements with Ascend
Financial.
Each Distribution Agreement may be terminated by the respective Fund or
Ascend Financial at any time by the giving of 60 days' written notice, and
terminates automatically in the event of its assignment. Unless sooner
terminated, the Distribution Agreement for the respective Fund shall continue
in effect for more than two years after its execution only so long as such
continuance is specifically approved at least annually by either the Board of
Directors of the Fund or by a vote of a majority of the outstanding voting
securities, provided that in either event such continuance is also approved
by the vote of a majority of the directors who are not parties to the
Distribution Agreement, or interested persons of such parties, cast in person
at a meeting called for the purpose of voting on such approval.
The Distribution Agreements require Ascend Financial to pay all
advertising and promotional expenses in connection with the distribution of
the Funds' shares including paying for Prospectuses and Statements of
Additional Information (if any) for new shareholders, shareholder reports for
new shareholders, and the costs of sales literature.
In the Distribution Agreements, Ascend Financial undertakes to
indemnify the Funds against all costs of litigation and other legal
proceedings, and against any liability incurred by or imposed upon the Funds
in any way arising out of or in connection with the sale or distribution of
the Funds' shares, except to the extent that such liability is the result of
information which was obtainable by Ascend Financial only from persons
affiliated with the Funds but not with Ascend Financial.
Payment of Certain Distribution Expenses of the Funds
Money Market Fund has adopted a Plan of Distribution, and each of the
other Funds has adopted separate Plans of Distribution applicable to Class A
shares, Class B shares and Class C shares, respectively, relating to the
payment of certain distribution and/or shareholder servicing expenses
pursuant to Rule 12b-1 under the Investment Company Act of 1940. Money
Market Fund, pursuant to its Plan of Distribution, pays a fee to Ascend
Financial which, on an annual basis, is equal to .25% of the Fund's average
daily net assets, and is to be used to pay certain expenses incurred in
connection with servicing shareholder accounts. Each of the other Funds,
pursuant to its Plans of Distribution, also pays fees to Ascend Financial
which equal, on an annual basis, a percentage of the Fund's average daily net
assets attributable to Class A shares, Class B shares and Class C shares,
respectively, as set forth in the following table:
Rule 12b-1 Fee as Percentage
of Average Daily Net Assets Attributable to
Fund Class A Shares Class B Shares Class C Shares
Horizon Fund .25% 1.00% 1.00%
Spectrum Fund .25% 1.00% 1.00%
Mortgage Securities Fund .25% 1.00% 1.00%
Bond Fund .25% 1.00% 1.00%
Cornerstone Fund .25% 1.00% 1.00%
Enterprise Fund .25% 1.00% 1.00%
International Fund .25% 1.00% 1.00%
Such fees are used for distribution-related services for Class B and C
shares and for servicing of shareholder accounts in connection with Class A,
B and C shares.
A portion of the Rule 12b-1 fees payable by the Advantus Multiple Class
Funds with respect to Class B and Class C shares equal to 0.75% of the
average daily net assets attributable to such Class B and Class C shares,
constitute distribution fees designed to compensate Ascend Financial for
advertising, marketing and distributing the shares of the Advantus Multiple
Class Funds.
The distribution fees may be used by Ascend Financial for the purpose
of financing any activity which is primarily intended to result in the sale
of shares of the particular Fund. For example, such distribution fee may be
used by Ascend Financial: (a) to compensate broker-dealers, including Ascend
Financial and its registered representatives, for their sale of a Fund's
shares, including the implementation of the programs described below with
respect to broker-dealers, banks, and other financial institutions; and (b)
to pay other advertising and promotional expenses in connection with the
distribution of a Fund's shares. These advertising and promotional expenses
include, by way of example but not by way of limitation, costs of
prospectuses for other than current shareholders; preparation and
distribution of sales literature; advertising of any type; expenses of branch
offices provided jointly by Ascend Financial and any affiliate thereof; and
compensation paid to and expenses incurred by officers, employees or
representatives of Ascend Financial or of other broker-dealers, banks, or
financial institutions.
All of the Rule 12b-1 fee payable with respect to Class A shares and a
portion of the Rule 12b-1 fee payable with respect to Class B and Class C
shares, of each of the Advantus Multiple Class Funds, equal to .25% of the
average daily net assets attributable to such Class A, B and Class C shares,
constitute a shareholder servicing fee designed to compensate Ascend
Financial for the provision of certain services to the holders of Class A, B
and Class C shares.
Amounts expended by the Funds under the respective Plan of Distribution
are expected to be used for the implementation by Ascend Financial of a
dealer incentive program. Pursuant to the program, Ascend Financial may
provide compensation to investment dealers for the provision of distribution
assistance in connection with the sale of the Funds' shares to such dealers'
customers and for the provision of administrative support services to
customers who directly or beneficially own shares of the Funds. The
distribution assistance and administrative support services rendered by
dealers may include, but are not limited to, the following: distributing
sales literature; answering routine customer inquiries concerning the Funds;
assisting customers in changing dividend options, account designation and
addresses, and in enrolling into the pre-authorized check plan or systematic
withdrawal plan; assisting in the establishment and maintenance of customer
accounts and records and in the processing of purchase and redemption
transactions; investing dividends and any capital gains distributions
automatically in the Funds' shares and providing such other information and
services as the Funds or the customer may reasonably request. Such fees for
servicing customer accounts would be in addition to the portion of the sales
charge received or to be received by dealers which sell shares of the Funds.
Ascend Financial may also provide compensation to certain institutions
such as banks ("Service Organizations") which have purchased shares of the
Funds for the accounts of their clients, or which have made the Funds' shares
available for purchase by their clients, and/or which provide continuing
service to such clients. Applicable laws may prohibit certain banks from
engaging in the business of underwriting securities. In such circumstances,
Ascend Financial, if so requested, will engage such banks as Service
Organizations only to perform administrative and shareholder servicing
functions, but at the same fees and other terms applicable to dealers. If a
bank were prohibited from acting as a Service Organization, its shareholder
clients would be permitted to remain shareholders of the Funds and
alternative means for continuing servicing of such shareholders would be
sought. In such event changes in the operation of the Funds might occur and
a shareholder serviced by such bank might no longer be able to avail itself
of any automatic investment or other services then being provided by the
bank. It is not expected that shareholders would suffer any adverse
financial consequences as a result of any of these occurrences.
In addition, the applicable Plan of Distribution contains, among other
things, provisions complying with the requirements of Rule 12b-1 discussed
below. In particular, each Plan provides that (1) the Plan will not take
effect until it has been approved by a vote of a majority of the outstanding
voting securities of the Fund, and by a majority vote of both the full board
of directors of the Fund and those directors who are not interested persons
of the Fund and who have no direct or indirect financial interest in the
operation of the Plan or in any agreements relating to it (the Independent
Directors), (2) the Plan will continue in effect from one year to another so
long as its continuance is specifically approved annually by a majority vote
of both the full board of directors and the Independent Directors, (3) the
Plan may be terminated at any time, without penalty, by vote of a majority of
the Independent Directors or by a vote of a majority of the outstanding
voting securities of the Fund, (4) the Plan may not be amended to increase
materially the amount of the fees payable thereunder unless the amendment is
approved by a vote of a majority of the outstanding voting securities of the
Fund, and all material amendments must be approved by a majority vote of both
the full board of directors and the Independent Directors, (5) while the Plan
is in effect, the selection and nomination of any new Independent Directors
is committed to the discretion of the Independent Directors then in office,
and (6) the Fund's underwriter will prepare and furnish to the board of
directors, and the board of directors will review, at least quarterly,
written reports which set forth the amounts expended under the Plan and the
purposes for which those expenditures were made.
Rule 12b-1(b) provides that any payments made by an investment company
in connection with the distribution of its shares may only be made pursuant
to a written plan describing all material aspects of the proposed financing
of distribution and also requires that all agreements with any person
relating to implementation of the plan must be in writing. In addition, Rule
12b-1(b)(2) requires that such plan, together with any related agreements, be
approved by a vote of the board of directors and of the directors who are not
interested persons of the investment company and have no direct or indirect
financial interest in the operation of the plan or in any agreements related
to the plan, cast in person at a meeting called for the purpose of voting on
such plan or agreements. Rule 12b-1(b)(3) requires that the plan or
agreement provide, in substance: (1) that it shall continue in effect for a
period of more than one year from the date of its execution or adoption only
so long as such continuance is specifically approved at least annually in the
manner described in paragraph (b)(2) of Rule 12b-1; (2) that any person
authorized to direct the disposition of monies paid or payable by the
investment company pursuant to the plan or any related agreement shall
provide to the investment company's board of directors, and the directors
shall review, at least quarterly, a written report of the amounts so expended
and the purposes for which such expenditures were made; and (3) in the case
of a plan, that it may be terminated at any time by vote of a majority of the
members of the board of directors of the investment company who are not
interested persons of the investment company and have no direct or indirect
financial interest in the operation of the plan or in any agreements related
to the plan or by vote of a majority of the outstanding voting securities of
the investment company. Rule 12b-1(b)(4) requires that such plans may not be
amended to increase materially the amount to be spent for distribution
without shareholder approval and that all material amendments of the plan
must be approved in the manner described in paragraph (b)(2) of Rule 12b-1.
Rule 12b-1(c) provides that the investment company may rely upon Rule 12b-
1(b) only if selection and nomination of the investment company's
disinterested directors are committed to the discretion of such disinterested
directors. Rule 12b-1(e) provides that the investment company may implement
or continue a plan pursuant to Rule 12b-1(b) only if the directors who vote
to approve such implementation or continuation conclude, in the exercise of
reasonable business judgment and in light of their fiduciary duties under
state law, and under Sections 36(a) and (b) of the Investment Company Act of
1940, that there is a reasonable likelihood that the plan will benefit the
investment company and its shareholders. At the Board of Directors meeting
held January 25, 2000, the directors of the Funds so concluded.
During the fiscal year ended September 30, 1999, each of the Advantus
Multiple Class Funds made payments under its Plans of Distribution applicable
to Class A, Class B and Class C shares as set forth below (distribution fees
waived by Ascend Financial, if any, are shown in parentheses).
Class A Class B Class C
Horizon Fund $149,250 (n/a) $218,777 $27,014
Spectrum Fund $210,339 (n/a) 225,080 51,268
Mortgage Securities Fund 89,220 (5,448) 121,858 43,336
Bond Fund 50,469 (3,209) 86,763 21,023
Cornerstone Fund 270,308 (16,931) 214,827 28,187
Enterprise Fund 101,768 (44,303) 67,028 8,554
International Fund 134,992 (35,105) 53,826 29,733
Money Market Fund made no payments under its Plan of Distribution
during the fiscal year ended September 30, 1998. Ascend Financial waived
distribution fees from Money Market Fund in the amount of $172,928 during
such period.
The Plans of Distribution could be construed as "compensation plans"
because Ascend Financial is paid a fixed fee and is given discretion
concerning what expenses are payable under the Plans of Distribution. Under
a compensation plan, the fee to the distributor is not directly tied to
distribution expenses actually incurred by the distributor, thereby
permitting the distributor to receive a profit if amounts received exceed
expenses. Ascend Financial may spend more or less for the distribution and
promotion of the Funds' shares than it receives as distribution fees pursuant
to the Plans of Distribution. However, to the extent fees received exceed
expenses, including indirect expense such as overhead, Ascend Financial could
be said to have received a profit.
Transfer Agent and Administrative Services
Effective May 1, 2000, each Fund pays its own transfer agent costs.
Prior to that date, Advantus Capital paid the costs of providing transfer
agent services to each of the Funds except Money Market Fund. Effective
October 26, 1998, the Funds' transfer agent is PFPC Inc. ("PFPC"). Prior to
that date each of the Funds had engaged Minnesota Life to act as its transfer
agent, dividend disbursing agent and redemption agent. During the period
from October 1, 1998 to October 25, 1998, Money Market Fund paid Minnesota
Life $11,902 for transfer agent services.
In addition, separate from the investment advisory agreement, each of
the Funds has entered into an agreement with Minnesota Life under which
Minnesota Life provides (i) accounting, legal and other administrative
services and (ii) shareholder servicing to the Funds. Minnesota Life
currently provides administrative services to the Funds at a monthly cost of
$6,200 for Horizon Fund, Spectrum Fund, Mortgage Securities Fund, Bond Fund,
Enterprise Fund and Cornerstone Fund, and $5,100 for Money Market Fund and
$5,300 for International Fund. During the fiscal year ended September 30,
1999, each of the Funds paid Minnesota Life the following amounts for such
administrative services:
Fund Amount
Horizon Fund $61,400
Spectrum Fund 61,400
Mortgage Securities Fund 61,400
Money Market Fund 51,400
Bond Fund 61,400
Cornerstone Fund 61,400
Enterprise Fund 61,400
International Fund 51,800
Effective May 1, 2000, each Fund pays its own shareholder servicing
costs. Prior to that date Advantus Capital paid the costs of providing
shareholder services to each of the Funds except Money Market Fund.
Minnesota Life currently provides shareholder servicing to each Fund at a
cost of $5 per shareholder account per year.
International Balanced Fund has also entered into a separate agreement
with SEI Investments Mutual Fund Services ("SEI") pursuant to which SEI
provides daily accounting services for the Fund. Minnesota Life, pursuant to
its administrative services agreement with International Balanced Fund,
provides the Fund with financial reporting services and generally oversees
SEI's performance of its services. Under the agreement with SEI, the cost to
International Balanced Fund for SEI's services is an annual fee equal to the
greater of $45,000 or .08% of the Fund's first $150 million of net assets and
.05% of its net assets in excess of $150 million. International Balanced
Fund also reimburses SEI for certain out-of-pocket expenses. During the last
three fiscal years, the amounts paid by International Balanced Fund to SEI
(or to Norwest Bank National Association, which performed these services
prior to April 1, 1998) were as follows:
September 30
1999 1998 1997
$57,220 $69,774 $37,678
MONEY MARKET FUND AMORTIZED COST METHOD OF PORTFOLIO VALUATION
Money Market Fund values its portfolio securities at amortized cost in
accordance with Rule 2a-7 under the Investment Company Act of 1940, as
amended. This method involves valuing an instrument at its cost and
thereafter assuming a constant amortization to maturity of any discount or
premium, regardless of the impact of fluctuations in interest rates on the
market value of the instrument and regardless of any unrealized capital gains
or losses. While this method provides certainty in valuation, it may result
in periods during which value, as determined by amortized cost, is higher or
lower than the price the Fund would receive if it sold the instrument.
During periods of declining interest rates, the daily yield on shares of the
Fund computed by dividing the annualized daily income of the Fund by the net
asset value computed as described above may tend to be higher than a like
computation made by the Fund with identical investments utilizing a method of
valuation based upon market prices and estimates of market prices for all of
its securities.
Pursuant to Rule 2a-7, the Board of Directors of the Fund has
determined, in good faith based upon a full consideration of all material
factors, that it is in the best interests of the Fund and its shareholders to
maintain a stable net asset value per share by virtue of the amortized cost
method of valuation. The Fund will continue to use this method only so long
as the Board of Directors believes that it fairly reflects the market-based
net asset value per share. In accordance with Rule 2a-7, the Board of
Directors has undertaken, as a particular responsibility within the overall
duty of care owed to the Fund's shareholders, to establish procedures
reasonably designed, taking into account current market conditions and the
Fund's investment objectives, to stabilize the Fund's net asset value per
share at a single value. These procedures include the periodic determination
of any deviation of current net asset value per share calculated using
available market quotations from the Fund's amortized cost price per share,
the periodic review by the Board of the amount of any such deviation and the
method used to calculate any such deviation, the maintenance of records of
such determinations and the Board's review thereof, the prompt consideration
by the Board if any such deviation exceeds 1/2 of 1%, and the taking of such
remedial action by the Board as it deems appropriate where it believes the
extent of any such deviation may result in material dilution or other unfair
results to investors or existing shareholders. Such remedial action may
include redemptions in kind, selling portfolio instruments prior to realizing
capital gains or losses, shortening the average portfolio maturity,
withholding dividends or utilizing a net asset value per share as determined
by using available market quotations.
The Fund will, in further compliance with Rule 2a-7, maintain a dollar-
weighted average portfolio maturity not exceeding 90 days and will limit its
portfolio investments to those United States dollar-denominated instruments
which the Board determines present minimal credit risks and which are
eligible securities. The Fund will limit its investments in the securities
of any one issuer to no more than 5% of the Fund's total assets and it will
limit investment in securities of less than the highest rated category to 5%
of the Fund's total assets. Investment in the securities of any issuer of
less than the highest rated category will be limited to the greater of 1% of
the Fund's total assets or one million dollars. In addition, the Fund will
reassess promptly any security which is in default or downgraded from its
rating category to determine whether that security then presents minimal
credit risks and whether continuing to hold the securities is in the best
interests of the Fund. In addition, the Fund will record, maintain, and
preserve a written copy of the above-described procedures and a written
record of the Board's considerations and actions taken in connection with the
discharge of its above-described responsibilities.
PORTFOLIO TRANSACTIONS AND ALLOCATION OF BROKERAGE
Horizon Fund, Spectrum Fund, Cornerstone Fund and Enterprise Fund
In a number of security transactions, it is possible for Horizon Fund,
Spectrum Fund, Cornerstone Fund and Enterprise Fund to deal in the over-the-
counter security markets (including the so-called "third market" which is the
"over-the-counter" market for securities listed on the New York Stock
Exchange) without the payment of brokerage commissions but at net prices
including a spread or markup; these Funds trade in this manner whenever the
net price appears advantageous.
Mortgage Securities Fund and Bond Fund
Portfolio transactions of Mortgage Securities Fund and Bond Fund occur
primarily with issuers, underwriters or major dealers acting as principals.
Such transactions are normally on a net basis which do not involve payment of
brokerage commissions. The cost of securities purchased from an underwriter
usually includes a commission paid by the issuer to the underwriters;
transactions with dealers normally reflect the spread between bid and asked
prices. Premiums are paid with respect to options purchased by these two
Funds and brokerage commissions are payable with respect to transactions in
exchange-traded interest rate futures contracts.
Money Market Fund
Most transactions in portfolio securities of Money Market Fund are
purchases from issuers or dealers in money market instruments acting as
principal. There usually are no brokerage commissions paid by the Fund for
such purchases since securities are purchased on a net price basis. Trading
does, however, involve transaction costs. Transactions with dealers serving
as primary market makers reflect the spread between the bid and asked prices
of securities. Purchases of underwritten issues may be made which reflect a
fee paid to the underwriter.
International Fund
Templeton Counsel, as investment sub-adviser to the International Fund,
is primarily responsible for selecting and (where applicable) negotiating
commissions with the brokers who execute the transactions for the Fund.
Templeton Counsel, in managing the International Fund, follows the same basic
brokerage practices as those described below for Advantus Capital. In
addition, in selecting brokers for portfolio transactions, Templeton Counsel
takes into account its past experience as to brokers qualified to achieve
"best execution," including the ability to effect transactions at all where a
large block is involved, availability of the broker to stand ready to execute
possibly difficult transactions in the future, the financial strength and
stability of the broker, and whether the broker specializes in foreign
securities held by the International Fund. Purchases and sales of portfolio
securities within the United States other than on a securities exchange are
executed with primary market makers acting as principal, except where, in the
judgment of Templeton Counsel, better prices and execution may be obtained on
a commission basis or from other sources.
Generally
Advantus Capital selects and (where applicable) negotiates commissions
with the brokers who execute the transactions for the Funds (except for
International Fund, as described above). During the fiscal years ended
September 30, 1999, 1998 and 1997, brokerage commissions paid were:
Fund 1999 1998 1997
Horizon Fund $110,447 $88,188 $61,259
Spectrum Fund 122,688 98,839 56,107
Mortgage Securities Fund 0 0 0
Money Market Fund 0 0 0
Bond Fund 0 0 0
Cornerstone Fund 258,334 388,917 263,314
Enterprise Fund 66,576 54,692 37,239
International Fund 81,086 59,313 82,535
The primary criteria for the selection of a broker is the ability of
the broker, in the opinion of Advantus Capital, to secure prompt execution of
the transactions on favorable terms, including the reasonableness of the
commission and considering the state of the market at the time. In selecting
a broker, Advantus Capital considers whether such broker provides brokerage
and research services (as defined in the Securities Exchange Act of 1934),
and generally the Funds pay higher than the lowest commission rates
available. Advantus Capital may direct Fund transactions to brokers who
furnish research services to Advantus Capital. Such research services
include advice, both directly and in writing, as to the value of securities,
the advisability of investing in, purchasing or selling securities, and the
availability of securities or purchasers or sellers of securities, as well as
analyses and reports concerning issues, industries, securities, economic
factors and trends, portfolio strategy, and the performance of accounts. By
allocating brokerage business in order to obtain research services for
Advantus Capital, the Funds enable Advantus Capital to supplement its own
investment research activities and allows Advantus Capital to obtain the
views and information of individuals and research staffs of many different
securities research firms prior to making investment decisions for the Funds.
To the extent such commissions are directed to these other brokers who
furnish research services to Advantus Capital, Advantus Capital receives a
benefit, not capable of evaluation in dollar amounts, without providing any
direct monetary benefit to the Funds from these commissions.
There is no formula for the allocation by Advantus Capital of the
Funds' brokerage business to any broker-dealer for brokerage and research
services. However, Advantus Capital will authorize a Fund to pay an amount
of commission for effecting a securities transaction in excess of the amount
of commission another broker would have charged only if Advantus Capital
determines in good faith that such amount of commission is reasonable in
relation to the value of the brokerage and research services provided by such
broker viewed in terms of either that particular transaction or Advantus
Capital's overall responsibilities with respect to the accounts as to which
it exercises investment discretion. During the fiscal year ended September
30, 1999, Horizon Fund, Spectrum Fund, Cornerstone Fund, Enterprise Fund and
International Fund directed transactions to brokers because of research
services they provided, and paid commissions in connection with such
transactions, in the aggregate amounts set forth below:
Aggregate Transactions Commissions Paid on
Fund Directed for Research Directed Transaction
Horizon Fund $2,185,290
$106,479
Spectrum Fund 111,903,352 109,844
Cornerstone Fund 13,281,612 231,950
Enterprise Fund 7,984,006 52,044
International Fund 64,598,267 81,086
During the same period, Mortgage Securities Fund, Money Market Fund and Bond
Fund directed no transactions to brokers because of research services they
provided.
No brokerage is allocated for the sale of Fund shares. Advantus
Capital believes that most research services obtained by it generally benefit
one or more of the investment companies which it manages and also benefit
accounts which it manages. Normally research services obtained through
managed funds and managed accounts investing in common stocks would primarily
benefit such funds and accounts; similarly, services obtained from
transactions in fixed income securities would be of greater benefit to the
managed funds and managed accounts investing in debt securities.
The same security may be suitable for one or more of the Funds and the
other funds or private accounts managed by Advantus Capital or its
affiliates. If and when two or more funds or accounts simultaneously
purchase or sell the same security, the transactions will be allocated as to
price and amount in accordance with arrangements equitable to each fund or
account. The simultaneous purchase or sale of the same securities by one
Fund and other Funds or accounts may have a detrimental effect on that Fund,
as this may affect the price paid or received by the Fund or the size of the
position obtainable by the Fund.
The Funds will not execute portfolio transactions through any
affiliate, unless such transactions, including the frequency thereof, the
receipt of commissions payable in connection therewith and the selection of
the affiliated broker-dealer effecting such transactions are not unfair or
unreasonable to the shareholders of the Funds. In the event any transactions
are executed on an agency basis, Advantus Capital will authorize the Funds to
pay an amount of commission for effecting a securities transaction in excess
of the amount of commission another broker-dealer would have charged only if
Advantus Capital determines in good faith that such amount of commission is
reasonable in relation to the value of the brokerage and research services
provided by such broker-dealer, viewed in terms of either that particular
transaction or the overall responsibilities of Advantus Capital with respect
to the Funds as to which it exercises investment discretion. If the Funds
execute any transactions on an agency basis, they will generally pay higher
than the lowest commission rates available.
In determining the commissions to be paid to an affiliated broker-
dealer, it is the policy of the Funds that such commissions will, in the
judgment of Advantus Capital, subject to review by the Fund's Board of
Directors, be both (a) at least as favorable as those which would be charged
by other qualified brokers in connection with comparable transactions
involving similar securities being purchased or sold on an exchange during a
comparable period of time, and (b) at least as favorable as commissions
contemporaneously charged by such affiliated broker-dealers on comparable
transactions for their most favored comparable unaffiliated customers. While
the Funds do not deem it practicable and in their best interest to solicit
competitive bids for commission rates on each transaction, consideration will
regularly be given to posted commission rates as well as to other information
concerning the level of commissions charged on comparable transactions by
other qualified brokers.
Information regarding the acquisition by the Funds during the fiscal
year ended September 30, 1999, of securities of the Funds' regular brokers or
dealers, or the parents of those broker or dealers that derive more than 15
percent of their gross revenue from securities-related activities, is
presented below:
Approximate Value of
Securities Owned at the
Fund Name of Issuer End of Fiscal Period
Spectrum Fund Bear Stearns Mortgage Securities, Inc. $477,612
Morgan Stanley Dean Witter 734,966
Mortgage Securities Fund Bear Stearns Mortgage Securities, Inc.
1,988,181
GE Capital Mortgage Securities 2,401,629
Paine Webber Mortgage Acceptance
Corporation 1,657,615
Prudential Home Mortgage Securities 3,479,493
Money Market Fund General Motors Acceptance Corporation 1,675,390
GE Capital Corporation 2,503,982
American General Finance Corporation 2,186,327
Associates Corporation of America 1,569,996
Ciesco LP 1,503,977
Bond Fund Morgan Stanley Dean Witter 881,960
Cornerstone Fund Morgan Stanley Dean Witter 1,856,884
CALCULATION OF PERFORMANCE DATA
Money Market Fund
Money Market Fund may issue "current yield" and "effective yield"
quotations. "Current yields" are computed by determining the net change in
the value of a hypothetical account having a balance of one share at the
beginning of a recent seven calendar day period, and multiplying that change
by 365/7. "Effective yields" are computed by determining the net change in
the value of a hypothetical account having a balance of one share at the
beginning of a recent seven calendar day period, dividing that change by
seven, adding one to the quotient, raising the sum to the 365th power, and
subtracting one from the result. For purposes of the foregoing calculations,
the value of the hypothetical account includes accrued interest income plus
or minus amortized purchase discount or premium less accrued expenses, but
does not include realized gains and losses or unrealized appreciation and
depreciation. The Fund will also quote the average dollar-weighted portfolio
maturity for the corresponding seven-day period.
Although there can be no assurance that the net asset value of Money
Market Fund's shares will always be $1.00, Advantus Capital does not expect
that the net asset value of its shares will fluctuate since the Fund uses the
amortized cost method of valuation to maintain a stable $1.00 net asset
value. See "Money Market Fund Amortized Cost Method of Portfolio Valuation."
Principal is not, however, insured. Yield is a function of portfolio quality
and composition, maturity, and operating expenses. Yield information is
useful in reviewing the Fund's performance, but it may not provide a basis
for comparison with bank deposits or other investments, which pay a fixed
yield for a stated period of time, or other investment instruments, which may
use a different method of calculating yield.
For the seven calendar days ended September 30, 1999, Money Market
Fund's annualized current yield was 4.35% and its annualized effective yield
was 4.45%. The Fund's investment adviser was voluntarily absorbing certain
expenses of the Fund during that period. If the Fund had been charged these
expenses its current yield and effective yield for the same period would have
been 3.69% and 3.76% respectively.
Advantus Multiple Class Funds
Advertisements and other sales literature for the Advantus Multiple
Class Funds may refer to "yield," "average annual total return" and
"cumulative total return." Performance quotations are computed separately
for each class of shares of the Advantus Multiple Class Funds.
Yield. Yield is computed by dividing the net investment income per
share (as defined under Securities and Exchange Commission rules and
regulations) earned during the computation period by the maximum offering
price per share on the last day of the period, according to the following
formula:
a-b
YIELD = 2[( ----- +1) 6-1]
cd
Where: a = dividends and interest earned during the period;
b = expenses accrued for the period (net of reimbursements);
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends; and
d = the maximum offering price per share on the last day of the
period.
The yield on investments in each of these Funds for the 30 day period
ended September 30, 1999 was as set forth in the table below. The Funds'
investment adviser and distributor were voluntarily absorbing and waiving
certain expenses of certain of the Funds during that period. If such Funds
had been charged for these expenses the yield on investments for the same
period would have been lower, as also shown in the table below in
parentheses.
Yield
Fund Class A Class B Class C
Horizon Fund -.98 (-.98) -1.79 (-1.79) -1.79 (-1.79)
Spectrum Fund 1.56 (1.56) .89 (.89) .89 (.89)
Mortgage Securities Fund 6.04 (5.83) 5.55 (5.36) 5.56 (5.36)
Bond Fund 5.80 (5.43) 5.31 (4.95) 5.36 (5.00)
Cornerstone Fund .59 (.59) -.12 (-.12) -.12 (-.12)
Enterprise Fund -1.38 (-1.58) -2.31 (-2.51) -2.30 (-2.50)
International Fund 1.18 (1.18) .44 (.44) .44 (.44)
Average Annual Total Return. Average annual total return is computed by
finding the average annual compounded rates of return over the periods
indicated in the advertisement that would equate the initial amount invested
to the ending redeemable value, according to the following formula:
P(1+T) n = ERV
Where: P = a hypothetical initial payment of $1,000;
T = average annual total return;
n = number of years; and
ERV = ending redeemable value at the end of the period of a
hypothetical $1,000 payment made at the beginning of such
period.
The average annual total return on investments in each of the Advantus
Multiple Class Funds for the periods indicated ending September 30, 1999,
were as set forth in the table below. Average annual total returns quoted
assume that the Class A maximum initial sales charge of 4.5% for Bond and
Mortgage Funds and 5.5% for Horizon, Spectrum, Cornerstone, Enterprise and
International Funds was in effect at the beginning of each period shown. The
maximum initial sales charge was 5.0% prior to February 1, 1999. The Funds'
investment adviser and distributor were voluntarily absorbing and waiving
certain expenses of certain of the Funds during these periods. If such Funds
had been charged for these expenses the average annual total returns for the
same periods would have been lower, as also shown in the table below in
parentheses.
1 Year
Fund Class A Class B Class C
Horizon Fund(1) 17.88% (17.88%) 18.93% (18.93%) 23.82% (23.82%)
Spectrum Fund (2) 9.69 (9.69) 10.31 (10.31) 15.29 (15.29)
Mortgage Securities Fund (1) -2.34 (-2.70) -3.49 (-3.67) 1.50 (1.23)
Bond Fund (3) -6.76 (-7.05) -7.83 (-8.12) -3.10 (3.36)
Cornerstone Fund (4) 4.07 (4.07) 4.26 (4.25) 9.35 (9.34)
Enterprise Fund (4) 21.54 (21.46) 22.57 (22.57) 27.48 (27.48)
International Fund (5) 10.24 (10.08) 10.84 (10.16) 15.71 (15.04)
5 Year
Fund Class A Class B Class C
Horizon Fund(1) 20.18% (20.18%) 20.52% (20.52%) n/a (n/a)
Spectrum Fund (2) 13.91 (13.91) 14.31 (14.31) n/a (n/a)
Mortgage Securities Fund (1) 6.88 (6.61) 6.87 (6.66) n/a (n/a)
Bond Fund (3) 6.06 (5.43) 5.98 (5.49) n/a (n/a)
Cornerstone Fund (4) 13.25 (13.05) 13.43 (13.33) n/a (n/a)
Enterprise Fund (4) 7.81 (7.76) 7.88 (7.88) n/a (n/a)
International Fund (5) 7.02 (6.80) n/a (n/a) n/a (n/a)
10 Year
Fund Class A Class B Class C
Horizon Fund(1) 14.37% (14.32%) n/a (n/a) n/a (n/a)
Spectrum Fund (2) 11.08 (10.88) n/a (n/a) n/a (n/a)
Mortgage Securities Fund (1) 7.35 (7.16) n/a (n/a) n/a (n/a)
Bond Fund (3) 6.79 (5.97) n/a (n/a) n/a (n/a)
Cornerstone Fund (4) n/a (n/a) n/a (n/a) n/a (n/a)
Enterprise Fund (4) n/a (n/a) n/a (n/a) n/a (n/a)
International Fund (5) n/a (n/a) n/a (n/a) n/a (n/a)
Since Inception
Fund Class A Class B Class C
Horizon Fund(1) 13.29% (13.10%) 20.31% (20.31%) 21.53% (21.53%)
Spectrum Fund (2) 11.59 (11.05) 13.97 (13.97) 14.73 (14.73)
Mortgage Securities Fund (1) 8.17 (7.92) 6.56 (6.34) 6.74 (6.51)
Bond Fund (3) 6.97 (6.06) 5.57 (5.07) 5.72 (5.26)
Cornerstone Fund (4) 12.84 (12.82) 13.02 (12.92) 14.23 (14.13)
Enterprise Fund (4) 7.57 (7.52) 7.62 (7.62) 7.63 (7.63)
International Fund (5) 6.55 (6.34) 3.25 (3.01) 8.87 (8.68)
_______________
(1) Class A Inception May 3, 1985.
Class B Inception August 19, 1994.
Class C Inception March 1, 1995.
(2) Class A Inception November 16, 1987.
Class B Inception August 19, 1994.
Class C Inception March 1, 1995
(3) Class A Inception August 14, 1987.
Class B Inception August 19, 1994.
Class C Inception March 1, 1995.
(4) Class A and Class B Inception September 16, 1994.
Class C Inception March 1, 1995.
(5) Class A Inception September 16, 1994.
Class B Inception January 31, 1997.
Class C Inception March 1, 1995.
Cumulative Total Return. Cumulative total return figures are computed by
finding the cumulative compounded rate of return over the period indicated in
the advertisement that would equate the initial amount invested to the ending
redeemable value, according to the following formula:
ERV-P
CTR = ( ----- )100
P
Where: CTR = cumulative total return;
ERV = ending redeemable value at the end of the period of a
hypothetical $1,000 payment made at the beginning of
such period; and
P = initial payment of $1,000.
The cumulative total return on investments in each of the Advantus
Multiple Class Funds for the period indicated ended September 30, 1999, was
as set forth in the table below. Average annual total returns quoted assume
that the Class A maximum initial sales charge of 4.5% for Bond and Mortgage
Funds and 5.5% for Horizon, Spectrum, Cornerstone, Enterprise and
International Funds was in effect at the inception date of Class A shares.
The maximum initial sales charge was 5.0% prior to February 1, 1999. The
Funds' investment adviser was voluntarily absorbing certain expenses of
certain of the Funds during these periods. If such Funds had been charged
for these expenses the cumulative total return for the same periods would
have been lower, as also shown in the table below in parentheses.
Cumulative Total Return
Fund Class A Class B Class C
Horizon Fund(1) 504.71% (490.25%) 157.74% (157.74%) 144.69% (144.69%)
Spectrum Fund (2) 268.04 (247.42) 95.34 (95.34) 87.87 (87.87)
Mortgage Securities Fund (1) 210.37 (200.19) 38.45 (36.99) 34.89 (33.57)
Bond Fund (3) 126.59 (104.26) 31.99 (28.82) 29.08 (26.52)
Cornerstone Fund (4) 83.67 (81.87) 85.15 (84.49) 83.92 (83.48)
Enterprise Fund (4) 44.49 (44.15) 44.83 (44.83) 40.13 (40.13)
International Fund (5) 37.71 (36.35) 8.86 (8.19) 47.70 (46.52)
_____________
(1) Class A Inception May 3, 1985.
Class B Inception August 19, 1994.
Class C Inception March 1, 1995.
(2) Class A Inception November 16, 1987.
Class B Inception August 19, 1994.
Class C Inception March 1, 1995.
(3) Class A Inception August 14, 1987.
Class B Inception August 19, 1994.
Class C Inception March 1, 1995.
(4) Class A and Class B Inception September 16, 1994.
Class C Inception March 1, 1995.
(5) Class A Inception September 16, 1994.
Class B Inception January 31, 1997.
Class C Inception March 1, 1995.
The calculations for both average annual total return and cumulative
total return deduct the maximum sales charge from the initial hypothetical
$1,000 investment, assume all dividends and capital gain distributions are
reinvested at net asset value on the appropriate reinvestment dates as
described in the Prospectus, and include all recurring fees, such as
investment advisory and management fees, charged as expenses to all
shareholder accounts.
Such average annual total return and cumulative total return figures
may also be accompanied by average annual total return and cumulative total
return figures, for the same or other periods, which do not reflect the
deduction of any sales charges.
CAPITAL STOCK AND OWNERSHIP OF SHARES
Each Fund's shares of common stock, and each class thereof, have a par
value $.01 per share, and have equal rights to share in dividends and assets.
The shares possess no preemptive or conversion rights. Cumulative voting is
not authorized. This means that the holders of more than 50% of the shares
voting for the election of directors can elect 100% of the directors if they
choose to do so, and in such event the holders of the remaining shares will
be unable to elect any directors.
Each of the Funds has 10 billion authorized shares of common stock.
Each of the Advantus Multiple Class Funds has designated 2 billion authorized
shares as Class A shares, 2 billion authorized shares as Class B shares, and
2 billion authorized shares as Class C shares. The Funds have the number of
shares outstanding as set forth below.
Shares Outstanding at September 30, 1999
Fund Class A Class B Class C
Horizon Fund 2,105,243 922,499 98,855
Spectrum Fund 4,116,117 1,372,361 319.960
Mortgage Securities Fund 3,262,306 1,361,216 497,187
Money Market Fund 41,202,756 n/a n/a
Bond Fund 1,837,282 839,194 164,274
Cornerstone Fund 6,119,445 1,243,291 134,939
Enterprise Fund 2,748,024 467,651 58,496
International Fund 4,193,369 453,852 215,244
As of September 30, 1999, no person held of record, to the knowledge of
the respective Funds, or owned more than 5% of the outstanding shares of any
of the Funds, except as set forth in the following table:
Number of
Name and Address of Shareholder Shares Percentage
Horizon Fund
Minnesota Life and affiliates* 40,832 1.3%
Spectrum Fund
Minnesota Life and affiliates* 59,826 1.0%
Mortgage Securities Fund
Minnesota Life and affiliates* 642,997 12.6%
Money Market Fund
Minnesota Life and affiliates* 4,745,294 11.5%
Bond Fund
Minnesota Life and affiliates* 388,667 13.7%
Cornerstone Fund
Minnesota Life and affiliates* 4,815,701 64.2%
Enterprise Fund
Minnesota Life and affiliates* 2,227,414 68.0%
International Fund
Minnesota Life and affiliates* 2,763,676 56.8%
* 400 Robert Street North, St. Paul, Minnesota 55101.
HOW TO BUY SHARES
Each Fund's shares may be purchased at the public offering price from
Ascend Financial, and from certain other broker-dealers. Ascend Financial
reserves the right to reject any purchase order. Shares of the Funds may be
purchased at a price equal to their respective net asset value, which, in the
case of Money Market Fund, will normally be constant at $1.00 per share.
There is no assurance that Money Market Fund can maintain the $1.00 per share
value.
Certificates representing shares purchased are not currently issued.
However, shareholders will receive written confirmation of their purchases.
Shareholders will have the same rights of ownership with respect to such
shares as if certificates had been issued. Shareholders who hold previously
issued certificates representing any of their shares will not be allowed to
redeem such certificated shares by telephone.
Alternative Purchase Arrangements. The Funds offer investors the
choice among three classes of shares which offer different sales charges and
bear different expenses. These alternatives permit an investor to choose the
method of purchasing shares that the investor believes is most beneficial
given the amount of the purchase, the length of time the investor expects to
hold the shares and other circumstances. For a detailed discussion of these
alternative purchase arrangements see "Reduced Sales Charges" and
"Shareholder Services" below.
The decision as to which class of shares provides a more suitable
investment for an investor may depend on a number of factors, including the
amount and intended length of the investment. Investors making investments
that qualify for a waiver of initial sales charges should purchase Class A
shares. Other investors should consider Class B or Class C shares because
all of the purchase price is invested immediately. Investors who expect to
hold shares for relatively shorter periods of time may prefer Class C shares
because such shares may be redeemed at any time without payment of a
contingent deferred sales charge. Investors who expect to hold shares
longer, however, may choose Class B shares because such shares convert to
Class A shares sooner than do Class C shares and thus pay the higher Rule
12b-1 fee for a shorter period.
Purchase orders for $1,000,000 or more will be accepted for Class A
shares only and are not subject to a sales charge at the time of purchase,
but a deferred sales charge will be imposed if such shares are sold within
one year after the date of purchase. Orders for Class B or Class C shares
for $1,000,000 or more will be treated as orders for Class A shares or
declined.
Purchase by Check. New investors may purchase shares of the Fund by
completing an account application and sending it, together with a check
payable to the Fund, directly to PFPC, the Funds' transfer agent, at Advantus
Funds Group, P.O. Box 9767, Providence, Rhode Island 02940-5059. Additional
purchases may be made at any time by mailing a check, payable to the Fund, to
the same address. Checks for additional purchases should be identified with
the appropriate account number. Purchase orders may also be submitted
through Ascend Financial or other broker-dealers authorized to sell shares of
the Fund.
Purchase by Wire. Shares may also be purchased by Federal Reserve or
bank wire. This method will result in a more rapid investment in shares of
the Fund. Before wiring any funds, contact Minnesota Life, through its
Advantus Shareholder Services division, at (800) 665-6005 for instructions.
Promptly after making an initial purchase by wire, an investor should
complete an account application and mail it to at Advantus Funds Group, P.O.
Box 9767, Providence, Rhode Island 02940-5059.
Subsequent purchases may be made in the same manner. Wire purchases
normally take two or more hours to complete, and to be accepted the same day
must be received by 3:00 p.m. (Central time). Banks may charge a fee for
transmitting funds by wire.
Purchase by Internet. Existing Advantus Funds shareholders may also
purchase shares via the Internet, once they have established on-line
authorization. Please contact Advantus Shareholder Services at (800) 665-
6005 for information on how to establish your account.
Timing of Purchase Orders. An order in proper form for the purchase of
shares of the Fund received by the Fund prior to the close of normal trading
on the New York Stock Exchange ("NYSE"), which is generally 3:00 p.m. Central
time, will be effected at the price next determined on the date received by
PFPC.. Orders received after the close of the NYSE will be effected at the
price next determined on the next business day.
Minimum Investments. A minimum initial investment of $250 is required,
and the minimum subsequent investment is $25.
Public Offering Price. The public offering price of the Fund will be
the net asset value per share of the Fund next determined after an order is
received and becomes effective, plus the applicable sales charge, if any.
The net asset value per share of each class is determined by dividing the
value of the securities, cash and other assets (including dividends accrued
but not collected) of the Fund attributable to such class less all
liabilities (including accrued expenses but excluding capital and surplus)
attributable to such class, by the total number of shares of such class
outstanding.
The net asset value of the shares of the Fund is determined as of the
close of normal trading on the New York Stock Exchange (as of the date of
this Statement of Additional Information the primary close of trading is 3:00
p.m. (Central time), but this time may be changed) on each day, Monday
through Friday, except (i) days on which changes in the value of the Fund's
portfolio securities will not materially affect the current net asset value
of Fund shares, (ii) days during which no Fund shares are tendered for
redemption and no order to purchase or sell Fund shares is received by the
Fund and (iii) customary national business holidays on which the New York
Stock Exchange is closed for trading.
Securities, including put and call options, which are traded over-the-
counter and on a national exchange will be valued according to the broadest
and most representative market. A security which is only listed or traded on
an exchange, or for which an exchange is the most representative market, is
valued at its last sale price (prior to the time as of which assets are
valued) on the exchange where it is principally traded. Lacking any sales on
the exchange where it is principally traded on the day of valuation, prior to
the time as of which assets are valued, the security generally is valued at
the last bid price on that exchange. Futures contracts will be valued in a
like manner, except that open futures contracts sales will be valued using
the closing
settlement price or in the absence of such a price, the most recent quoted
bid price. All other securities for which over-the-counter market quotations
are readily available are valued on the basis of the last current bid price.
When market quotations are not readily available, such securities are valued
at fair value as determined in good faith by the Board of Directors. Other
assets also are valued at fair value as determined in good faith by the Board
of Directors. However, debt securities may be valued on the basis of
valuations furnished by a pricing service which utilizes electronic data
processing techniques to determine valuations for normal institutional-size
trading units of debt securities, without regard to sale or bid prices, when
such valuations are believed to more accurately reflect the fair market value
of such securities. Short-term investments in debt securities are valued
daily at market.
Money Market Fund values its portfolio investments at amortized cost in
accordance with Rule 2a-7 under the 1940 Act. See "Money Market Fund
Amortized Cost Method of Portfolio Valuation" above.
SALES CHARGES
Class A Shares
The public offering price of Class A shares of each Fund is the net
asset value of the Fund's shares (other than Money Market Fund) plus the
applicable front end sales charge ("FESC"), which will vary with the size of
the purchase. Ascend Financial receives all applicable sales charges.
Shares of Money Market Fund will be purchased at its net asset value, which
will normally be constant at $1.00. There is no sales charge applicable to
the purchase of Money Market Fund shares. The Fund receives the net asset
value. The current sales charges are:
Horizon Fund, Spectrum Fund, Cornerstone Fund, Enterprise Fund, and
International Fund
Amount Paid to Broker-Dealers
Sales Charge as a as a Percentage of
Percentage of: Offering Price:
Net
Offering Amount
Value of Total Investment Price Invested
Less Than $50,000 5.5% 5.82% 5.00%
$50,000 But Less Than
$100,000 4.5 4.71 4.00
$100,000 But Less Than
$250,000 3.5 3.63 3.00
$250,000 But Less Than
$500,000 2.5 2.56 2.25
$500,000 But Less Than
$1,000,000 2.0 2.04 1.75
$1,000,000 And Over (1) 0 0 1.00*
Mortgage Securities Fund and Bond Fund
Amount Paid to Broker-Dealers
Sales Charge as a as a Percentage of
Percentage of: Offering Price:
Net
Offering Amount
Value of Total Investment Price Invested
Less Than $100,000 4.5% 4.71% 4.00%
$100,000 But Less Than
$250,000 3.5 3.63 3.00
$250,000 But Less Than
$500,000 2.5 2.56 2.25
$500,000 But Less Than
$1,000,000 2.0 2.04 1.75
$1,000,000 And Over (1) 0 0 1.00*
(1) A FESC will not be assessed for purchases of Class A shares of at least
$1 million, but a contingent deferred sales charge of 1.00% will be imposed
if such shares are sold within one year after the date of purchase.
* These payments are paid by Ascend Financial or one of its affiliates, at
its own expense, and not by the Fund or its shareholders.
The sales charge applicable to an initial investment in the Fund
depends on the offering price of the investment. The sales charge applicable
to subsequent investments, however, depends on the offering price of that
investment plus the current net asset value of the investor's previous
investments in the Fund. For example, if an investor makes an initial
investment in Class A shares of Horizon Fund with an offering price of
$40,000 the investor will pay a sales charge equal to 5.5% of the $40,000
investment, but if an investor already owns Class A shares of Horizon Fund
with a current net asset value of $40,000 and invests in additional Class A
shares of Horizon Fund with an offering price of $10,000 the investor will
pay a sales charge equal to 4.5% of the additional $10,000 since the total
investment in the Fund would then be $50,000.
Class B Shares
Class B shares of the Fund are sold without an initial sales charge so
that the Fund receives the full amount of the investor's purchase. However,
a contingent deferred sales charge ("CDSC") of up to 5% will be imposed if
shares are redeemed within six years of purchase. For additional
information, see "Redemptions" below. Class B shares will automatically
convert to Class A shares of the Fund on the fifteenth day of the month (or,
if different, the last business day prior to such date) following the
expiration of a specified holding period. In addition, Class B shares are
subject to higher Rule 12b-1 fees as described below. The amount of the CDSC
will depend on the number of years since the purchase was made, the amount of
shares originally purchased and the dollar amount being redeemed. The amount
of the applicable CDSC and the holding period prior to conversion are
determined in accordance with the following table:
Shares Convert to Class
A in the Month After
CDSC Applicable in Year Expiration of
Shares Purchased in an Amount 1 2 3 4 5 6
Less Than $50,000 5.0% 4.5% 3.5% 2.5% 1.5% 1.5% 84 Months
$50,000 But Less Than
$100,000 4.5 3.5 2.5 1.5 1.5 0 76 Months
$100,000 But Less Than
$250,000 3.5 2.5 1.5 1.5 0 0 60 Months
$250,000 But Less Than
$500,000 2.5 1.5 1.5 0 0 0 44 Months
$500,000 But Less Than
$1,000,000 1.5 1.5 0 0 0 0 28 Months
Proceeds from the CDSC are paid to Ascend Financial and are used to
defray expenses related to providing distribution-related services to the
Fund in connection with the sale of Class B shares, such as the payment of
compensation to selected broker-dealers, and for selling Class B shares. The
combination of the CDSC and the Rule 12b-1 fee enables the Fund to sell the
Class B shares without deduction of a sales charge at the time of purchase.
Although Class B shares are sold without an initial sales charge, Ascend
Financial pays a sales commission to broker-dealers, and to registered
representatives of Ascend Financial, who sell Class B shares. The amount of
this commission may differ from the amount of the commission paid in
connection with sales of Class A shares. The higher Rule 12b-1 fee will
cause Class B shares to have a higher expense ratio and to pay lower
dividends than Class A shares. Ascend Financial pays other broker-dealers
for the sale of Class B shares in accordance with the following schedule:
Advantus Multiple Class Funds:
Amount Paid to Broker-Dealers as a
Shares Purchased in An Amount Percentage of Offering Price
Less Than $50,000 4.17%
$50,000 But Less Than $100,000 3.75
$100,000 But Less Than $250,000 2.92
$250,000 But Less Than $500,000 2.08
$500,000 But Less Than $1,000,000 1.25
Conversion Feature. On the fifteenth day of the month (or, if
different, the last business day prior to such date) after the expiration of
the applicable holding period described in the table above, Class B shares
will automatically convert to Class A shares and will no longer be subject to
a higher Rule 12b-1 fee. Such conversion will be on the basis of the
relative net asset values of the two classes. Class A shares issued upon
such conversion will not be subject to any FESC or CDSC. Class B shares
acquired by exchange from Class B shares of another Advantus Multiple Class
Funds will convert into Class A shares based on the time of the initial
purchase. Purchased Class B shares ("Purchased B Shares") will convert after
the specified number of months following the purchase date. All Class B
shares in a shareholder's account that were acquired through the reinvestment
of dividends and distributions ("Reinvestment B Shares") will be held in a
separate sub-account. Each time any Purchased B Shares convert to Class A
shares, a pro rata portion (based on the ratio that the total converting
Purchased B Shares bears to the shareholder's total converting and non-
converting Purchased B Shares immediately prior to the conversion) of the
Reinvestment B Shares then in the sub-account will also convert to Class A
shares.
The conversion of Class B shares to Class A shares is subject to the
continuing availability of a ruling from the Internal Revenue Service or an
opinion of counsel that payment of different dividends by each of the classes
of shares does not result in the Fund's dividends or distributions
constituting "preferential dividends" under the Internal Revenue Code of
1986, as amended, and that such conversions do not constitute taxable events
for Federal tax purposes. There can be no assurance that such ruling or
opinion will be available, and the conversion of Class B shares to Class A
shares will not occur if such ruling or opinion is not available. In such
event, Class B shares would continue to be subject to higher expenses than
Class A shares for an indefinite period.
Class C Shares
Class C shares of the Fund are sold without an initial sales charge so
that the Fund receives the full amount of the investor's purchase. Unlike
Class B shares, however, no CDSC is imposed when Class C shares are redeemed.
Class C shares will automatically convert to Class A shares of the Fund on
the fifteenth day of the month (or, if different, the last business day prior
to such date) following the expiration of a specified holding period. In
addition, Class C shares are subject to higher Rule 12b-1 fees (as described
below), and are subject to such higher fees for a longer period than are
Class B shares because of a longer holding period prior to conversion. The
applicable holding period prior to conversion is determined in accordance
with the following table:
Shares Convert to Class A in the Month
Shares Purchased in an Amount After Expiration of
Less Than $50,000 96 Months
$50,000 But Less Than $100,000 88 Months
$100,000 But Less Than $250,000 72 Months
$250,000 But Less Than $500,000 56 Months
$500,000 But Less Than $1,000,000 40 Months
The longer period during which the Rule 12b-1 fee is charged enables
the Fund to sell the Class C shares without deduction of a sales charge at
the time of purchase and without imposing a CDSC at redemption. Ascend
Financial does not pay a sales commission to broker-dealers, or to registered
representatives of Ascend Financial, who sell Class C shares. The higher
Rule 12b-1 fee will cause Class C shares to have a higher expense ratio and
to pay lower dividends than Class A shares.
Conversion Feature. On the fifteenth day of the month (or, if
different, the last business day prior to such date) after the expiration of
the applicable holding period described in the table above, Class C shares
will automatically convert to Class A shares and will no longer be subject to
a higher Rule 12b-1 fee. Such conversion will be on the basis of the
relative net asset values of the two classes. Class A shares issued upon
such conversion will not be subject to any FESC or CDSC. Class C shares
acquired by exchange from Class C shares of another Advantus Multiple Class
Fund will convert into Class A shares based on the time of the initial
purchase. Purchased Class C shares ("Purchased C Shares") will convert after
the specified number of months following the purchase date. All Class C
shares in a shareholder's account that were acquired through the reinvestment
of dividends and distributions ("Reinvestment C Shares") will be held in a
separate sub-account. Each time any Purchased C Shares convert to Class A
shares, a pro rata portion (based on the ratio that the total converting
Purchased C Shares bears to the shareholder's total converting and non-
converting Purchased C Shares immediately prior to the conversion) of the
Reinvestment C Shares then in the sub-account will also convert to Class A
shares.
The conversion of Class C shares to Class A shares is subject to the
continuing availability of a ruling from the Internal Revenue Service or an
opinion of counsel that payment of different dividends by each of the classes
of shares does not result in the Fund's dividends or distributions
constituting "preferential dividends" under the Internal Revenue Code of
1986, as amended, and that such conversions do not constitute taxable events
for Federal tax purposes. There can be no assurance that such ruling or
opinion will be available, and the conversion of Class C shares to Class A
shares will not occur if such ruling or opinion is not available. In such
event, Class C shares would continue to be subject to higher expenses than
Class A shares for an
indefinite period.
Other Payments to Broker-Dealers
Broker-dealers selling Class A, Class B and Class C shares of the
Advantus Multiple Class Funds will receive a shareholder servicing fee (Rule
12b-1 fee) equal, on a an annual basis, to .25% of the net asset values
attributable to Class A, Class B and Class C shares. All such shareholder
servicing fees are paid quarterly in arrears beginning with the second year
after the sale of the shares to which such fees are attributable (i.e., the
first payment is at the end of the fifteenth month). Rule 12b-1 distribution
fees will also be paid quarterly in arrears to broker-dealers selling Class C
shares equal, on an annual basis, to .75% of the net asset values
attributable to such Class C shares.
NET ASSET VALUE AND PUBLIC OFFERING PRICE
Shares of Money Market Fund may be purchased at a price equal to their
net asset value, which will normally be constant at $1.00 per share. See
"Money Market Fund Amortized Cost Method of Valuation." There is no
assurance that Money Market Fund can maintain the $1.00 per share value. The
portfolio securities in which the Advantus Multiple Class Funds invest
fluctuate in value, and hence the net asset value per share of each Fund also
fluctuates.
On September 30, 1999, the net asset value and public offering price
per share for Class A, Class B and Class C shares of each of the Funds
(except Money Market Fund) were calculated as set forth below.
Horizon Fund
Class A Shares
Net Assets ($56,581,313) = Net Asset Value Per Share ($26.88)
Shares outstanding (2,105,243)
To obtain the maximum public offering price per share, the Fund's
maximum sales charge must be added to the net asset value obtained above:
$26.88 = Public Offering Price Per Share ($28.44)
.945(1)
Class B Shares
Net Assets ($23,560,857) = Net Asset Value and Public
Shares outstanding (922,499) Offering Price Per Share ($25.54)
Class C Shares
Net Assets ($2,539,504) = Net Asset Value and Public
Shares outstanding (98,855) Offering Price Per Share
($25.69)
Spectrum Fund
Class A Shares
Net Assets ($73,612,896) = Net Asset Value Per Share ($17.88)
Shares outstanding (4,116,117)
To obtain the maximum public offering price per share, the Fund's
maximum sales charge must be added to the net asset value obtained above:
$17.88 = Public Offering Price Per Share ($18.92)
.945(1)
Class B Shares
Net Assets ($24,420,364) = Net Asset Value and Public
Shares outstanding (1,372,361) Offering Price Per Share ($17.79)
Class C Shares
Net Assets ($5,659,359) = Net Asset Value and Public
Shares Outstanding (319,960) Offering Price Per Share ($17.69)
Mortgage Securities Fund
Class A Shares
Net Assets ($33,616,635) = Net Asset Value Per Share ($10.30)
Shares outstanding (3,262,306)
To obtain the maximum public offering price per share, the Fund's
maximum sales charge must be added to the net asset value obtained above:
$10.30 = Public Offering Price Per Share ($10.79)
.955(1)
Class B Shares
Net Assets ($14,056,810) = Net Asset Value and Public
Shares outstanding (1,361,216) Offering Price Per Share
($10.33)
Class C Shares
Net Assets ($5,125,662) = Net Asset Value and Public
Shares outstanding (497,187) Offering Price Per Share
($10.31)
Bond Fund
Class A Shares
Net Assets ($17,845,967) = Net Asset Value Per Share ($9.71)
Shares outstanding (1,837,282)
To obtain the maximum public offering price per share, the Fund's
maximum sales charge must be added to the net asset value obtained above:
$9.71 = Public Offering Price Per Share ($10.17)
.955(1)
Class B Shares
Net Assets ($8,170,737) = Net Asset Value and Public
Shares outstanding (839,194) Offering Price Per Share ($9.74)
Class C Shares
Net Assets ($1,594,144) = Net Asset Value and Public
Shares outstanding (164,274) Offering Price Per Share ($9.70)
Cornerstone Fund
Class A Shares
Net Assets ($92,657,418) = Net Asset Value Per Share ($15.14)
Shares outstanding (6,119,445)
To obtain the maximum public offering price per share, the Fund's
maximum sales charge must be added to the net asset value obtained above:
$15.14 = Public Offering Price Per Share ($16.02)
.945(1)
Class B Shares
Net Assets ($18,610,671) = Net Asset Value and Public
Shares outstanding (1,243,291) Offering Price Per Share ($14.97)
Class C Shares
Net Assets ($2,014,588) = Net Asset Value and Public
Shares outstanding (134,939) Offering Price Per Share ($14.93)
Enterprise Fund
Class A Shares
Net Assets ($40,008,663) = Net Asset Value Per Share ($14.56)
Shares outstanding (2,748,024)
To obtain the maximum public offering price per share, the Fund's
maximum sales charge must be added to the net asset value obtained above:
$14.56 = Public Offering Price Per Share ($15.41)
.945(1)
Class B Shares
Net Assets ($6,491,014) = Net Asset Value and Public
Shares outstanding (467,651) Offering Price Per Share ($13.88)
Class C Shares
Net Assets ($811,537) = Net Asset Value and Public
Shares outstanding (58,496) Offering Price Per Share ($13.87)
International Fund
Class A Shares
Net Assets ($49,502,238) = Net Asset Value Per Share ($11.80)
Shares outstanding (4,193,369)
To obtain the maximum public offering price per share, the Fund's
maximum sales charge must be added to the net asset value obtained above:
$11.80 = Public Offering Price Per Share ($12.49)
.945(1)
Class B Shares
Net Assets ($5,293,030) = Net Asset Value and Public
Shares outstanding (453,852) Offering Price Per Share ($11.66)
Class C Shares
Net Assets ($2,510,016) = Net Asset Value and Public
Shares outstanding (215,244) Offering Price Per Share ($11.66)
(1) Effective February 1, 1999, the maximum FESC for Horizon Fund, Spectrum
Fund, Cornerstone Fund, Enterprise Fund and International Fund was
increased to 5.5% and the maximum FESC for Mortgage Securities Fund and
Bond Fund was decreased to 4.5%.
REDUCED SALES CHARGES
Special purchase plans are enumerated in the text of each Fund's
Prospectus under "Buying and Selling Shares - Reducing Sales Charges" and are
fully described below.
Right of Accumulation-Cumulative Purchase Discount
The front end sales charge and contingent deferred sales charge
applicable to each purchase of Class A shares and Class B shares,
respectively, of the Advantus Multiple Class Funds and Real Estate Fund is
based on the next computed net asset value of all Class A, Class B and Class
C shares of such Funds held by the shareholder (including dividends
reinvested and capital gains distributions accepted in shares), plus the cost
of all Class A, Class B and Class C shares of such Funds currently being
purchased. It is the obligation of each shareholder desiring this discount
in sales charge to notify Ascend Financial, through his or her dealer or
otherwise, that he or she is entitled to the discount.
Letter of Intent
The applicable sales charge for purchases of Class A shares is based on
total purchases over a 13-month period where there is an initial purchase
equal to or exceeding $250, accompanied by filing with Ascend Financial a
signed "Letter of Intent" form to purchase, and by in fact purchasing not
less than $100,000 of shares in the case of Mortgage Securities Fund or Bond
Fund, not less than $50,000 of shares in one of the other Advantus Funds
(except Money Market Fund), within that time. The 13-month period is
measured from the date the Letter of Intent is approved by Ascend Financial,
or at the purchaser's option, it may be made retroactive 90 days, in which
case Ascend Financial will make appropriate adjustments on purchases during
the 90-day period.
In computing the total amount purchased for purposes of determining the
applicable sales charge, the net asset value of Class A, Class B and Class C
shares currently held in all Advantus Multiple Class Funds and Real Estate
Fund, on the date of the first purchase under the Letter of Intent, may be
used as a credit toward Fund shares to be purchased under the Letter of
Intent. Class A, Class B and Class C shares of all the Advantus Multiple
Class Funds and Real Estate Fund may also be included in the purchases during
the 13-month period.
The Letter of Intent includes a provision for payment of additional
applicable Class A sales charges at the end of the period in the event the
investor fails to purchase the amount indicated. This is accomplished by
holding 5.5%, or 4.5% in the case of Mortgage Securities Fund and Bond Fund,
of the investor's initial Class A share purchase in escrow. If the
investor's purchases equal those specified in the Letter of Intent, the
escrow is released. If the purchases do not equal those specified in the
Letter of Intent, he or she may remit to Ascend Financial an amount equal to
the difference between the dollar amount of sales charges actually paid and
the amount of sales charges that would have been paid on the aggregate
purchases if the total of such purchases had been made at a single time. If
the purchaser does not remit this sum to Ascend Financial on a timely basis,
Ascend Financial will redeem the appropriate number of shares, and then
release or deliver any remaining shares in the escrow account. The Letter of
Intent is not a binding obligation on the part of the investor to purchase,
or the respective Fund to sell, the full amount indicated. Nevertheless, the
Letter of Intent should be read carefully before it is signed.
Combining Purchases
With respect to each of the Advantus Multiple Class Funds and Real
Estate Fund, purchases of Class A, Class B and Class C shares for any other
account of the investor, or such person's spouse or minor children, or
purchases on behalf of participants in a tax-qualified retirement plan may be
treated as purchases by a single investor for purposes of determining the
availability of a reduced sales charge.
Group Purchases
An individual who is a member of a qualified group may also purchase
shares of the Advantus Multiple Class Funds and Real Estate Fund at the
reduced sales charge applicable to the group taken as a whole. The sales
charge is calculated by taking into account not only the dollar amount of the
Class A, Class B and Class C shares of the Funds being purchased by the
individual member, but also the aggregate dollar value of such Class A, Class
B and Class C shares previously purchased and currently held by other members
of the group. Members of a qualified group may not be eligible for a Letter
of Intent.
A "qualified group" is one which (i) has been in existence for more
than six months, (ii) has a purpose other than acquiring Fund shares at a
discount, and (iii) satisfies uniform criteria which enable Ascend Financial
to realize economies of scale in distributing such shares. A qualified group
must have more than ten members, must be available to arrange for group
meetings between representatives of Ascend Financial, must agree to include
sales and other materials related to the Funds in its publications and
mailings to members at reduced or no cost to Ascend Financial, and must seek,
upon request, to arrange for payroll deduction or other bulk transmission of
investments to the Funds.
Waiver of Sales Charges For Certain Sales of Class A Shares
Directors and officers of Advantus Capital, Templeton Counsel (with
respect to International Fund only), CSAM (with respect to Enterprise Fund
only), Ascend Financial, the Funds, Minnesota Life, or any of Minnesota
Life's other affiliated companies, and their full-time and part-time
employees, sales representatives and retirees, any trust, pension, profit-
sharing, or other benefit plan for such persons, the spouses, siblings,
direct ancestors or direct descendants of such persons, Minnesota Life and
its affiliates themselves, advisory clients of Advantus Capital, employees of
sales representatives employed in offices maintained by such sales
representatives, certain accounts as to which a bank or broker-dealer charges
an account management fee, provided the bank or broker-dealer has an
agreement with Ascend Financial, and certain accounts sold by registered
investment advisers who charge clients a fee for their services may purchase
Class A shares of the Advantus Multiple Class Funds and Real Estate Fund at
net asset value. These persons must give written assurance that they have
bought for investment purposes, and that the securities will not be resold
except through redemption or repurchase by, or on behalf of, the respective
Fund. These persons are not required to pay a sales charge because of the
reduced sales effort involved in their purchases.
EXCHANGE AND TRANSFER OF FUND SHARES
A shareholder can exchange some or all of his or her Class A, Class B
and Class C shares in the Advantus Multiple Class Funds, or shares in Real
Estate Fund, including shares acquired by reinvestment of dividends, for
shares of the same class of any of the other Advantus Multiple Class Funds or
Real Estate Fund (provided such Fund is available in the shareholder's
State), and can thereafter re- exchange such exchanged shares back for shares
of the same class of the Fund, provided that the minimum amount which may be
transferred is $250. The exchange will be made on the basis of the relative
net asset values without the imposition of any additional sales load. When
Class B shares acquired through the exchange are redeemed, the shareholder
will be treated as if no exchange took place for the purpose of determining
the contingent deferred sales charge ("CDSC") period and applying the CDSC.
Class A, Class B and Class C shares may also be exchanged for shares of
the Money Market Fund at net asset values. No CDSC will be imposed at the
time of any such exchange of Class B shares; however, the Money Market Fund
shares acquired in any such exchange will remain subject to the CDSC
otherwise applicable to such Class B shares as of the date of exchange, and
the period during which such shares of Money Market Fund are held will not be
included in the calculation of the CDSC due at redemption of such Money
Market Fund shares or any reacquired Class B shares, except as follows.
Ascend Financial is currently waiving the entire Rule 12b-1 fee due from
Money Market Fund. In the event Ascend Financial begins to receive any
portion of such fee, either (i) the time period during which shares of Money
Market Fund acquired in exchange for Class B shares are held will be included
in the calculation of the CDSC due at redemption, or (ii) such time period
will not be included but the amount of the CDSC will be reduced by the amount
of any Rule 12b-1 payments made by Money Market Fund with respect to those
shares.
Shares of Money Market Fund acquired in an exchange for Class A, Class
B or Class C shares from any of the Advantus Multiple Class Funds or Real
Estate Fund may also be re-exchanged at relative net asset values for Class
A, Class B and Class C shares, respectively, of the Fund. Class C shares re-
acquired in this manner will have a remaining holding period prior to
conversion equal to the remaining holding period applicable to the prior
Class C shares at the time of the initial exchange. Shares of Money Market
Fund not acquired in an exchange from any of the Advantus Multiple Class
Funds or Real Estate Fund may be exchanged at relative net asset values for
either Class A, Class B or Class C shares of the Fund, subject to the sales
charge applicable to the class selected.
The exchange privilege is available only in states where such exchanges
may legally be made (at the present time the Fund believes this privilege is
available in all states). An exchange may be made by written request or by a
telephone call, (unless the shareholder has elected on the account
application not to have telephone transaction privileges) or by Internet. Up
to twelve exchanges each calendar year may be made without charge. A $7.50
service charge will be imposed on each subsequent exchange and/or telephone
transfer. No service charge is imposed in connection with systematic
exchange plans. However, the Fund reserves the right to restrict the
frequency of, or otherwise modify, condition, terminate, or impose additional
charges upon, the exchange and/or telephone transfer privileges and/or
Internet transactions, upon 60 days' prior notice to shareholders. An
exchange is considered to be a sale of shares for federal income tax purposes
on which an investor may realize a long- or short-term capital gain or loss.
See "Distributions and Tax Status" for a discussion of the effect of
redeeming shares within 90 days after acquiring them and subsequently
acquiring new shares in any mutual fund at a reduced sales charge.
Systematic Exchange Plan
Shareholders of the Fund may elect to have shares of the Fund
systematically exchanged for shares of any of the other Advantus Funds on a
monthly basis. The minimum amount which may be exchanged on such a
systematic basis is $25. The terms and conditions otherwise applicable to
exchanges generally, as described above, also apply to such systematic
exchange plans.
SHAREHOLDER SERVICES
Open Accounts
A shareholder's investment is automatically credited to an open account
maintained for the shareholder by PFPC, the Fund's transfer agent. Stock
certificates are not currently issued. Following each transaction in the
account, a shareholder will receive a confirmation statement disclosing the
current balance of shares owned and the details of recent transactions in the
account. After the close of each year PFPC sends to each shareholder a
statement providing federal tax information on dividends and distributions
paid to the shareholder during the year. This should be retained as a
permanent record. A fee may be charged for providing duplicate information.
The open account system provides for full and fractional shares
expressed to four decimal places and, by making the issuance and delivery of
stock certificates unnecessary, eliminates problems of handling and
safekeeping, and the cost and inconvenience of replacing lost, stolen,
mutilated or destroyed certificates.
The costs of maintaining the open account system are paid by each Fund.
No direct charges are made to shareholders. Although the Funds have no
present intention of making such direct charges to shareholders, they reserve
the right to do so. Shareholders will receive prior notice before any such
charges are made.
Automatic Investment Plan
Each Fund provides a convenient, voluntary method of purchasing shares
in the Fund through its "Automatic Investment Plan" (the "Plan").
The principal purposes of the Plan are to encourage thrift by enabling
you to make regular purchases in amounts less than normally required, and, in
the case of the Advantus Multiple Class Funds and Real Estate Fund, to employ
the principle of dollar cost averaging, described below.
By acquiring Fund shares on a regular basis pursuant to the Automatic
Investment Plan, or investing regularly on any other systematic plan, the
investor takes advantage of the principle of dollar cost averaging. Under
dollar cost averaging, if a constant amount is invested at regular intervals
at varying price levels, the average cost of all the shares will be lower
than the average of the price levels. This is because the same fixed number
of dollars buys more shares when price levels are low and fewer shares when
price levels are high. There is no guarantee, however, that the automatic
investment plan will always result in a lower cost per share compared to
other investment programs. It is essential that the investor consider his or
her financial ability to continue this investment program during times of
market decline as well as market rise. The principle of dollar cost
averaging will not protect against loss in a declining market, as a loss will
result if the plan is discontinued when the market value is less than cost.
A Plan may be opened by indicating an intention to invest $25 or more
monthly for at least one year. Investors will receive a confirmation showing
the number of shares purchased, purchase price, and subsequent new balance of
shares accumulated.
An investor has no obligation to invest regularly or to continue the
Plan, which may be terminated by the investor at any time without penalty.
Under the Plan, any distributions of income and realized capital gains will
be reinvested in additional shares at net asset value unless a shareholder
instructs the Fund in writing to pay them in cash. The Fund reserves the
right to increase or decrease the amount required to open and continue a
Plan, and to terminate any Plan after one year if the value of the amount
invested is less than $250.
Group Systematic Investment Plan
This Plan provides employers and employees with a convenient means for
purchasing shares of each Fund under various types of employee benefit and
thrift plans, including payroll withholding and bonus incentive plans. The
Plan may be started with an initial cash investment of $50 per participant
for a group consisting of five or more participants. The shares purchased by
each participant under the Plan will be held in a separate account in which
all dividends and capital gains will be reinvested in additional shares of
the Fund at net asset value. To keep his or her account open, subsequent
payments totaling $25 per month must be made into each participant's account.
If the group is reduced to less than five participants, the minimums set
forth under "Automatic Investment Plan" shall apply. The Plan may be
terminated by the Fund or the shareholder at any time upon reasonable notice.
Retirement Plans Offering Tax Benefits
The federal tax laws provide for a variety of retirement plans offering
tax benefits. These plans may be funded with shares of any of the Funds.
The plans include H.R. 10 (Keogh) plans for self-employed individuals and
partnerships, individual retirement accounts (IRA's), corporate pension trust
and profit sharing plans, including 401(k) plans, and retirement plans for
public school systems and certain tax exempt organizations, e.g. 403(b)
plans.
The initial investment in each Fund by such a plan must be at least
$250 for each participant in a plan, and subsequent investments must be at
least $25 per month for each participant. Income dividends and capital gain
distributions must be reinvested. Plan documents and further information can
be obtained from Ascend Financial.
An investor should consult a competent tax or other adviser as to the
suitability of Fund shares as a vehicle for funding a plan, in whole or in
part, under the Employee Retirement Income Security Act of 1974 and as to the
eligibility requirements for a specific plan and its state as well as federal
tax aspects.
Systematic Withdrawal Plans
An investor owning shares in any one of the Funds having a value of
$5,000 or more at the current public offering price may establish a
Systematic Withdrawal Plan providing for periodic payments of a fixed or
variable amount. Withdrawal payments for Class A shares of Real Estate Fund
and the Advantus Multiple Class Funds purchased in amounts of $1 million or
more, and for Class B shares of Advantus Multiple Class Funds, may also be
subject to a CDSC. As a result, a shareholder should consider whether a
Systematic Withdrawal Plan is appropriate. It may be appropriate for the
shareholder to consult a tax adviser before establishing such a plan.
The Plan is particularly convenient and useful for trustees in making
periodic distributions to retired employees. Through this Plan a trustee can
arrange for the retirement benefit to be paid directly to the employee by the
respective Fund and to continue the tax-free accumulation of income and
capital gains prior to their distribution to the employee. An investor may
terminate the Plan at any time. A form for use in establishing such a plan
is available from Ascend Financial.
A shareholder under a Systematic Withdrawal Plan may elect to receive
payments monthly, quarterly, semiannually, or annually for a fixed amount of
not less than $50 or a variable amount based on (1) the market value of a
stated number of shares, (2) a specified percentage of the account's market
value or (3) a specified number of years for liquidating the account (e.g., a
20-year program of 240 monthly payments would be liquidated at a monthly rate
of 1/240, 1/239, 1/238, etc.). The initial payment under a variable payment
option may be $50 or more.
All shares under the Plan must be left on deposit. Income dividends
and capital gain distributions will be reinvested without a sales charge at
net asset value determined on the record date.
Since withdrawal payments represent proceeds from the liquidation of
shares, withdrawals may reduce and possibly exhaust the initial investment,
particularly in the event of a decline in net asset value.
Under this Plan, any distributions of income and realized capital gains
must be reinvested in additional shares, and are reinvested at net asset
value. If a shareholder wishes to purchase additional shares of the
respective Fund under this Plan, except in the case of Money Market Fund,
other than by reinvestment of distributions, it should be understood that, in
the case of Class A shares, he or she would be paying a sales commission on
such purchases, while liquidations effected under the Plan would be at net
asset value, and, in the case of Class B shares, he or she would be
purchasing such shares at net asset value while liquidations effected under
the Plan would involve the payment of a contingent deferred sales charge.
Purchases of additional shares concurrent with withdrawals are ordinarily
disadvantageous to the shareholder because of sales charges and tax
liabilities. Additions to a shareholder account in which an election has
been made to receive systematic withdrawals will be accepted only if each
such addition is equal to at least one year's scheduled withdrawals or
$1,200, whichever is greater. A shareholder may not have an "Automatic
Withdrawal Plan" and a "Systematic Investment Plan" in effect simultaneously
as it is not, as explained above, advantageous to do so.
REDEMPTIONS
Registered holders of shares of the Funds may redeem their shares at
the per share net asset value next determined following receipt by the Fund
(at its mailing address listed on the cover page) of a written redemption
request signed by all shareholders exactly as the account is registered (and
a properly endorsed stock certificate if one has been issued). Class A and
Class C shares may be redeemed without charge. A contingent deferred sales
charge may be applicable upon redemption of certain Class A shares and Class
B shares. Both share certificates and stock powers, if any, tendered in
redemption must be endorsed and executed exactly as the Fund shares are
registered. Any certificates should be sent to the Fund by certified mail.
Payment will be made as soon as possible, but not later than seven days
after receipt of a properly executed written redemption request (and any
certificates). The amount received by the shareholder may be more or less
than the shares' original cost.
If stock certificates have not been issued, and if no signature
guarantee is required, shareholders may also submit their signed written
redemption request to the Fund by facsimile (FAX) transmission. The Fund's
FAX number is (508) 871-3560.
Each Fund will pay in cash all redemption requests by any shareholder
of record, limited in amount during any 90-day period to the lesser of
$250,000 or 1% of the net asset value of the Fund at the beginning of such
period. When redemption requests exceed such amount, however, the Fund
reserves the right to make part or all of the payment in the form of
securities or other assets of the Fund. An example of when this might be
done is in case of emergency, such as in those situations enumerated in the
following paragraph, or at any time a cash distribution would impair the
liquidity of the Fund to the detriment of the existing shareholders. Any
securities being so distributed would be valued in the same manner as the
portfolio of the Fund is valued. If the recipient sold such securities, he
or she probably would incur brokerage charges. Each Fund has filed with the
Securities and Exchange Commission a notification of election pursuant to
Rule 18f-1 under the Investment Company Act of 1940 in order to make such
redemptions in kind.
Redemption of shares, or payment, may be suspended at times (a) when
the New York Stock Exchange is closed for other than customary weekend or
holiday closings, (b) when trading on said Exchange is restricted, (c) when
an emergency exists, as a result of which disposal by the Fund of securities
owned by it is not reasonably practicable, or it is not reasonably
practicable for the Fund fairly to determine the value of its net assets, or
during any other period when the Securities and Exchange Commission, by
order, so permits; provided that applicable rules and regulations of the
Securities and Exchange Commission shall govern as to whether the conditions
prescribed in (b) or (c) exist.
Signature Guarantee
In order to protect both shareholders and the Funds against fraudulent
orders, a shareholder signature is required to be guaranteed in certain
cases. No signature guarantee is required if the redemption proceeds are
less than $50,000 and are to be paid to the registered holder and sent to the
address of record for that account, or if the written redemption request is
from pre-authorized trustees of plans, trusts and other tax-exempt
organizations and the redemption proceeds are less than $50,000.
A signature guarantee is required, however, if (i) the redemption
proceeds are $50,000 or more, (ii) the redemption proceeds are to be paid to
someone other than the registered holder, (iii) the redemption proceeds are
to be mailed to an address other than the registered shareholder's address,
(iv) within the 30-day period prior to receipt of the redemption request,
instructions have been received to change the shareholder's address of
record, or, in the case of redemptions to be paid by wire, instructions have
been received within such period to change the shareholder's bank wire
instructions, (v) the shares are requested to be transferred to the account
of another owner, or (vi) in the case of plans, trusts, or other tax-exempt
organizations, the redemption request is not from a pre-authorized trustee.
The Fund reserves the right to require signature guarantees on all
redemptions.
A signature guarantee must be provided by an eligible guarantor
institution. A notarized signature is not sufficient. Eligible guarantors
include (1) national or state banks, savings associations, savings and loan
associations, trust companies, savings banks, industrial loan companies and
credit unions; (2) national securities exchanges, registered securities
associations and clearing agencies; (3) securities broker-dealers which are
members of a national securities exchange or a clearing agency or which have
minimum net capital of $100,000; or (4) institutions that participate in the
Securities Transfer Agent Medallion Program ("STAMP") or other recognized
signature medallion program.
Contingent Deferred Sales Charge
The CDSC applicable upon redemption of Class A shares purchased in
amounts of $1 million or more and Class B shares will be calculated on an
amount equal to the lesser of the net asset value of the shares at the time
of purchase or their net asset value at the time of redemption. No charge
will be imposed on increases in net asset value above the initial purchase
price. In addition, no charge will be assessed on shares derived from
reinvestment of dividends or capital gains distributions or on shares held
for longer than the applicable CDSC period. See "Sales Charges - Class B
Shares" above.
In determining whether a CDSC is payable with respect to any redemption
of Class B shares, the calculation will be determined in the manner that
results in the lowest rate being charged.
The CDSC does not apply to: (1) redemption of Class B shares in
connection with the automatic conversion to Class A shares; (2) redemption of
shares when a Fund exercises its right to liquidate accounts which are less
than the minimum account size; and (3) redemptions in the event of the death
or disability of the shareholder within the meaning of Section 72(m)(7) of
the Internal Revenue Code. The CDSC will also not apply to certain
exchanges. See "Exchange and Transfer of Fund Shares," above.
Telephone Redemption
The Fund's shareholders have this privilege automatically, unless they
have elected on the account application not to have such privilege, and may
redeem shares by calling Advantus Shareholder Services at 1-800-665-6005 (see
"Telephone Transactions"). A telephone redemption request will not be
honored, however, if the shareholder's address of record or bank wire
instructions have been changed without a guarantee of the shareholder's
signature (see "Signature Guarantee" above) within the 30-day period prior to
receipt of the redemption request. The maximum amount which may be redeemed
by telephone is $50,000. The proceeds will be sent by check to the address
of record for the account. If the amount is $500 or more, and if the
shareholder has designated a bank account, the proceeds may be wired to the
shareholder's designated bank account, and the prevailing wire charge
(currently $5.00) will be added to the amount redeemed from the Fund. The
Fund reserves the right to modify, terminate or impose
charges upon the telephone redemption privilege.
Internet Redemption
The Fund's shareholders may elect to perform certain transactions via the
Internet. In order to do so, you must first authorize us to transmit
information on-line and agree to our web site procedures. Please contact
Advantus Funds Shareholder Services at (800) 665-6005 for more information on
how to enable your account. Internet transactions may not be honored,
however, if the shareholder's address of record or bank wire instructions
have been changed without a guarantee of the shareholder's signature (see
"Signature Guarantee" above) within the 30 day period prior to receipt of the
redemption request. The maximum amount which may be redeemed by internet is
$50,000. The proceeds will be sent by check to the address of record for the
account. If the amount is $500 or more, and if the shareholder has
designated a bank account, the proceeds may be wired to the shareholder's
designated bank account, and the prevailing wire charge (currently $5.00)
will be added to the amount redeemed from the Fund. The Fund reserves the
right to modify, terminate or impose charges upon the telephone redemption
privilege.
Delay in Payment of Redemption Proceeds
Payment of redemption proceeds will ordinarily be made as soon as
possible and within the periods of time described above. However, an
exception to this is that if redemption is requested after a purchase by non-
guaranteed funds (such as a personal check), the Fund will delay mailing the
redemption check or wiring proceeds until it has reasonable assurance that
the purchase check has cleared (good payment has been collected). This delay
may be up to 14 days from the purchase date.
Fund's Right to Redeem Small Accounts
The Fund has the right to redeem the shares in inactive accounts which,
due to redemptions and not to decreases in market value of the shares in the
account, have a total current value of less than $150. Before redeeming an
account, the Fund will mail to the shareholder a written notice of its
intention to redeem, which will give the investor an opportunity to make an
additional investment. If no additional investment is received by the Fund
within 60 days of the date the notice was mailed, the shareholder's account
will be redeemed.
Checkwriting
Money Market Fund shareholders may elect the checkwriting privilege
which allows them to write checks in amounts from a minimum of $250 to a
maximum of $100,000. No charge is made for check orders. Checks may not be
written against shares in a Fund account which have been purchased within the
last 14 days, except for shares purchased by wire transfer (which are
immediately available). Checkwriting is not an appropriate means to close a
Fund account. A $10 service fee will be charged when a check is presented to
redeem Fund shares (i) in excess of the value of the shareholder's Fund
account, or (ii) which were purchased by check within 14 days. A $15 service
fee will be charged when a shareholder requests "stop payment" of a check.
Automatic Premium Payments
A shareholder may authorize Minnesota Life to redeem shares in his or
her Money Market Fund account periodically in amounts equal to the premiums
due on insurance policies issued to the shareholder by Minnesota Life and to
apply those amounts in payment of the premiums due on those policies.
Payment of insurance premiums in this manner may be made only where such
insurance premiums are due on a monthly basis. In no event will Minnesota
Life redeem shares to pay on insurance premium unless there are shares in a
shareholder's Money Market Fund account sufficient to pay the full amount of
the premium.
Reinstatement Privilege
The Prospectus for each of the Advantus Multiple Class Funds describes
redeeming shareholders' reinstatement privileges in "Buying and Selling
Shares" in each Fund's Prospectus. Written notice from persons wishing to
exercise this reinstatement privilege must be received by Ascend Financial
within 90 days after the date of the redemption. The reinstatement or
exchange will be made at net asset value next determined after receipt of the
notice and will be limited to the amount of the redemption proceeds or to the
nearest full share if fractional shares are not purchased. All shares issued
as a result of the reinstatement privilege applicable to redemptions of Class
A and Class B shares will be issued only as Class A shares. Any CDSC
incurred in connection with the prior redemption (within 90 days) of Class B
shares will not be refunded or re-credited to the shareholder's account.
Shareholders who redeem Class C shares and exercise their reinstatement
privilege will be issued only Class C shares, which shares will have a
remaining holding period prior to conversion equal to the remaining holding
period applicable to the prior Class C shares at redemption.
See "Distributions and Tax Status" below for a discussion of the effect
of redeeming shares within 90 days after acquiring them and subsequently
acquiring new shares in any mutual fund at a reduced sales charge. Should an
investor utilize the reinstatement privilege following a redemption which
resulted in a loss, all or a portion of that loss might not be currently
deductible for Federal income tax purposes, for an investor which is not tax-
exempt. Exercising the reinstatement privilege would not alter any capital
gains taxes payable on a realized gain, for an investor which is not tax-
exempt. See discussion under "Distributions and Tax Status" below regarding
the taxation of capital gains.
TELEPHONE TRANSACTIONS
Shareholders of the Fund are permitted to exchange or redeem the Fund's
shares by telephone. See "Exchange and Transfer of Fund Shares" and
"Redemptions" for further details. The privilege to initiate such
transactions by telephone is made available automatically unless the
shareholder elects on the account application not to have such privilege.
Shareholders, or persons authorized by shareholders, may initiate
telephone transactions by telephoning Advantus Shareholder Services, toll
free, at 1-800-665-6005. Automated service is available 24 hours a day, and
service representatives are available Monday through Friday, from 8:00 a.m.
to 4:45 p.m. (Central Time). Telephone transaction requests received after
3:00 p.m. (Central Time) will be treated as received the next business day.
The maximum amount which may be redeemed by telephone is $50,000. During
periods of marked economic or market changes, shareholders may experience
difficulty in implementing a telephone exchange or redemption due to a heavy
volume of telephone calls. In such a circumstance, shareholders should
consider submitting a written request while continuing to attempt a telephone
exchange or redemption. The Fund reserves the right to modify, terminate or
impose charges upon the telephone exchange and redemption privileges upon 60
days' prior notice to shareholders.
The Fund will not be liable for following instructions communicated by
telephone which it reasonably believes to be genuine; provided, however, that
the Fund will employ reasonable procedures to confirm that instructions
communicated by telephone are genuine, and that if they do not, they may be
liable for any losses due to unauthorized or fraudulent instructions. The
procedures for processing telephone transactions include tape recording of
telephone instructions, asking shareholders for their account number and a
personal identifying number, and providing written confirmation of such
transactions.
INTERNET TRANSACTIONS
Shareholders of the Fund are permitted to exchange or redeem the Fund's
share via the Internet. See "Exchange and Transfer of Fund Shares" and
"Redemptions" for further details. The privilege to initiate such
transactions via Internet requires that a shareholder contact Advantus at
(800) 665-6005 to enable their account.
Shareholders, or persons authorized by shareholders, may initiate
Internet transactions by going to the Advantus Funds web site,
www.advantusfunds.com. Automated service is generally available 24 hours a
day. Internet transaction requests received after 3:00 p.m. (Central time)
will be treated as received the next business day. The maximum amount which
may be redeemed via Internet is $50,000. During periods of marked economic
or market changes, shareholders may experience difficulty in implementing an
on-line exchange or redemption due to a heavy volume. In such a
circumstance, shareholders should consider submitting a written request while
continuing to attempt an on-line exchange or redemption. The Fund reserves
the right to modify, terminate or impose charges upon the Internet on-line
exchange and redemption privileges upon 60 days' prior notice to
shareholders.
The Fund will not be liable for following instructions communicated by
Internet which it reasonably believes to be genuine; provided, however, that
the Fund will employ reasonable procedures to confirm that instructions
communicated via the Internet are genuine, and that if they do not, they may
be liable for any losses due to unauthorized or fraudulent instructions. The
procedures for processing Internet transactions include requiring
shareholders to contact Advantus in order to establish their on-line account,
asking shareholders for their account number and a personal identifying
number, providing a confirmation number on-screen, at the completion of an
on-line transaction, and providing written confirmation of such transactions.
DISTRIBUTIONS AND TAX STATUS
Dividends and Capital Gains Distributions
The policy of the Funds (other than Mortgage Securities Fund, Bond Fund
and Money Market Fund) has been to pay dividends from net investment income
quarterly. In the case of Horizon Fund, however, such quarterly dividends
from current income have not been paid since 1993 inasmuch as the dividend
yields of the mid and large capitalization companies in which the Fund
invests have generally fallen below the average yield for all companies. The
policy of Mortgage Securities Fund, Bond Fund and Money Market Fund has been
to declare dividends from net investment income on each business day of the
Fund, except that dividends for Saturdays, Sundays and holidays are declared
on the next business day, and to pay such dividends monthly. Any net
realized capital gains are generally distributed once a year, during
December.
For all Funds other than Money Market Fund, distributions, if any, paid
with respect to Class A, Class B and Class C shares will be calculated in the
same manner, at the same time, on the same day and will be in the same
amount, except that the higher Rule 12b-1 fees applicable to Class B and
Class C shares will be borne exclusively by such shares. The per share
distributions on Class B and Class C shares will be lower than the per share
distributions on Class A shares as a result of the higher Rule 12b-1 fees
applicable to Class B and Class C shares.
Any dividend payments or net capital gains distributions made by a Fund
are in the form of additional shares of the same class of the Fund rather
than in cash, unless a shareholder specifically requests the Fund in writing
that the payment be made in cash. The distribution of these shares is made
at net asset value on the payment date of the dividend, without any sales or
other charges to the shareholder. The taxable status of income dividends
and/or net capital gains distributions is not affected by whether they are
reinvested or paid in cash. Authorization to pay dividends in cash may be
made on the application form, or at any time by letter.
Upon written request to a Fund, a shareholder may also elect to have
dividends from the Fund invested without sales charge in shares of Money
Market Fund or shares of the same class of another of the Advantus Funds at
the net asset value of such other Fund on the payable date for the dividends
being distributed (subject to the applicable sales charge). To use this
privilege of investing dividends from a Fund in shares of another of the
Funds, shareholders must maintain a minimum account value of $250 in both the
Fund paying the dividends and the other Fund in which dividends are
reinvested.
Taxation - General
The following is a general summary of certain federal tax
considerations affecting the Funds and their shareholders. No attempt is
made to present a detailed explanation of the tax treatment of the Funds or
their shareholders, and the discussion here is not intended as a substitute
for careful tax planning.
During the year ended September 30, 1999 each Fund fulfilled, and
intends to continue to fulfill, the requirements of Subchapter M of the
Internal Revenue Code of 1986, as amended (the "Code"), as a regulated
investment company. If so qualified, each Fund will not be liable for
federal income taxes to the extent it distributes its taxable income to its
shareholders.
Distributions of investment company taxable income from a Fund
generally will be taxable to shareholders as ordinary income, regardless of
whether such distributions are paid in cash or are invested in additional
shares of the Fund's stock. A distribution of net capital gain (a "capital
gain distribution"), whether paid in cash or reinvested in shares, generally
is taxable to shareholders as long-term capital gain, regardless of the
length of time a shareholder has held his or her shares or whether such gain
was realized by the Fund before the shareholder acquired such shares and was
reflected in the price paid for the shares. Long-term capital gains of
individuals are taxed at a maximum rate of 20%, and the highest marginal
regular tax rates on ordinary income for individuals is 39.6%.
Some or all of the dividend distributions from Horizon, Spectrum,
Enterprise and Cornerstone Funds are expected to qualify for the 70% dividend
received deduction for corporations.
If more than 50% of International Fund's total assets at the close of
its fiscal year consist of securities of foreign corporations, it will be
eligible to, and may, file an election with the Internal Revenue Service
pursuant to which shareholders will be required to include their pro rata
portions of foreign taxes paid by the Fund as income received by them.
Shareholders may then either deduct such pro rata portions in computing their
taxable income or use them as foreign tax credits against their United States
income taxes. If the Fund makes such an election, it will report annually to
each shareholder the amount of foreign taxes to be included in income and
then either deducted or credited.
Alternatively, if the amount of foreign taxes paid by International
Fund is not large enough to warrant its making the election described above,
the Fund may claim the amount of foreign taxes paid as a deduction against
its own gross income. In that case, shareholders would not be required to
include any amount of foreign taxes paid by the Fund in their income and
would not be permitted either to deduct any portion of foreign taxes from
their own income or to claim any amount of foreign tax credit for taxes paid
by the Fund.
Prior to purchasing shares of the Fund, prospective shareholders
(except for tax-qualified retirement plans) should consider the impact of
dividends or capital gains distributions which are expected to be announced,
or have been announced but not paid. Any such dividends or capital gains
distributions paid shortly after a purchase of shares by an investor prior to
the record date will have the effect of reducing the per share net asset
value by the amount of the dividends or distributions. All or a portion of
such dividends or distributions, although in effect a return of capital, is
subject to taxation.
The Code provides that a shareholder who pays a sales charge in
acquiring shares of a mutual fund, redeems those shares within 90 days after
acquiring them, and subsequently acquires new shares in any mutual fund for a
reduced sales charge or no sales charge (pursuant to a reinvestment right
acquired with the first shares), may not take into account the sales charge
imposed on the first acquisition, to the extent of the reduction in the sales
charge on the second acquisition, for purposes of computing gain or loss on
disposition of the first acquired shares. The amount of sales charge
disregarded under this rule will, however, be treated as incurred in
connection with the acquisition of the second acquired shares.
Shareholders of the Fund receive an annual statement detailing federal
tax information. Distributions by the Funds, including the amount of any
redemption, are reported to shareholders in such annual statement and to the
Internal Revenue Service to the extent required by the Code.
The Funds are required by federal law to withhold 31% of reportable
payments (including dividends, capital gain distributions, and redemptions)
paid to certain accounts whose owners have not complied with IRS regulations.
In order to avoid this backup withholding requirement, each shareholder will
be asked to certify on the shareholder's account application that the social
security or taxpayer identification number provided is correct and that the
shareholder is not subject to backup withholding for previous underreporting
to the IRS.
Some of the investment practices that may be employed by the Funds will
be subject to special provisions that, among other things, may defer the use
of certain losses of such Funds, affect the holding period of the securities
held by the Funds and, particularly in the case of transactions in or with
respect to foreign currencies, affect the character of the gains or losses
realized. These provisions may also require the Funds to mark-to-market some
of the positions in their respective portfolios (i.e., treat them as closed
out) or to accrue original discount, both of which may cause such Funds to
recognize income without receiving cash with which to make distributions in
amounts necessary to satisfy the distribution requirements for qualification
as a regulated investment company and for avoiding income and excise taxes.
Accordingly, in order to make the required distributions, a Fund may be
required to borrow or liquidate securities. Each Fund will monitor its
transactions and may make certain elections in order to mitigate the effect
of these rules and prevent disqualification of the Funds as regulated
investment companies.
Each Fund is subject to a non-deductible excise tax equal to 4 percent
of the excess, if any, of the amount required to be distributed pursuant to
the Code for each calendar year over the amount actually distributed. In
order to avoid the imposition of this excise tax, the Fund generally must
declare dividends by the end of a calendar year representing 98 percent of
the Fund's ordinary income for the calendar year and 98 percent of its
capital gain net income (both long-term and short-term capital gains) for the
twelve-month period ending October 31 of the calendar year.
The foregoing relates only to federal taxation. Prospective
shareholders should consult their tax advisers as to the possible application
of state and local income tax laws to ownership of Fund shares.
FINANCIAL STATEMENTS
The Funds' financial statements for the year ended September 30, 1999,
including the financial highlights for each of the respective periods
presented, appearing in each Fund's Annual Report to shareholders, and the
report thereon of the Funds' independent auditors, KPMG LLP, also appearing
therein, are incorporated by reference in this Statement of Additional
Information.
APPENDIX A - MORTGAGE-RELATED SECURITIES
Mortgage-related securities represent an ownership interest in a pool
of residential mortgage loans. These securities are designed to provide
monthly payments of interest and principal to the investor. The mortgagor's
monthly payments to his lending institution are "passed-through" to investors
such as the Fund. Most insurers or services provide guarantees of payments,
regardless of whether or not the mortgagor actually makes the payment. The
guarantees made by issuers or servicers are backed by various forms of
credit, insurance and collateral.
Underlying Mortgages
Pools consist of whole mortgage loans or participations in loans. The
majority of these loans are made to purchasers of 1-4 family homes. Some of
these loans are made to purchasers of mobile homes. The terms and
characteristics of the mortgage instruments are generally uniform within a
pool buy may vary among pools. For example, in addition to fixed-rate fixed-
term mortgages, the fund may purchase pools of variable rate mortgages,
growing equity mortgages, graduated payment mortgages and other types.
All servicers apply standards for qualification to local lending
institutions which originate mortgages for the pools. Servicers also
establish credit standards and underwriting criteria for individual mortgages
included in the pools. In addition, many mortgages included in pools are
insured through private mortgage insurance companies.
Liquidity and Marketability
Since the inception of the mortgage-related pass-through security in
1970, the market for these securities has expanded considerably. The size of
the primary issuance market and active participation in the secondary market
by securities dealers and many types of investors makes government and
government-related pass-through pools highly liquid. The recently introduced
private conventional pools of mortgages (pooled by commercial banks, savings
and loans institutions and others, with no relationship with government and
government-related entities) have also achieved broad market acceptance and
consequently an active secondary market has emerged. However, the market for
conventional pools is smaller and less liquid than the market for the
government and government-related mortgage pools. The Fund may purchase some
mortgage-related securities through private placements, in which case only a
limited secondary market exists, and the security is considered illiquid.
Average Life
The average life of pass-through pools varies with the maturities of
the underlying mortgage instruments. In addition, a pool's term may be
shortened by unscheduled or early payments of principal and interest on the
underlying mortgages. The occurrence of mortgage prepayments is affected by
factors including the level of interest rates, general economic conditions,
the location and age of the mortgage and other social and demographic
conditions.
As prepayment rates of individual pools vary widely, it is not possible
to accurately predict the average life of a particular pool. For pools of
fixed-rate 30-year mortgages, common industry practice is to assume that
prepayments will result in a 12-year average life. Pools of mortgages with
other maturities or different characteristics will have varying assumptions
for average life. The assumed average life of pools of mortgages having
terms of less than 30 years is less than 12 years, but typically not less
than 5 years.
Yield Calculations
Yields on pass-through securities are typically quoted by investment
dealers and vendors based on the maturity of the underlying instruments and
the associated average life assumption. In periods of falling interest rates
the rate of prepayment tends to increase, thereby shortening the actual
average life of a pool of mortgage-related securities. Conversely, in
periods of rising rates and the rate of prepayment tends to decrease, thereby
lengthening the actual average life of the pool. Historically, actual
average life has been consistent with the 12-year assumption referred to
above.
Actual prepayment experience may cause the yield to differ from the
assumed average life yield. Reinvestment of prepayments may occur at higher
or lower interest rates than the original investment, thus affecting the
yield of the Fund. The compounding effect from reinvestments of monthly
payments received by the Fund will increase the yield to shareholders
compared to bonds that pay interest semi-annually.
APPENDIX B - BOND AND COMMERCIAL PAPER RATINGS
Bond Ratings
Moody's Investors Service, Inc. describes its six highest ratings for
corporate bonds and mortgage-related securities as follows:
Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred
to as "gilt edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong
position of such issues.
Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are
generally known as high grade bonds. They are rated lower than the
best bonds because margins of protection may not be as large as in Aaa
securities or fluctuation of protective elements may be of greater
amplitude or there may be other elements present which make the long
term risks appear somewhat larger than in Aaa securities.
Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors
giving security to principal and interest are considered adequate but
elements may be present which suggest a susceptibility to impairment
some time in the future.
Bonds which are rated Baa are considered medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest
payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of
interest and principal payments may be very moderate, and thereby not
well safeguarded during both good and bad times over the future.
Uncertainty of position characterizes bonds in this class.
Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time
may be small.
Moody's Investors Service, Inc. also applies numerical modifiers, 1, 2, and
3, in each of these generic rating classifications. The modifier 1 indicates
that the security ranks in the higher end of its generic rating category; the
modifier 2 indicates a mid-range ranking; and the modifier 3 indicates that
the issue ranks in the lower end of its
generic rating category.
Standard & Poor's Corporation describes its six highest ratings for corporate
bonds and mortgage-related securities as follows:
AAA. Debt rated "AAA" has the highest rating assigned by Standard &
Poor's. Capacity to pay interest and repay principal is extremely
strong.
AA. Debt rated "AA" has a very strong capacity to pay interest and
repay principal and differs from the higher rated issues only in small
degree.
A. Debt rated "A" has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than debt
in higher rated categories.
BBB. Debt rated "BBB" is regarded as having an adequate capacity to
pay interest and repay principal. Whereas it normally exhibits
adequate protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than in higher
rated categories.
BB. Debt rated "BB" has less near-term vulnerability to default than
other speculative grade debt. However, it faces major ongoing
uncertainties or exposure to adverse business, financial, or economic
conditions that could lead to inadequate capacity to meet timely
interest and principal payments.
B. Debt rated "B" has a greater vulnerability to default but currently
has the capacity to meet interest payments and principal repayments.
Adverse business, financial, or economic conditions will likely impair
capacity or willingness to pay interest and repay principal. The "B"
rating category is also used for debt subordinated to senior debt that
is assigned an actual or implied "BB" or "BB-" rating.
Standard & Poor's Corporation applies indicators "+", no character, and "-"
to the above rating categories. The indicators show relative standing within
the major rating categories.
Commercial Paper Ratings
The rating Prime-1 is the highest commercial paper rating assigned by Moody's
Investors Service, Inc. Among the factors considered by Moody's Investors
Service, Inc. in assigning the ratings are the following: (1) evaluation of
the management of the issuer, (2) economic evaluation of the issuer's
industry or industries and an appraisal of speculative-type risks which may
be inherent in certain areas; (3) evaluation of the issuer's products in
relation to competition and customer acceptance; (4) liquidity; (5) amount
and quality of long-term debt; (6) trend of earnings over a period of ten
years; (7) financial strength of a parent company and the relationships which
exist with the issuer; an (8) recognition by the management of obligations
which may be present or may arise as a result of public interest questions
and preparations to meet such obligations.
The rating A-1 is the highest rating assigned by Standard & Poor's
Corporation to commercial paper which is considered by Standard & Poor's
Corporation to have the following characteristics:
Liquidity ratios of the issuer are adequate to meet cash redemptions. Long-
term senior debt is rated "A" or better. The issuer has access to at least
two additional channels of borrowing.
Basic earnings and cash flow have an upward trend with allowance made for
unusual circumstances. Typically, the issuer's industry is well established
and the issuer has a strong position within the industry. The reliability
and quality of management are unquestioned.
APPENDIX C - FUTURES CONTRACTS
Example of Futures Contract Sale
The Fund would engage in a futures contract sale to maintain the income
advantage from continued holding of a long-term security while endeavoring to
avoid part or all of the loss in market value that would otherwise accompany
a decline in long-term securities prices. Assume that the market value of a
certain security in the Fund's portfolio tends to move in concert with the
futures market prices of long-term United States Treasury bonds ("Treasury
bonds"). The Fund wishes to fix the current market value of this portfolio
security until some point in the future. Assume the portfolio security has a
market value of $100, and the Fund believes that, because of an anticipated
rise in interest rates, the value will decline to $95. The Fund might enter
into futures contract sales of Treasury bonds for a price of $98. If the
market value of the portfolio security does indeed decline from $100 to $95,
the futures market price for the Treasury bonds might also decline from $98
to $93.
In that case, the $5 loss in the market value of the portfolio security
would be offset by the $5 gain realized by closing out the futures contract
sale. Of course, the futures market price of Treasury bonds might decline to
more than $93 or to less than $93 because of the imperfect correlation
between cash and futures prices mentioned above.
The Fund could be wrong in its forecast of interest rates and the
futures market price could rise above $98. In this case, the market value of
the portfolio securities, including the portfolio security being protected,
would increase. The benefit of this increase would be reduced by the loss
realized on closing out the futures contract sale.
If interest rate levels did not change prior to settlement date, the
Fund, in the above example, would incur a loss of $2 if it delivered the
portfolio security on the settlement date (which loss might be reduced by an
offsetting transaction prior to the settlement date). In each transaction,
nominal transaction expenses would also be incurred.
Example of Futures Contract Purchase
The Fund would engage in a futures contract purchase when it is not
fully invested in long-term securities but wishes to defer for a time the
purchase of long-term securities in light of the availability of advantageous
interim investments, e.g., short-term securities whose yields are greater
than those available on long-term securities. The Fund's basic motivation
would be to maintain for a time the income advantage from investing in the
short-term securities; the Fund would be endeavoring at the same time to
eliminate the effect of all or part of the increases in market price of the
long-term securities that the Fund may purchase.
For example, assume that the market price of a long-term security that
the Fund may purchase, currently yielding 10%, tends to move in concert with
futures market prices of Treasury bonds. The Fund wishes to fix the current
market price (and thus 10% yield) of the long-term security until the time
(four months away in this example) when it may purchase the security.
Assuming the long-term security has a market price of $100, and the
Fund believes that, because of an anticipated fall in interest rates, the
price will have risen to $105 (and the yield will have dropped to about 9-
1/2%) in four months, the Fund might enter into futures contracts purchases
of Treasury bonds for a price of $98. At the same time, the Fund would
assign a pool of investments in short-term securities that are either
maturing in four months or earmarked for sale in four months, for purchase of
the long-term security at an assumed market price of $100. Assume these
short-term securities are yielding 15%. If the market price of the long-term
bond does indeed rise from $100 to $105, the futures market price for
Treasury bonds might also rise from $98 to $103. In that case, the $5
increase in the price that the Fund pays for the long-term security would be
offset by the $5 gain realized by closing out the futures contract purchase.
The Fund could be wrong in its forecast of interest rates; long-term
interest rates might rise to above 10%, and the futures market price could
fall below $98. If short-term rates at the same time fall to 10% or below,
it is possible that the Fund would continue with its purchase program for
long-term securities. The market prices of available long-term securities
would have decreased. The benefit of this price decrease, and thus yield
increase, will be reduced by the loss realized on closing out the futures
contract purchase.
If, however, short-term rates remained above available long-term rates,
it is possible that the Fund would discontinue its purchase program for long-
term securities. The yields on short-term securities in the portfolio,
including those originally in the pool assigned to the particular long-term
security, would remain higher than yields on long-term bonds. The benefit of
this continued incremental income will be reduced by the loss realized on
closing out the futures contract purchase.
In each transaction, nominal transaction expenses would also be
incurred.
Tax Treatment
The amount of any gain or loss realized by the Fund on closing out a
futures contract may result in a capital gain or loss for federal income tax
purposes. Generally, futures contracts held by the Fund at the close of the
Fund's taxable year will be treated for federal income tax purposes as sold
for their fair market value on the last business day of such year. Forty
percent of any gain or loss resulting from such constructive sale will be
treated as short-term capital gain or loss and 60 percent of such gain or
loss will be treated as long-term capital gain or loss. The amount of any
capital gain or loss actually realized by the Fund in a subsequent sale or
other disposition of these futures contracts will be adjusted to reflect any
capital gain or loss taken into account by the Fund in a prior year as a
result of the constructive sale of the contract. Notwithstanding the rules
described above, with respect to futures contracts which are part of futures
contract sales, and in certain other situations, the Fund may make an
election which may have the effect of exempting all or a part of those
identified future contracts from being treated for federal income tax
purposes as sold on the last business day of the Fund's taxable year; all or
part of any gain or loss otherwise realized by the Fund on any closing
transaction may be deferred until all of the Fund's positions with respect to
the futures contract sales are closed; and, all or part of any gain or loss
may be treated as short-term capital gain or loss.
Under the Federal income tax provisions applicable to regulated
investment companies, at least 90% of the Fund's annual gross income must be
derived from dividends, interest, payments with respect to loans of
securities, and gains from the sale or other disposition of securities
("qualifying income"). Under the Internal Revenue Code of 1986, as amended
(the "Code"), the Fund may include gains from forward contracts in
determining qualifying income. In addition, in order that the Fund continue
to qualify as a regulated investment company for Federal income tax purposes,
less than 30% of its gross income for any year must be derived from gains
realized on the sale or other disposition of securities held by the Fund for
less than three months. For this purpose, the Fund will treat gains realized
on the closing out of futures contracts as gains derived from the sale of
securities. This treatment could, under certain circumstances, require the
Fund to defer the closing out of futures contracts until after three months
from the date the fund acquired the contracts, even if it would be more
advantageous to close out the contracts prior to that time. However, under
the Code, a special rule is provided with respect to certain hedging
transactions which has the effect of allowing the Fund to engage in such
short-term transactions in limited circumstances. Any gains realized by the
Fund as a result of the constructive sales of futures contacts held by the
Fund at the end of its taxable year, as described in the preceding paragraph,
will in all instances be treated as derived from the sale of securities held
for three months or more, regardless of the actual period for which the Fund
has held the futures contracts at the end of the year.
-1-
A-2
B-3
C-3
