<PAGE>
Prospectus Dated May 1, 1997
- --------------------------------------------------------------------------------
ADVANTUS SERIES FUND, INC.
- ---------------------------------
400 ROBERT STREET NORTH x ST. PAUL, MINNESOTA 55101 x 1-800-443-3677
- --------------------------------------------------------------------------------
-
Advantus Series Fund, Inc. (the "Fund"), a Minnesota corporation, is a
diversified, open-end management investment company, commonly known as a mutual
fund. Prior to May 1, 1997, the Fund was known as MIMLIC Series Fund, Inc. The
Fund provides for a range of investment objectives through twenty separate
investment portfolios: the Growth Portfolio, the Bond Portfolio, the Money
Market Portfolio, the Asset Allocation Portfolio, the Mortgage Securities
Portfolio, the Index 500 Portfolio, the Capital Appreciation Portfolio, the
International Stock Portfolio, the Small Company Portfolio, four Maturing
Government Fund Portfolios, maturing respectively, 1998, 2002, 2006 and 2010,
the Value Stock Portfolio, the Small Company Value Portfolio, the International
Bond Portfolio, the Index 400 Mid-Cap Portfolio, the Micro-Cap Value Portfolio,
the Macro-Cap Value Portfolio and the Micro-Cap Growth Portfolio (herein
referred to as "Portfolios"). A separate series of the Fund's common stock is
issued for each Portfolio. Although the Small Company Value, International Bond,
Index 400 Mid-Cap, Micro-Cap Value, Macro-Cap Value and Micro-Cap Growth
Portfolios are included in this Prospectus, they will not be available until
October 1, 1997.
Shares of the Fund are not offered directly to the public. They are sold only
to The Minnesota Mutual Life Insurance Company ("Minnesota Mutual") in
connection with its variable life insurance policies and variable annuity
contracts.
The investment objectives and certain policies and risks associated with the
Portfolios are as follows:
The Growth Portfolio seeks the long-term accumulation of capital.
Current income, while a factor in investment selection, is a secondary
objective. In pursuit of these objectives the Growth Portfolio will invest
primarily in common stocks and other equity securities. Common stocks are
more volatile than debt securities and involve greater investment risk.
The Bond Portfolio seeks as high a level of long-term total rate of
return as is consistent with prudent investment risk. A secondary objective
is to seek preservation of capital. In pursuit of these objectives the Bond
Portfolio will invest primarily in long-term, fixed-income, high-quality
debt instruments. The value of debt securities will tend to rise and fall
inversely with the rise and fall of interest rates.
The Money Market Portfolio seeks maximum current income to the extent
consistent with liquidity and the preservation of capital. In pursuit of
this objective the Money Market Portfolio will follow a policy of investing
in money market instruments and other debt securities with maturities not
exceeding one year. The return produced by these securities will reflect
fluctuations in short-term interest rates.
AN INVESTMENT IN THE MONEY MARKET PORTFOLIO IS NEITHER INSURED NOR
GUARANTEED BY THE U.S. GOVERNMENT, AND THERE CAN BE NO ASSURANCE THAT THE
PORTFOLIO WILL BE ABLE TO MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER
SHARE.
The Asset Allocation Portfolio seeks as high a level of long-term total
rate of return as is consistent with prudent investment risk. In pursuit of
this objective the Asset Allocation Portfolio will invest in common stocks
and other equity securities, bonds, mortgage-related securities and money
market instruments. The Asset Allocation Portfolio involves the risks
inherent in stocks and debt securities of varying maturities, and the risk
that the Portfolio may invest too much or too little of its assets in each
type of security at any particular time.
The Mortgage Securities Portfolio seeks a high level of current income
consistent with prudent investment risk. In pursuit of this objective the
Mortgage Securities Portfolio will invest primarily in a diversified
portfolio of mortgage-related securities. Prices of mortgage-related
securities will tend to rise and fall inversely with the rise and fall of
the general level of interest rates. In addition, the rate of prepayment of
mortgages underlying mortgage-related securities tends to increase during
periods of declining interest rates, and such prepayments must be reinvested
at the then prevailing lower interest rates.
(CONTINUED ON NEXT PAGE)
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
The Index 500 Portfolio seeks to provide investment results that
correspond generally to the price and yield performance of the common stocks
included in the Standard & Poor's Corporation 500 Composite Stock Price
Index (the "Index"). All common stocks, including those in the Index,
involve greater investment risk than debt securities. The fact that a stock
has been included in the Index affords no assurance against declines in the
price or yield performance of that stock.
The Capital Appreciation Portfolio seeks growth of capital. Investments
will be made based upon their potential for capital appreciation. Therefore,
current income will be incidental to the objective of capital growth.
Because of the market risks inherent in any equity investment, the selection
of securities on the basis of their appreciation possibilities cannot ensure
against possible loss in value.
The International Stock Portfolio seeks long-term capital growth. In
pursuit of this objective the International Stock Portfolio will follow a
policy of investing in stocks issued by companies, large and small, and debt
obligations of companies and governments outside the United States. Current
income will be incidental to the objective of capital growth. The Portfolio
is designed for persons seeking international diversification. Investors
should consider carefully the substantial risks involved in investing in
securities issued by companies and governments of foreign nations, which are
in addition to the usual risks inherent in domestic investments.
The Small Company Portfolio seeks the long-term accumulation of capital.
In pursuit of this objective, the Small Company Portfolio will follow a
policy of investing primarily in common and preferred stocks issued by small
companies, defined in terms of either market capitalization or gross
revenues. Investments in small companies usually involve greater investment
risks than fixed income securities or corporate equity securities generally.
Dividend income will be incidental to the investment objective for this
Portfolio.
The Maturing Government Bond Portfolios seek to provide as high an
investment return as is consistent with prudent investment risk for a
specified period of time ending on a specified liquidation date. In pursuit
of this objective each of the Maturing Government Bond Portfolios seeks to
return a reasonably assured targeted dollar amount, predictable at the time
of investment, on a specific target date in the future through investment in
a portfolio composed primarily of zero coupon securities. These are
securities that pay no cash income and are sold at a discount from their par
value at maturity. The current target dates for the maturities of these
Portfolios are 1998, 2002, 2006 and 2010, respectively.
The Value Stock Portfolio seeks the long-term accumulation of capital.
In pursuit of this objective, the Value Stock Portfolio will follow a policy
of investing primarily in the equity securities of companies which, in the
opinion of the adviser, have market values which appear low relative to
their underlying value or future earnings and growth potential. As it is
anticipated that the Portfolio will consist in large part of dividend-paying
common stocks, the production of income will be a secondary objective of the
Portfolio.
The Small Company Value Portfolio seeks the long-term accumulation of
capital. The Portfolio will follow a policy of investing primarily in the
equity securities of small companies, defined in terms of market
capitalization and which appear to have market values which are low relative
to their underlying value or future earnings and growth potential. Dividend
income will be incidental to the investment objective for this Portfolio.
The International Bond Portfolio seeks to maximize current income
consistent with protection of principal. The Portfolio pursues its objective
by investing primarily in a managed portfolio of non-U.S. dollar denominated
debt securities issued by foreign governments, companies and supranational
entities.
The Index 400 Mid-Cap Portfolio seeks to provide investment results
generally corresponding to the aggregate price and dividend performance of
publicly traded common stocks that comprise the Standard & Poor's 400 MidCap
Index. The Portfolio pursues its investment objective by investing primarily
in the 400 common stocks that comprise the Index, issued by medium-sized
domestic companies with market capitalizations that generally range from
$200 million to $5 billion. It is designed to provide an economical and
convenient means of maintaining a diversified portfolio in this equity
security area as part of an over-all investment strategy. The inclusion of a
stock in the Index in no way implies an opinion by Standard & Poor's as to
its attractiveness as an investment, nor is it a sponsor or in any way
affiliated with the Portfolio.
2
<PAGE>
The Micro-Cap Value Portfolio seeks capital appreciation. The Portfolio
will pursue its objective by investing in a diversified portfolio of
securities that the sub-adviser believes to be undervalued. It will invest
primarily in common stocks and stock equivalents of micro-cap companies,
that is, companies with a market capitalization of less than $300 million.
The Macro-Cap Value Portfolio seeks to provide high total return. It
pursues this objective by investing in equity securities that the
sub-adviser believes, through the use of dividend discount models, to be
undervalued relative to their long-term earnings power, creating a
diversified portfolio of equity securities which typically will have a
price/earnings ratio and a price to book ratio that reflects a value
orientation. The Portfolio seeks to enhance its total return relative to
that of the universe of large-sized U.S. companies.
The Micro-Cap Growth Portfolio seeks long-term capital appreciation. It
pursues this objective by investing primarily in equity securities of
smaller companies which the sub-adviser believes are in an early stage or
transitional point in their development and have demonstrated or have the
potential for above average revenue growth. It will invest primarily in
common stocks and stock equivalents of micro-cap companies, that is,
companies with a market capitalization of less than $300 million.
There is no assurance that the investment objectives of any of the Fund's
Portfolios will be realized. See "Investment Objectives, Policies and Risks" on
page 21.
This Prospectus sets forth concisely the information that a prospective
investor should know before investing in the Fund, and it should be read and
kept for future reference. A Statement of Additional Information dated May 1,
1997, which contains further information about the Fund, has been filed with the
Securities and Exchange Commission and is incorporated by reference into this
Prospectus. A copy of the Statement of Additional Information may be obtained
without charge by calling (612) 665-3500, or by writing the Fund at its
principal office at Minnesota Mutual Life Center, 400 Robert Street North, St.
Paul, Minnesota 55101-2098.
3
<PAGE>
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x
TABLE OF
CONTENTS
- ------------
<TABLE>
<S> <C>
FINANCIAL HIGHLIGHTS...................................................... 5
PERFORMANCE DATA.......................................................... 19
THE FUND.................................................................. 20
INVESTMENT OBJECTIVES, POLICIES AND RISKS................................. 21
GROWTH PORTFOLIO...................................................... 21
BOND PORTFOLIO........................................................ 23
MONEY MARKET PORTFOLIO................................................ 25
ASSET ALLOCATION PORTFOLIO............................................ 26
MORTGAGE SECURITIES PORTFOLIO......................................... 27
INDEX 500 PORTFOLIO................................................... 30
CAPITAL APPRECIATION PORTFOLIO........................................ 33
INTERNATIONAL STOCK PORTFOLIO......................................... 33
SMALL COMPANY PORTFOLIO............................................... 36
MATURING GOVERNMENT BOND PORTFOLIOS................................... 37
VALUE STOCK PORTFOLIO................................................. 39
SMALL COMPANY VALUE PORTFOLIO......................................... 41
INTERNATIONAL BOND PORTFOLIO.......................................... 46
INDEX 400 MID-CAP PORTFOLIO........................................... 50
MICRO-CAP VALUE PORTFOLIO............................................. 53
MACRO-CAP VALUE PORTFOLIO............................................. 58
MICRO-CAP GROWTH PORTFOLIO............................................ 60
INVESTMENT RESTRICTIONS................................................... 65
THE FUND AND ITS MANAGEMENT............................................... 66
INVESTMENT ADVISER........................................................ 66
INVESTMENT SUB-ADVISERS................................................... 70
PURCHASE AND REDEMPTION OF SHARES......................................... 71
DIVIDENDS AND DISTRIBUTIONS............................................... 72
TAXES..................................................................... 72
CUSTODIANS................................................................ 72
THE STANDARD & POOR'S LICENSE............................................. 73
APPENDIX A................................................................ 74
APPENDIX B................................................................ 76
</TABLE>
No dealer, salesman or other person has been authorized to give any
information or to make any representations, other than those contained in this
Prospectus, in connection with the offer contained in this Prospectus, and, if
given or made, such other information or representations must not be relied upon
as having been authorized by the Fund or the Investment Adviser. This Prospectus
does not constitute an offering in any state in which such offering may not
lawfully be made.
4
<PAGE>
FINANCIAL HIGHLIGHTS
The following tables, for each Portfolio, which show certain per share data
for a share of capital stock outstanding during the periods and selected
information for each period, have been audited by KPMG Peat Marwick LLP,
independent auditors, as set forth in their report appearing in the Fund's
Annual Report to Shareholders for the year ended December 31, 1996, which has
been incorporated by reference in the Statement of Additional Information. This
information should be read in conjunction with the audited financial statements
contained in the Fund's Annual Report and incorporated by reference in the
Statement of Additional Information.
GROWTH PORTFOLIO
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------------
1996(D) 1995 1994 1993 1992 1991 1990 1989 1988 1987
-------- -------- -------- ------- ------- ------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
year........................ $2.210 $1.866 $1.912 $1.889 $1.864 $1.391 $1.406 $1.149 $1.017 $1.056
-------- -------- -------- ------- ------- ------- ------ ------ ------ ------
Income from investment
operations:
Net investment income..... .022 .021 .019 .020 .026 .031 .010 .028 .032 .017
Net gains or losses on
securities (both
realized and
unrealized)............. .325 .416 (.005) .063 .060 .442 (.007) .271 .129 .031
-------- -------- -------- ------- ------- ------- ------ ------ ------ ------
Total from investment
operations......... .347 .437 .014 .083 .086 .473 .003 .299 .161 .048
-------- -------- -------- ------- ------- ------- ------ ------ ------ ------
Less distributions:
Dividends from net
investment income....... (.021) (.020) (.020) (.027) (.031) -- (.012) (.030) (.029) (.042)
Distributions from capital
gains................... (.193) (.073) (.040) (.033) (.030) -- (.006) (.012) -- (.045)
-------- -------- -------- ------- ------- ------- ------ ------ ------ ------
Total distributions... (.214) (.093) (.060) (.060) (.061) -- (.018) (.042) (.029) (.087)
-------- -------- -------- ------- ------- ------- ------ ------ ------ ------
Net asset value, end of
year........................ $2.343 $2.210 $1.866 $1.912 $1.889 $1.864 $1.391 $1.406 $1.149 $1.017
-------- -------- -------- ------- ------- ------- ------ ------ ------ ------
-------- -------- -------- ------- ------- ------- ------ ------ ------ ------
Total return (a).............. 17.2% 24.3% .8% 4.7% 4.8% 34.1% .2% 26.0% 15.9% 4.2%
Net assets, end of year (in
thousands).................. $248,465 $201,678 $157,369 $125,745 $99,128 $75,518 $51,485 $7,809 $3,996 $2,867
Ratio of expenses to average
daily net assets (b)........ .59% .55% .56% .58% .58% .63% .65% .65% .65% .66%
Ratio of net investment income
to average daily net
assets (b).................. 1.04% 1.04% 1.22% 1.21% 1.72% 2.11% 2.70% 2.74% 3.05% 2.59%
Portfolio turnover rate
(excluding short-term
securities)................. 154.7% 91.9% 42.0% 51.0% 22.4% 15.7% 19.2% 32.4% 34.1% 29.3%
Average commission rate on
stock transactions (c)...... $ .0617 N/A N/A N/A N/A N/A N/A N/A N/A N/A
<FN>
- ---------
(a) Total return figures are based on a share outstanding throughout the period
and assumes reinvestment of distributions at net asset value. Total return
figures do not reflect charges pursuant to the terms of the variable life
insurance policies and variable annuity contracts funded by separate
accounts that invest in the Fund's shares.
(b) Minnesota Mutual voluntarily absorbed $293, $6,738, $11,045 and $9,202 in
expenses for the years ended December 31, 1990, 1989, 1988 and 1987,
respectively. Had the portfolio paid all fees and expenses, the ratio of
expenses to average daily net assets would have been .65%, .76%, .95% and
1.00%, respectively, and the ratio of net investment income to average
daily net assets would have been 2.70%, 2.63%, 2.75% and 2.25%,
respectively.
(c) Beginning in 1996, the Portfolio is required to disclose an average
brokerage commission rate. The rate is calculated by dividing the total
brokerage commissions paid on applicable purchases and sales of stocks for
the period by the number of related shares purchased and sold.
(d) On October 1, 1996, the Portfolio entered into a new sub-advisory agreement
with Voyageur Fund Managers, Inc. to perform sub-advisory services for the
Portfolio.
</TABLE>
5
<PAGE>
BOND PORTFOLIO
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
------- ------- ------- ------- ------- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of year...... $1.332 $1.157 $1.300 $1.258 $1.264 $1.075 $1.080 $1.026 $1.027 $1.160
------- ------- ------- ------- ------- ------ ------ ------ ------ ------
Income from investment operations:
Net investment income............... .068 .074 .042 .051 .053 .078 .083 .077 .073 .076
Net gains or losses on securities
(both realized and unrealized).... (.034) .147 (.100) .074 .024 .111 (.005) .053 (.001) (.054)
------- ------- ------- ------- ------- ------ ------ ------ ------ ------
Total from investment
operations................... .034 .221 (.058) .125 .077 .189 .078 .130 .072 .022
------- ------- ------- ------- ------- ------ ------ ------ ------ ------
Less distributions:
Dividends from net investment
income............................ (.070) (.046) (.052) (.058) (.069) -- (.083) (.076) (.073) (.134)
Distributions from capital gains.... (.013) -- (.033) (.025) (.014) -- -- -- -- (.021)
------- ------- ------- ------- ------- ------ ------ ------ ------ ------
Total distributions............. (.083) (.046) (.085) (.083) (.083) -- (.083) (.076) (.073) (.155)
------- ------- ------- ------- ------- ------ ------ ------ ------ ------
Net asset value, end of year............ $1.283 $1.332 $1.157 $1.300 $1.258 $1.264 $1.075 $1.080 $1.026 $1.027
------- ------- ------- ------- ------- ------ ------ ------ ------ ------
------- ------- ------- ------- ------- ------ ------ ------ ------ ------
Total return (a)........................ 3.0% 19.8% (4.6)% 10.3% 6.7% 17.6% 7.2% 12.7% 7.1% 1.6%
Net assets, end of year (in
thousands)............................ $125,886 $101,045 $74,679 $43,927 $24,914 $13,088 $9,325 $6,080 $3,284 $2,213
Ratio of expenses to average daily net
assets (b)............................ .56% .58% .61% .64% .65% .65% .65% .65% .65% .67%
Ratio of net investment income to
average daily net assets (b).......... 6.36% 6.57% 6.12% 5.57% 6.56% 7.79% 8.29% 9.15% 7.88% 7.64%
Portfolio turnover rate (excluding
short-term securities)................ 154.0% 205.4% 166.2% 166.8% 140.2% 93.8% 77.7% 117.7% 210.3% 138.5%
<FN>
- ---------
(a) Total return figures are based on a share outstanding throughout the period
and assumes reinvestment of distributions at net asset value. Total return
figures do not reflect charges pursuant to the terms of the variable life
insurance policies and variable annuity contracts funded by separate
accounts that invest in the Fund's shares.
(b) Minnesota Mutual voluntarily absorbed $12,179, $13,182, $5,834, $6,951,
$9,621 and $6,676 in expenses for the years ended December 31, 1992, 1991,
1990, 1989, 1988 and 1987, respectively. Had the portfolio paid all fees
and expenses, the ratio of expenses to average daily net assets would have
been .72%, .78%, .72%, .80%, .98% and .94%, respectively, and the ratio of
net investment income to average daily net assets would have been 6.49%,
7.66%, 8.22%, 9.00%, 7.55% and 7.37%, respectively.
</TABLE>
6
<PAGE>
MONEY MARKET PORTFOLIO
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
------- ------- ------- ------- ------- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of year...... $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000
------- ------- ------- ------- ------- ------ ------ ------ ------ ------
Income from investment operations:
Net investment income............... .048 .053 .036 .027 .032 .053 .075 .082 .064 .054
------- ------- ------- ------- ------- ------ ------ ------ ------ ------
Total from investment
operations................... .048 .053 .036 .027 .032 .053 .075 .082 .064 .054
------- ------- ------- ------- ------- ------ ------ ------ ------ ------
Less distributions:
Dividends from net investment
income............................ (.048) (.053) (.036) (.027) (.032) (.053) (.075) (.082) (.064) (.054)
------- ------- ------- ------- ------- ------ ------ ------ ------ ------
Total distributions............. (.048) (.053) (.036) (.027) (.032) (.053) (.075) (.082) (.064) (.054)
------- ------- ------- ------- ------- ------ ------ ------ ------ ------
Net asset value, end of year............ $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000
------- ------- ------- ------- ------- ------ ------ ------ ------ ------
------- ------- ------- ------- ------- ------ ------ ------ ------ ------
Total return (a)........................ 4.9% 5.4% 4.2% 2.7% 3.2% 5.4% 7.7% 8.6% 6.6% 5.6%
Net assets, end of year (in
thousands)............................ $51,461 $30,166 $23,107 $18,423 $13,591 $12,834 $9,555 $5,838 $2,471 $1,504
Ratio of expenses to average daily net
assets (b)............................ .60% .64% .65% .65% .65% .65% .65% .65% .65% .66%
Ratio of net investment income to
average daily net assets (b).......... 4.81% 5.29% 3.71% 2.65% 3.17% 5.26% 7.46% 8.22% 6.52% 5.47%
<FN>
- ---------
(a) Total return figures are based on a share outstanding throughout the period
and assumes reinvestment of distributions at net asset value. Total return
figures do not reflect charges pursuant to the terms of the variable life
insurance policies and variable annuity contracts funded by separate
accounts that invest in the Fund's shares.
(b) Minnesota Mutual voluntarily absorbed $13,734, $23,714, $20,913, $22,877,
$14,752, $11,987, $11,919 and $10,690 in expenses for the years ended
December 31, 1994, 1993, 1992, 1991, 1990, 1989, 1988 and 1987,
respectively. Had the portfolio paid all fees and expenses the ratio of
expenses to average daily net assets would have been .72%, .81%, .80%,
.85%, .84%, .95%, 1.24% and 1.76%, respectively, and the ratio of net
investment income to average daily net assets would have been 3.64%, 2.49%,
3.02%, 5.06%, 7.27%, 7.92%, 5.93% and 4.37%, respectively.
</TABLE>
7
<PAGE>
ASSET ALLOCATION PORTFOLIO
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
-------- -------- -------- -------- -------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
year.......................... $1.826 $1.524 $1.589 $1.574 $1.558 $1.209 $1.232 $1.101 $1.046 $1.092
-------- -------- -------- -------- -------- ------- ------- ------- ------- -------
Income from investment
operations:
Net investment income....... .052 .061 .047 .030 .034 .047 .061 .066 .059 .037
Net gains or losses on
securities (both realized
and unrealized)........... .155 .308 (.069) .066 .070 .302 (.017) .156 .056 (.012)
-------- -------- -------- -------- -------- ------- ------- ------- ------- -------
Total from investment
operations........... .207 .369 (.022) .096 .104 .349 .044 .222 .115 .025
-------- -------- -------- -------- -------- ------- ------- ------- ------- -------
Less distributions:
Dividends from net
investment income......... (.059) (.049) (.033) (.037) (.041) -- (.063) (.065) (.060) (.067)
Distributions from capital
gains..................... (.109) (.018) (.010) (.044) (.047) -- (.004) (.026) -- (.004)
-------- -------- -------- -------- -------- ------- ------- ------- ------- -------
Total distributions..... (.168) (.067) (.043) (.081) (.088) -- (.067) (.091) (.060) (.071)
-------- -------- -------- -------- -------- ------- ------- ------- ------- -------
Net asset value, end of year.... $1.865 $1.826 $1.524 $1.589 $1.574 $1.558 $1.209 $1.232 $1.101 $1.046
-------- -------- -------- -------- -------- ------- ------- ------- ------- -------
-------- -------- -------- -------- -------- ------- ------- ------- ------- -------
Total return (a)................ 12.5% 25.0% (1.4)% 6.5% 7.3% 28.9% 3.6% 20.2% 11.1% 2.1%
Net assets, end of year (in
thousands).................... $414,709 $349,010 $272,629 $250,011 $150,998 $68,592 $35,455 $22,205 $15,161 $12,037
Ratio of expenses to average
daily net assets (b).......... .54% .55% .56% .57% .60% .62% .65% .65% .65% .66%
Ratio of net investment income
to average daily net assets
(b)........................... 3.09% 3.75% 3.31% 2.63% 3.68% 4.50% 5.71% 6.23% 5.75% 4.85%
Portfolio turnover rate
(excluding short-term
securities)................... 120.1% 157.0% 123.6% 85.7% 106.5% 78.6% 67.2% 93.0% 190.2% 99.5%
Average commission rate on stock
transactions (c).............. $ .0692 N/A N/A N/A N/A N/A N/A N/A N/A N/A
<FN>
- ---------
(a) Total return figures are based on a share outstanding throughout the period
and assumes reinvestment of distributions at net asset value. Total return
figures do not reflect charges pursuant to the terms of the variable life
insurance policies and variable annuity contracts funded by separate
accounts that invest in the Fund's shares.
(b) Minnesota Mutual voluntarily absorbed $2,078, $13,305 and $3,453 in
expenses for the years ended December 31, 1989, 1988 and 1987,
respectively. Had the portfolio paid all fees and expenses, the ratio of
expenses to average daily net assets would have been .66%, .74% and .69%,
respectively, and the ratio of net investment income to average daily net
assets would have been 6.22%, 5.66% and 4.82%, respectively.
(c) Beginning in 1996, the Portfolio is required to disclose an average
brokerage commission rate. The rate is calculated by dividing the total
brokerage commissions paid on applicable purchases and sales of stocks for
the period by the total number of related shares purchased and sold.
</TABLE>
8
<PAGE>
MORTGAGE SECURITIES PORTFOLIO
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 28,
YEAR ENDED DECEMBER 31, 1987 (a) TO
----------------------------------------------------------------------------- DECEMBER 31,
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
------- ------- ------- ------- ------- ------- ------- ------ ------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period........................... $1.207 $1.098 $1.218 $1.185 $1.196 $1.029 $1.018 $.976 $.979 $1.000
------- ------- ------- ------- ------- ------- ------- ------ ------ -----
Income from investment operations:
Net investment income.......... .076 .081 .074 .054 .045 .069 .086 .084 .086 .050
Net gains or losses on
securities (both realized and
unrealized).................. (.020) .107 (.115) .052 .024 .098 .011 .047 (.002) (.019)
------- ------- ------- ------- ------- ------- ------- ------ ------ -----
Total from investment
operations.............. .058 .188 (.041) .106 .069 .167 .097 .131 .084 .031
------- ------- ------- ------- ------- ------- ------- ------ ------ -----
Less distributions:
Dividends from net investment
income....................... (.078) (.079) (.054) (.055) (.056) -- (.085) (.084) (.087) (.051)
Distributions from capital
gains........................ -- -- (.025) (.018) (.024) -- (.001) (.005) -- (.001)
------- ------- ------- ------- ------- ------- ------- ------ ------ -----
Total distributions........ (.078) (.079) (.079) (.073) (.080) -- (.086) (.089) (.087) (.052)
------- ------- ------- ------- ------- ------- ------- ------ ------ -----
Net asset value, end of period..... $1.187 $1.207 $1.098 $1.218 $1.185 $1.196 $1.029 $1.018 $.976 $.979
------- ------- ------- ------- ------- ------- ------- ------ ------ -----
------- ------- ------- ------- ------- ------- ------- ------ ------ -----
Total return (b)................... 5.3% 18.0% (3.4)% 9.3% 6.4% 16.3% 9.4% 13.5% 8.6% 3.0%(d)
Net assets, end of period (in
thousands)....................... $75,992 $69,746 $59,666 $63,902 $37,011 $16,520 $12,124 $8,172 $6,002 $5,112
Ratio of expenses to average daily
net assets (c)................... .58% .58% .60% .63% .65% .65% .65% .65% .65% .65%(e)
Ratio of net investment income to
average daily net assets (c)..... 6.94% 7.09% 6.55% 5.87% 6.64% 8.02% 8.80% 8.84% 8.83% 8.71%(e)
Portfolio turnover rate (excluding
short-term securities)........... 70.0% 133.7% 197.3% 138.4% 96.2% 112.0% 5.2% 51.7% 10.1% 2.2%
<FN>
- ---------
(a) The inception of the Portfolio was April 28, 1987. However, operations did
not commence until May 1, 1987 when the shares of the portfolio became
effectively registered under the Securities Act of 1933.
(b) Total return figures are based on a share outstanding throughout the period
and assumes reinvestment of distributions at net asset value. Total return
figures do not reflect charges pursuant to the terms of the variable life
insurance policies and variable annuity contracts funded by separate
accounts that invest in the Fund's shares.
(c) Minnesota Mutual voluntarily absorbed $10,341, $16,372, $3,492, $3,393,
$6,738 and $1,757 in expenses for the years ended December 31, 1992, 1991,
1990, 1989, 1988 and the period ended December 31, 1987, respectively. Had
the Portfolio paid all fees and expenses, the ratio of expenses to average
daily net assets would have been .69%, .79%, .68%, .69%, .76% and .71%,
respectively, and the ratio of net investment income to average daily net
assets would have been 6.60%, 7.88%, 8.77%, 8.80%, 8.72% and 8.65%,
respectively.
(d) Total return is presented for the period from May 1, 1987, commencement of
operations, to December 31, 1987.
(e) Adjusted to an annual basis.
</TABLE>
9
<PAGE>
INDEX 500 PORTFOLIO
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 28,
YEAR ENDED DECEMBER 31, 1987 (a) TO
------------------------------------------------------------------------------ DECEMBER 31,
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
------- ------- ------- ------- ------- ------- ------- ------- ------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period........................... $2.023 $1.518 $1.532 $1.428 $1.454 $1.120 $1.204 $.950 $.853 $1.000
------- ------- ------- ------- ------- ------- ------- ------- ------ -----
Income from investment operations:
Net investment income.......... .031 .031 .029 .026 .024 .034 .032 .026 .035 .020
Net gains or losses on
securities (both realized and
unrealized).................. .400 .517 (.012) .110 .073 .300 (.080) .262 .103 (.148)
------- ------- ------- ------- ------- ------- ------- ------- ------ -----
Total from investment
operations.............. .431 .548 .017 .136 .097 .334 (.048) .288 .138 (.128)
------- ------- ------- ------- ------- ------- ------- ------- ------ -----
Less distributions:
Dividends from net investment
income....................... (.030) (.031) (.026) (.025) (.032) -- (.035) (.024) (.036) (.018)
Distributions from capital
gains........................ (.015) (.012) (.005) (.007) (.091) -- (.001) (.010) (.005) (.001)
------- ------- ------- ------- ------- ------- ------- ------- ------ -----
Total distributions........ (.045) (.043) (.031) (.032) (.123) -- (.036) (.034) (.041) (.019)
------- ------- ------- ------- ------- ------- ------- ------- ------ -----
Net asset value, end of period..... $2.409 $2.023 $1.518 $1.532 $1.428 $1.454 $1.120 $1.204 $.950 $.853
------- ------- ------- ------- ------- ------- ------- ------- ------ -----
------- ------- ------- ------- ------- ------- ------- ------- ------ -----
Total return (b)................... 21.6% 36.8% 1.2% 9.8% 7.4% 29.8% (3.9)% 30.7% 16.0% (12.9)%(d)
Net assets, end of period (in
thousands)....................... $204,395 $123,999 $73,432 $56,209 $35,620 $20,999 $18,204 $14,002 $6,225 $4,808
Ratio of expenses to average daily
net assets (c)................... .45% .47% .50% .55% .55% .55% .55% .55% .55% .55%(e)
Ratio of net investment income to
average daily net assets (c)..... 1.77% 2.08% 2.34% 2.27% 2.42% 2.70% 3.16% 3.09% 4.06% 3.55%(e)
Portfolio turnover rate (excluding
short-term securities)........... 15.2% 4.8% 5.9% 4.8% 6.1% 26.4% 4.3% 8.8% 8.0% 5.7%
Average commission rate on stock
transactions (f)................. $ .0429 N/A N/A N/A N/A N/A N/A N/A N/A N/A
<FN>
- ---------
(a) The inception of the Portfolio was April 28, 1987. However, operations did
not commence until May 1, 1987 when the shares of the portfolio became
effectively registered under the Securities Act of 1933.
(b) Total return figures are based on a share outstanding throughout the period
and assumes reinvestment of distributions at net asset value. Total return
figures do not reflect charges pursuant to the terms of the variable life
insurance policies and variable annuity contracts funded by separate
accounts that invest in the Fund's shares.
(c) Minnesota Mutual voluntarily absorbed $7,228, $13,123, $3,284, $6,269,
$8,068 and $5,831 in expenses for the years ended December 31, 1992, 1991,
1990, 1989, 1988 and the period ended December 31, 1987, respectively. Had
the Portfolio paid all fees and expenses, the ratio of expenses to average
daily net assets would have been .58%, .62%, .57%, .61%, .69% and .74%,
respectively, and the ratio of net investment income to average daily net
assets would have been 2.39%, 2.63%, 3.14%, 3.03%, 3.92% and 3.36%,
respectively.
(d) Total return is presented for the period from May 1, 1987, commencement of
operations, to December 31, 1987.
(e) Adjusted to an annual basis.
(f) Beginning in 1996, the Portfolio is required to disclose an average
brokerage commission rate. The rate is calculated by dividing the total
brokerage commissions paid on applicable purchases and sales of stocks for
the period by the total number of related shares purchased and sold.
</TABLE>
10
<PAGE>
CAPITAL APPRECIATION PORTFOLIO
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 28,
YEAR ENDED DECEMBER 31, 1987 (a) TO
---------------------------------------------------------------------------------- DECEMBER 31,
1996 1995 1994 1993 1992 (b) 1991 1990 1989 1988 1987
-------- -------- -------- ------- -------- ------- ------- ------ ------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning
of period................. $2.160 $1.808 $1.797 $1.682 $1.684 $1.198 $1.265 $.954 $.899 $1.000
-------- -------- -------- ------- -------- ------- ------- ------ ------ -----
Income from investment
operations:
Net investment income
(loss)................ (.002) (.003) -- .001 .004 .009 .010 .008 .006 .006
Net gains or losses on
securities (both
realized and
unrealized)........... .374 .406 .039 .167 .078 .488 (.035) .355 .063 (.081)
-------- -------- -------- ------- -------- ------- ------- ------ ------ -----
Total from
investment
operations....... .372 .403 .039 .168 .082 .497 (.025) .363 .069 (.075)
-------- -------- -------- ------- -------- ------- ------- ------ ------ -----
Less distributions:
Dividends from net
investment income..... -- -- (.002) (.005) (.009) (.003) (.009) (.007) (.006) (.005)
Distributions from
capital gains......... (.061) (.051) (.026) (.048) (.075) (.008) (.033) (.045) (.008) (.021)
-------- -------- -------- ------- -------- ------- ------- ------ ------ -----
Total
distributions.... (.061) (.051) (.028) (.053) (.084) (.011) (.042) (.052) (.014) (.026)
-------- -------- -------- ------- -------- ------- ------- ------ ------ -----
Net asset value, end of
period.................... $2.471 $2.160 $1.808 $1.797 $1.682 $1.684 $1.198 $1.265 $.954 $.899
-------- -------- -------- ------- -------- ------- ------- ------ ------ -----
-------- -------- -------- ------- -------- ------- ------- ------ ------ -----
Total return (c)............ 17.6% 22.8% 2.3% 10.4% 5.0% 41.8% (2.1)% 38.2% 7.8% (7.5)%(e)
Net assets, end of period
(in thousands)............ $214,468 $163,520 $115,607 $84,840 $52,365 $23,822 $10,241 $5,386 $2,184 $1,250
Ratio of expenses to average
daily net assets (d)...... .85% .80% .83% .86% .90% .90% .90% .90% .90% .90%(f)
Ratio of net investment
income to average daily
net assets (d)............ (.09)% (.15)% (.09)% .12% .42% .92% 1.15% 1.03% .91% 1.19%(f)
Portfolio turnover rate
(excluding short-term
securities)............... 62.9% 51.1% 68.4% 95.9% 138.8% 70.5% 57.9% 89.1% 103.0% 121.6%
Average commission rate on
stock transactions (g).... $ .0625 N/A N/A N/A N/A N/A N/A N/A N/A N/A
<FN>
- ---------
(a) The inception of the Portfolio was April 28, 1987. However, operations did
not commence until May 1, 1987 when the shares of the portfolio became
effectively registered under the Securities Act of 1933.
(b) On October 1, 1992, the portfolio entered into a new sub-advisory agreement
with Winslow Capital Management, Inc. to perform sub-advisory services for
the Portfolio. Prior to October 1, 1992, the portfolio had a sub-advisory
agreement with Alliance Capital Management L.P. for sub-advisory services.
(c) Total return figures are based on a share outstanding throughout the period
and assumes reinvestment of distributions at net asset value. Total return
figures do not reflect charges pursuant to the terms of the variable life
insurance policies and variable annuity contracts funded by separate
accounts that invest in the Fund's shares.
(d) Minnesota Mutual voluntarily absorbed $16,612, $15,552, $7,786, $8,899,
$12,636 and $7,450 in expenses for the years ended December 31, 1992, 1991,
1990, 1989, 1988 and the period ended December 31, 1987, respectively. Had
the Portfolio paid all fees and expenses, the ratio of expenses to average
daily net assets would have been .94%, 1.00%, 1.00%, 1.14%, 1.62% and
1.96%, respectively, and the ratio of net investment income to average
daily net assets would have been .38%, .82%, 1.05%, .79%, .19% and .13%,
respectively.
(e) Total return is presented for the period from May 1, 1987, commencement of
operations, to December 31, 1987.
(f) Adjusted to an annual basis.
(g) Beginning in 1996, the Portfolio is required to disclose an average
brokerage commission rate. The rate is calculated by dividing the total
brokerage commissions paid on applicable purchases and sales of stocks for
the period by the total number of related shares purchased and sold.
</TABLE>
11
<PAGE>
INTERNATIONAL STOCK PORTFOLIO
<TABLE>
<CAPTION>
PERIOD FROM
MAY 1,
YEAR ENDED DECEMBER 31, 1992 (a) TO
------------------------------------- DECEMBER 31,
1996 1995 1994 1993 1992
-------- -------- -------- ------- ------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period.............. $1.410 $1.235 $1.310 $.919 $1.000
-------- -------- -------- ------- ------
Income from investment operations:
Net investment income......................... .030 .033 .011 .016 .010
Net gains or losses on securities (both
realized and unrealized).................... .238 .142 (.015) .389 (.077)
-------- -------- -------- ------- ------
Total from investment operations.......... .268 .175 (.004) .405 (.067)
-------- -------- -------- ------- ------
Less distributions:
Dividends from net investment income.......... (.039) -- (.029) (.007) (.010)
Excess distributions of net investment
income...................................... -- -- -- -- (.002)
Tax return of capital......................... -- -- (.001) -- --
Distributions from capital gains.............. (.042) -- (.041) (.007) --
Excess distributions of net realized gains.... -- -- -- -- (.002)
-------- -------- -------- ------- ------
Total distributions....................... (.081) -- (.071) (.014) (.014)
-------- -------- -------- ------- ------
Net asset value, end of period.................... $1.597 $1.410 $1.235 $1.310 $.919
-------- -------- -------- ------- ------
-------- -------- -------- ------- ------
Total return (b).................................. 19.8% 14.2% (.3)% 44.2% (6.8)%(d)
Net assets, end of period (in thousands).......... $213,608 $140,770 $107,490 $61,106 $17,401
Ratio of expenses to average daily net
assets (c)...................................... 1.06% 1.04% 1.24% 1.55% 2.00%(e)
Ratio of net investment income to average daily
net assets (c).................................. 2.53% 2.69% 1.68% 1.04% 2.10%(e)
Portfolio turnover rate (excluding short-term
securities)..................................... 11.5% 20.3% 12.9% 12.7% 11.7%
Average commission rate on stock
transactions (f)................................ $.0160 N/A N/A N/A N/A
<FN>
- ---------
(a) The inception of the Portfolio was January 21, 1992. However, operations
did not commence until May 1, 1992 when shares of the portfolio became
effectively registered under the Securities Act of 1933.
(b) Total return figures are based on a share outstanding throughout the period
and assumes reinvestment of distributions at net asset value. Total return
figures do not reflect charges pursuant to the terms of the variable life
insurance policies and variable annuity contracts funded by separate
accounts that invest in the Fund's shares.
(c) Minnesota Mutual voluntarily absorbed $8,450 in expenses for the period
from May 1, 1992 to December 31, 1992. Had the Portfolio paid all fees and
expenses the ratio of expenses to average daily net assets would have been
2.09% and the ratio of net investment income to average daily net assets
would have been 2.01%.
(d) Total return presented for the period from May 1, 1992, commencement of
operations, to December 31, 1992.
(e) Adjusted to an annual basis.
(f) Beginning in 1996, the Portfolio is required to disclose an average
commission rate. The rate is calculated by dividing the total brokerage
commissions paid on applicable purchases and sales of stocks during the
period by the total number of related shares purchased and sold. The
comparability of this information may be affected by the fact that
commission rates per share vary significantly among foreign countries.
</TABLE>
12
<PAGE>
SMALL COMPANY PORTFOLIO
<TABLE>
<CAPTION>
PERIOD FROM
MAY 3,
YEAR ENDED DECEMBER 31, 1993 (a) TO
------------------------------------------ DECEMBER 31,
1996 1995 1994 1993
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period.............. $1.602 $1.226 $1.157 $1.000
------------ ------ ------ ------
Income from investment operations:
Net investment income......................... .004 .002 .002 --
Net gains or losses on securities (both
realized and unrealized)..................... .097 .392 .069 .173
------------ ------ ------ ------
Total from investment operations.......... .101 .394 .071 .173
------------ ------ ------ ------
Less distributions:
Dividends from net investment income.......... (.004) (.002) (.002) --
Distributions from net realized gains......... (.164) (.016) -- (.015)
Excess distributions of net realized gains.... -- -- -- (.001)
------------ ------ ------ ------
Total distributions....................... (.168) (.018) (.002) (.016)
------------ ------ ------ ------
Net asset value, end of period.................... $1.535 $1.602 $1.226 $1.157
------------ ------ ------ ------
------------ ------ ------ ------
Total return (b).................................. 6.5% 32.1% 6.2% 17.4%(c)
Net assets, end of period (in thousands).......... $ 144,544 $ 98,895 $ 51,105 $13,043
Ratio of expenses to average daily net
assets (d)...................................... .81% .84% .89% .90%(e)
Ratio of net investment income (loss) to average
daily net assets (d)............................ .24% .15% .24% (.02)%(e)
Portfolio turnover rate (excluding short-term
securities)..................................... 74.4% 61.3% 28.1% 34.9%
Average commission rate on stock
transactions (f)................................ $.1045 N/A N/A N/A
<FN>
- ---------
(a) The inception of the Portfolio was January 26, 1993. However, operations
did not commence until May 3, 1993 when the shares of the portfolio became
effectively registered under the Securities Act of 1933.
(b) Total return figures are based on a share outstanding throughout the period
and assumes reinvestment of distributions at net asset value. Total return
figures do not reflect charges pursuant to the terms of the variable life
insurance policies and variable annuity contracts funded by separate
accounts that invest in the Fund's shares.
(c) Total return presented for the period from May 3, 1993, commencement of
operations, to December 31, 1993.
(d) Minnesota Mutual voluntarily absorbed $9,532 and $30,330 in expenses for
the year ended December 31, 1994 and the period from May 3, 1993 to
December 31, 1993. Had the Portfolio paid all fees and expenses, the ratio
of expenses to average daily net assets would have been .92% and 1.58%,
respectively and the ratio of net investment income (loss) to average daily
net assets would have been .21% and (.70)%, respectively.
(e) Adjusted to an annual basis.
(f) Beginning in 1996, the Portfolio is required to disclose an average
commission rate. The rate is calculated by dividing the total brokerage
commissions paid on applicable purchases and sales of stocks during the
period by the total number of related shares purchased and sold.
</TABLE>
13
<PAGE>
MATURING GOVERNMENT BOND 1998 PORTFOLIO
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED MAY 2,
DECEMBER 31, 1994 (a) TO
------------------ DECEMBER 31,
1996 1995 1994
-------- -------- ------------
<S> <C> <C> <C>
Net asset value, beginning of period.............. $1.038 $.945 $.989
-------- -------- ------
Income from investment operations:
Net investment income......................... .058 .059 .043
Net gains or losses on securities (both
realized and unrealized)..................... (.015) .092 (.043)
-------- -------- ------
Total from investment operations.......... .043 .151 --
-------- -------- ------
Less distributions:
Dividends from net investment income.......... (.001) (.058) (.044)
Distributions from capital gains.............. -- -- --
-------- -------- ------
Total distributions....................... (.001) (.058) (.044)
-------- -------- ------
Net asset value, end of period.................... $1.080 $1.038 $.945
-------- -------- ------
-------- -------- ------
Total return (b).................................. 4.1% 16.0% .1%(c)
Net assets, end of period (in thousands).......... $6,099 $5,057 $3,402
Ratio of expenses to average daily net assets
(d)............................................. .20% .20% .20%(e)
Ratio of net investment income to average daily
net assets (d).................................. 6.19% 6.22% 6.45%(e)
Portfolio turnover rate (excluding short-term
securities)..................................... 18.1% 9.0% --
<FN>
- ---------
(a) The inception of the Portfolio was November 9, 1993. However, operations
did not commence until May 2, 1994 when shares of the portfolio became
effectively registered under the Securities Act of 1933.
(b) Total return figures are based on a share outstanding throughout the period
and assumes reinvestment of distributions at net asset value. Total return
figures do not reflect charges pursuant to the terms of the variable life
insurance policies and variable annuity contracts funded by separate
accounts that invest in the Fund's shares.
(c) Total return is presented for the period from May 2, 1994, commencement of
operations, to December 31, 1994.
(d) Minnesota Mutual voluntarily absorbed $27,510, $22,794 and $21,714 in
expenses for the years ended December 31, 1996 and 1995 and the period from
May 2, 1994 to December 31, 1994. Had the Portfolio paid all fees and
expenses, the ratio of expenses to average daily net assets would have been
.72%, .72% and 1.12%, respectively, and the ratio of net investment income
to average daily net assets would have been 5.67%, 5.70% and 5.53%,
respectively.
(e) Adjusted to an annual basis.
</TABLE>
14
<PAGE>
MATURING GOVERNMENT BOND 2002 PORTFOLIO
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED MAY 2,
DECEMBER 31, 1994 (a) TO
------------------ DECEMBER 31,
1996 1995 1994 (a)
-------- -------- ------------
<S> <C> <C> <C>
Net asset value, beginning of period.............. $1.091 $.932 $.977
-------- -------- -----
Income from investment operations:
Net investment income......................... .061 .072 .047
Net gains or losses on securities (both
realized and unrealized)..................... (.042) .161 (.044)
-------- -------- -----
Total from investment operations.......... .019 .233 .003
-------- -------- -----
Less distributions:
Dividends from net investment income.......... (.061) (.072) (.048)
Tax return of capital......................... -- (.002) --
Distributions from capital gains.............. -- -- --
-------- -------- -----
Total distributions....................... (.061) (.074) (.048)
-------- -------- -----
Net asset value, end of period.................... $1.049 $1.091 $.932
-------- -------- -----
-------- -------- -----
Total return (b).................................. 1.7% 25.0% .3%(c)
Net assets, end of period (in thousands).......... $ 3,900 $ 3,049 $ 2,575
Ratio of expenses to average daily net assets
(d)............................................. .20% .20% .20%(e)
Ratio of net investment income to average daily
net assets (d).................................. 6.52% 6.52% 7.18%(e)
Portfolio turnover rate (excluding short-term
securities)..................................... 21.9% -- 11.6%
<FN>
- ---------
(a) The inception of the Portfolio was November 9, 1993. However, operations
did not commence until May 2, 1994 when shares of the portfolio became
effectively registered under the Securities Act of 1933.
(b) Total return figures are based on a share outstanding throughout the period
and assumes reinvestment of distributions at net asset value. Total return
figures do not reflect charges pursuant to the terms of the variable life
insurance policies and variable annuity contracts funded by separate
accounts that invest in the Fund's shares.
(c) Total return is presented for the period from May 2, 1994, commencement of
operations, to December 31, 1994.
(d) Minnesota Mutual voluntarily absorbed $31,158, $24,709 and $23,298 in
expenses for the years ended December 31, 1996 and 1995 and the period from
May 2, 1994 to December 31, 1994. Had the Portfolio paid all fees and
expenses, the ratio of expenses to average daily net assets would have been
1.14%, 1.06% and 1.52%, respectively and the ratio of net investment income
to average daily net assets would have been 5.58%, 5.66% and 5.86%,
respectively.
(e) Adjusted to an annual basis.
</TABLE>
15
<PAGE>
MATURING GOVERNMENT BOND 2006 PORTFOLIO
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED MAY 2,
DECEMBER 31, 1994 (a) TO
------------------ DECEMBER 31,
1996 1995 1994
-------- -------- ------------
<S> <C> <C> <C>
Net asset value, beginning of period.............. $1.174 $.923 $.970
-------- -------- -----
Income from investment operations:
Net investment income......................... .064 .069 .047
Net gains or losses on securities (both
realized and unrealized)..................... (.078) .251 (.046)
-------- -------- -----
Total from investment operations.......... (.014) .320 .001
-------- -------- -----
Less distributions:
Dividends from net investment income.......... (.064) (.069) (.048)
Distributions from capital gains.............. (.002) -- --
-------- -------- -----
Total distributions....................... (.066) (.069) (.048)
-------- -------- -----
Net asset value, end of period.................... $ 1.094 $ 1.174 $ .923
-------- -------- -----
-------- -------- -----
Total return (b).................................. (1.2)% 34.7% .1%(c)
Net assets, end of period (in thousands).......... $ 3,095 $ 2,570 $ 1,860
Ratio of expenses to average daily net assets
(d)............................................. .40% .40% .40%(e)
Ratio of net investment income to average daily
net assets (d).................................. 6.43% 6.56% 7.45%(e)
Portfolio turnover rate (excluding short-term
securities)..................................... 25.7% 10.0% --
<FN>
- ---------
(a) The inception of the Portfolio was November 9, 1993. However, operations
did not commence until May 2, 1994 when shares of the portfolio became
effectively registered under the Securities Act of 1933.
(b) Total return figures are based on a share outstanding throughout the period
and assumes reinvestment of distributions at net asset value. Total return
figures do not reflect charges pursuant to the terms of the variable life
insurance policies and variable annuity contracts funded by separate
accounts that invest in the Fund's shares.
(c) Total return is presented for the period from May 2, 1994, commencement of
operations, to December 31, 1994.
(d) Minnesota Mutual voluntarily absorbed $31,536, $25,199 and $24,803 in
expenses for the years ended December 31, 1996 and 1995 and the period from
May 2, 1994 to December 31, 1994. Had the Portfolio paid all fees and
expenses, the ratio of expenses to average daily net assets would have been
1.58%, 1.56% and 2.37%, respectively and the ratio of net investment income
to average daily net assets would have been 5.25%, 5.40% and 5.48%,
respectively.
(e) Adjusted to an annual basis.
</TABLE>
16
<PAGE>
MATURING GOVERNMENT BOND 2010 PORTFOLIO
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED MAY 2,
DECEMBER 31, 1994 (a) TO
------------------ DECEMBER 31,
1996 1995 1994
-------- -------- ------------
<S> <C> <C> <C>
Net asset value, beginning of period.............. $ 1.214 $.910 $.962
-------- -------- ------
Income from investment operations:
Net investment income......................... .049 .070 .049
Net gains or losses on securities (both
realized and unrealized)..................... (.090) .304 (.052)
-------- -------- ------
Total from investment operations.......... (.041) .374 (.003)
-------- -------- ------
Less distributions:
Dividends from net investment income.......... (.001) (.070) (.049)
Distributions from capital gains.............. -- -- --
-------- -------- ------
Total distributions....................... (.001) (.070) (.049)
-------- -------- ------
Net asset value, end of period.................... $ 1.172 $1.214 $.910
-------- -------- ------
-------- -------- ------
Total return (b).................................. (3.4)% 41.2% (.3)%(c)
Net assets, end of period (in thousands).......... $ 2,813 $1,384 $1,071
Ratio of expenses to average daily net assets
(d).............................................. .40% .40% .40%(e)
Ratio of net investment income to average daily
net assets (d)................................... 6.40% 6.58% 7.79%(e)
Portfolio turnover rate (excluding short-term
securities)...................................... 71.0% -- 14.5%
<FN>
- ---------
(a) The inception of the Portfolio was November 9, 1993. However, operations
did not commence until May 2, 1994 when shares of the portfolio became
effectively registered under the Securities Act of 1933.
(b) Total return figures are based on a share outstanding throughout the period
and assumes reinvestment of distributions at net asset value. Total return
figures do not reflect charges pursuant to the terms of the variable life
insurance policies and variable annuity contracts funded by separate
accounts that invest in the Fund's shares.
(c) Total return is presented for the period from May 2, 1994, commencement of
operations, to December 31, 1994.
(d) Minnesota Mutual voluntarily absorbed $33,042, $26,308 and $25,888 in
expenses for the years ended December 31, 1996 and 1995 and the period from
May 2, 1994 to December 31, 1994. Had the Portfolio paid all fees and
expenses, the ratio of expenses to average daily net assets would have been
2.18%, 2.68% and 4.01%, respectively and the ratio of net investment income
to average daily net assets would have been 4.62%, 4.30% and 4.18%,
respectively.
(e) Adjusted to an annual basis.
</TABLE>
17
<PAGE>
VALUE STOCK PORTFOLIO
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED MAY 2,
DECEMBER 31, 1994 (a) TO
------------------ DECEMBER 31,
1996 1995 1994
-------- -------- ------------
<S> <C> <C> <C>
Net asset value, beginning of period.............. $1.312 $1.044 $1.010
-------- -------- ------
Income from investment operations:
Net investment income......................... .013 .010 .008
Net gains or losses on securities (both
realized and unrealized)..................... .389 .331 .038
-------- -------- ------
Total from investment operations.......... .402 .341 .046
-------- -------- ------
Less distributions:
Dividends from net investment income.......... (.013) (.010) (.009)
Distributions from capital gains.............. (.110) (.063) (.003)
-------- -------- ------
Total distributions....................... (.123) (.073) (.012)
-------- -------- ------
Net asset value, end of period.................... $ 1.591 $1.312 $1.044
-------- -------- ------
-------- -------- ------
Total return (b).................................. 31.0% 33.0% 4.6%(c)
Net assets, end of period (in thousands).......... $ 97,187 $31,825 $8,771
Ratio of expenses to average daily net assets
(d).............................................. .83% .89% .90%(e)
Ratio of net investment income to average daily
net assets (d)................................... 1.28% 1.25% 2.07%(e)
Portfolio turnover rate (excluding short-term
securities)...................................... 88.6% 164.2% 49.5%
Average commission rate on stock
transactions (f)................................. $ .0672 N/A N/A
<FN>
- ---------
(a) The inception of the Portfolio was January 18, 1994. However, operations
did not commence until May 2, 1994 when shares of the portfolio became
effectively registered under the Securities Act of 1933.
(b) Total return figures are based on a share outstanding throughout the period
and assumes reinvestment of distributions at net asset value. Total return
figures do not reflect charges pursuant to the terms of the variable life
insurance policies and variable annuity contracts funded by separate
accounts that invest in the Fund's shares.
(c) Total return is presented for the period from May 2, 1994, commencement of
operations, to December 31, 1994.
(d) Minnesota Mutual voluntarily absorbed $11,610 and $22,503 in expenses for
the year ended December 31, 1995 and the period from May 2, 1994 to
December 31, 1994. Had the Portfolio paid all fees and expenses, the ratio
of expenses to average daily net assets would have been .95% and 1.56%,
respectively, and the ratio of net investment income to average daily net
assets would have been 1.19% and 1.41%, respectively.
(e) Adjusted to an annual basis.
(f) Beginning in 1996, the Portfolio is required to disclose an average
commission rate. The rate is calculated by dividing the total brokerage
commissions paid on applicable purchases and sales of stocks during the
period by the total number of related shares purchased and sold.
</TABLE>
18
<PAGE>
- --------------------------------------------------------------------------------
PERFORMANCE
DATA
- ------------------------------------
From time to time the Fund may publish advertisements
containing performance data relating to its Portfolios. In the case of the Money
Market Portfolio, the Fund will publish yield or effective yield quotations for
a seven-day or other specified period. In the case of Portfolios other than the
Money Market Portfolio, the Fund may publish yield quotations for a recent
30-day period. The Fund may also publish, for all Portfolios, cumulative total
return quotations for the period since shares of the Portfolio became available
for sale pursuant to the Fund's registration statement. All quotations of 30-day
yields and cumulative total returns will be accompanied by average annual total
return quotations for a one-year period and for the period since shares of the
Portfolio became available for sale pursuant to the Fund's registration
statement. Performance figures used by the Fund are based on historical
information of the Portfolios for specified periods, and the figures are not
intended to suggest that such performance will continue in the future. The
various performance figures used in Fund advertisements are summarized below.
More detailed information on the computations is set forth in the Statement of
Additional Information.
PERFORMANCE FIGURES OF THE FUND WILL NOT REFLECT CHARGES MADE PURSUANT TO THE
TERMS OF THE VARIABLE LIFE INSURANCE POLICIES AND VARIABLE ANNUITY CONTRACTS
FUNDED BY SEPARATE ACCOUNTS THAT INVEST IN THE FUND'S SHARES. FUND PERFORMANCE
INFORMATION WILL BE PRESENTED IN CONJUNCTION WITH PERFORMANCE INFORMATION ABOUT
THOSE POLICIES OR CONTRACTS. PURCHASERS OF VARIABLE CONTRACTS ISSUED BY
MINNESOTA MUTUAL SHOULD THEREFORE RECOGNIZE THAT THE YIELD, CUMULATIVE TOTAL
RETURN AND AVERAGE ANNUAL TOTAL RETURN ON THE SEPARATE ACCOUNT ASSETS RELATING
TO SUCH A CONTRACT WHICH ARE INVESTED IN SHARES OF ANY OF THE FUND'S PORTFOLIOS
WOULD BE LOWER THAN THE YIELD, CUMULATIVE TOTAL RETURN AND AVERAGE ANNUAL TOTAL
RETURN OF SUCH PORTFOLIO FOR THE SAME PERIOD.
MONEY MARKET PORTFOLIO YIELD. Yield quotations for the Money Market Portfolio
are based on the income generated by an investment in the portfolio over a
specified period, usually seven days. The figures are "annualized," that is, the
amount of income generated by the investment during the period is assumed to be
generated over a 52-week period and is shown as a percentage of the investment.
Effective yield quotations are calculated similarly, but when annualized the
income earned by an investment in the portfolio is assumed to be reinvested.
Effective yield quotations will be slightly higher than yield quotations because
of the compounding effect of this assumed reinvestment. The yield and effective
yield of the Money Market Portfolio for the seven-day period ended December 31,
1996 were 4.77% and 4.89%, respectively. (See also, "Performance Data" in the
Statement of Additional Information.)
YIELD QUOTATIONS FOR OTHER PORTFOLIOS. Yield figures may also be quoted for
Portfolios other than the Money Market Portfolio and the International Stock
Portfolio. Yield figures will always be based on a 30-day period and will be
determined by dividing the net investment income per share of the Portfolio
during the period by the net asset value per share on the last day of the
period. An annualized yield figure is computed on the assumption that net
investment income is earned and reinvested at a constant rate and annualized at
the end of a six-month period. For purposes of the computation, net investment
income is determined in accordance with rules prescribed by the Securities and
Exchange Commission, and it may differ from the actual net investment income
determined for the period under the Fund's accounting practices.
TOTAL RETURN FIGURES. Cumulative total return figures may also be quoted for
all Portfolios of the Fund. Cumulative total return is based on a hypothetical
$1,000 investment in the Portfolio at the beginning of the advertised period,
and is equal to the percentage change between the $1,000 net asset value of that
investment at the beginning of the period and the net asset value of that
investment at the end of the period with dividend and capital gain distributions
treated as reinvested.
All quotations of yields for Portfolios other than the Money Market Portfolio
and all quotations of cumulative total return figures will be accompanied by
average annual total return figures for one-year and five-year periods and for
the period since shares of the Portfolio became available pursuant to the Fund's
registration statement. Average annual total return figures will show for the
specified period the average annual rate of return required for an initial
investment of $1,000 to equal the redemption value of that investment at the end
of the period.
PREDICTABILITY OF RETURN. For each of the Maturing Government Bond
Portfolios, the Fund may calculate an anticipated growth rate (AGR) and an
anticipated value at maturity (AVM) on any day on which the Fund values its
securities. AGR is an estimate of the average annual total return that would be
experienced by an investment maintained in the Portfolio from the date of
initial purchase until the target maturity date, assuming no
19
<PAGE>
withdrawals or additional investments. AVM is the estimated value of such an
investment at the target maturity date. AGR and AVM, like the Portfolios'
historical total return data discussed above, do not reflect any loads or
contract charges deducted from payments or from separate account assets. Daily
calculations for each are necessary because (i) the AGR and AVM calculations
assume, among other things, an expense ratio and portfolio composition that
remains unchanged for the life of each such Portfolio to the target date at
maturity, and (ii) such calculations are therefore meaningful as a measure of
predictable return with respect to particular shares only if such shares are
held to the applicable target maturity date and only with respect to shares
purchased on the date of such calculations (the AGR and AVM applicable to shares
purchased on any other date may be materially different). Those assumptions can
only be hypothetical given that owners of shares have the option to purchase or
redeem those shares on any business day, and will receive dividend and capital
gain distributions through the receipt of additional shares. A number of factors
in addition to shareholder activity can cause a Maturing Government Bond
Portfolio's AGR and AVM to change from day to day. These include the adviser's
efforts to improve total return through market opportunities, transaction costs,
interest rate changes and other events that affect the market value of the
investments held in each Maturing Government Bond Portfolio. Despite these
factors, it is anticipated that if specific shares of a Maturing Government Bond
Portfolio are held to the applicable target maturity date, then the AGR and AVM
applicable to such shares (i.e., calculated as of the date of purchase of such
shares) will vary from the actual return experienced by such shares within a
narrow range.
ADDITIONAL PERFORMANCE INFORMATION. Further information about the performance
of the Fund is contained in the Fund's Annual Report to Shareholders, which may
be obtained without charge by writing the Fund at 400 Robert Street North, St.
Paul, Minnesota 55101-2098, or by calling (612) 665-3500.
- --------------------------------------------------------------------------------
THE FUND
- ------------------------------------
Advantus Series Fund, Inc., (the "Fund") is a diversified,
open-end management investment company incorporated under Minnesota law on
February 21, 1985. Prior to May 1, 1997, the Fund was known as MIMLIC Series
Fund, Inc. The Minnesota Mutual Life Insurance Company ("Minnesota Mutual") has
established certain separate accounts for the purpose of issuing variable
annuity contracts and variable life insurance policies (collectively, the
"Contracts"). The Fund serves as the underlying investment medium for amounts
invested in the Contracts. The Fund may also be used as the underlying
investment medium for separate accounts of the Northstar Life Insurance Company,
a wholly-owned life insurance subsidiary of Minnesota Mutual which is domiciled
in the state of New York. The Fund may be used for other purposes in the future.
It is conceivable that in the future it may be disadvantageous for variable
life insurance separate accounts and variable annuity separate accounts to
invest in the Fund simultaneously. Although neither Minnesota Mutual nor the
Fund currently foresees any such disadvantages either to variable life insurance
policy owners or to variable annuity contract owners, the Fund's Board of
Directors intends to monitor events in order to identify any material conflicts
between such policy owners and contract owners and to determine what action, if
any, should be taken in response thereto. Such action could include the sale of
Fund shares by one or more of the separate accounts, which could have adverse
consequences. Material conflicts could result from, for example, (1) changes in
state insurance laws, (2) changes in federal income tax laws, (3) changes in the
investment management of any of the Portfolios of the Fund, or (4) differences
in voting instructions between those given by policy owners and those given by
contract owners. The costs of resolving any such material conflicts will be
borne solely by Minnesota Mutual.
The Fund is a series company, which means that it consists of several separate
Portfolios, each with its own investment objectives. Currently, there are twenty
such Portfolios: the Growth Portfolio, the Bond Portfolio, the Money Market
Portfolio, the Asset Allocation Portfolio, the Mortgage Securities Portfolio,
the Index 500 Portfolio, the Capital Appreciation Portfolio, the International
Stock Portfolio, the Small Company Portfolio, four Maturing Government Bond
Portfolios (maturing respectively in 1998, 2002, 2006 and 2010), the Value Stock
Portfolio, the Small Company Value Portfolio, the International Bond Portfolio,
the Index 400 Mid-Cap Portfolio, the Micro-Cap Value Portfolio, the Macro-Cap
Value Portfolio and the Micro-Cap Growth Portfolio. Each Portfolio issues a
separate class of the Fund's common stock. The investment adviser of the Fund is
Advantus Capital Management, Inc., a Minnesota corporation ("Advantus Capital").
Advantus Capital has entered
20
<PAGE>
into an investment sub-advisory agreement with Winslow Capital Management, Inc.
("Winslow Management"), a Minnesota corporation with principal offices in
Minneapolis, Minnesota, under which Winslow Management serves as investment
sub-adviser to the Fund's Capital Appreciation Portfolio. Advantus Capital has
also entered into an investment sub-advisory agreement with Templeton Investment
Counsel, Inc., a Florida corporation with principal offices in Fort Lauderdale,
Florida ("Templeton Cousel"), under which Templeton Counsel serves as investment
sub-adviser to the Fund's International Stock Portfolio. Advantus Capital has
entered into a sub-advisory agreement with Julius Baer Investment Management
Inc. ("Julius Baer"), a Delaware corporation with primary offices in New York,
New York, under which Julius Baer provides advisory services to the
International Bond Portfolio. Advantus Capital has entered into a sub-advisory
agreement with Keystone Investment Management Company ("Keystone Management"), a
Delaware corporation with primary offices in Boston, Massachusetts, under which
Keystone Management provides advisory services to the Micro-Cap Value Portfolio.
Advantus Capital has entered into a sub-advisory agreement with J.P. Morgan
Investment Management Inc. ("Morgan Investment"), a Delaware corporation with
primary offices in New York, New York, under which Morgan Investment provides
advisory services to the Macro-Cap Value Portfolio. Advantus Capital has entered
into a sub-advisory agreement with Wall Street Associates ("Wall Street"), a
California corporation with primary offices in La Jolla, California, under which
Wall Street provides advisory services to the Micro-Cap Growth Portfolio.
Currently, Fund shares are purchased only by Minnesota Mutual to fund the
Contracts. Minnesota Mutual is a mutual life insurance company which is
domiciled in Minnesota and authorized to do business in 49 states. The Fund may
also sell its shares to separate accounts of Northstar Life Insurance Company, a
wholly-owned subsidiary of Minnesota Mutual which is domiciled in the state of
New York. Fund shares are not offered directly to and may not be purchased
directly by members of the public. Consequently, the terms "shareholder" and
"shareholders" in this Prospectus refer to Minnesota Mutual.
The value of certain benefits under the Contracts will vary with the
investment performance of the Fund's Portfolios. Because contract owners will
allocate their investments among the Portfolios of the Fund, in response to or
in anticipation of changes in market or economic conditions, prospective
purchasers should carefully consider the information about the Fund and its
Portfolios presented in this Prospectus prior to purchasing such a Contract.
- --------------------------------------------------------------------------------
INVESTMENT
OBJECTIVES,
POLICIES AND RISKS
- ------------------------------------
Each Portfolio has a stated investment objective
which it pursues through separate investment
policies. The differences in objectives and policies among the Portfolios can be
expected to affect the return of each Portfolio and the degree of market and
financial risk to which each Portfolio is subject. Financial risk refers to the
ability of an issuer of a debt security to pay principal and interest on such
security and to the earning stability and overall financial soundness of an
issuer of an equity security. Market risk refers to the volatility of the
reaction of the price of a security to changes and conditions in the securities
markets in general and, with particular reference to debt securities, changes in
the overall level of interest rates.
Some debt securities may be purchased on a when-issued or forward commitment
basis, which means that it may take as long as 45 days after the purchase before
the securities are delivered to the Fund. Payment and interest terms, however,
are fixed at the time the purchaser enters into the commitment. The Fund does
not pay for the securities or start earning interest on them until the
contractual settlement date. When-issued securities are subject to market
fluctuations and they may affect the Fund's total assets the same as owned
securities.
The investment objective, certain policies and risks associated with each
Portfolio are as described below. The investment policies of the Fund set forth
in this Prospectus and in the Statement of Additional Information may be changed
without shareholder approval except that the investment objectives of a
Portfolio as set forth in this Prospectus are fundamental and may not be changed
without the approval of a majority of the outstanding voting securities of the
Portfolio.
- --------------------------------------------------------------------------------
GROWTH -
PORTFOLIO
The investment objective of the Growth Portfolio is to seek the
long-term accumulation of capital. Current income, while a factor in investment
selection, is a secondary
21
<PAGE>
objective. In pursuit of these objectives the Growth Portfolio will follow a
policy of investing primarily in common stocks and other equity securities. Such
investments involve greater investment risk than fixed income securities.
The Portfolio's growth approach is based on sound fundamental investment
analysis in which individual stock selection is critical. Thus, the Portfolio's
holdings are selected on the basis of a fundamental analysis which seeks to
identify sound companies whose stock prices, in the opinion of Advantus Capital,
do not reflect their long-term growth potential.
Generally, the Portfolio invests in companies with strong long-term outlooks.
These quality issues are emphasized as a way to protect against downside risk
inherent in the stock market. However, the Portfolio may also seek to achieve
its objective by investing in companies which, in Advantus Capital's judgment,
have temporarily undervalued securities, or, because of new management, products
or markets or other factors, show promise of substantially improved results.
The assets of the Portfolio usually will be invested in a diversified
portfolio of equity securities, mainly common stocks, across all industry
sectors. Changes in investments will be made from time to time to take into
account changes in the outlook for particular industries or companies and in the
general level of common stock prices. The purchase of common stocks may occur in
rising or declining markets.
The Portfolio will typically maintain a fully invested position, but when
economic conditions or general levels of common stock prices are such that
investments of other types may be advantageous on the basis of combined
considerations of risk, income and appreciation, the Portfolio may temporarily
take a defensive position by investing a substantial portion of its assets in
bonds, notes or other evidences of indebtedness, including United States
Government securities, or may hold its assets in cash. Those investments may, or
may not, be convertible into stock. The Portfolio may also temporarily hold its
assets in cash or money market instruments pending investment in accordance with
its policies.
The Portfolio may invest up to 10% of the value of its total assets in
securities of foreign issuers which are not publicly traded in the United
States. (Securities of foreign issuers which are publicly traded in the United
States, usually in the form of sponsored American Depositary Receipts ("ADRs"),
are not subject to this 10% limitations.) 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 United States. 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
United States companies. Further, the Portfolio may encounter difficulties in
pursuing (or be unable to pursue) legal remedies and in obtaining judgments in
foreign courts. Commission rates in foreign countries, which are sometimes fixed
rather than subject to negotiation as in the United States, 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 United
States. The foreign securities markets of many of the countries in which the
Portfolio may invest may also be smaller, less liquid, and subject to greater
price volatility than those in the United States. Also, some countries may
withhold portions of interest, dividends and gains at the source. There are
further risk considerations, including possible losses through the holding of
securities in domestic and foreign custodial banks and depositories.
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.
22
<PAGE>
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.
- --------------------------------------------------------------------------------
BOND -
PORTFOLIO
The investment objective of the Bond Portfolio is to seek as high a
level of long-term total rate of return as is consistent with prudent investment
risk. A secondary objective is to seek preservation of capital. In pursuit of
these objectives, the Bond Portfolio will follow a policy of investing primarily
in long-term, fixed-income, high-quality debt instruments. The value of debt
securities will tend to rise and fall inversely with the rise and fall of
interest rates.
The Fund anticipates that under normal circumstances at least 75% of the
Portfolio's assets, exclusive of cash items which may include commercial paper,
certificates of deposit and United States Treasury obligations not exceeding one
year in maturity, will be invested in one or more of the following types of
securities:
- - Corporate debt securities which at the time of purchase are rated within the
four highest grades assigned by Moody's, S&P or any other national rating
service. To the extent that the Portfolio invests in bonds in the lowest of
such four grades (i.e., in bonds rated BBB or Baa by S&P or Moody's,
respectively) it will be investing in bonds which may have speculative
characteristics. In addition, changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make
principal and interest payments in such bonds than is the case with higher
grade bonds. If, after acquisition, a bond is downgraded by the rating
agencies to a rating lower than BBB or Baa by S&P or Moody's, respectively,
it is the Fund's general policy to dispose of such downgraded securities.
- - Debt securities of, or guaranteed by, the United States Government, its
agencies or instrumentalities. (Purchases of United States Treasury
obligations of all maturities will be limited in accordance with the
diversification regulations issued under Section 817(h) of the Internal
Revenue Code.)
The balance of the Portfolio's assets, exclusive of cash items, may be
invested in other fixed income investments not described above including
corporate debt securities or preferred stocks which in either case may or may
not be convertible. It is not expected that the Portfolio will invest in common
stocks, rights to acquire common stocks or other equity securities, but it may
retain for reasonable periods of time up to five percent of its total assets in
common stocks acquired upon conversion of debt securities or preferred stocks or
upon exercise of warrants acquired with debt securities.
The Portfolio may purchase mortgage-backed securities issued by government
entities (some of which may be U.S. Government agency issued or guaranteed debt
securities of the types described above) and non-government entities such as
banks, mortgage lenders, or other financial institutions. A mortgage-backed
security may be an obligation of the issuer backed by a mortgage or pool of
mortgages or a direct interest in an underlying pool of mortgages. Some
mortgage-backed securities, such as collateralized mortgage obligations, make
payments of both principal and interest at a variety of intervals; others make
semiannual interest payments at a predetermined rate and repay principal at
maturity (like a typical bond). Mortgage-backed securities are based on
different types of mortgages including those on commercial real estate or
residential properties.
The value of mortgage-backed securities may change due to shifts in the
market's perception of issuers. In addition, regulatory or tax changes may
adversely affect the mortgage securities market as a whole. Non-government
mortgage-backed securities may offer higher yields than those issued by
government entities, but also may be subject to greater price changes than
government issues. Mortgage-backed securities are subject to prepayment risk.
Prepayment, which occurs when unscheduled or early payments are made on the
underlying mortgages, may shorten the effective maturities of these securities
and may lower their total returns.
The Portfolio may also invest in collateralized mortgage obligations ("CMOs")
of the type eligible for purchase by the Mortgage Securities Portfolio (see the
discussion of CMOs, and the risks associated therewith, under the caption
"Mortgage Securities Portfolio," below). The Bond Portfolio, however, will not
purchase "accrual" or "Z" bond types of CMOs (a CMO tranche which is not
entitled to receive cash payments until one or more other tranches have been
paid in full); inverse or reverse floating CMOs (a tranche of a CMO with a
coupon rate that moves in the reverse direction to an applicable interest rate
index); or "interest only" or
23
<PAGE>
"principal only" stripped mortgage-backed securities.
The Portfolio may also purchase asset-backed securities, which 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.
The Portfolio may 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. Such securities do not present the same
currency risks as securities traded outside the United States and denominated in
a foreign currency. Investing in securities of foreign issuers may, nonetheless,
result in greater risk than that incurred in investing in securities of domestic
issuers. The obligations of foreign issuers may be affected by political or
economic instabilities. Financial information published by foreign companies may
be less reliable or complete than information disclosed by domestic companies
pursuant to United States Government securities laws, and may not have been
prepared in accordance with generally accepted account principles.
It is expected that the Bond Portfolio will invest in debt securities of
varying long-term maturities and from various industry classifications,
depending on Advantus Capital's evaluation of current and anticipated market
conditions, as well as industry outlook and company operations. Yields on debt
securities depend upon a number of factors, including the size of a particular
offering, maturities and ratings of the obligations and general economic,
monetary and market conditions. The market value of debt instruments will vary
depending on their respective yields and, as a result, the net asset value of
the Bond Portfolio will change from time to time as the general level of
interest rates change.
When economic conditions or general levels of debt security prices are such
that investments of
24
<PAGE>
other types may be advantageous on the basis of combined considerations of risk,
income and appreciation, the Portfolio may invest a substantial portion of its
assets in intermediate-term or short-term debt securities including cash and
money market instruments. The Portfolio may temporarily hold its assets in cash
or money market instruments pending investment in accordance with its policies.
The Bond Portfolio will engage in portfolio transactions when Advantus Capital
believes that such transactions will help to achieve the Portfolio's overall
objectives. Portfolio securities may or may not be held to maturity.
- --------------------------------------------------------------------------------
MONEY MARKET -
PORTFOLIO
The investment objective of the Money Market Portfolio is to seek
maximum current income to the extent consistent with liquidity and the
preservation of capital. In pursuit of this objective the Money Market Portfolio
will follow a policy of investing in money market instruments and other debt
securities. The return produced by these securities will reflect fluctuations in
short-term interest rates.
The Portfolio is 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
Portfolio 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
Portfolio 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 Standard & Poor's Corporation, or Prime-1 or Prime-2 by Moody's
Investors Service, Inc.
Rule 2a-7 also requires, among other things, that the Portfolio may not
invest, other than in United States "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 Portfolio's
present practice is not to purchase any Second Tier Securities.
Subject to these limitations, the money market instruments held by the
Portfolio shall include:
- - Obligations issued or guaranteed as to principal or interest by the United
States Government, or any agency or authority controlled or supervised by and
acting as an instrumentality of the United States Government pursuant to
authority granted by Congress.
- - Obligations (including certificates of deposit and bankers acceptances) of
United States banks and savings and loan associations 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 billion, United States dollar
denominated obligations of Canadian chartered banks, London branches of
United States banks, and United States branches or agencies of foreign banks
if such banks meet the above-stated qualifications, and certificates of
deposit of such banks and savings and loan associations regardless of size
provided that the amount of the deposit does not exceed $100,000 for any one
bank or savings and loan association 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
United States limited partnerships, corporations or foreign corporations
directly related to the United States 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 Portfolio
seeks to lessen the changes in the value of its assets caused by market factors.
The Money Market Portfolio 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.
The Portfolio, consistent with its investment objective, will attempt to
maximize yield through trading. This may involve selling 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.
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<PAGE>
Selling securities prior to their maturity may result in the Portfolio's
realizing gains and losses.
Repurchase agreements involve the risk that the seller may fail to repurchase
the underlying security. In such event, the Portfolio would attempt to dispose
of the underlying security in the market or would hold the underlying security
until maturity. However, in the case of a repurchase agreement construed by the
courts as a collateralized loan, the Portfolio may be subject to various delays
and risks of loss in attempting to dispose of the underlying security, including
(a) possible declines in the value of the underlying security during the period
while the Portfolio seeks to enforce its rights thereto, (b) possible reduced
levels of income and lack of access to income during this period and (c) expense
involved in the enforcement of the Portfolio's rights. The Board of Directors of
the Fund has an obligation to evaluate the creditworthiness of all entities that
enter into repurchase agreements with the Fund.
Obligations of Canadian chartered banks, London branches of United States
banks, and United States branches and agencies of foreign banks may involve
somewhat greater opportunity for income than the other money market instruments
in which the Portfolio invests, 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 United States banks, and United States
branches and agencies of foreign banks are subject to fewer United States
regulatory restrictions than those applicable to domestic banks, and London
branches of United States banks may be subject to less stringent reserve
requirements than domestic branches. Canadian chartered banks, United States
branches and agencies of foreign banks, and London branches of United States
banks may provide less public information than, and may not be subject to the
same accounting, auditing and financial record keeping standards as, domestic
banks.
The Portfolio will not invest more than a total of 25% of its total assets in
obligations of Canadian chartered banks, London branches of United States banks,
and United States branches and agencies of foreign banks.
See Appendix A to this Prospectus for more information on certain of the
Fund's investment policies, including descriptions of money market obligations
and ratings.
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ASSET ALLOCATION -
PORTFOLIO
The investment objective of the Asset Allocation Portfolio is to seek
as high a level of long-term total rate of return as is consistent with prudent
investment risk. In pursuit of this objective the Asset Allocation Portfolio
will invest in common stocks and other equity securities, bonds, mortgage
securities and money market instruments. The Asset Allocation Portfolio involves
the risks inherent in stocks and debt securities of varying maturities, and the
risk that the Portfolio may invest too much or too little of its assets in each
type of security at any particular time.
The Asset Allocation Portfolio may invest in the following types of money
market, debt and equity securities:
- - Money market instruments and other debt securities with maturities not
exceeding one year in which the Money Market Portfolio may invest.
- - Bonds and other debt securities, including mortgage-related securities, with
maturities generally exceeding one year in which the Bond and Mortgage
Securities Portfolios may invest.
- - Common stock and other equity securities in which the Growth, Index 500,
Capital Appreciation and Small Company Portfolios may invest.
Thus, with respect to equity securities, the Portfolio will attempt to achieve
long-term accumulation of capital. With respect to mortgage-related securities
and bonds, the Portfolio will attempt to provide as high a level of long-term
total rate of return as is consistent with prudent investment risk. A secondary
objective is to seek preservation of shareholder's capital. With respect to
money market securities, the Portfolio will attempt to achieve maximum current
income to the extent consistent with liquidity and preservation of capital.
The Portfolio will continuously adjust the mix of investments among the three
market sectors to capitalize on perceived variations in return potential
produced by the interaction of changing financial market and economic
conditions. No more than 75% of the Portfolio's assets may be invested in either
the common stock sector or the bond sector. Up to 100% of the Portfolio's assets
may be invested
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in money market instruments. No minimum percentage has been established for any
of the sectors. Major changes in investment mix may occur several times within a
year or over several years, depending upon market and economic conditions.
- --------------------------------------------------------------------------------
MORTGAGE SECURITIES -
PORTFOLIO
The investment objective of the Mortgage Securities Portfolio is to
seek a high level of current income consistent with prudent investment risk. In
pursuit of this objective the Mortgage Securities Portfolio will follow a policy
of investing primarily in a diversified portfolio of mortgage-related
securities. Prices of mortgage-related securities will tend to rise and fall
inversely with the rise and fall of the general level of interest rates.
The Fund anticipates that under normal circumstances at least 65% of the
Portfolio's assets will be invested in mortgage-related securities (except when
in a temporary defensive posture) of the following types:
- - Mortgage-related securities issued by United States Government owned or
sponsored corporations (purchases of these securities will be limited in
accordance with the diversification regulations for variable insurance
contracts issued under Section 817(h) of the Internal Revenue Code).
- - Mortgage-related securities rated A or better by Moody's or S&P or rated at a
comparable level by an independent publicly-recognized rating agency, or, if
not rated, are of equivalent investment quality as determined by Advantus
Capital.
At times the Portfolio may invest in mortgage-related securities not meeting
the foregoing investment quality standards when deemed by Advantus Capital to be
consistent with the Portfolio's objective of high current income to the extent
consistent with prudent investment risk; however, the Portfolio will not invest
in mortgage-related securities, or debt securities not mortgage related, rated
lower than BBB or Baa by S&P or Moody's, respectively, and no such investments
(i.e., investments in securities rated BBB or Baa) will be made in excess of 20%
of the value of the Portfolio's total assets. (Investments in mortgage-related
securities rated BBB or Baa will be considered mortgage-related securities for
purposes of the policy that the Portfolio invest at least 65% of the value of
its total assets in mortgage-related securities.) To the extent that the
Portfolio invests in securities rated BBB or Baa by S&P or Moody's,
respectively, it will be investing in securities which may have speculative
characteristics. In addition, changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make principal
and interest payments in such securities than is the case with higher grade
securities. If, after acquisition, a security is downgraded by the rating
agencies to a rating lower than BBB or Baa by S&P or Moody's, respectively, it
is the Fund's general policy to dispose of such downgraded securities. Advantus
Capital monitors continuously the ratings of securities held by the Portfolio
and the creditworthiness of their issuers.
The Portfolio may invest up to 35% of the value of its total assets in the
following types of securities: (i) securities issued or guaranteed by the United
States Government, its agencies and instrumentalities, (ii) certificates of
deposit, bankers' acceptances and interest-bearing savings deposits of banks
having total assets of more than $1 billion and which are members of the Federal
Deposit Insurance Corporation, (iii) commercial paper of prime quality rated A-1
or higher by S&P or Prime-1 or higher by Moody's or, if not rated, issued by
companies which have an outstanding debt issue rated AA or higher by S&P or Aa
or higher by Moody's, and (iv) debt securities which, although not
mortgage-related securities, are rated BBB or Baa or better by S&P or Moody's,
respectively, or, if not rated, are of equivalent investment quality as
determined by Advantus Capital; such securities may entitle the holder to
participate in income derived from mortgaged properties or from sales thereof.
The Portfolio will not invest in debt securities rated BBB or Baa by S&P or
Moody's, respectively, (or, if not rated, are of equivalent investment quality
as determined by Advantus Capital), including mortgage-related securities, in
excess of 20% of the value of the Portfolio's total assets. When business or
financial conditions warrant, the Portfolio may take a temporary defensive
position and invest without limit in the foregoing securities.
Although some of the mortgage-related securities held by the Portfolio are
guaranteed by governmental and government-related organizations, the
governmental and government-related guarantors do not guarantee the Portfolio's
yield or the price of its shares. The net asset value of the Portfolio
fluctuates in response to changes in the general level of interest rates. When
interest rates rise, prices of fixed income securities held by the Portfolio
tend to fall and the rate of prepayment of mortgages underlying mortgage-related
securities tends to decline (lengthening the average maturity of the
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<PAGE>
Portfolio). In periods of declining interest rates, however, the prices of such
securities tend to rise and the rate of prepayment of mortgages underlying
mortgage-related securities tends to increase, and such prepayments must be
reinvested at the then prevailing lower interest rates. In addition, the net
asset value of the Portfolio may fluctuate in response to the market's
perception of the creditworthiness of the issuers of the Portfolio's securities.
The availability of interest-sensitive mortgage-related securities, in which the
Portfolio concentrates its investments, may be limited by government regulation
or tax policy. For example, action by the Board of Governors of the Federal
Reserve System to limit the growth of the nation's money supply may cause
interest rates to rise and thereby reduce the volume of new residential
mortgages. Although mortgage-related securities are generally supported by some
form of government or private guarantees and insurance, the Portfolio's shares
are not guaranteed and there can be no assurance that private insurers can meet
their obligations.
The mortgage-related securities in which the Portfolio principally invests
provide funds for mortgage loans made to residential home buyers. These include
securities which represent interests in pools of mortgage loans made by lenders
such as savings and loan institutions, mortgage bankers, commercial banks and
others. Pools of mortgage loans are assembled for sale to investors (such as the
Fund) by various governmental, government-related and private organizations.
Interests in pools of mortgage-related securities differ from other forms of
debt securities, which normally provide for periodic payment of interest in
fixed amounts with principal payments at maturity or specified call dates.
Instead, these securities usually provide a monthly payment which consists of
both interest and principal payments. In effect, these payments are a
"pass-through" of the monthly payments made by the individual borrower on their
residential or commercial mortgage loans, net of any fees paid, to the servicer,
the issuer or guarantor of such securities. Additional payments are caused by
repayments of principal resulting from the sale of the underlying residential
property, refinancing, curtailments (partial prepayment) or foreclosure, net of
fees or costs which may be incurred. Some mortgage-related securities (such as
securities issued by the Government National Mortgage Association) are described
as "modified pass-through." These securities entitle the holder to receive all
interest and principal payments owed on the mortgage pool, net of certain fees,
regardless of whether or not the mortgagor actually makes the payment. For
further information about the characteristics of mortgage-related securities,
see Appendix B to this Prospectus.
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 nongovernmental 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, 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, banks and other financial
institutions, 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 Portfolio's investment quality
standards. There can be no assurance that the private insurers can meet their
obligations under the policies. The Portfolio may buy mortgage-related
securities without insurance or guarantees if through an examination of the loan
experience and practices of the poolers Advantus Capital determines that the
securities meet the Portfolio's quality and liquidity standards.
The Portfolio 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
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<PAGE>
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.
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. For that reason, and except as otherwise provided (see the following
paragraphs for a discussion of the Portfolio's investment policies regarding
CMOs known as "Z" bonds and inverse or reverse floating CMOs), the Portfolio
will not purchase a CMO tranche unless, at the time of purchase, such tranche is
part of a series with either the first or second highest priority within the CMO
to receive cash flows. These types of CMOs tend to provide more predictable and
stable returns, but carry lower current yields, than other more volatile CMOs
(which have a lower cash flow priority). 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 Portfolio may invest in such
securities, usually subject to a cap, provided such securities satisfy the same
requirements regarding cash flow priority applicable to the Portfolio'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 Portfolio 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.
The Portfolio 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
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<PAGE>
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, the Portfolio will not purchase a Z bond if the Portfolio's
aggregate investment in Z bonds which are then still in their accrual periods
would exceed 20% of the Portfolio's total assets (Z bonds which have begun to
receive cash payments are not included for purposes of this 20% limitation).
The Portfolio 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 Portfolio 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, the Portfolio 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 the
Portfolio's net assets.
The Portfolio may purchase stripped mortgage-backed securities, which
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 Portfolio.
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 Portfolio will treat all IOs and
POs as illiquid securities. Therefore, the Portfolio will limit its investments
in IOs and POs, together with all other illiquid securities, to 15% of the
Portfolio's net assets. See "Investment Restrictions."
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INDEX 500 -
PORTFOLIO
The investment objective of the Index 500 Portfolio is to seek
investment results that correspond generally to the price and yield performance
of the common stocks included in the Standard & Poor's Corporation 500 Composite
Stock Price Index (the "Index"). The Index is an unmanaged index of common
stocks comprised of 500 industrial, financial, utility and transportation
companies. It is designed to provide an economical and convenient means of
maintaining a broad position in the equity market as part of an overall
investment strategy. All common stocks, including those in the Index, involve
greater investment risk than debt securities. The fact that a stock has been
included in the Index in no way implies an opinion by S&P as to its
attractiveness as an investment, nor is it a sponsor or in any way affiliated
with the Portfolio. (See "The Standard & Poor's License," below.)
The Portfolio will at all times invest at least 75%, and may invest up to
100%, of its assets in common stocks included in the Index. There is no minimum
or maximum number of stocks included in the Index which the Portfolio must hold.
Under normal circumstances it is expected that the Portfolio will hold between
200-450 different stocks included in the Index. In order to maintain adequate
liquidity to meet its redemption demands, the Portfolio may also invest up to
10% of its total assets in short-term investments, including repurchase
agreements, and stock index futures contracts. The use of stock index futures
contracts allows the Portfolio to maintain
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liquidity while also increasing the level of the Portfolio's assets that reflect
the performance of the S&P 500 Index.
The Portfolio uses the Index as the standard performance comparison because it
represents over 70% of the total market value of all common stocks, is well
known to investors, and in the opinion of Advantus Capital is representative of
the performance of publicly traded common stocks. The Index is composed of 500
selected common stocks, most of which are listed on the New York Stock Exchange.
Inclusion of a stock in the Index in no way implies an opinion by Standard &
Poor's Corporation as to its attractiveness as an investment.
The method used to select investments for the Portfolio involves investing
primarily in those stocks in the Index having the highest statistical weightings
in the Index. Stocks in the Index are ranked in accordance with their
statistical weightings from highest to lowest. The Portfolio will invest in all
of the stocks above a specified level in the ranking in approximately the same
proportion as the weightings of those stocks in the Index. However, the
Portfolio will not invest in all of the stocks below the specified level in the
ranking, but rather will invest only in those stocks, and in amounts, as
Advantus Capital determines to be necessary or appropriate for the Portfolio to
approximate the performance of the Index. To assist in such determination
Advantus Capital has entered into an agreement with Wilshire Associates which
permits Advantus Capital to use Wilshire Associates' proprietary index fund
statistical sampling technique. The Portfolio's ability to duplicate the
performance of the Index will depend to some extent, however, on the size and
timing of cash flows into or out of the Portfolio. Investment changes to
accommodate these cash flows will be made to maintain the similarity of the
Portfolio's holdings to the Index to the maximum practicable extent.
Advantus Capital monitors the tracking accuracy of the Portfolio to the Index
by comparing the weightings of securities in the Portfolio to that of the Index.
A difference between the two results in a deviation error in the Portfolio's
composition. The amount of the Portfolio's deviation is reviewed at least weekly
and more frequently if such a review is indicated by significant cash balance
changes, market conditions or changes in the composition of the Index. If
deviation accuracy is not maintained, the Portfolio will rebalance its
composition by selecting securities which, in the opinion of Advantus Capital,
will provide a more representative sampling of the capitalization of the
securities in the Index as a whole or a more representative sampling of the
sector diversification in the Index. This rebalancing may be accomplished by
either a purchase or sale of securities and is based upon an analysis of the
position of the Portfolio with respect to securities held by it, the number of
securities held, the industrial sectors represented and its current cash
balance.
Economic, financial, or market analysis will not be used in selecting
investments for the Portfolio, nor will adverse financial condition of a company
necessarily result in the sale of the company's stock by the Portfolio. However,
the Portfolio reserves the right to sell a stock held if Advantus Capital
determines that the investment has been impaired substantially by the financial
condition of or extraordinary events involving the stock's issuer.
SHORT-TERM INVESTMENTS. Although the Portfolio normally seeks to remain
substantially fully invested in common stocks, the Portfolio may invest
temporarily in certain high grade short-term fixed income securities or in
commercial paper or other cash equivalents rated A-1 by Standard & Poor's
Corporation or Prime-1 by Moody's Investors Service, Inc. Such investments may
be used to invest uncommitted cash balances or to maintain liquidity to meet
shareholder redemptions. These investments include: obligations of the U.S.
Government and its agencies or instrumentalities; commercial paper, bank
certificates of deposit, and bankers' acceptances; and repurchase agreements
collateralized by these securities.
STOCK INDEX FUTURES CONTRACTS. The Portfolio may utilize stock index futures
contracts to a limited extent. Specifically, the Portfolio may enter into stock
index futures contracts provided that not more than 5% of its assets are
required as a margin deposit for such contracts and provided that not more than
20% of its total assets (including assets held as "cover" in segregated accounts
or as margin deposits) are invested in stock index futures obligations at any
time. Futures contracts may be used for several reasons: to simulate full
investment in the underlying index while retaining a cash balance for Portfolio
management purposes, to facilitate trading or to reduce transaction costs. While
these securities can be used as leveraged investments, the Portfolio may not use
them to leverage its net assets.
The risk of loss associated with stock index futures contracts in some
strategies is potentially unlimited due both to the low margin deposits required
and the extremely high degree of leverage involved in futures pricing. As a
result, a relatively small price
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<PAGE>
movement in a stock index futures contract may result in an immediate and
substantial loss or gain. However, the Portfolio will not use stock index
futures contracts for speculative purposes or to leverage its net assets. The
successful use of futures contracts by the Fund, however, is dependent upon the
ability of Advantus Capital to predict correctly movements in the direction of
stock prices and interest rates. Accordingly, the primary risks associated with
the use of stock index futures contracts by the Portfolio are: (i) imperfect
correlation between the change in market value of the stocks held by the
Portfolio and the prices of stock index futures contracts; and (ii) possible
lack of a liquid secondary market for a stock index futures contract and the
resulting inability to close a futures position prior to its maturity date. The
risk of imperfect correlation will be minimized by investing only in those
contracts whose behavior is expected to resemble that of the Fund's underlying
securities. The risk that the Portfolio will be unable to close out a futures
position will be minimized by entering into such transactions on an exchange
with an active and liquid secondary market.
ILLIQUID SECURITIES AND RULE 144A PAPER. The Portfolio is permitted to invest
up to 15% of its net assets in securities or other assets which are illiquid. 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.
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,
Advantus Capital and the Portfolio believe that a similar market exists for
commercial paper issued pursuant to the private placement exemption of Section
4(2) of the 1933 Act. The Portfolio may invest up to 20% of its net assets in
these forms of restricted securities if such securities are deemed by Advantus
Capital to be liquid in accordance with standards established by the Fund's
Board of Directors. Under these guidelines, Advantus Capital 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.
REPURCHASE AGREEMENTS. The Portfolio may also enter into repurchase
agreements. Repurchase agreements are agreements by which the Portfolio
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 Portfolio 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 Portfolio enters into repurchase
agreements is monitored by the Portfolio's investment 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 Portfolio the opportunity
to earn a return on temporarily available cash. The Portfolio'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 Portfolio 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
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repurchase agreement, the Portfolio 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 Portfolio 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.
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CAPITAL APPRECIATION -
PORTFOLIO
The investment objective of the Capital Appreciation Portfolio is to
seek growth of capital. Investments will be made based upon their potential for
capital appreciation. Therefore, current income will be incidental to the
objective of capital growth. Because of the market risks inherent in any equity
investment, the selection of securities on the basis of their appreciation
possibilities cannot ensure against possible loss in value, and there is of
course no assurance that the Portfolio's investment objective will be met.
Within this basic framework, the policy of the Portfolio is to invest in any
companies and industries and in any types of equity securities which are
believed to offer possibilities for capital appreciation. Investments may be
made in well-known and established companies, as well as in newer and relatively
unseasoned companies. Critical factors considered in the selection of securities
include the early recognition of trends in corporate profits, the values of
individual securities relative to other investment alternatives, the economic
and political outlook, and management capabilities.
It is the policy of the Portfolio to invest principally in equity securities
(common stocks, securities convertible into common stocks or rights or warrants
to subscribe for or purchase common stocks). When business or financial
conditions warrant, a more defensive position may be assumed and the Portfolio
may invest in short-term, fixed-income securities or preferred stocks or hold
its assets in cash. Investments generally will not be made on the basis of
market timing techniques, rather it is anticipated that the Portfolio will be
relatively fully invested at most times.
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INTERNATIONAL STOCK -
PORTFOLIO
The investment objective of the International Stock Portfolio is
long-term capital growth. In pursuit of this objective the International Stock
Portfolio will follow a policy of investing in stocks issued by companies, large
and small, and debt obligations of companies and governments outside the United
States. Current income will be incidental to the objective of capital growth.
In pursuit of its investment objective, the Portfolio will normally maintain
at least 65% of its assets in common and preferred stocks. There is no
limitation on the percentage of the Portfolio's assets that may be invested in
any one country although the Portfolio will maintain an exposure to the equities
markets in at least three countries under normal circumstances.
The Portfolio has a flexible investment policy. The exercise of this flexible
policy may include decisions to purchase securities with substantial risk
characteristics and other decisions such as changing the emphasis on investments
from one nation to another and from one type of security to another. Some of
these decisions may later prove profitable and others may not. No assurance can
be given that profits, if any, will exceed losses.
Whenever, in the judgment of Templeton Counsel, market or economic conditions
warrant, the Portfolio may, for temporary defensive purposes, invest without
limit in U.S. Government securities, bank time deposits in the currency of any
major nation and commercial paper meeting the quality ratings set forth herein
and purchase from banks or broker-dealers Canadian or U.S. Government securities
with a simultaneous agreement by the seller to repurchase them within no more
than seven days at the original purchase price plus accrued interest.
The Portfolio is authorized to invest in debt securities that are rated BBB or
higher by Standard & Poor's Corporation ("S&P") and Baa or higher by Moody's
Investors Service, Inc. ("Moody's") or, if unrated, are of equivalent investment
quality as determined by Templeton Counsel.
The Portfolio may invest for defensive purposes in commercial paper of U.S.
issuers which, at the date of investment, must be rated A-1 by Standard & Poor's
Corporation ("S&P") or Prime-1 by Moody's Investors Service, Inc. ("Moody's")
or, if not rated, be issued by a company which at the date of investment has an
outstanding debt issue rated AAA or AA by S&P or Aaa or Aa by Moody's.
Contract owners should understand that all investments involve risk and there
can be no guarantee against loss resulting from an investment in the Portfolio,
nor can there be any assurance that the Portfolio's investment objective will be
attained. The Portfolio is designed for investors seeking international
diversification.
The Portfolio has the right to purchase securities in any foreign country,
developed or
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underdeveloped. Investors should consider carefully the substantial risks
involved in investing in securities issued by companies and governments of
foreign nations, which are in addition to the usual risks inherent in domestic
investments. 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 United States. 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
United States companies. Further, the Portfolio 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 United States, 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 United States. The foreign
securities markets of many of the countries in which the Portfolio may invest
may also be smaller, less liquid, and subject to greater price volatility than
those in the United States. Also, some countries may withhold portions of
interest, dividends and gains at the source. There are further risk
considerations, including possible losses through the holding of securities in
domestic and foreign custodial banks and depositories. The Portfolio may invest
in Eastern European countries, which involves special risks that are described
herein.
Certain of the recent political and economic developments in Eastern Europe,
including the introduction of aspects of a market economy in certain Eastern
European countries, are related to developments in what was formerly known as
the Soviet Union. Trends in Eastern Europe that may be considered favorable for
achievement of the Portfolio's investment objectives may be adversely affected
by political or social developments in the Soviet Union. So long as the
centralist political powers continue to exercise a significant or, in some
countries, dominant role in Eastern European countries, investments in such
countries will involve risks of nationalization, expropriation and confiscatory
taxation. The communist governments of a number of Eastern European countries
expropriated large amounts of private property in the past, in many cases
without adequate compensation, and there can be no assurance that such
expropriation will not occur in the future. In the event of such expropriation,
the Portfolio could lose a substantial portion of any investments it has made in
the affected countries. Further, no accounting standards exist in Eastern
European countries. Finally, even though certain Eastern European currencies may
be convertible into U.S. dollars, the conversion rates may be artificial to the
actual market values and may be adverse to the Portfolio's contract owners.
The Portfolio 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 Portfolio
converts assets from one currency to another. Further, the Portfolio may be
affected either unfavorably or favorably by fluctuations in the relative rates
of exchange between the currencies of different nations.
The Portfolio may buy and sell index futures contracts with respect to any
non-U.S. stock index. The Portfolio may invest in index futures contracts for
hedging purposes only and not for speculation. A Portfolio may engage in such
transactions only to the extent that the total contract value of the futures
contracts do not exceed 5% of the Portfolio's total assets at the time when such
contracts are entered into. Successful use of stock index futures is subject to
the ability of Templeton Counsel to predict correctly movements in the direction
of the stock markets. No assurance can be given that Templeton Counsel's
judgment in this respect will be correct.
A stock index futures contract is a contract to buy or sell units of a stock
index at a specified future date at a price agreed upon when the contract is
made. The value of a unit is the current value of the stock index. During or in
anticipation of a period of market appreciation, the Portfolio may enter into a
"long hedge" of common stock which it proposes to add to its portfolio by
purchasing stock index futures for the purpose of reducing the effective
purchase price of such common stock. To the extent that the securities which the
Portfolio proposes to purchase increase in value in correlation with the stock
index
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contracts, the purchase of futures contracts on that index would result in gains
to the Portfolio which could be offset against rising prices of such common
stock. During or in anticipation of a period of market decline, the Portfolio
may "hedge" common stock in its portfolio by selling stock index futures for the
purpose of limiting the exposure of its portfolio to such decline. To the extent
that a portfolio of securities decreases in value in relation with a given stock
index, the sale of futures contracts on that index could substantially reduce
the risk to the portfolio of a market decline and, by so doing, provide an
alternative to the liquidation of securities positions in the portfolio with
resultant transaction costs.
A purchase or sale of a futures contract may result in losses in excess of the
amount invested. There can be significant differences between the securities and
futures markets that could result in an imperfect correlation between the
markets, causing a given hedge not to achieve its objectives. The degree of
imperfection of correlation depends on circumstances such as variations in
speculative market demand for futures, including technical influences in futures
trading, and differences between the financial instruments being hedged and the
instruments underlying the standard contracts available for trading in such
respects as interest rate levels, maturities, and creditworthiness of issuers. A
decision as to whether, when, and how to hedge involves the exercise of skill
and judgment, and even a well-conceived hedge may be unsuccessful to some degree
because of market behavior or unexpected interest rate trends.
Futures exchanges may limit the amount of fluctuation permitted in certain
futures contract prices during a single trading day. The daily limit establishes
the maximum amount that the price of a futures contract may vary either up or
down from the previous day's settlement price at the end of the current trading
session. Once the daily limit has been reached in a futures contract subject to
the limit, no more trades may be made on that day at a price beyond that limit.
The daily limit governs only price movements during a particular trading day
and, therefore, does not limit potential losses because the limit may work to
prevent the liquidation of unfavorable positions. For example, futures prices
have occasionally moved to the daily limit for several consecutive trading days
with little or no trading, thereby preventing prompt liquidation of positions
and subjecting some holders of futures contracts to substantial losses.
There can be no assurance that a liquid market will exist at a time when the
Portfolio seeks to close out a futures position, and it would remain obligated
to meet margin requirements until the position is closed. The Portfolio intends
to purchase or sell futures only on exchanges or boards of trade where there
appears to be an active secondary market, but there is no assurance that a
liquid secondary market will exist for any particular contract or at any
particular time. In addition, many of the futures contracts available may be
relatively new instruments without a significant trading history. As a result,
there can be no assurance that an active secondary market will develop or
continue to exist.
Use of stock index futures for hedging may involve risks because of imperfect
correlations between movements in the prices of the stock index futures on the
one hand and movements in the prices of the securities being hedged or of the
underlying stock index on the other. Successful use of stock index futures by
the Portfolio for hedging purposes also depends upon Templeton Counsel's ability
to predict correctly movements in the direction of the market, as to which no
assurance can be given.
Warrants with cash extractions are permitted and may be used as investment
alternatives to equity shares. A warrant with a cash extraction consists of one
warrant and cash with a current value that closely approximates the current
value of an equivalent number of shares that would be delivered if the warrant
were exercised. These investment instruments may (1) provide attractive cash
yields and (2) minimize capital loss risk. Alternatively, perfect replication of
underlying share price movements may be hindered by warrant premiums which occur
because shorter-term investors value the leveraging power of naked warrants.
Given these circumstances, capital gains potential of warrants with cash
extractions may be less than that of underlying shares.
The International Stock Portfolio has authority to deal in forward foreign
exchange contracts between currencies of the different countries in which the
Portfolio 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. The Portfolio'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
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payables of the Portfolio arising from the purchase and sale of portfolio
securities, the sale and redemption of shares of the Portfolio, or the payment
of dividends and distributions by the Portfolio. Position hedging is the sale of
forward foreign exchange contracts with respect to portfolio security positions
denominated or quoted in such foreign currency. The Portfolio will not engage in
naked forward foreign exchange contracts.
In addition, when Templeton Counsel 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
Portfolio'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 Portfolio 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 Portfolio 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 Portfolio is
obligated to deliver.
If the Portfolio retains the portfolio security and engages in an offsetting
transaction, the Portfolio will incur a gain or a loss to the extent that there
has been movement in forward contract prices. If the Portfolio 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 Portfolio 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 Portfolio 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 Portfolio 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.
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SMALL COMPANY -
PORTFOLIO
The investment objective of the Small Company Portfolio is to seek
the long-term accumulation of capital. In pursuit of this objective, the Small
Company Portfolio will follow a policy of investing primarily in common and
preferred stocks issued by small companies, defined in terms of either market
capitalization or gross revenues. Investments in small companies usually involve
greater investment risks than fixed income securities or corporate equity
securities generally. Dividend income will be incidental to the investment
objective for this Portfolio.
Under normal circumstances, at least 65% of the Small Company Portfolio's
assets will be invested in small companies. Such companies may encompass
well-known and established companies as well as newer and relatively unknown
companies. Small companies will typically have a market capitalization of less
than $1.5 billion or annual gross revenues of less than $1.5 billion.
Market capitalization is the term which refers to the total market value of a
company's outstanding shares of common stock. Application of the market
capitalization or gross revenue tests will be made only at the time that the
Portfolio's initial position in the company is taken. Thus, for purposes of the
65% test any company deemed to be a small company at the time of the Portfolio's
initial position therein will be treated as a small company, regardless of
subsequent developments, so long as the Portfolio maintains a position in the
company.
Small 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. Management 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 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.
Investments in small companies involve greater risks than equity securities
generally due to their small size and the fact that they may have limited
product lines, less access to the financial market for additional corporate
financings or less management
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depth. In addition, many of the securities of these firms trade less frequently
and in lower volumes than do securities issued by larger firms. The result is
that the short-term volatility of the prices of those securities is greater than
the prices of larger, more established companies which are more widely held in
the market. The securities of small companies may also be more sensitive to
market changes generally than the securities of large companies.
While historically securities issued by smaller capitalization companies have
produced better market results than the securities of larger issuers, there is
no assurance that they will continue to do so or that the Portfolio will invest
specifically in those companies which produce those results. Because of the
risks involved, the Small Company Portfolio is not intended as a complete
investment program.
From time to time, the Portfolio will also invest a portion of its assets in
stocks with larger market capitalization whose long-term appreciation potential
is believed by the adviser to be well above average.
The Portfolio may invest up to 10% of the value of its total assets in
securities of foreign issuers which are not publicly traded in the United
States. (Securities of foreign issuers which are publicly traded in the United
States, usually in the form of sponsored American Depositary Receipts ("ADRs"),
are not subject to this 10% limitation.) See the discussion of foreign
securities and ADRs, and the risks of investing therein, under the caption
"Growth Portfolio" above.
The Portfolio will typically maintain a fully invested position, but when
economic conditions or general levels of common stock prices are such that
investments of other types may be advantageous on the basis of combined
considerations of risk, income and appreciation, the Portfolio may temporarily
take a defensive position by investing a substantial portion of its assets in
bonds, notes or other evidences of indebtedness, including United States
Government securities, or may hold its assets in cash. Those investments may, or
may not, be convertible into stock. The Portfolio may also temporarily hold its
assets in cash or money market instruments pending investment in accordance with
its policies.
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MATURING GOVERNMENT -
BOND PORTFOLIOS
The investment objective of each of the Maturing Government
Bond Portfolios is to provide as high an investment return as is consistent with
prudent investment risk for a specified period of time ending on a specified
liquidation date. In pursuit of this objective each of the Maturing Government
Bond Portfolios seeks to return a reasonably assured targeted dollar amount,
predictable at the time of investment, on a specific target date in the future
through investment in a portfolio composed primarily of zero coupon securities.
These are securities that pay no cash income and are sold at a discount from
their par value at maturity.
Each Maturing Government Bond Portfolio will invest in a portfolio of
securities consisting of: (a) debt obligations issued by the U.S. Treasury that
have been stripped of their unmatured interest coupons; and (b) receipts and
certificates for stripped debt obligations and stripped coupons, including U.S.
Government trust certificates (collectively "Stripped Treasury Securities").
These Stripped Treasury Securities are not anticipated to be in excess of 55% of
the assets of each Portfolio.
Each Maturing Government Bond Portfolio will also purchase other zero coupon
securities issued by the U.S. Government and its agencies and instrumentalities,
by Trusts where the payment of principal and interest to the Trust are
guaranteed by the United States, and by "mixed-ownership government
corporations" (collectively, "Stripped Government Securities"). In addition, the
Maturing Government Bond Portfolios will also purchase zero coupon securities
issued in the United States issued by domestic corporations which consist of
corporate debt obligations without interest coupons and, if available, interest
coupons that have been stripped from corporate debt obligations, and receipts
and certificates for such stripped debt obligations and stripped coupons
(collectively, "Stripped Corporate Securities"). Stripped Treasury Securities,
Stripped Government Securities and Stripped Corporate Securities are referred to
collectively herein as "Stripped Securities."
Each Maturing Government Bond Portfolio will mature on a specified target
date. The current Target Dates, as that term is defined herein, are in September
in the years 1998, 2002, 2006 and 2010.
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Under normal circumstances, each Maturing Government Bond Portfolio will
invest at least 65% of its net assets in Stripped Treasury Securities and
Stripped Government Securities. To pay expenses and to provide funds with which
to meet redemption requests, the Maturing Government Bond Portfolios may
purchase interest bearing U.S. Government securities and other money market
instruments. The Portfolios may enter into repurchase agreements with respect to
securities in which they are permitted to invest.
If the assets of a Maturing Government Bond Portfolio do not exceed $1
million, up to 100% of its net assets may be invested in short-term, interest-
paying U.S. Government obligations and repurchase agreements with respect to
such securities. To provide income for expenses, redemption payment, and cash
dividends, up to 20% of each Maturing Government Bond Portfolio assets may be
invested in interest-paying U.S. Government securities and repurchase agreements
with respect to such securities.
When held to maturity, the entire return on zero coupon securities, which
consists of the amortization of discount, comes from the difference between
their purchase price and their maturity value. This difference is known at the
time of purchase, so persons holding a portfolio composed entirely of zero
coupon securities, with no expenses until maturity, would know the amount of
their investment return at the time of their initial payment. While these
Portfolios will have additional holdings, including cash, which will affect
performance, they will describe an anticipated yield to maturity from time to
time. In order to obtain this return, contract owners electing to have payments
allocated to a Maturing Government Bond Portfolio should plan to maintain their
investment until the maturity of that Maturing Government Bond Portfolio.
While many factors may affect the yield to maturity of each of the Portfolios,
one such factor which may operate to the detriment of those contract owners
holding interests in such Portfolio until maturity, is the ability of other
contract owners to purchase or redeem shares on any business day.
Because each Maturing Government Bond Portfolio will be primarily invested in
zero coupon securities, contract owners whose purchase payments are invested in
shares held to maturity, including those obtained through reinvestment of
dividends and distributions, will experience a return consisting primarily of
the amortization of discount on the underlying securities in the Maturing
Government Bond Portfolio. However, the net asset value of the Portfolio's
shares will increase or decrease with the daily changes in the market value of
that Maturing Government Bond Portfolio's investments which will tend to vary
inversely with changes in prevailing interest rates. If shares of a Maturing
Government Bond Portfolio are redeemed prior to the maturity date of that
Maturing Government Bond Portfolio, a contract owner may experience a
significantly different investment return than was anticipated at the time of
purchase.
The Maturing Government Bond Portfolios will also seek to minimize
reinvestment risk. Reinvestment risk arises from the uncertainty as to the total
return which will be realized from conventional interest-paying bonds due to the
fact that periodic interest, received in cash, will be reinvested in the future
at interest rates unknown at the time of the original purchase. With zero coupon
securities, however, there are no cash distributions to reinvest, so an owner of
such a security would bear no reinvestment risk if a zero coupon security was
held to maturity. Since each Maturing Government Bond Portfolio will not be
invested entirely in zero coupon securities maturing on the Target Date, there
will be some reinvestment risk.
Stripped Securities investments, like other investments in debt securities,
are subject to certain risks, including credit and market risks. Credit risk is
the function of the ability of an issuer of a security to maintain timely
interest payments and to pay the principal of a security upon maturity.
Securities purchased by the Maturing Government Bond Portfolios will be rated at
least single A or better by nationally recognized statistical rating agencies.
Securities rated single A are regarded as having an adequate capacity to pay
principal and interest, but with greater vulnerability to adverse economic
conditions and some speculative characteristics. The Maturing Government Bond
Portfolios will also attempt to minimize the impact of individual credit risks
by diversifying their portfolio investments.
Market risk is the risk of the price fluctuation of a security due primarily
to market interest rates prevailing generally in the economy. Market risk may
also include elements which take into account the underlying credit rating of an
issuer, the maturity length of a security, a security's yield, and general
economic and interest rate conditions. Stripped Securities do not make any
periodic payments of interest prior to maturity and the stripping of the
securities causes the Stripped Securities to be offered at a discount from their
face amounts. The market value of Stripped Securities and, therefore
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the net asset value of the shares of the Maturing Government Bond Portfolios,
will fluctuate, perhaps markedly, with changes in interest rates and other
factors and may be subject to greater fluctuations in response to changing
interest rates than would a fund of securities consisting of debt obligations of
comparable coupon bearing maturities. The amount of fluctuation increases with
longer maturities.
Because they do not pay interest, zero coupon securities tend to be subject to
greater fluctuation of market value in response to changes in interest rates
than interest-paying securities of similar maturities. Contract owners can
expect more appreciation of the net asset value of a Maturing Government Bond
Portfolio's shares during periods of declining interest rates than from
interest-paying securities of similar maturity. Conversely, when interest rates
rise, the net asset value of a Maturing Government Bond Portfolio's shares will
normally decline more in price than interest-paying securities of a similar
maturity. Price fluctuations are expected to be greatest in the longer-maturity
Portfolios and are expected to diminish as a Maturing Government Bond Portfolio
approaches its Target Date. These fluctuations may make the Maturing Government
Bond Portfolios an inappropriate selection as a basis for variable annuity
payments. Interest rates can change suddenly and unpredictably.
When held to maturity, the return on zero coupon securities consists entirely
of the difference between the maturity value and the purchase price of
securities held in the Portfolio. While this difference allows investors to
measure initial investment return, it also must be considered in light of
changing economic conditions. Inflationary risk, that is the risk attendant to
holding fixed-rate investments during a period of generally upward changing
price levels in the economy, must be considered in selecting a Maturing
Government Bond Portfolio as an investment choice or in selecting a particular
Maturing Government Bond Portfolio.
The Fund currently offers four separate Maturing Government Bond Portfolios,
each maturing on the third Friday of September of the specific maturity year
(the "Target Date"). On each Portfolio's Target Date, the Portfolio will be
converted to cash and reinvested in another of the Fund's Portfolios at the
direction of the contract owner. If the contract owner does not complete an
instruction form directing what should be done with liquidation proceeds, the
proceeds will be automatically invested in the Money Market Portfolio and the
contract owner will be notified of that allocation.
The investment adviser of the Portfolios will attempt to maintain the average
maturity of each Maturing Government Bond Portfolio within twelve months of that
Portfolio's Target Date. A Portfolio of securities consisting entirely of zero
coupon securities maturing on the Target Date with no cash or interest bearing
securities will have a maturity and duration which are equal.
Duration is the measure of the length of an investment and its price
volatility which takes into account, through present value analysis, the timing
and amount of any interest payments as well as the amount of the principal
repayment thus measuring volatility or price fluctuation. Duration is commonly
used by professional investment managers to help identify and control
reinvestment risk. Since each Maturing Government Bond Portfolio will not be
invested entirely in zero coupon securities maturing on the Target Date, there
will be some reinvestment risk. By balancing investments with slightly longer
and shorter durations, the investment adviser believes it can, under normal
circumstances, maintain a Maturing Government Bond Portfolio's average duration
within twelve months of the Maturing Government Bond Portfolio's Target Date and
thereby reduce its reinvestment risk.
Under federal income tax laws, a portion of the difference between the
purchase price of the zero coupon securities and their face value ("original
issue discount") is considered to be income to the Maturing Government Bond
Portfolios each year, even though such Portfolios will not receive cash payments
representing the discount from these securities. This original issue discount
will comprise a part of the net taxable investment income of the Maturing
Government Bond Portfolios which must be "distributed" to the insurance company
shareholder each year, whether or not such distributions are paid in cash. To
the extent such distributions are paid in cash, a Maturing Government Bond
Portfolio may have to generate the required cash from interest earned on
non-zero coupon securities or possibly from the disposition of zero coupon
securities.
The Maturing Government Bond Portfolios may not be appropriate for contract
owners who do not plan to have their premiums invested in shares of a Maturing
Government Bond Portfolio for a long term or until its maturity.
- --------------------------------------------------------------------------------
VALUE STOCK -
PORTFOLIO
The objective of the Value Stock Portfolio is to seek the long-term
accumulation of capital. In pursuit of this objective, the Value Stock
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Portfolio will follow a policy of investing primarily in the equity securities
of companies which, in the opinion of the adviser, have market values which
appear low relative to their underlying value or future earnings and growth
potential. As it is anticipated that the Portfolio will consist in large part of
dividend-paying common stocks, the production of income will be a secondary
objective of the Portfolio.
The Portfolio will primarily purchase securities of companies that could be
described as follows: (a) companies whose securities are selling at low market
valuations of assets relative to the securities markets in general, or companies
that may currently be earning a very low return on assets but which have the
potential to earn higher returns; (b) companies whose securities Advantus
Capital believes are undervalued in relation to their potential for growth in
earnings and book value; or (c) companies which have recently changed management
or control and have the potential to achieve sharply improved earnings. Advantus
Capital may give emphasis on securities of companies that may be temporarily out
of favor or whose value is not yet recognized by the market.
Tests applied by the adviser to measure the value of securities will include
their price/earnings ratio, price/book ratio, price to cash flow ratio and
yield. A price/earnings ratio is the price of a share of stock divided by its
earnings per share and it is a measure of the market price of the security
relative to its earnings per share. A price/book ratio is the price of a share
of stock divided by its book value per share and it is a measure of the market
price of the security relative to its book value per share. A price to cash flow
ratio is the price of a share of stock divided by the firm's net income after
taxes, plus depreciation and other non-cash expenses, expressed on a per share
basis. Yield is the annual dividend of a share of stock divided by its market
price. Stocks will be selected by the adviser using statistical measures of
relative value. Returns on such stocks are likely to be influenced by the
recognition of their undervaluation by other investors and the market. Under
most circumstances, if Advantus Capital determines that a stock has reached an
over-valued position, it may be sold and replaced by securities which are deemed
to be undervalued in the marketplace.
The Portfolio's investments will typically be characterized by the purchase of
securities with lower price to earnings ratios, lower price to cash flow ratios
and/or price to book value ratios relative to the equity markets in general.
This approach may be considered to differ from a growth approach which would
consider the purchase of securities with an anticipated above-average earnings
growth potential over time. This distinction between these two approaches to
equity investing is important because historically there are periods in which
either growth or value investing may be successful approaches to total return in
the equity markets.
The Portfolio may invest up to 10% of the value of its total assets in
securities of foreign issuers which are not publicly traded in the United
States. (Securities of foreign issuers which are publicly traded in the United
States, usually in the form of sponsored American Depositary Receipts ("ADRs"),
are not subject to this 10% limitation.) See the discussion of foreign
securities and ADRs, and the risks of investing therein, under the caption
"Growth Portfolio" above.
The Value Stock Portfolio will ordinarily invest at least 65% of the value of
its total assets in common stocks with the characteristics described above. The
balance of its assets may be invested in other equity securities or U.S.
Government securities or may be held in cash or cash equivalents. However, the
Portfolio may temporarily take a defensive position by investing a substantial
portion of its assets in bonds, notes or other evidences of indebtedness,
including United States Government securities, or may hold its assets in cash.
Those investments may, or may not, be convertible into stock. The Portfolio may
also temporarily hold its assets in cash or money market instruments pending
investments in accordance with its policies.
The Portfolio will invest primarily in stocks, but it also has the ability to
purchase securities, including debt obligations, convertible into common stock
and which may produce capital appreciation. Securities that meet the criteria of
the Portfolio may not be popular during certain market cycles. Securities held
by the Portfolio may experience less volatile price changes during certain
market rallies or market downturns than the fluctuations in the market generally
as evidenced by common stock indices.
The Portfolio 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
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yield of higher quality, shorter-term bonds, but not as much as common stocks.
The Portfolio 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 Advantus Capital. Debt securities rated below the four highest
categories (i.e., below BBB) are not considered "investment grade" obligations.
These securities have speculative characteristics and present more credit risk
than investment grade obligations. Bonds rated below BBB are regarded as
predominately speculative with respect to the issuer's continuing ability to
meet principal and interest payments. As an operating policy, the Portfolio will
not purchase a non-investment grade convertible debt security if immediately
after such purchase the Portfolio would have more than 10% of its total assets
invested in such securities. See Appendix I in the Statement of Additional
Information for a description of the ratings used by S&P and Moody's.
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 the Portfolio's net asset value. Although they may offer higher yields than
do higher rated securities, low rated (i.e., below BBB) 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 Portfolio's 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 Portfolio's 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 Portfolio to
achieve its 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 Portfolio 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 Portfolio 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.
After purchase by the Portfolio, a debt security may cease to be rated or its
rating may be reduced below the minimum required for purchase by the Portfolio.
Neither event will require a sale of such security by the Portfolio, but
Advantus Capital will consider such event in the determination of whether the
Portfolio should continue to hold the security.
- --------------------------------------------------------------------------------
SMALL COMPANY VALUE -
PORTFOLIO
The investment objective of the Small Company Value Portfolio is the
long-term accumulation of capital. In pursuit of this objective, the Small
Company Value Portfolio will follow a policy of investing primarily in the
equity securities of small companies, defined in terms of market capitalization,
which, in the opinion of the Adviser, have market values which appear low
relative to their underlying value or future earnings and growth potential.
Dividend income will be incidental to the investment objective for this
Portfolio. Investments in small companies usually involve greater investment
risks than fixed income securities or corporate equity securities generally. The
investment objective may not be changed without the approval of a majority of
the outstanding shares of the Portfolio.
The Small Company Value Portfolio will primarily purchase securities which, at
the time of purchase, are issued by "small companies" and are considered by
Advantus Capital to be "value" securities. Small
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companies are those which have a market capitalization of less than $1.5 billion
(see "Small Companies" below). Value securities are issued by companies which
could be described as follows: (a) companies whose securities Advantus Capital
believes are selling at low market valuations relative to the securities markets
in general, or companies that may currently be earning a very low return on
assets but which have the potential to earn higher returns; (b) companies whose
securities Advantus Capital believes are undervalued in relation to their
potential for improved operating performance and financial strength; or (c)
companies which have recently changed management or control and whose
securities, in the judgment of Advantus Capital, are therefore undervalued in
relation to their potential to achieve sharply improved operating performance.
Securities of companies that may be temporarily out of favor or whose value is
not yet recognized by the market may also be considered by Advantus Capital to
be value securities (see, "Value Securities" below).
The Small Company Value Portfolio will ordinarily invest at least 65% of the
value of its total assets in common stocks with the characteristics described
above. The balance of its assets may be invested in other equity securities,
including stocks with larger market capitalization whose long-term appreciation
potential is believed by Advantus Capital to be well above average, debt
obligations convertible into common stock and which may produce capital
appreciation, other corporate debt obligations, U.S. Government securities, cash
or cash equivalents. However, the Small Company Value Portfolio may temporarily
take a defensive position by investing a substantial portion of its assets in
bonds, notes or other evidences of indebtedness, including U.S. Government
securities and corporate debt securities, provided that such debt securities
(excluding debt securities convertible into common stock as described below) are
rated BBB or Baa or higher by Standard & Poor's Corporation ("S&P") or Moody's
Investors Services, Inc. ("Moody's"), respectively, or may hold its assets in
cash. The Small Company Value Portfolio may also temporarily hold its assets in
cash or money market instruments pending investments in accordance with its
policies.
VALUE SECURITIES. Tests applied by Advantus Capital to measure the value of
securities will include their price/earnings ratio, price/book ratio, price to
cash flow ratio and yield. A price/earnings ratio is the price of a share of
stock divided by its earnings per share and it is a measure of the market price
of the security relative to its earnings per share. A price/book ratio is the
price of a share of stock divided by its book value per share and it is a
measure of the market price of the security relative to its book value per
share. Book value per share is generally equal to assets less liabilities
divided by the total number of outstanding shares (i.e., the "net worth" per
share). A price to cash flow ratio is the price of a share of stock divided by
the firm's net income after taxes, plus depreciation and other non-cash
expenses, expressed on a per share basis. Yield is the annual dividend of a
share of stock divided by its market price. Stocks will be selected by Advantus
Capital using statistical measures of relative value. Returns on such stocks are
likely to be influenced by the recognition of their undervaluation by other
investors and the market. Under most circumstances, if Advantus Capital
determines that a stock has reached an over-valued position, it may be sold and
replaced by securities which are deemed to be undervalued in the marketplace.
The Small Company Value Portfolio's investments in value securities will
typically be characterized by the purchase of securities with lower price to
normalized earnings ratios ("normalized earnings" are average earnings under
average business conditions), lower price to cash flow ratios and/or price to
book value ratios relative to the equity markets in general. This value approach
to investing may be considered to differ from a growth approach which would
consider the purchase of securities with an anticipated above-average earnings
growth potential over time. This distinction between these two approaches to
equity investing is important because historically there are periods in which
either growth or value investing may be successful approaches to total return in
the equity markets. Securities that meet the criteria of the Small Company Value
Portfolio may not be popular during certain market cycles.
SMALL COMPANIES. Companies characterized as "small" companies may encompass
well-known and established companies as well as newer and relatively unknown
companies, and will have, at the time of purchase, a market capitalization of
less than $1.5 billion.
Market capitalization is the term which refers to the total market value of a
company's outstanding shares of common stock. Application of the market
capitalization test will be made only at the time that the Portfolio's initial
position in the company is taken. Thus, for purposes of the 65% test, any
company deemed to be a small company at the time of the Portfolio's initial
position therein will be
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treated as a small company, regardless of subsequent developments, so long as
the Portfolio maintains a position in the company.
Small 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. Advantus Capital 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 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 historically securities issued by small capitalization companies have
produced better market results than the securities of larger issuers, there is
no assurance that they will continue to do so or that the Portfolio will invest
specifically in those companies which produce those results. Because of the
risks involved, Small Company Value Portfolio is not intended as a complete
investment program.
CONVERTIBLE SECURITIES. The Portfolio 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. The Portfolio 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 Adviser.
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 in fact have speculative characteristics and present
more credit risk than investment grade obligations. Bonds rated below BBB are
regarded as predominately speculative with respect to the issuer's continuing
ability to meet principal and interest payments. (See "Debt Securities," below,
for a description of the risks associated with debt securities rated below
investment grade.) As an operating policy, the Portfolio will not purchase a
non-investment grade convertible debt security if immediately after such
purchase the Portfolio would have more than 10% of its total assets invested in
such securities. See the Appendix to the Statement of Additional Information for
a description of the ratings used by S&P and Moody's.
DEBT SECURITIES. The Portfolio may invest in non-convertible debt securities
rated BBB or Baa or higher by S&P or Moody's, respectively. In addition, the
Portfolio may invest in debt securities convertible into common stock which are
rated lower than BBB or Baa (see "Convertible Securities" above). 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 the Portfolio's net
asset value. Although they may offer higher yields than do higher rated
securities, low rated (i.e., below BBB) 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
Portfolio's 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 Portfolio's 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 Portfolio to
achieve its 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 Portfolio were investing in higher rated securities.
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<PAGE>
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 Portfolio 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.
After purchase by the Portfolio, a debt security may cease to be rated or its
rating may be reduced below the minimum required for purchase by the Portfolio.
Neither event will require a sale of such security by the Portfolio, but the
Adviser will consider such event in the determination of whether the Portfolio
should continue to hold the security.
OPTIONS. The Portfolio may write covered call options which are traded on
national securities exchanges with respect to common stocks in its portfolio
("covered options") in an attempt to earn additional current income on its
portfolio or to guard against an expected decline in the price of a security. By
writing a covered call option, the Portfolio gives the purchaser of the option
the right to buy the underlying security at the price specified in the option.
The Portfolio realizes income from the sale of the option, but foregoes the
opportunity to profit during the option period from an increase in the market
value of the underlying security above the exercise price. The Portfolio does
not write call options in an aggregate amount greater than 15% of its net
assets. The Portfolio purchases call options only to close out a position, and
will neither write nor purchase put options. The use of options contracts
involves additional risk of loss to the Portfolio, including the risk that the
Portfolio may incur a loss because the prices of the underlying securities do
not move as anticipated. See the Statement of Additional Information for a more
detailed discussion of options and the risks associated therewith.
LOANS OF PORTFOLIO SECURITIES. For the purpose of realizing additional
income, the Portfolio may make secured loans of portfolio securities amounting
to not more than 20% of its total assets. 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
or securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities. While the securities are being lent, the Portfolio 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. The Portfolio has a right to call each
loan and obtain the securities on five business days' notice. The Portfolio 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 Portfolio's
investment adviser to be of good standing and to have sufficient financial
responsibility, and will not be made unless, in the judgment of the Portfolio's
investment adviser, the consideration to be earned from such loans would justify
the risk. The creditworthiness of entities to which the Portfolio makes loans of
portfolio securities is monitored by the Portfolio's investment adviser
throughout the term of each loan.
WARRANTS. The Portfolio may invest in warrants; however, not more than 5% of
its assets (at the time of purchase) will be invested in warrants other than
warrants acquired in units or attached to other securities. Of such 5% not more
than 2% of the Portfolio assets at the time of purchase may be invested in
warrants that are not listed on the New York or American Stock Exchanges.
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.
ILLIQUID SECURITIES AND RULE 144A PAPER. The Portfolio is permitted to invest
up to 15% of its net assets in securities or other assets which are illiquid. 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
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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.
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 Adviser and the Portfolio believe that a similar market exists for
commercial paper issued pursuant to the private placement exemption of Section
4(2) of the 1933 Act. The Portfolio may invest without limitation in these forms
of restricted securities if such securities are deemed by the Adviser to be
liquid in accordance with standards established by the Board of Directors of the
Fund. Under these guidelines, the 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
Portfolio's illiquidity to the extent that qualified purchasers of the
securities become, for a time, uninterested in purchasing these securities.
FOREIGN SECURITIES. The Portfolio may also invest up to 10% of the market
value of the Portfolio's total assets in securities of foreign issuers which are
not publicly traded in the United States. (Securities of foreign issuers which
are publicly traded in the United States, usually in the form of sponsored
American Depositary Receipts, are not subject to this 10% limitation.) Investing
in securities of foreign issuers may result in greater risk than that incurred
in investing in securities of domestic issuers. There is a 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
United States. 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 United States
companies. Further, the Portfolio 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 United States, 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 United States. The foreign securities
markets of many of the countries in which the Portfolio may invest may also be
smaller, less liquid, and subject to greater price volatility than those in the
United States. Also, some countries may withhold portions of interest, dividends
and gains at the source. There are further risk considerations, including
possible losses through the holding of securities in domestic and foreign
custodial banks and depositories.
An ADR is sponsored if the original issuing company has selected a single U.S.
bank to serve as its U.S. depository and transfer agent. This relationship
requires a deposit agreement which defines the rights and duties of both the
issuer and depository. 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 depository. Unsponsored shares issued after 1983 are not
eligible for U.S. stock exchange listings. Furthermore, they do not generally
include voting rights.
REPURCHASE AGREEMENTS. The Portfolio may also enter into repurchase
agreements. Repurchase
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agreements are agreements by which the Portfolio 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 Portfolio 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 Portfolio enters into repurchase agreements is monitored by the
Portfolio's investment 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 Portfolio the opportunity to earn a return on
temporarily available cash. The Portfolio'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 Portfolio 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 Portfolio 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 Portfolio 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.
Equity securities, in which the Portfolio will be primarily invested, are more
volatile than debt securities and involve greater investment risk. The Portfolio
is dependent on the Adviser's judgment as to general economic and market
policies and trends in investment yields, as well as its judgment as to the
composition of the Portfolio.
Investments in small companies, such as those made by the Small Company Value
Portfolio, involve greater risks than equity securities generally due to their
small size and the fact that they may have limited product lines, less access to
the financial market for additional corporate financings or less management
depth. In addition, many of the securities of these firms trade less frequently
and in lower volumes than do securities issued by larger firms. The result is
that the short-term volatility of the prices of those securities is greater than
the prices of larger, more established companies which are more widely held in
the market. The securities of small companies may also be more sensitive to
market changes generally than the securities of large companies.
Some of the investment policies which the Portfolio may employ, such as
investing in options, repurchase agreements, and illiquid and foreign
securities, involve special risks not associated with more traditional
investment instruments and policies. Loans of portfolio securities, for example,
involve risks of possible delay in receiving additional collateral or in the
recovery of the loaned securities, or possible loss of rights in the collateral
should the borrower fail financially. The use of options may, in the case of a
sale of a covered call option, result in a loss to the Portfolio as a result of
the foregone increase in value of the underlying security. The Portfolio will
purchase a covered call option only to close out an option which the Portfolio
has written and, in such circumstances, may also experience a loss if the amount
paid to purchase the call option is greater than the premium received for
writing the option being closed out. Illiquid securities include certain types
of restricted securities, which may be sold only in a privately negotiated
transaction or in a public offering for which a registration statement is in
effect under the Securities Act of 1933. Because of such restrictions, the
Portfolio 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 Portfolio may be required to bear the expenses of
registration of such restricted securities.
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INTERNATIONAL BOND -
PORTFOLIO
The International Bond Portfolio seeks, as its investment objective,
to maximize current income consistent with protection of principal. The
Portfolio pursues its objective by investing primarily in a managed portfolio of
non-U.S. dollar debt securities issued by foreign governments and companies and
supranational entities. Under normal market conditions, at least
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65% of the Portfolio's assets will be invested in fixed income securities of
issuers domiciled in at least five foreign countries. The Portfolio will not
invest more than 20% of its assets in the securities of governments or companies
in any one country, except that the Portfolio may invest up to 35% of its assets
in each of Australia, Canada, France, Japan, the United Kingdom and Germany. In
addition, the Portfolio will not invest more than 10% of its assets, in the
aggregate, in securities of governments or companies in emerging or developing
markets. The Portfolio limits its purchases of debt securities to those that are
rated within the four highest categories established by S&P or Moody's or, if
unrated, are deemed by Julius Baer to be of comparable quality, except that the
Portfolio may invest up to 10% of its assets in debt securities rated BB or Ba
by S&P or Moody's, respectively (or, if unrated, are deemed by Julius Baer to be
of comparable quality). See the Appendix to the Statement of Additional
Information for a description of Moody's and S&P's ratings. The Portfolio may
attempt to hedge against unfavorable changes in currency exchange rates by
engaging in forward currency transactions and trading currency futures contracts
and options thereon. The Portfolio may purchase temporary investments, purchase
securities on a when-issued basis and lend its portfolio securities.
Although the Portfolio may take a temporary defensive position during adverse
market conditions, the Portfolio generally intends to be substantially fully
invested in accordance with its investment objectives and policies during most
market conditions. This policy may impede the Portfolio's ability to protect
capital during declines in the particular segment of the market to which the
Portfolio's assets are committed. Consequently, the Portfolio should not be
considered a complete investment program and an investment in the Portfolio
should be regarded as a long-term commitment that should be held through several
market cycles.
The Portfolio is classified as a "non-diversified" investment company under
the Investment Company Act of 1940, as amended (the "1940 Act"), which means
that it is not limited by the 1940 Act in the proportion of its assets that it
may invest in the securities of a single issuer. The Portfolio, as a non-
diversified investment company, may invest in a smaller number of individual
issuers than a diversified investment company. Thus, an investment in the
Portfolio may, due to changes in the financial condition or in the market's
assessment of those issuers, present greater risk to an investor than an
investment in a diversified investment company. However, the Portfolio intends
to conduct its operations so as to qualify as a "regulated investment company"
for purposes of the Internal Revenue Code of 1986, as amended (the "Code"),
which will relieve the Portfolio of any liability for federal income tax to the
extent that its earnings are distributed to shareholders. In order to so
qualify, among other things, the Portfolio must ensure that, at the close of
each quarter of the taxable year, (i) not more than 25% of the market value of
the Portfolio's total assets is invested in the securities (other than U.S.
Government securities) of a single issuer or of two or more issuers that the
Portfolio controls and that are engaged in the same, similar or related trades
or businesses and (ii) at least 50% of the market value of the Portfolio's total
assets is represented by (a) cash and cash items, (b) U.S. Government securities
and (c) other securities limited in respect of any one issuer to an amount not
greater in value than 5% of the market value of the Portfolio's total assets and
to not more than 10% of the outstanding voting securities of the issuer.
Inasmuch as the Portfolio serves as the underlying investment medium for
amounts invested in the Contracts issued by Minnesota Mutual and its separate
accounts, the Portfolio also intends to comply with the diversification
requirements contained in the regulations issued under Section 817(h) of the
Code. These regulations provide generally that the Contracts will not be treated
as either an annuity or life insurance contract for tax purposes unless each
underlying investment medium for the Contracts, including the Portfolio, is
"adequately diversified" as defined in such regulations.
TEMPORARY INVESTMENTS. For temporary defensive purposes during periods when
Julius Baer believes that pursuing the Portfolio's basic investment strategy may
be inconsistent with the best interests of its shareholders, the Portfolio may
invest its assets in the following money market instruments: U.S. Government
securities (including those purchased in the form of custodial receipts),
repurchase agreements, certificates of deposit and bankers' acceptances issued
by U.S. banks or savings and loan associations having assets of at least $500
million as of the end of their most recent fiscal year and high quality
commercial paper. During such periods, the Portfolio may also invest without
limit in obligations issued or guaranteed by foreign governments or by any of
their political subdivisions, authorities, agencies or instrumentalities that
are rated at least
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AA by S&P or Aa by Moody's or, if unrated, are determined by Julius Baer to be
of equivalent quality. The Portfolio also may hold a portion of its assets in
money market instruments or cash in amounts designed to pay expenses, to meet
anticipated redemptions or pending investments in accordance with its objectives
and policies. Any temporary investments may be purchased on a when-issued basis.
FIXED INCOME SECURITIES. The market value of fixed income obligations of the
Portfolio will be affected by general changes in interest rates which will
result in increases or decreases in the value of the obligations held by the
Portfolio. The market value of the obligations held by the Portfolio can be
expected to vary inversely to changes in prevailing interest rates. Investors
also should recognize that, in periods of declining interest rates, the
Portfolio's yield will tend to be somewhat higher than prevailing market rates
and, in periods of rising interest rates, the Portfolio's yield will tend to be
somewhat lower. Also, when interest rates are falling, the inflow of net new
money to the Portfolio from the continuous sale of its shares will tend to be
invested in instruments producing lower yields than the balance of its
portfolio, thereby reducing the Portfolio's current yield. In periods of rising
interest rates, the opposite can be expected to occur. In addition, securities
in which the Portfolio may invest may not yield as high a level of current
income as might be achieved by investing in securities with less liquidity, less
creditworthiness or longer maturities.
Securities rated in the fourth highest category by S&P or Moody's, although
considered investment grade, may possess speculative characteristics, and
changes in economic or other conditions are more likely to impair the ability of
issuers of these securities to make interest and principal payments than is the
case with respect to issuers of higher grade bonds. Ratings made available by
S&P and Moody's are relative and subjective and are not absolute standards of
quality. Although these ratings are initial criteria for selection of portfolio
investments, the Portfolio also will make its own evaluation of these
securities. Among the factors that will be considered are the long-term ability
of the issuers to pay principal and interest and general economic trends.
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. Although they may offer higher yields than
do higher rated securities, such 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
Portfolio's 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 Portfolio's shares.
FOREIGN SECURITIES. Investing in securities issued by foreign companies and
governments involves considerations and potential risks not typically associated
with investing in obligations issued by the U.S. government and domestic
corporations. Substantially less information may be available about foreign
companies, particularly emerging market country companies, than about domestic
companies and, even when public information about such companies is available,
it may be less reliable than information concerning U.S. companies. Foreign
companies generally are not subject to uniform accounting, auditing and
financial reporting standards and such standards may differ, in some cases
significantly, from standards in other countries, including the United States.
The values of foreign investments are affected by changes in currency rates or
exchange control regulations, restrictions or prohibitions on the repatriation
of foreign currencies, application of foreign tax laws, including withholding
taxes, changes in governmental administration or economic or monetary policy (in
the United States or abroad) or changed circumstances in dealings between
nations. Costs are also incurred in connection with conversions between various
currencies. In addition, foreign brokerage commissions and custody fees are
generally higher than those charged in the United States, and foreign securities
markets may be less liquid, more volatile and less subject to governmental
supervision than in the United States. Investments in foreign countries could be
affected by other factors not present in the United States, including
expropriation, confiscatory taxation, lack of uniform accounting and auditing
standards and potential difficulties in enforcing contractual
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obligations and could be subject to extended clearance and settlement periods.
SUPRANATIONAL ENTITIES. Subject to applicable diversification requirements of
the Code, the Portfolio may invest up to 20% of its total assets in debt
securities issued by supranational organizations such as the International Bank
for Reconstruction and Development (commonly referred to as the World Bank),
which was chartered to finance development projects in developing member
countries; the European Community, which is a twelve-nation organization engaged
in cooperative economic activities; the European Coal and Steel Community, which
is an economic union of various European nations' steel and coal industries; and
the Asian Development Bank, which is an international development
bank-established to lend funds, promote investment and provide technical
assistance to member nations in the Asian and Pacific regions. As supranational
entities do not possess taxing authority, they are dependent upon their members'
continued support in order to meet interest and principal payments.
WHEN-ISSUED AND DELAYED-DELIVERY SECURITIES. To secure prices deemed
advantageous at a particular time, the Portfolio may purchase securities on a
when-issued or delayed-delivery basis, in which case delivery of the securities
occurs beyond the normal settlement period; payment for or delivery of the
securities would be made prior to the reciprocal delivery or payment by the
other party to the transaction. The Portfolio will enter into when-issued or
delayed-delivery transactions for the purpose of acquiring securities and not
for the purpose of leverage. When-issued securities purchased by the Portfolio
may include securities purchased on a "when, as and if issued" basis under which
the issuance of the securities depends on the occurrence of a subsequent event,
such as approval of a merger, corporate reorganization or debt restructuring.
The Portfolio will establish with its custodian, or with a designated
sub-custodian, a segregated account consisting of cash, U.S. Government
securities or other liquid high grade debt obligations in an amount equal to the
amount of its when-issued or delayed-delivery purchase commitments.
Securities purchased on a when-issued or delayed-delivery basis may expose the
Portfolio to risk because the securities may experience fluctuations in value
prior to their actual delivery. The Portfolio does not accrue income with
respect to a when-issued or delayed-delivery security prior to its stated
delivery date. Purchasing securities on a when-issued or delayed-delivery basis
can involve the additional risk that the yield available in the market when the
delivery takes place may be higher than that obtained in the transaction itself.
LENDING PORTFOLIO SECURITIES. To generate income for the purpose of helping
to meet its operating expenses, the Portfolio may lend securities to brokers,
dealers and other financial organizations. These loans, if and when made, may
not exceed 10% of the Portfolio's assets taken at value. The Portfolio's loans
of securities will be collateralized at least 100% by cash, letters of credit or
U.S. Government securities, which will be marked to market daily. The cash or
instruments collateralizing the Portfolio's loans of securities will be
maintained at all times in a segregated account with the Portfolio's custodian,
or with a designated sub-custodian, in an amount at least equal to the current
market value of the loaned securities. In lending securities to brokers, dealers
and other financial organizations, the Portfolio is subject to risks, which,
like those associated with other extensions of credit, include delays in
recovery and possible loss of rights in the collateral should the borrower fail
financially.
CURRENCY EXCHANGE RATES. The Portfolio's share value may change significantly
when the currencies, other than the U.S. dollar, in which the Portfolio's
investments are denominated strengthen or weaken against the U.S. dollar.
Currency exchange rates generally are determined by the forces of supply and
demand in the foreign exchange markets and the relative merits of investments in
different countries as seen from an international perspective. Currency exchange
rates can also be affected unpredictably by intervention by U.S. or foreign
governments or central banks or by currency controls or political developments
in the United States or abroad.
FORWARD CURRENCY CONTRACTS. The Portfolio may hold currencies to meet
settlement requirements for foreign securities and may engage in currency
exchange transactions in order to protect against uncertainty in the level of
future exchange rates between a particular foreign currency and the U.S. dollar
or between foreign currencies in which the Portfolio's securities are or may be
denominated. Forward currency contracts are agreements to exchange one currency
for another--for example, to exchange a certain amount of U.S. dollars for a
certain amount of French francs at a future date. The date (which may be any
agreed-upon fixed number of days in the future), the amount of currency to be
exchanged and the price at which the exchange will take place will be negotiated
with a currency trader and fixed for the term of the contract
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at the time that the Portfolio enters into the contract. To assure that the
Portfolio's forward currency contracts are not used to achieve investment
leverage, the Portfolio will segregate cash or high grade securities with its
custodian in an amount at all times equal to or exceeding the Portfolio's
commitment with respect to these contracts.
In hedging specific portfolio positions, the Portfolio may enter into a
forward contract with respect to either the currency in which the positions are
denominated or another currency deemed appropriate by Julius Baer. The amount
the Portfolio may invest in forward currency contracts is limited to the amount
of the Portfolio's aggregate investments in foreign currencies. Risks associated
with entering into forward currency contracts include the possibility that the
market for forward currency contracts may be limited with respect to certain
currencies and, upon a contract's maturity, the inability of the Portfolio to
negotiate with the dealer to enter into an offsetting transaction. Forward
currency contracts may be closed out only by the parties entering into an
offsetting contract. In addition, the correlation between movements in the
prices of those contracts and movements in the price of the currency hedged or
used for cover will not be perfect. There is no assurance that an active forward
currency contract market will always exist. These factors will restrict the
Portfolio's ability to hedge against the risk of devaluation of currencies in
which the Portfolio holds a substantial quantity of securities and are unrelated
to the qualitative rating that may be assigned to any particular security.
FUTURES CONTRACTS AND RELATED OPTIONS. The Portfolio may enter into futures
contracts and purchase and write (sell) options on these contracts, including
but not limited to interest rate, securities index and foreign currency futures
contracts and put and call options on these futures contracts. These contracts
will be entered into only when Julius Baer determines that such contracts are
necessary or appropriate in the management of the Portfolio's assets. These
contracts will be entered into on exchanges designated by the Commodity Futures
Trading Commission ("CFTC") or, consistent with CFTC regulations, on foreign
exchanges. These transactions may be entered into for bona fide hedging and
other permissible risk management purposes including protecting against
anticipated changes in the value of securities the Portfolio intends to
purchase.
The Portfolio will not enter into futures contracts and related options for
which the aggregate initial margin and premiums exceed 5% of the fair market
value of the Portfolio's assets after taking into account unrealized profits and
unrealized losses on any contracts it has entered into. All futures and options
on futures positions will be covered by owning the underlying security or
segregation of assets. With respect to long positions in a futures contract or
option (e.g., futures contracts to purchase the underlying instrument and call
options purchased or put options written on these futures contracts or
instruments), the underlying value of the futures contract at all times will not
exceed the sum of cash, short-term U.S. debt obligations or other high quality
obligations set aside for this purpose.
The Portfolio may lose the expected benefit of these futures or options
transactions and may incur losses if the prices of the underlying commodities
move in an unanticipated manner. In addition, changes in the value of the
Portfolio's futures and options positions may not prove to be perfectly or even
highly correlated with changes in the value of its portfolio securities.
Successful use of futures and related options is subject to Julius Baer's
ability to predict correctly movements in the direction of the securities
markets generally, which ability may require different skills and techniques
than predicting changes in the prices of individual securities. Moreover,
futures and options contracts may only be closed out by entering into offsetting
transactions on the exchange where the position was entered into (or a linked
exchange), and as a result of daily price fluctuation limits there can be no
assurance that an offsetting transaction could be entered into at an
advantageous price at any particular time. Consequently, the Portfolio may
realize a loss on a futures contract or option that is not offset by an increase
in the value of its portfolio securities that are being hedged or the Portfolio
may not be able to close a futures or options position without incurring a loss
in the event of adverse price movements.
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INDEX 400 MID-CAP -
PORTFOLIO
The Index 400 Mid-Cap Portfolio seeks to provide investment results
generally corresponding to the aggregate price and dividend performance of
publicly traded common stocks that comprise the Standard & Poor's 400 MidCap
Index.
The Portfolio pursues its investment objective by investing primarily in the
400 common stocks that comprise the Index, issued by medium-sized domestic
companies with market capitalizations that generally range from $200 million to
$5 billion. The stocks are selected for inclusion in the Index by
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Standard & Poor's Ratings Group ("S&P") on the basis of the issuer's anticipated
contribution to the diversification of the index. A particular stock's weighting
in the Index is based on its relative total market value, that is, the stock's
market price per share times the number of shares outstanding. From time to
time, S&P may add or delete stocks from the Index. It is designed to provide an
economical and convenient means of maintaining a diversified portfolio in this
equity security area as part of an over-all investment strategy. The inclusion
of a stock in the Index in no way implies an opinion by S&P as to its
attractiveness as an investment, nor is it a sponsor or in any way affiliated
with the Portfolio. (See "The Standard & Poor's License," below.)
The Portfolio will not attempt to actively manage the securities held by it.
Rather, the Portfolio will utilize a passive approach in pursuit of its
investment objective, meaning that the Portfolio will not employ the traditional
management functions of economic, financial and market analysis associated with
actively managed funds. Thus, unless an issuer's stock is removed from the Index
by S&P, an issuer's adverse financial circumstance will not cause its stock to
be eliminated from the Portfolio's holdings of securities. The Portfolio is
designed for long-term investors seeking the advantages of a "passive" approach
for investing in a diversified portfolio of common stocks. All common stocks,
including those in the S&P 400 MidCap Index, involve greater investment risk
than debt securities. Investors should also be aware that the S&P 400 MidCap
Index is an unmanaged index and that its performance does not take into account
management fees, brokerage commissions or other costs of investing that the
Portfolio must bear.
The Portfolio will at all times invest at least 75% and may invest up to 100%,
of its assets in common stock included in the Index. There is no minimum or
maximum number of stocks included in the Index which the Portfolio must hold.
Under normal circumstances, it is expected that the Portfolio will hold between
200-350 different stocks included in the Index. Regardless of the number, or
relative weightings, of stocks included in the S&P 400 MidCap Index held by the
Portfolio, however, the Portfolio's intention is to seek investment results,
before Portfolio expenses, which match as closely as possible the investment
performance of the S&P 400 MidCap Index.
In order to maintain adequate liquidity to meet its redemption demands, the
Portfolio may also invest up to 10% of its total assets in short-term
investments, including repurchase agreements and stock index futures contracts.
The use of stock index futures contracts allows the Portfolio to maintain
liquidity while also increasing the level of the Portfolio's assets that reflect
the performance of the S&P 400 MidCap Index.
In keeping with the passive management approach, the Portfolio will be managed
using a computer program strategy to determine which securities are to be
purchased or sold so as to replicate the composition of the S&P 400 MidCap Index
to the extent feasible. This strategy distinguishes between "capitalization"
securities and "balancing" securities. Capitalization securities represent the
very largest capitalization securities in the Index and are added to the
Portfolio according to their relative capitalization weight. Balancing
securities are smaller market capitalization securities which are added to the
Portfolio in equal amounts according to an analysis of the sector
diversification of the S&P 400 MidCap Index.
From time to time, adjustments will be made in the Portfolio's holdings of
securities so as to respond to changes in the Index's composition, as well as to
corporate reorganizations and other circumstances. It is expected that
adjustments to the Portfolio's holdings of securities will occur infrequently
and that transaction costs and other expenses will be minimized. Because
portfolio turnover is expected to be well below that encountered in actively
managed investment company portfolios, the Portfolio anticipates that
accompanying costs, including accounting costs, brokerage fees, custodial
expenses and transfer taxes, will be relatively low. While the cash flows into
and out of the Portfolio will have an impact upon the portfolio turnover rate of
the Portfolio and its ability to replicate and track the performance of the
Index, investment adjustments will be made, as is practical, to account for
these circumstances.
Economic, financial or market analysis will not be used in selecting
investments for the Portfolio, nor will the adverse financial condition of a
company necessarily result in the sale of the company's stock by the Portfolio.
However, the Portfolio reserves the right to sell a stock held if Advantus
Capital determines that the investment has been impaired substantially by the
financial condition or extraordinary events involving the stock's issuer.
SHORT-TERM INVESTMENTS. Although the Portfolio normally seeks to remain
substantially fully invested in common stocks, the Portfolio may invest
temporarily in certain high grade short-term fixed income securities or in
commercial paper or other cash equivalents rated A-1 by Standard & Poor's
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Corporation or Prime-1 by Moody's Investors Services, Inc. Such investments may
be used to invest uncommitted cash balances or to maintain liquidity to meet
shareholder redemptions. These investment include: obligations of the U.S.
Government and its agencies or instrumentalities; commercial paper, bank
certificates of deposit, and bankers' acceptances; and repurchase agreements
collateralized by these securities.
STOCK INDEX FUTURES CONTRACTS. The Portfolio may utilize stock index futures
contracts to a limited extent. Specifically, the Portfolio may enter into stock
index futures contracts provided that not more than 5% of its assets are
required as a margin deposit for such contracts and provided that not more than
20% of its total assets (including assets held as "cover" in segregated accounts
or as margin deposits) are invested in stock index futures obligations at any
time. Futures contracts may be used for several reasons: to simulate full
investment in the underlying index while retaining a cash balance for Portfolio
management purposes, to facilitate trading or to reduce transaction costs. While
these securities can be used as leveraged investments, the Portfolio may not use
them to leverage its net assets.
The risk of loss associated with stock index futures contracts in some
strategies is potentially unlimited due both to the low margin deposits required
and the extremely high degree of leverage involved in futures pricing. As a
result, a relatively small price movement in a stock index futures contract may
result in an immediate and substantial loss or gain. However, the Portfolio will
not use stock index futures contracts for speculative purposes or to leverage
its net assets. The successful use of futures contracts by the Fund, however, is
dependent upon the ability of Advantus Capital to predict correctly movements in
the direction of stock prices and interest rates. Accordingly, the primary risks
associated with the use of stock index futures contracts by the Portfolio are:
(i) imperfect correlation between the change in market value of the stocks held
by the Portfolio and the prices of stock index futures contracts; and (ii)
possible lack of a liquid secondary market for a stock index futures contract
and the resulting inability to close a futures position prior to its maturity
date. The risk of imperfect correlation will be minimized by investing only in
those contracts whose behavior is expected to resemble that of the Fund's
underlying securities. The risk that the Portfolio will be unable to close out a
futures position will be minimized by entering into such transactions on an
exchange with an active and liquid secondary market.
ILLIQUID SECURITIES AND RULE 144A PAPER. The Portfolio is permitted to invest
up to 15% of its net assets in securities or other assets which are illiquid. 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.
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,
Advantus Capital and the Portfolio believe that a similar market exists for
commercial paper issued pursuant to the private placement exemption of Section
4(2) of the 1933 Act. The Portfolio may invest up to 20% of its net assets in
these forms of restricted securities if such securities are deemed by Advantus
Capital to be liquid in accordance with standards established by the Fund's
Board of Directors. Under these guidelines, Advantus Capital 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.
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REPURCHASE AGREEMENTS. The Portfolio may also enter into repurchase
agreements. Repurchase agreements are agreements by which the Portfolio
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 Portfolio 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 Portfolio enters into repurchase
agreements is monitored by the Portfolio's investment 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 Portfolio the opportunity
to earn a return on temporarily available cash. The Portfolio'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 Portfolio 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 Portfolio
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 Portfolio 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.
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MICRO-CAP VALUE -
PORTFOLIO
The Micro-Cap Value Portfolio seeks capital appreciation. The
Portfolio will pursue its objective by investing in a diversified portfolio of
securities that the sub-adviser believes to be undervalued. It will invest
primarily in common stocks and stock equivalents of micro-cap companies, that
is, companies with a market capitalization of less than $300 million and which
appear to have market values which are low relative to their underlying value or
future earnings and growth potential. Dividend income will be incidental to the
investment objective for this Portfolio.
The Micro-Cap Value Portfolio will follow a policy of investing primarily in
the equity securities of "micro-cap" companies, defined in terms of
capitalization and which, in the opinion of Keystone Investment, have market
values which appear low relative to their underlying value or future earnings
and growth potential. The typical capitalization of issuers of securities
purchased by the Portfolio is expected to be between $75 million and $300
million. The median market capitalization of securities in the Portfolio is
expected to be less than $200 million under most circumstances. While micro-cap
company securities may offer a greater capital appreciation potential than
investment in securities of larger companies, they may also present greater
risks. Micro-cap companies may have limited product lines, market and financial
resources, or may be dependent on small or less experienced management groups.
In addition, the trading volume of micro-cap companies may be limited.
Historically, the market price for securities of micro-cap companies has been
more volatile than for securities of companies with greater capitalization. The
investment objective may not be changed without the approval of a majority of
the outstanding shares of the Portfolio.
The Micro-Cap Value Portfolio will primarily purchase securities which, at the
time of purchase, are issued by "micro-cap companies" and are considered by
Keystone Investment to be "value" securities. Value securities are issued by
companies which could be described as follows: (a) companies whose securities
Keystone Investment believes are selling at low market valuations relative to
the securities markets in general, or companies that may currently be earning a
very low return on assets but which have the potential to earn higher returns;
(b) companies whose securities Keystone Investment believes are undervalued in
relation to their potential for improved operating performance and financial
strength; or (c) companies which have recently changed management or control and
whose securities, in the judgment of Keystone Investment, are therefore
undervalued in relation to their potential to achieve sharply improved operating
performance. Securities of companies that may be temporarily out of favor or
whose value is not yet recognized by the market may also be considered by
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Advantus Capital to be value securities (see "Value Securities" below).
The Micro-Cap Value Portfolio will ordinarily invest at least 65% of the value
of its total assets in common stocks with the characteristics described above.
The Portfolio intends to be substantially fully invested at all times. If
suitable investments are not immediately available, the Portfolio may hold a
portion of its investments in cash and cash equivalents. The Portfolio may also
invest in other equity securities, including stocks with larger market
capitalization whose long-term appreciation potential is believed by Advantus
Capital to be well above average, debt obligations convertible into common stock
and which may produce capital appreciation, other corporate debt obligations,
U.S. Government securities, cash or cash equivalents. However, the Micro-Cap
Value Portfolio may temporarily take a defensive position by investing a
substantial portion of its assets in bonds, notes or other evidences of
indebtedness, including U.S. Government securities and corporate debt
securities, provided that such debt securities (excluding debt securities
convertible into common stock as described below) are rated BBB or Baa or higher
by Standard & Poor's Corporation ("S&P") or Moody's Investors Services, Inc.
("Moody's"), respectively, or may hold its assets in cash. The Micro-Cap Value
Portfolio may also temporarily hold its assets in cash or money market
instruments pending investments in accordance with its policies.
VALUE SECURITIES. Tests applied by Keystone Investment to measure the value
of securities will include their price/earnings ratio, price/book ratio, price
to cash flow ratio and yield. A price/earnings ratio is the price of a share of
stock divided by its earnings per share and it is a measure of the market price
of the security relative to its earnings per share. A price/book ratio is the
price of a share of stock divided by its book value per share and it is a
measure of the market price of the security relative to its book value per
share. Book value per share is generally equal to assets less liabilities
divided by the total number of outstanding shares (i.e., the "net worth" per
share). A price to cash flow ratio is the price of a share of stock divided by
the firm's net income after taxes, plus depreciation and other non-cash
expenses, expressed on a per share basis. Yield is the annual dividend of a
share of stock divided by its market price. Stocks will be selected by Advantus
Capital using statistical measures of relative value. Returns on such stocks are
likely to be influenced by the recognition of their undervaluation by other
investors and the market. Under most circumstances, if Advantus Capital
determines that a stock has reached an over-valued position, it may be sold and
replaced by securities which are deemed to be undervalued in the marketplace.
The Micro-Cap Value Portfolio's investments in value securities will typically
be characterized by the purchase of securities with lower price to normalized
earnings ratios ("normalized earnings" are average earnings under average
business conditions), lower price to cash flow ratios and/or price to book value
ratios relative to the equity markets in general. This value approach to
investing may be considered to differ from a growth approach which would
consider the purchase of securities with an anticipated above-average earnings
growth potential over time. This distinction between these two approaches to
equity investing is important because historically there are periods in which
either growth or value investing may be successful approaches to total return in
the equity markets. Securities that meet the criteria of the Micro-Cap Value
Portfolio may not be popular during certain market cycles.
MICRO-CAP COMPANIES. Companies characterized as "micro-cap" companies may
encompass well-known and established companies as well as newer and relatively
unknown companies, and will have, at the time of purchase, a market
capitalization of less than $300 million.
Market capitalization is the term which refers to the total market value of a
company's outstanding shares of common stock. Application of the market
capitalization test will be made only at the time that the Portfolio's initial
position in the company is taken. Thus, for purposes of the 65% test, any
company deemed to be a micro-cap company at the time of the Portfolio's initial
position therein will be treated as a micro-cap company, until the market
capitalization of that company exceeds $300 million.
Micro-cap 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. Advantus Capital 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 companies frequently retain a large part of
their earnings for research, development and
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investment in capital assets, so that the prospects for immediate dividend
income are limited.
While historically securities issued by small capitalization companies have
produced better market results than the securities of larger issuers, there is
no assurance that they will continue to do so or that the Portfolio will invest
specifically in those companies which produce those results. Because of the
risks involved, the Micro-Cap Value Portfolio is not intended as a complete
investment program.
CONVERTIBLE SECURITIES. The Portfolio 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. The Portfolio 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 Adviser.
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 in fact have speculative characteristics and present
more credit risk than investment grade obligations. Bonds rated below BBB are
regarded as predominately speculative with respect to the issuer's continuing
ability to meet principal and interest payments. (See "Debt Securities," below,
for a description of the risks associated with debt securities rated below
investment grade.) As an operating policy, the Portfolio will not purchase a
non-investment grade convertible debt security if immediately after such
purchase the Portfolio would have more than 10% of its total assets invested in
such securities. See the Appendix for a description of the ratings used by S&P
and Moody's.
DEBT SECURITIES. The Portfolio may invest in non-convertible debt securities
rated BBB or Baa or higher by S&P or Moody's, respectively. In addition, the
Portfolio may invest in debt securities convertible into common stock which are
rated lower than BBB or Baa (see "Convertible Securities" above). 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 the Portfolio's net
asset value. Although they may offer higher yields than do higher rated
securities, low rated (i.e., below BBB) 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
Portfolio's 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 Portfolio's 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 Portfolio to
achieve its 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 Portfolio 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 security 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 Portfolio 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.
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After purchase by the Portfolio, a debt security may cease to be rated or its
rating may be reduced below the minimum required for purchase by the Portfolio.
Neither event will require a sale of such security by the Portfolio, but the
Adviser will consider such event in the determination of whether the Portfolio
should continue to hold the security.
OPTIONS. The Portfolio may write covered call options which are traded on
national securities exchanges with respect to common stocks in its portfolio
("covered options") in an attempt to earn additional current income on its
portfolio or to guard against an expected decline in the price of a security. By
writing a covered call option, the Portfolio gives the purchaser of the option
the right to buy the underlying security at the price specified in the option.
The Portfolio realizes income from the sale of the option, but foregoes the
opportunity to profit during the option period from an increase in the market
value of the underlying security above the exercise price. The Portfolio does
not write call options in an aggregate amount greater than 10% of its net
assets. The Portfolio purchases call options only to close out a position, and
will neither write nor purchase put options. The use of options contracts
involves additional risk of loss to the Portfolio, including the risk that the
Portfolio may incur a loss because the prices of the underlying securities do
not move as anticipated. See the Statement of Additional Information for a more
detailed discussion of options and the risks associated therewith.
LOANS OF PORTFOLIO SECURITIES. For the purpose of realizing additional
income, the Portfolio may make secured loans of portfolio securities amounting
to not more than 20% of its total assets. 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
or securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities. While the securities are being lent, the Portfolio 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. The Portfolio has a right to call each
loan and obtain the securities on five business days' notice. The Portfolio 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 Portfolio's
investment adviser to be of good standing and to have sufficient financial
responsibility, and will not be made unless, in the judgment of the Portfolio's
investment adviser, the consideration to be earned from such loans would justify
the risk. The creditworthiness of entities to which the Portfolio makes loans of
portfolio securities is monitored by the Portfolio's investment adviser
throughout the term of each loan.
WARRANTS. The Portfolio may invest in warrants; however, not more than 5% of
its assets (at the time of purchase) will be invested in warrants other than
warrants acquired in units or attached to other securities. Of such 5% not more
than 2% of the Portfolio assets at the time of purchase may be invested in
warrants that are not listed on the New York or American Stock Exchanges.
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.
ILLIQUID SECURITIES AND RULE 144A PAPER. The Portfolio is permitted to invest
up to 15% of its net assets in securities or other assets which are illiquid. 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.
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 Adviser and the Portfolio believe that a similar market exists for
commercial paper issued pursuant to the private placement exemption of Section
4(2) of the 1933 Act. The Portfolio may invest without limitation in these forms
of restricted securities if such securities are deemed by the Adviser to be
liquid in accordance with standards
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established by the Board of Directors of the Fund. Under these guidelines, the
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 Portfolio's illiquidity to
the extent that qualified purchasers of the securities become, for a time,
uninterested in purchasing these securities.
FOREIGN SECURITIES. The Portfolio may also invest up to 10% of the market
value of the Portfolio's total assets in securities of foreign issuers which are
not publicly traded in the United States. (Securities of foreign issuers which
are publicly traded in the United States, usually in the form of sponsored
American Depository Receipts, are not subject to this 10% limitation.) Investing
in securities of foreign issuers may result in greater risk than that incurred
in investing in securities of domestic issuers. There is a 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
United States. 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 United States
companies. Further, the Portfolio 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 United States, 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 United States. The foreign securities
markets of many of the countries in which the Portfolio may invest may also be
smaller, less liquid, and subject to greater price volatility than those in the
United States. Also, some countries may withhold portions of interest, dividends
and gains at the source. There are further risk considerations, including
possible losses through the holding of securities in domestic and foreign
custodial banks and depositories.
An ADR is sponsored if the original issuing company has selected a single U.S.
bank to serve as its U.S. depository and transfer agent. This relationship
requires a deposit agreement which defines the rights and duties of both the
issuer and depository. 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 depository. Unsponsored shares issued after 1983 are not
eligible for U.S. stock exchange listings. Furthermore, they do not generally
include voting rights.
REPURCHASE AGREEMENTS. The Portfolio may also enter into repurchase
agreements. Repurchase agreements are agreements by which the Portfolio
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 Portfolio 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 Portfolio enters into repurchase
agreements is monitored by the Portfolio's investment 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 Portfolio the opportunity
to earn a return on temporarily available cash. The Portfolio's custodian, or a
duly appointed subcustodian, holds
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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 Portfolio 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 Portfolio 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 Portfolio 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.
Equity securities, in which the Portfolio will be primarily invested, are more
volatile than debt securities and involve greater investment risk. The Portfolio
is dependent on the Adviser's judgment as to general economic and market
policies and trends in investment returns, as well as its judgment as to the
composition of the Portfolio.
Investments in small companies, such as those made by the Micro-Cap Value
Portfolio, involve greater risks than equity securities generally due to their
small size and the fact that they may have limited product lines, less access to
the financial market for additional corporate financings or less management
depth. In addition, many of the securities of these firms trade less frequently
and in lower volumes than do securities issued by larger firms. The result is
that the short-term volatility of the prices of those securities is greater than
the prices of larger, more established companies which are more widely held in
the market. The securities of small companies may also be more sensitive to
market changes generally than the securities of large companies.
Some of the investment policies which the Portfolio may employ, such as
investing in options, repurchase agreements, and illiquid and foreign
securities, involve special risks not associated with more traditional
investment instruments and policies. Loans of portfolio securities, for example,
involve risks of possible delay in receiving additional collateral or in the
recovery of the loaned securities, or possible loss of rights in the collateral
should the borrower fail financially. The use of options may, in the case of a
sale of a covered call option, result in a loss to the Portfolio as a result of
the foregone increase in value of the underlying security. The Portfolio will
purchase a covered call option only to close out an option which the Portfolio
has written and, in such circumstances, may also experience a loss if the amount
paid to purchase the call option is greater than the premium received for
writing the option being closed out. Illiquid securities include certain types
of restricted securities, which may be sold only in a privately negotiated
transaction or in a public offering for which a registration statement is in
effect under the Securities Act of 1933. Because of such restrictions, the
Portfolio 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 Portfolio may be required to bear the expenses of
registration of such restricted securities.
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MACRO-CAP VALUE -
PORTFOLIO
The Macro-Cap Value Portfolio seeks as its investment objective to
provide high total return. It pursues this objective by investing primarily in
selected common stocks of large U.S. corporations (defined as those with market
capitalizations typically above approximately $8 billion at the time of
purchase). There can be no assurance that the Portfolio will achieve its
investment objective.
J.P. Morgan seeks to enhance the Portfolio's total return relative to that of
the universe of large sized U.S. companies, typically represented by the S&P 500
Index, by investing in those securities that J.P. Morgan's dividend discount
model shows as undervalued relative to their long-term earnings power. The
median market capitalization of the Portfolio is currently expected to be above
$7.5 billion and the average market capitalization is expected to be above $26
billion.
Fundamental research is the cornerstone of the valuation-driven investment
approach. J.P. Morgan's equity analysts develop long-term forecasts of
normalized earnings, cash flows and dividends on more than 600 domestic
companies in an effort to identify unrecognized value. J.P. Morgan then uses the
dividend discount model to rank companies
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within economic sectors according to their relative value.
From the universe of securities that are identified as undervalued, J.P.
Morgan creates a diversified portfolio of securities which typically has a
price/ earnings ratio and a price to book ratio that reflects a value
orientation. J.P. Morgan may modestly under or over-weight selected economic
sectors against the S&P 500 Index's sector weightings to seek to enhance the
Portfolio's total return or reduce the fluctuation in its market value relative
to the Index.
EQUITY INVESTMENTS. During ordinary market conditions, J.P. Morgan intends to
keep the Portfolio essentially fully invested with at least 65% of its assets
invested in common stocks having the characteristics described above. The common
stock in which the Portfolio may invest includes common stock of any class or
series or any similar equity interest, such as trust or limited partnership
interests. The Portfolio may also invest in other securities with equity
characteristics such as preferred stock, warrants, rights and convertible
securities. To a limited extent, the Portfolio may invest in equity securities
of foreign corporations. These equity investments may or may not pay dividends
and may or may not carry voting rights. The Portfolio invests in securities
listed on a securities exchange or traded in an over-the-counter (OTC) market,
and may invest in certain restricted or unlisted securities.
CONVERTIBLE SECURITIES. The convertible securities in which the Portfolio may
invest include any debt securities or preferred stock which may be converted
into common stock or which carry the right to purchase common stock. Convertible
securities entitle the holder to exchange the securities for a specified number
of shares of common stock, usually of the same company, at specified prices
within a certain period of time.
COMMON STOCK WARRANTS. The Portfolio may invest in common stock warrants that
entitle the holder to buy common stock from the issuer of the warrant at a
specific price (the strike price) for a specific period of time. The market
price of warrants may be substantially lower than the current market price of
the underlying common stock, yet warrants are subject to similar price
fluctuations. As a result, warrants may be more volatile investments than the
underlying common stock.
Warrants generally do not entitle the holder to dividends or voting rights
with respect to the underlying common stock and do not represent any rights in
the assets of the issuer company. A warrant will expire worthless if it is not
exercised on or prior to the expiration date.
WHEN-ISSUED AND DELAYED DELIVER SECURITIES. The Portfolio may purchase
securities on a when-issued or delayed delivery basis. Delivery of and payment
for these securities may take as long as a month or more after the date of the
purchase commitment. The value of these securities is subject to market
fluctuation during this period and for fixed income investments no interest
accrues to the Portfolio until settlement. At the time of settlement, a
when-issued security may be valued at less than its purchase price. The
Portfolio maintains with its custodian a separate account with a segregated
portfolio of securities in an amount at least equal to these commitments. When
entering into a when-issued or delayed delivery transaction, the Portfolio will
rely on the other party to consummate the transaction; if the other party fails
to do so, the Portfolio may be disadvantaged. It is the current policy of the
Portfolio not to enter into when-issued commitments exceeding in the aggregate
15% of the market value of the Portfolio's total assets less liabilities other
than the obligations created by these commitments.
LOANS OF PORTFOLIO SECURITIES. Subject to applicable investment restrictions,
the Portfolio is permitted to lend its securities in an amount up to 10% of the
value of the Portfolio's net assets. The Portfolio may lend its securities if
such loans are secured continuously by cash or equivalent collateral or by a
letter of credit in favor of the Portfolio at least equal at all times to 100%
of the market value of the securities loaned, plus accrued interest. While such
securities are on loan, the borrower will pay the Portfolio any income accruing
thereon. Loans will be subject to termination by the Portfolio in the normal
settlement time, generally three business days after notice, or by the borrower
on one day's notice. Borrowed securities must be returned when the loan is
terminated. Any gain or loss in the market price of the borrowed securities
which occurs during the term of the loan inures to the Portfolio and its
respective investors. The Portfolio may pay reasonable finders' and custodial
fees in connection with a loan. In addition, the Portfolio will consider all
facts and circumstances, including the creditworthiness of the borrowing
financial institution, and the Portfolio will not make any loans in excess of
one year.
FOREIGN INVESTMENTS. The Portfolio may invest in equity securities of foreign
corporations included in the S&P 500 Index or listed on a national securities
exchange. However, the Portfolio does not expect to
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invest more than 10% of its assets at the time of purchase in securities of
foreign issuers. Investment in securities of foreign issuers involves somewhat
different investment risks from those affecting securities of U.S. domestic
issuers. There may be limited publicly available information with respect to
foreign issuers, and foreign issuers are not generally subject to uniform
accounting, auditing and financial standards and requirements comparable to
those applicable to domestic companies. Dividends and interest paid by foreign
issuers may be subject to withholding and other foreign taxes which may decrease
the net return on foreign investments as compared to dividends and interest paid
to the Portfolio by domestic companies.
Investors should realize that the value of the Portfolio's investments in
foreign securities may be adversely affected by changes in political or social
conditions, diplomatic relations, confiscatory taxation, expropriation,
nationalization, limitation on the removal of funds or assets, or imposition of
(or change in) exchange control or tax regulations in those foreign countries.
In addition, changes in government administrations or economic or monetary
policies in the United States or abroad could result in appreciation or
depreciation of Portfolio securities and could favorably or unfavorably affect
the Portfolio's operations.
The Portfolio may invest in securities of foreign issuers directly or in the
form of American Depositary Receipts ("ADRs"), European Depositary Receipts
("EDRs") or other similar securities of foreign issuers. These securities may
not necessarily be denominated in the same currency as the securities they
represent. ADRs are receipts typically issued by a U.S. bank or trust company
evidencing ownership of the underlying foreign securities. Certain such
institutions issuing ADRs may not be sponsored by the issuer of the underlying
foreign securities. A non-sponsored depository may not provide the same
shareholder information that a sponsored depository is required to provide under
its contractual arrangements with the issuer of the underlying foreign
securities. EDRs are receipts issued by a European financial institution
evidencing a similar arrangement. Generally, ADRs, in registered form, are
designed for use in the U.S. securities markets, and EDRs, in bearer form, are
designed for use in European securities markets.
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MICRO-CAP GROWTH -
PORTFOLIO
The Micro-Cap Growth Portfolio seeks long-term capital appreciation.
It pursues this objective by investing primarily in equity securities of smaller
companies which the sub-adviser believes are in an early stage or transitional
point in their development and have demonstrated or have the potential for above
average revenue growth. It will invest primarily is common stocks and stock
equivalents of micro-cap companies, that is, companies with a market
capitalization of less than $300 million. Dividend income will be incidental to
the investment objective for this Portfolio.
The Micro-Cap Growth Portfolio will follow a policy of investing primarily in
the equity securities of "micro-cap" companies, defined in terms of
capitalization and which, in the opinion of the sub-adviser, have the potential
to gain market share in their industry, achieve and maintain high and consistent
profitability or produce increases in earnings. The sub-adviser also seeks
companies with strong company management and superior fundamental strength.
The typical capitalization of issues of securities purchased by the Portfolio
is expected to be between $75 million and $300 million. The median market
capitalization of securities in the Portfolio is expected to be less than $200
million under most circumstances. However, equity investment typically will
stress market capitalizations exceed $20 million with New York Stock Exchange,
American Stock Exchange and NASDAQ listing, or equivalent liquidity. While
micro-cap company securities may offer a greater capital appreciation potential
than investment in securities of larger companies, they may also present greater
risks. Micro-cap companies may have limited product lines, market and financial
resources, or may be depended on small or less experienced management groups. In
addition, the trading volume of micro-cap companies may be limited.
Historically, the market price for securities of micro-cap companies have been
more volatile than for securities of companies with greater capitalization. The
investment objective may not be changed without the approval of a majority of
the outstanding shares of the Portfolio.
The Micro-Cap Growth Portfolio will primarily purchase securities which, at
the time of purchase, are issued by "micro-cap" companies and are considered by
the sub-adviser to be "growth" securities. The Portfolio's growth approach is
based on sound fundamental investment analysis in which individual stock
selection is critical. Generally, the Portfolio invests in companies with strong
long-term outlooks. Investments will be based on fundamental and detailed
research and analysis, with particular emphasis on smaller capitalization growth
stocks with rapidly accelerating earnings, strong
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fundamentals and attractive price/earnings valuations.
The Micro-Cap Growth Portfolio will ordinarily invest at least 65% of the
value of its total assets in common stocks with the characteristics described
above. The Portfolio intends to be substantially fully invested at all times. If
suitable investments are not immediately available, the Portfolio may hold a
portion of its investments in cash and cash equivalents. The Portfolio may also
invest in other equity securities, including stocks with larger market
capitalizations whose long-term appreciation potential is believed by the
advisers to be well above average, debt obligations convertible into common
stock and which may produce capital appreciation, other corporate debt
obligations, U.S. Government securities, cash or cash equivalents. However, the
Micro-Cap Growth Portfolio may temporarily take a defensive position by
investing a substantial portion of its assets in bonds, notes or other evidences
of indebtedness, including U.S. Government securities and corporate debt
securities, provided that such debt securities (excluding debt securities
convertible into common stock as described below) are rated BBB or Baa or higher
by Standard & Poor's Corporation ("S&P") or Moody's Investors Services, Inc.
("Moody's"), respectively, or may hold its assets in cash. The Micro-Cap Growth
Portfolio may also temporarily hold its assets in cash or money market
instruments pending investment in accordance with its policies.
MICRO-CAP COMPANIES. Companies characterized as "micro-cap " companies may
encompass well-known and established companies as well as newer and relatively
unknown companies, and will have, at the time of purchase, a market
capitalization of less than $300 million.
Market capitalization is the term which refers to the total market value of a
company's outstanding shares of common stock. Application of the market
capitalization or gross revenue tests will be made only at the time that the
Portfolio's initial position in the company is taken. Thus, for purposes of the
65% test, any company deemed to be a micro-cap company at the time of the
Portfolio's initial position therein will be treated as a micro-cap company,
until the market capitalization of that company exceeds $300 million.
Micro-cap 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. Wall Street Associates believe 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 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 historically securities issued by small capitalization companies have
produced better market results than the securities of larger issuers, there is
no assurance that they will continue to do so or that the Portfolio will invest
specifically in those companies which produce those results. Because of the
risks involved, the Micro-Cap Growth Portfolio is not intended as a complete
investment program.
CONVERTIBLE SECURITIES. The Portfolio 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. The Portfolio 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 Adviser.
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 in fact have speculative characteristics and present
more credit risk than investment grade obligations. Bonds rated below BBB are
regarded as predominately speculative with respect to the issuer's continuing
ability to meet principal and interest payments. (See "Debt Securities," below,
for a description of the risks associated with debt securities rated below
investment grade.) As an operating policy, the Portfolio will not purchase a
non-investment grade convertible debt security if immediately after such
purchase the Portfolio would have more than 10% of its total assets invested in
such securities. See the Appendix to the Statement
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of Additional Information for a description of the ratings used by S&P and
Moody's.
DEBT SECURITIES. The Portfolio may invest in non-convertible debt securities
rated BBB or Baa or higher by S&P or Moody's, respectively. In addition, the
Portfolio may invest in debt securities convertible into common stock which are
rated lower than BBB or Baa (see "Convertible Securities" above). 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 the Portfolio's net
asset value. Although they may offer higher yields than do higher rated
securities, low rated (i.e., below BBB) 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
Portfolio's 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 Portfolio's 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 Portfolio to
achieve its 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 Portfolio 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 security 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 Portfolio 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.
After purchase by the Portfolio, a debt security may cease to be rated or its
rating may be reduced below the minimum required for purchase by the Portfolio.
Neither event will require a sale of such security by the Portfolio, but the
Adviser will consider such event in the determination of whether the Portfolio
should continue to hold the security.
OPTIONS. The Portfolio may write covered call options which are traded on
national securities exchanges with respect to common stocks in its portfolio
("covered options") in an attempt to earn additional current income on its
portfolio or to guard against an expected decline in the price of a security. By
writing a covered call option, the Portfolio gives the purchaser of the option
the right to buy the underlying security at the price specified in the option.
The Portfolio realizes income from the sale of the option, but foregoes the
opportunity to profit during the option period from an increase in the market
value of the underlying security above the exercise price. The Portfolio does
not write call options in an aggregate amount greater than 10% of its net
assets. The Portfolio purchases call options only to close out a position, and
will neither write nor purchase put options. The use of options contracts
involves additional risk of loss to the Portfolio, including the risk that the
Portfolio may incur a loss because the prices of the underlying securities do
not move as anticipated. See the Statement of Additional Information for a more
detailed discussion of options and the risks associated therewith.
LOANS OF PORTFOLIO SECURITIES. For the purpose of realizing additional
income, the Portfolio may make secured loans of portfolio securities amounting
to not more than 20% of its total assets. 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
or securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities. While the securities are being lent, the Portfolio will
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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. The Portfolio has a right to call each
loan and obtain the securities on five business days' notice. The Portfolio 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 Portfolio's
investment adviser to be of good standing and to have sufficient financial
responsibility, and will not be made unless, in the judgment of the Portfolio's
investment adviser, the consideration to be earned from such loans would justify
the risk. The creditworthiness of entities to which the Portfolio makes loans of
portfolio securities is monitored by the Portfolio's investment adviser
throughout the term of each loan.
WARRANTS. The Portfolio may invest in warrants; however, not more than 5% of
its assets (at the time of purchase) will be invested in warrants other than
warrants acquired in units or attached to other securities. Of such 5% not more
than 2% of the Portfolio assets at the time of purchase may be invested in
warrants that are not listed on the New York or American Stock Exchanges.
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.
ILLIQUID SECURITIES AND RULE 144A PAPER. The Portfolio is permitted to invest
up to 15% of its net assets in securities or other assets which are illiquid. 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.
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 Adviser and the Portfolio believe that a similar market exists for
commercial paper issued pursuant to the private placement exemption of Section
4(2) of the 1933 Act. The Portfolio may invest without limitation in these forms
of restricted securities if such securities are deemed by the Adviser to be
liquid in accordance with standards established by the Board of Directors of the
Fund. Under these guidelines, the 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
Portfolio's illiquidity to the extent that qualified purchasers of the
securities become, for a time, uninterested in purchasing these securities.
FOREIGN SECURITIES. The Portfolio may also invest up to 10% of the market
value of the Portfolio's total assets in securities of foreign issuers which are
not publicly traded in the United States. (Securities of foreign issuers which
are publicly traded in the United States, usually in the form of sponsored
American Depositary Receipts, are not subject to this 10% limitation.) Investing
in securities of foreign issuers may result in greater risk than that incurred
in investing in securities of domestic issuers. There is a 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
United States. Foreign companies are not generally subject to uniform
accounting, auditing and financial reporting standards, and auditing practices
and requirements
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may not be comparable to those applicable to United States companies. Further,
the Portfolio 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 United
States, 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 United States. The foreign securities markets of many of the
countries in which the Portfolio may invest may also be smaller, less liquid,
and subject to greater price volatility than those in the United States. Also,
some countries may withhold portions of interest, dividends and gains at the
source. There are further risk considerations, including possible losses through
the holding of securities in domestic and foreign custodial banks and
depositories.
An ADR is sponsored if the original issuing company has selected a single U.S.
bank to serve as its U.S. depository and transfer agent. This relationship
requires a deposit agreement which defines the rights and duties of both the
issuer and depository. 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 depository. Unsponsored shares issued after 1983 are not
eligible for U.S. stock exchange listings. Furthermore, they do not generally
include voting rights.
REPURCHASE AGREEMENTS. The Portfolio may also enter into repurchase
agreements. Repurchase agreements are agreements by which the Portfolio
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 Portfolio 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 Portfolio enters into repurchase
agreements is monitored by the Portfolio's investment 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 Portfolio the opportunity
to earn a return on temporarily available cash. The Portfolio'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 Portfolio 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 Portfolio
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 Portfolio 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.
Equity securities, in which the Portfolio will be primarily invested, are more
volatile than debt securities and involve greater investment risk. The Portfolio
is dependent on the Adviser's judgment as to general economic and market
policies and trends in investment returns, as well as its judgment as to the
composition of the Portfolio.
Investments in small companies, such as those made by the Micro-Cap Growth
Portfolio, involve greater risks than equity securities generally due to their
small size and the fact that they may have limited product lines, less access to
the financial market for additional corporate financings or less management
depth. In addition, many of the securities of these firms trade less frequently
and in lower volumes than do securities issued by larger firms. The result is
that the short-term volatility of the prices of those securities is greater than
the prices of larger, more established companies which
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are more widely held in the market. The securities of small companies may also
be more sensitive to market changes generally than the securities of large
companies.
Some of the investment policies which the Portfolio may employ, such as
investing in options, repurchase agreements, and illiquid and foreign
securities, involve special risks not associated with more traditional
investment instruments and policies. Loans of portfolio securities, for example,
involve risks of possible delay in receiving additional collateral or in the
recovery of the loaned securities, or possible loss of rights in the collateral
should the borrower fail financially. The use of options may, in the case of a
sale of a covered call option, result in a loss to the Portfolio as a result of
the foregone increase in value of the underlying security. The Portfolio will
purchase a covered call option only to close out an option which the Portfolio
has written and, in such circumstances, may also experience a loss if the amount
paid to purchase the call option is greater than the premium received for
writing the option being closed out. Illiquid securities include certain types
of restricted securities, which may be sold only in a privately negotiated
transaction or in a public offering for which a registration statement is in
effect under the Securities Act of 1933. Because of such restrictions, the
Portfolio 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 Portfolio may be required to bear the expenses of
registration of such restricted securities.
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INVESTMENT
RESTRICTIONS
- ------------------------------------
The Fund is subject to a number of restrictions in pursuing
its investment objectives and policies. The following is a brief summary of
certain restrictions. Some of these restrictions are subject to exceptions not
stated here. Those exceptions and a complete list of the investment restrictions
applicable to the individual Portfolios and to the Fund are set forth in the
Statement of Additional Information.
Except for the restrictions specifically identified as fundamental, all
investment restrictions described in this Prospectus and in the Statement of
Additional Information are not fundamental, so that the Board of Directors may
change them without shareholder approval. Fundamental policies may not be
changed without the affirmative vote of a majority of the outstanding voting
securities.
Fundamental policies applicable to all Portfolios include prohibitions on: (1)
investing more than 25% of the total assets of any Portfolio in the securities
of issuers conducting their principal business activity in the same industry
(with exceptions for United States Government securities and certain money
market instruments and, in the Mortgage Securities Portfolio, for investments in
the mortgage and mortgage-finance industry), (2) borrowing money, except for
temporary or emergency purposes and then not in excess of 10% of the value of
the total assets of the Portfolio at the time the borrowing is made (for
purposes of this restriction, "borrowing" shall not include reverse repurchase
agreements), (3) investing more than 5% of the value of a Portfolio's total
assets in the securities of any one issuer (excluding United States Government
securities and bank obligations) or investing in more than 10% of the voting
securities of any one issuer except that up to 25% of the value of each
Portfolio's total assets may be invested without regard to the restrictions of
this clause (3), (4) making short sales, except that each Portfolio may make
short sales "against the box" in amounts not in excess of 10% of such
Portfolio's total assets in certain unusual and defensive situations, and (5)
entering into reverse repurchase agreements if such investments taken together
with borrowings represented by senior securities exceed 33 1/3% of a Portfolio's
total assets less liabilities other than obligations under such borrowings and
reverse repurchase agreements. It should be noted, however, that the policies
described above in (1) and (3) are inapplicable to the International Bond
Portfolio, which by definition is non-diversified. At the time the Fund enters
into a reverse repurchase agreement, cash, U.S. Government securities or other
liquid high-grade debt obligations having a value sufficient to make payments
for the securities to be repurchased will be segregated, and will be maintained
throughout the period of the obligation.
Restrictions that apply to all Portfolios and that are not fundamental include
prohibitions on: (1) knowingly investing more than 15% of the value of the net
assets of any Portfolio (except the Money Market Portfolio, in which the
limitation shall be 10%) in "illiquid" securities (including repurchase
agreements maturing in more than seven days), (2) pledging, hypothecating,
mortgaging or transferring more than 10% of the total assets of any Portfolio as
security for indebtedness, and (3) purchasing securities of other investment
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companies having a value in excess of 5% of a Portfolio's total assets, other
than in connection with a merger, consolidation or reorganization or if the
purchase involves securities of closed-end investment companies and does not
result in more than 10% of the value of a Portfolio's total assets to be
invested in such securities.
Each Portfolio may lend its securities so long as such loans do not represent
in excess of 20% of a Portfolio's total assets. This is a fundamental policy.
The procedure for lending securities is for the borrower to give the lending
Portfolio collateral consisting of cash or cash equivalents. The lending
Portfolio may invest the cash collateral and earn additional income or receive
an agreed upon fee from a borrower which has delivered cash equivalent
collateral. The Fund anticipates that securities will be loaned only under the
following conditions: (1) the borrower must furnish collateral equal at all
times to the market value of the securities loaned and the borrower must agree
to increase the collateral on a daily basis if the securities increase in value,
(2) the loan will be made in accordance with New York Stock Exchange Rules,
which presently require the borrower, after notice, to redeliver the securities
within five business days, (3) any cash collateral invested by a Portfolio will
be in short-term investments which give maximum liquidity so that the collateral
may be paid back to the borrower when the securities are returned, and (4) the
Portfolio making the loan may pay reasonable service, placement, custodian or
other fees in connection with loans of securities and share a portion of the
interest from these investments with the borrower of the securities. It is the
intention of the investment adviser to structure agreements dealing with the
lending of securities so that voting rights attached to those securities will be
retained by the Fund. For the purposes of these restrictions, collateral
arrangements with respect to options forward currency and futures transactions
will not be deemed to involve a pledge of assets.
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THE FUND AND
ITS MANAGEMENT
- ------------------------------------
The Fund is a diversified, open-end, management
investment company incorporated under Minnesota law on February 21, 1985. The
Fund is a series fund, which means that it has several different Portfolios. The
business and affairs of the Fund are managed by its Board of Directors.
A separate class of the Fund's capital stock, par value of $.01 per share, is
issued for each Portfolio. A share of each class represents an undivided
interest in the assets of the Portfolio attributable to that class, and a
shareholder is entitled to a pro rata share of all dividends and distributions
arising from the net income and capital gains of each Portfolio or Portfolios in
which shares are held.
Shares of each Portfolio, including fractional shares, have equal rights with
regard to voting, redemptions, dividends, distributions and liquidations with
respect to that Portfolio. When issued, shares are fully paid and nonassessable
and do not have preemptive or conversion rights or cumulative voting rights. The
sole shareholder of the Fund and its Portfolios, Minnesota Mutual (through
certain of its separate accounts), will vote Fund shares allocated to its
separate accounts in accordance with instructions received from contract owners.
In the event no instructions are received from owners of the Contracts with
respect to shares of a Portfolio held by a sub-account of a separate account of
Minnesota Mutual, Minnesota Mutual will vote such shares in the same proportion
as shares of the Portfolio held by such sub-account for which instructions have
been received.
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INVESTMENT
ADVISER
- ------------------------------------
The Fund's investment adviser is Advantus Capital. Advantus
Capital commenced its current business in June, 1994, and provides investment
advisory services to the Fund. Advantus Capital provides advisory services to
eleven other mutual funds (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., Advantus Venture Fund,
Inc., Advantus Index 500 Fund, Inc., and MIMLIC Cash Fund, Inc.) and various
private accounts. Advantus Capital is a wholly-owned subsidiary of MIMLIC
Management which, prior to May 1, 1997, served as investment adviser to the
Fund. The same portfolio managers and other personnel who previously provided
investment advisory services to the Fund through MIMLIC Management continue to
provide the same services through Advantus Capital. MIMLIC Management commenced
its current business in January, 1984, and provides investment advisory services
to various private accounts. The personnel of Advantus Capital and MIMLIC
Management have also had experience in managing investments for Minnesota
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Mutual and its separate accounts. MIMLIC Management is a subsidiary of Minnesota
Mutual, which was organized in 1880, and has assets of more than $11.3 billion.
The address of the Fund, Advantus Capital, MIMLIC Management and Minnesota
Mutual is 400 Robert Street North, St. Paul, Minnesota 55101.
Advantus Capital acts as an investment adviser to the Fund pursuant to the
Investment Advisory Agreement. Advantus Capital selects and reviews the Fund's
investments, either directly or through sub-advisers, and provides executive and
other personnel for the management of the Fund. The Fund's Board of Directors
supervises the affairs of the Fund as conducted by Advantus Capital. The Growth,
Bond, Money Market, Asset Allocation and Mortgage Securities Portfolios of the
Fund pay Advantus Capital a fee equal to an annual rate of .50% of average daily
net assets. The Index 500 and Index 400 Mid-Cap Portfolios pay Advantus Capital
a fee equal to an annual rate of .40% of average daily net assets. The Capital
Appreciation, Small Company, Value Stock and Small Company Value Portfolios each
pay Advantus Capital a fee equal to an annual rate of .75% of average daily net
assets. International Stock Portfolio pays Advantus Capital a fee equal to an
annual rate of 1.00% on the first $10 million of average daily net assets, .90%
on the next $15 million, .80% on the next $25 million, .75% on the next $50
million and .65% on the next $100 million and thereafter. The Maturing
Government Bond Portfolios pay an advisory fee equal to an annual rate of .25%
of average daily net assets, however, the Portfolio which matures in 1998 will
pay a rate of .05% from its inception to April 30, 1998 and .25% thereafter and
the Portfolio which matures in 2002 will pay a rate of .05% from its inception
to April 30, 1998 and .25% thereafter of average daily net assets. The
International Bond Portfolio pays Advantus Capital a fee equal to an annual rate
of .60% of average daily net assets. The Micro-Cap Value Portfolio pays Advantus
Capital a fee equal to an annual rate of 1.25% of average daily net assets. The
Macro-Cap Value Portfolio pays Advantus Capital a fee equal to an annual rate of
.70% of average daily net assets. The Micro-Cap Growth Portfolio pays Advantus
Capital a fee equal to an annual rate of 1.10% of average daily net assets.
From its advisory fee for the Capital Appreciation Portfolio, Advantus Capital
pays Winslow Management, effective May 1, 1996, a fee equal to .375% of all
average daily net assets under its Investment Sub-Advisory Agreement. Prior to
May 1, 1996, MIMLIC Management paid Winslow Management a portion of the advisory
fee received from the Capital Appreciation Portfolio equal to .50% on the first
$75 million of average daily net assets and .45% of all net assets in excess of
$75 million for its services under its Investment Sub-Advisory Agreement. From
its advisory fee for the International Stock Portfolio, Advantus Capital pays
Templeton Counsel a fee equal to .75% on the first $10 million of average daily
net assets, .65% on the next $15 million, .55% on the next $25 million, .50% on
the next $50 million and .40% on the next $100 million and thereafter for its
services under its Investment Sub-Advisory Agreement. From its advisory fee for
the International Bond Portfolio, Advantus Capital pays Julius Baer Investment
Management Inc. ("JBIM") a fee equal to .35% of all daily net assets under its
Investment Sub-Advisory Agreement. From its advisory fee for the Micro-Cap Value
Portfolio, Advantus Capital pays Keystone Investment a fee equal to 1.00% of all
daily net assets under its Investment Sub-Advisory Agreement. From its advisory
fee for the Macro-Cap Value Portfolio, Advantus Capital pays Morgan Investment a
fee equal to .45% of all daily net assets under its Investment Sub-Advisory
Agreement. From its advisory fee for the Micro-Cap Growth Portfolio, Advantus
Capital pays Wall Street Associates a fee equal to .85% of all daily net assets
under its Investment Sub-Advisory Agreement.
Advantus Capital acts as investment adviser and manager for the Fund, except
as those duties have been delegated pursuant to the investment sub-advisory
agreements. See "Investment Sub-Advisers," below. Advantus Capital also manages
the Growth Portfolio which, for the period from September 30, 1996 to April 30,
1997, had been managed under a sub-advisory agreement with Voyageur Fund
Managers, Inc. ("Voyageur Managers"), of Minneapolis, Minnesota. The Fund's
Board of Directors terminated the sub-advisory agreement in February 1997,
because of a business reorganization of Voyageur Managers and its affiliates.
Advantus Capital also provides executive and other personnel for the management
of the Fund. Advantus Capital also furnishes the Fund office space and all
necessary office facilities and equipment and personnel for servicing the
investments of the Fund. For each of the last three
67
<PAGE>
calendar years, the various Portfolios paid the following amounts as investment
advisory fees:
<TABLE>
<CAPTION>
ADVISORY FEES PAID
PORTFOLIO 1996 1995 1994
- -------------------------------------------------------------
<S> <C> <C> <C>
GROWTH $1,125,803 $ 905,136 $ 678,415
BOND 555,501 435,045 245,068
MONEY MARKET 220,573 126,630 93,032
ASSET ALLOCATION 1,899,245 1,538,272 1,309,477
MORTGAGE SECURITIES 355,705 322,465 318,510
INDEX 500 645,280 388,206 263,397
CAPITAL APPRECIATION 1,435,461 1,071,527 739,240
INTERNATIONAL STOCK 1,293,012 955,095 715,345
SMALL COMPANY 937,728 552,670 226,241
MATURING GOVERNMENT
BOND --
1998 PORTFOLIO 2,632 2,184 1,179
2002 PORTFOLIO 1,657 1,441 879
2006 PORTFOLIO 6,682 5,450 3,149
2010 PORTFOLIO 4,631 2,888 1,791
VALUE STOCK 449,978 141,207 25,425
</TABLE>
The Fund pays all its costs and expenses which are not assumed by Advantus
Capital. These Fund expenses include, by way of example, but not by way of
limitation, all expenses incurred in the operation of the Fund including, among
others, interest, taxes, brokerage fees and commissions, fees of the directors
who are not employees of Advantus Capital or any of its affiliates, expenses of
directors' and shareholders' meetings, including the cost of printing and
mailing proxies, expenses of insurance premiums for fidelity and other coverage,
association membership dues, charges of custodians, auditing and legal expenses.
The Fund will also pay the fees and bear the expense of registering and
maintaining the registration of the Fund and its shares with the Securities and
Exchange Commission and registering or qualifying its shares under state or
other securities laws and the expense of preparing and mailing prospectuses and
reports to shareholders. Advantus Capital shall bear all advertising and
promotional expenses in connection with the distribution of the Fund's shares,
including paying for the printing of Prospectuses and Statements of Additional
Information for new shareholders, shareholder reports for new shareholders and
the costs of sales literature. Advantus Capital also bears all costs under its
agreement with Wilshire Associates for the use by Advantus Capital, in
connection with the Index 500 Portfolio, of Wilshire Associates' proprietary
index fund statistical sampling technique.
The names and titles of the portfolio managers employed by Advantus Capital,
or the Sub-Advisers, who are primarily responsible for the day-to-day management
of each of the Fund's Portfolios, other than the Index 500 and Index 400 Mid-Cap
Portfolios, the length of time employed in that position, and their other
business experience during the past five years are set forth below:
<TABLE>
<CAPTION>
PORTFOLIO MANAGER PRIMARY PORTFOLIO
PORTFOLIO AND TITLE MANAGER SINCE BUSINESS EXPERIENCE DURING PAST FIVE YEARS
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
GROWTH JAMES P. TATERA MAY 1, 1997 SENIOR VICE PRESIDENT OF ADVANTUS CAPITAL; VICE PRESIDENT OF
SENIOR VICE MIMLIC MANAGEMENT; SECOND VICE PRESIDENT OF MINNESOTA MUTUAL
PRESIDENT AND CHIEF
EQUITY PORTFOLIO
MANAGER
BOND WAYNE R. SCHMIDT MAY 1, 1991 VICE PRESIDENT OF ADVANTUS CAPITAL; INVESTMENT OFFICER OF
VICE PRESIDENT AND MIMLIC MANAGEMENT
PORTFOLIO MANAGER
MONEY MARKET WAYNE R. SCHMIDT MAY 1, 1991 VICE PRESIDENT OF ADVANTUS CAPITAL; INVESTMENT OFFICER OF
VICE PRESIDENT AND MIMLIC MANAGEMENT
PORTFOLIO MANAGER
ASSET THOMAS A. GUNDERSON JANUARY 1, 1989 VICE PRESIDENT OF ADVANTUS CAPITAL; INVESTMENT OFFICER OF
ALLOCATION VICE PRESIDENT AND MIMLIC MANAGEMENT
PORTFOLIO MANAGER
MORTGAGE KENT R. WEBER JANUARY 1, 1990 VICE PRESIDENT OF ADVANTUS CAPITAL; INVESTMENT OFFICER OF
SECURITIES VICE PRESIDENT AND MIMLIC MANAGEMENT
PORTFOLIO MANAGER
CAPITAL CLARK WINSLOW NOVEMBER 13, 1992 PRESIDENT, PORTFOLIO MANAGER AND DIRECTOR, WINSLOW CAPITAL
APPRECIATION PRESIDENT, WINSLOW MANAGEMENT, INC.; SENIOR VICE PRESIDENT AND PORTFOLIO
CAPITAL MANAGEMENT, MANAGER, ALLIANCE CAPITAL MANAGEMENT L.P.
INC.
INTERNATIONAL MARC S. JOSEPH JUNE 20, 1996 SENIOR VICE PRESIDENT, PORTFOLIO MANAGEMENT/ RESEARCH,
STOCK SENIOR VICE TEMPLETON INVESTMENT COUNSEL, INC., SINCE 1993; PRIOR
PRESIDENT, TEMPLETON THERETO FROM MAY 1990, VICE PRESIDENT, PACIFIC FINANCIAL
INVESTMENT COUNSEL, RESEARCH, BEVERLY HILLS, CALIFORNIA
INC.
</TABLE>
68
<PAGE>
<TABLE>
<CAPTION>
PORTFOLIO MANAGER PRIMARY PORTFOLIO
PORTFOLIO AND TITLE MANAGER SINCE BUSINESS EXPERIENCE DURING PAST FIVE YEARS
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SMALL COMPANY JAMES P. TATERA APRIL 23, 1993 SENIOR VICE PRESIDENT OF ADVANTUS CAPITAL; VICE PRESIDENT OF
SENIOR VICE MIMLIC MANAGEMENT; SECOND VICE PRESIDENT OF MINNESOTA MUTUAL
PRESIDENT AND CHIEF
EQUITY PORTFOLIO
MANAGER
MATURING KENT R. WEBER APRIL 25, 1994 VICE PRESIDENT OF ADVANTUS CAPITAL, INVESTMENT OFFICER OF
GOVERNMENT INVESTMENT OFFICER MIMLIC MANAGEMENT; ASSISTANT PORTFOLIO MANAGER OF MORTGAGE
BOND -- 1998, AND PORTFOLIO SECURITIES PRIOR TO 1990
2002, 2006 MANAGER
AND 2010
VALUE STOCK MATTHEW D. FINN APRIL 25, 1994 VICE PRESIDENT OF ADVANTUS CAPITAL; OWNER, MANAGING
VICE PRESIDENT AND DIRECTOR, UNIFIED CAPITAL MANAGEMENT, BLOOMFIELD HILLS,
PORTFOLIO MANAGER MICHIGAN, SEPTEMBER 1993 TO APRIL 1994; VICE
PRESIDENT/PORTFOLIO MANAGER, ACORN ASSET MANAGEMENT,
BLOOMFIELD HILLS, MICHIGAN, FEBRUARY 1990 TO SEPTEMBER 1993
SMALL COMPANY MATTHEW D. FINN OCTOBER 1, 1997 INVESTMENT OFFICER OF MIMLIC MANAGEMENT; OWNER, MANAGING
VALUE INVESTMENT OFFICER DIRECTOR, UNIFIED CAPITAL MANAGEMENT, BLOOMFIELD HILLS,
AND PORTFOLIO MICHIGAN, SEPTEMBER 1993 TO APRIL 1994; VICE PRESIDENT/
MANAGER PORTFOLIO MANAGER, ACORN ASSET MANAGEMENT, BLOOMFIELD HILLS,
MICHIGAN, FEBRUARY 1990 TO SEPTEMBER 1993
INTERNATIONAL EDWARD C. DOVE OCTOBER 1, 1997 DIRECTOR, FIXED INCOME, JULIUS BAER INVESTMENT MANAGEMENT
BOND DIRECTOR, FIXED INC. ("JBIM") SINCE JANUARY 1995, PRIOR TO, FROM DECEMBER
INCOME, JULIUS BAER 1992 TO DECEMBER 1994, SENIOR FIXED INCOME PORTFOLIO
INVESTMENT MANAGER, JBIM; PRIOR TO, FROM MARCH 1986 TO NOVEMBER 1992,
MANAGEMENT INC. EXECUTIVE DIRECTOR, FIXED INCOME/MARKETING, CHEMICAL GLOBAL
INVESTORS LIMITED, LONDON
MICRO-CAP WARREN J. ISABELLE OCTOBER 1, 1997 DIRECTOR OF RESEARCH AND VICE PRESIDENT, PIONEERING
VALUE SENIOR INVESTMENT MANAGEMENT CORPORATION, FROM 1984 TO FEBRUARY 1997
OFFICER, CHIEF
INVESTMENT
OFFICER/EQUITIES,
KEYSTONE INVESTMENT
MANAGEMENT COMPANY
MACRO-CAP MICHAEL J. KELLY OCTOBER 1, 1997 INSTITUTIONAL PORTFOLIO MANAGER
VALUE VICE PRESIDENT, J.P.
MORGAN INVESTMENT
MANAGEMENT INC.
MICRO-CAP WILLIAM JEFFERY, OCTOBER 1, 1997 PRINCIPAL AND PORTFOLIO MANAGERS
GROWTH III, KENNETH F.
MCCAIN AND RICHARD
S. COONS, PRINCIPALS
AND PORTFOLIO
MANAGERS, WALL
STREET ASSOCIATES
</TABLE>
Minnesota Mutual has voluntarily agreed to absorb all fees and expenses that
exceed .65% of average daily net assets for the Growth, Bond, Money Market,
Asset Allocation, and Mortgage Securities Portfolios, .55% of average daily net
assets for the Index 500 and Index 400 Mid-Cap Portfolios, .90% of average daily
net assets for the Capital Appreciation, Small Company, Value Stock and Small
Company Value Portfolios, 1.60% of average daily net assets of International
Bond Portfolio, 1.40% of average daily net assets of Micro-Cap Value Portfolio,
.85% of average daily net assets of Macro-Cap Value Portfolio, and 1.25% of
average daily net assets of Micro-Cap Growth Portfolio. In addition, Minnesota
Mutual has voluntarily agreed to absorb expenses that exceed 1.00% for the
International Stock Portfolio, other than the advisory fee which may not exceed
1.00%. In addition, Minnesota Mutual has voluntarily agreed to absorb all fees
and expenses that exceed .40% of average daily net assets for each of the four
Maturing Government Bond Portfolios; however, for the Portfolios which mature in
1998 and 2002, Minnesota Mutual has voluntarily agreed to absorb such fees and
expenses which exceed .20% of average daily net assets from the Portfolio's
inception to April 30, 1998 and which exceed .40% of average daily net assets
thereafter. For each of the last three calendar years, the expenses voluntarily
69
<PAGE>
absorbed by Minnesota Mutual for the various Portfolios were as follows:
<TABLE>
<CAPTION>
EXPENSES VOLUNTARILY ABSORBED
PORTFOLIO 1996 1995 1994
- ------------------------------------------------------------------
<S> <C> <C> <C>
GROWTH -0- $ -0- $ -0-
BOND -0- -0- -0-
MONEY MARKET -0- -0- 13,734
ASSET ALLOCATION -0- -0- -0-
MORTGAGE SECURITIES -0- -0- -0-
INDEX 500 -0- -0- -0-
CAPITAL APPRECIATION -0- -0- -0-
INTERNATIONAL STOCK -0- -0- -0-
SMALL COMPANY -0- -0- 9,532
MATURING GOVERNMENT BOND --
1998 PORTFOLIO 27,510 22,794 21,714
2002 PORTFOLIO 31,158 24,709 23,298
2006 PORTFOLIO 31,536 25,199 24,803
2010 PORTFOLIO 33,042 26,308 25,888
VALUE STOCK -0- 11,610 22,503
</TABLE>
There is no specified or minimum period of time during which Minnesota Mutual
has agreed to continue its voluntary absorption of these expenses, and Minnesota
Mutual may in its discretion cease its absorption of expenses at any time.
Should Minnesota Mutual cease absorbing expenses the effect would be to increase
substantially Fund expenses and thereby reduce investment return.
Each Portfolio will bear all expenses that may be incurred with respect to its
individual operation, including but not limited to transaction expenses,
advisory fees, brokerage, interest, taxes and the charges of the custodian. The
Fund will pay all other expenses not attributable to a specific Portfolio, but
those expenses will be allocated among the Portfolios on the basis of the size
of their respective net assets unless otherwise allocated by the Board of
Directors of the Fund.
- --------------------------------------------------------------------------------
INVESTMENT
SUB-ADVISERS
- ------------------------------------
SUB-ADVISORY ARRANGEMENTS Each of the Fund's
sub-advisers is registered as an investment adviser under the Investment
Advisers Act of 1940. Agreements with the sub-advisers have heretofore been
approved by the vote of a majority of the outstanding voting securities of each
Portfolio to be managed by the sub-adviser. The Fund has filed an application
with the Securities and Exchange Commission seeking exemptive relief to permit
the appointment of a sub-adviser pursuant to an agreement which is not approved
by shareholders. If granted, the Fund would be able to change sub-advisers from
time to time without the expense the delays associated with obtaining
shareholder approval for the new sub-adviser. There is no assurance that the
requested relief will be granted.
Winslow Capital Management, Inc. (hereinafter "Winslow Management"), a
Minnesota corporation with offices at 4720 IDS Tower, 80 South Eighth Street,
Minneapolis, Minnesota 55402 has been retained under an investment sub-advisory
agreement to provide investment advice and, in general, to conduct the
management and investment program of the Capital Appreciation Portfolio, subject
to the general control of the Board of Directors of the Fund. Winslow Management
is a registered investment adviser under the Investment Advisers Act of 1940.
The firm was established by its investment principals with a focus on providing
management services to growth equity investment accounts. Winslow Management has
one other investment company client for which it acts as the investment adviser.
Other assets currently under management are managed for corporate, endowment,
foundation, retirement system and individual clients.
Templeton Investment Counsel, Inc. (hereinafter "Templeton Counsel"), a
Florida corporation with principal offices at 500 East Broward Boulevard, Ft.
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 Stock Portfolio, 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., which in turn
is a wholly-owned subsidiary of Franklin Resources, Inc.
Julius Baer Investment Management Inc. ("JBIM"), with principal offices at 330
Madison Avenue, New York, New York 10017, 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 Bond Portfolio, subject
to the general control of the Board of Directors of the Fund. JBIM is a majority
owned subsidiary of Julius Baer Securities, Inc., a registered broker-dealer and
investment adviser, which in turn is a wholly-owned subsidiary of Baer Holding
Ltd. Julius Baer Securities, Inc. owns 93% of the outstanding stock of JBIM and
7% is owned by three employees of JBIM. JBIM has been registered as an
investment adviser since April of 1983. Directly and through Julius Baer
Securities, Inc., JBIM provides investment management services to a wide variety
of
70
<PAGE>
individual and institutional clients, including registered investment companies.
Keystone Investment Management Company ("Keystone Investment"), with principal
offices at 200 Berkeley Street, Boston, Massachusetts 02116-5034 has been
retained under an investment sub-advisory agreement to provide investment advice
and, in general, to conduct the management investment program of the Micro-Cap
Value Portfolio, subject to the general control of the Board of Directors of the
Fund. Keystone Investment is an investment adviser domiciled in Delaware.
Keystone Investment has provided investment advisory and management services
to investment companies and private accounts since 1932. Keystone Investment is
a wholly-owned subsidiary of Keystone Investments, Inc. Keystone Investments
provides accounting, bookkeeping, legal, personnel and general corporate
services to Keystone Investment, its affiliates, and the Keystone Investments
Families of Funds. Both Keystone and Keystone Investments, Inc. are located at
200 Berkeley Street, Boston, Massachusetts 02116-5034.
On December 11, 1996, Keystone Investments, Inc. succeeded to the business of
a corporation with the same name, but under different ownership. Keystone
Investments, Inc. is a wholly-owned subsidiary of First Union National Bank of
North Carolina ("FUNB"). FUNB is a subsidiary of First Union Corporation ("First
Union"), the sixth largest bank holding company in the United States based on
total assets as of September 30, 1996.
First Union is headquartered in Charlotte, North Carolina, and had $133.9
billion in consolidated assets as of September 30, 1996. First Union and its
subsidiaries provide a broad range of financial services to individuals and
businesses throughout the United States. The Capital Management Group of FUNB,
together with Lieber & Company and Evergreen Asset Management Corp.,
wholly-owned subsidiaries of FUNB, manage or otherwise oversee the investment of
over $50 billion in assets belonging to a wide range of clients, including the
Evergreen Family of Funds.
J.P. Morgan Investment Management Inc. ("Morgan Investment"), with principal
offices at 522 Fifth Avenue, New York, New York 10036, has been retained under
an investment sub-advisory agreement to provide investment advice and, in
general, to conduct the management investment program of the Macro-Cap Value
Portfolio, subject to the general control of the Board of Directors of the Fund.
Morgan Investment is a wholly-owned subsidiary of J.P. Morgan & Co. Incorporated
("J.P. Morgan"), a bank holding company organized under the laws of Delaware.
Through offices in New York City and abroad, J.P. Morgan, through Morgan
Investment and other subsidiaries, offers a wide range of services to
governmental, institutional, corporate and individual customers and acts as
investment adviser to individual and institutional clients.
Wall Street Associates ("WSA"), a California corporation with principal
offices at La Jolla Financial Building, Suite 100, 1200 Prospect Street, La
Jolla, California 92037, has been retained under an investment sub-advisory
agreement to provide investment advice and, in general, to conduct the
management investment program of the Micro-Cap Growth Portfolio, subject to the
general control of the Board of Directors of the Fund. WSA, founded in 1987,
provides investment advisory services for institutional clients and high net
worth individuals. WSA is jointly and equally owned by its founders, William
Jeffery, III, Kenneth F. McCain and Richard S. Coons, who also serve as fund
managers.
71
<PAGE>
- --------------------------------------------------------------------------------
PURCHASE AND
REDEMPTION
OF SHARES
- ------------------------------------
The Fund currently offers its shares continuously only to
Minnesota Mutual and its separate accounts. The shares are
sold to that company directly without the use of any underwriter. It is possible
that at some later date the Fund may offer shares to other investors.
The offering price and the redemption price of Portfolio shares are equal to
the net asset value per share next determined after an order for a purchase or
redemption is received. The net asset value per share for each Portfolio is
determined by adding the current value of all securities and all other assets
held by such Portfolio, subtracting liabilities, and dividing the remainder by
the number of shares outstanding. The Money Market Portfolio values its
investments at amortized cost in accordance with Rule 2a-7 under the Investment
Company Act of 1940, as amended.
The net asset value of the shares of the Portfolios shall be computed once
daily, and, in the case of Money Market Portfolio, after the declaration of the
daily dividend, as of the primary closing time for business on the New York
Stock Exchange (as of the date hereof 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 such Fund's portfolio
securities will not materially affect the current net asset value of such Fund's
shares, (ii) days during which no such Fund's shares are tendered for redemption
and no order to purchase or sell such Fund's shares is received by such Fund and
(iii) customary national business holidays on which the New York Stock Exchange
is closed for trading (as of the date hereof, New Year's Day, Presidents' Day,
Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day).
Except with respect to securities of the Money Market Portfolio and of some
securities of the International Stock Portfolio, the Fund values its securities
as follows: A security listed or traded on an exchange 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 such sales on the day of valuation,
the security is valued at the last bid price on that exchange. 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, securities are valued at fair value as determined in
good faith by the Board of Directors. 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. Debt securities of the International Stock Portfolio with
maturities of 60 days or less when acquired, or which subsequently are within 60
days of maturity, and all securities in the Money Market Portfolio, are valued
at amortized cost.
- --------------------------------------------------------------------------------
DIVIDENDS AND
DISTRIBUTIONS
- ------------------------------------
It is the Fund's intention to distribute substantially all
of the net investment income, if any, of each Portfolio. For dividend purposes,
net investment income of each Portfolio, exclusive of the Money Market
Portfolio, will consist of all dividends or interest earned by the Portfolio
less expenses, including the investment advisory fee. Net investment income for
dividend purposes of the Money Market Portfolio will consist of the interest
earned on investments, plus or minus amortized purchase discount or premium,
plus or minus realized gains and losses, less expenses, including the investment
advisory fee. Dividends from the net investment income and the net realized
gains, if any, for each Portfolio, exclusive of the Money Market Portfolio, will
be declared at least annually and reinvested in additional full and fractional
shares of that Portfolio. Dividends from net investment income and net realized
capital gains, if any, for the Money Market Portfolio will be declared and
reinvested daily.
Starting in fiscal year 1987, as a result of changes included in the Tax
Reform Act of 1986, each Portfolio is treated as a separate entity for federal
income tax purposes.
- --------------------------------------------------------------------------------
TAXES
- ------------------------------------
The Fund qualified for the year ended December 31, 1996 and intends to
continue to qualify as a "regulated investment company" under the provisions of
Subchapter M of the Internal Revenue Code, as amended (the "Code"). If the Fund
qualifies as a regulated investment company and complies with the appropriate
provisions of the Code, the Fund will be relieved of federal income taxes on the
amounts distributed.
72
<PAGE>
Since Minnesota Mutual currently is the sole shareholder of the Fund, no
discussion is included here as to the federal income tax consequences at the
shareholder level. For information concerning the federal tax consequences to
purchasers of the Contracts, see the attached Prospectus for those Contracts.
- --------------------------------------------------------------------------------
CUSTODIANS
- ------------------------------------
First Trust National Association, 180 East Fifth Street, St.
Paul, Minnesota 55101, acts as custodian of the securities held by the Growth,
Asset Allocation, Index 500, Capital Appreciation, Small Company, Value Stock,
Small Company Value, Index 400 Mid-Cap, Micro-Cap Value, Macro-Cap Value and
Micro-Cap Growth Portfolios. Bankers Trust Company, 280 Park Avenue, New York,
New York 10017, acts as custodian of the securities held by the Bond, Money
Market, Mortgage Securities, the four Maturing Government Bond Portfolios and
International Bond Portfolio. The custodian for the International Stock
Portfolio is Norwest Bank Minnesota, N.A., Sixth Street and Marquette Avenue,
Minneapolis, Minnesota 55479. Morgan Stanley Trust Company, One Pierrepont
Plaza, Brooklyn, New York 11201 acts as sub-custodian of the International Stock
Portfolio's assets and portfolio securities. Pursuant to Rule 17f-5 under the
1940 Act, the Board of Directors of the Fund has also approved, in connection
with the International Stock and International Bond Portfolios, the use of
various foreign sub-custodian banks and securities depositories to maintain
foreign securities in or near the market in which they are principally traded
and to maintain cash in amounts reasonably necessary to effect foreign
securities transactions in such locations. The Board of Directors may from time
to time approve other sub-custodian banks pursuant to Rule 17f-5.
Each custodian is authorized to use the facilities of the Depository Trust
Company and the book-entry system of the Federal Reserve Banks and may enter
into agreements with other banks for the custody by such banks of Fund
securities where direct custody by such custodian would be impracticable.
- --------------------------------------------------------------------------------
THE STANDARD &
POOR'S LICENSE
- ------------------------------------
Standard & Poor's ("S&P") is a division of the
McGraw-Hill Companies, Inc. S&P has trademark rights to the marks "Standard &
Poor's-Registered Trademark-," "S&P-Registered Trademark-," "S&P
400-Registered Trademark-," "Standard & Poor's 500," "Standard & Poor's MidCap
400" and "500" and has licensed the use of such marks by the Fund, the Index 500
Portfolio and the Index 400 Mid-Cap Portfolio.
The Index 500 Portfolio and the Index 400 Mid-Cap Portfolio are not sponsored,
endorsed, sold or promoted by S&P. S&P makes no representation or warranty,
express or implied, to the owners of the Index 500 or Index 400 Mid-Cap
Portfolios or any member of the public regarding the advisability of investing
in securities generally or in the Index 500 Portfolio and the Index 400 Mid-Cap
Portfolio particularly or the ability of the Index 500 Portfolio and the Index
400 Mid-Cap Portfolio to track general stock market performance. S&P's only
relationship to the Index 500 Portfolio and the Index 400 Mid-Cap Portfolio is
the licensing of certain trademarks and trade names of S&P and of the S&P 500
Index and the S&P 400 MidCap Index which are determined, composed and calculated
by S&P without regard to the Fund. S&P has no obligation to take the needs of
the Index 500 Portfolio and the Index 400 Mid-Cap Portfolio or the owners of the
Fund into consideration in determining, composing or calculating the S&P 500
Index or the S&P 400 MidCap Index. S&P is not responsible for and has not
participated in the determination of the net asset value or public offering
price of the Index 500 Portfolio and the Index 400 Mid-Cap Portfolio nor is S&P
a distributor of the Fund. S&P has no obligation or liability in connection with
the administration, marketing or trading of the Index 500 Portfolio and the
Index 400 Mid-Cap Portfolio.
S&P DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF THE S&P INDEX
OF THE S&P 400 MIDCAP INDEX OR ANY DATA INCLUDED THEREIN, NOR DOES S&P HAVE ANY
LIABILITY FOR ANY ERRORS, OMISSIONS, OR INTERRUPTIONS THEREIN. S&P MAKES NO
WARRANTY, EXPRESS OR IMPLIED, AS TO THE RESULTS TO BE OBTAINED BY THE INDEX 500
PORTFOLIO AND THE INDEX 400 MID-CAP PORTFOLIO, OWNERS OF THE FUND, OR ANY OTHER
PERSON OR ENTITY FROM THE USE OF THE S&P 500 INDEX, THE S&P 400 MIDCAP INDEX OR
ANY DATA INCLUDED THEREIN. S&P MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND
EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A
PARTICULAR PURPOSE OR USE WITH
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RESPECT TO THE S&P 500 INDEX, THE S&P 400 MIDCAP INDEX OR ANY DATE INCLUDED
THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL S&P HAVE ANY
LIABILITY FOR ANY SPECIAL, PUNITIVE, INDIRECT, OR CONSEQUENTIAL DAMAGES
(INCLUDING LOST PROFITS), EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.
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APPENDIX A
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This Appendix to the Prospectus describes in detail those
Money Market instruments and investment techniques set forth in the Prospectus
under the heading "Investment Objectives, Policies and Risks." They may be used
extensively by the Money Market Portfolio and by the Asset Allocation Portfolio.
They may also be used by other Portfolios to invest otherwise idle cash or on a
temporary basis or for defensive purposes.
UNITED STATES GOVERNMENT OBLIGATIONS--are bills, certificates of indebtedness,
notes and bonds issued or guaranteed as to principal or interest by the United
States Government or by agencies or authorities controlled or supervised by and
acting as instrumentalities of the United States Government established under
the authority granted by Congress, including, but not limited to, the Government
National Mortgage Association, the Export-Import Bank, the Student Loan
Marketing Association, the United States 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 United States Government
agencies, authorities and other instrumentalities are supported by the full
faith and credit of the United States 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 Treasury, such
as securities of the Federal Financing Bank and the United States 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.
REPURCHASE AGREEMENTS--are agreements by which the Portfolio 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, a securities
dealer provided the Board of Directors of the Fund has evaluated the seller's
creditworthiness through adoption of standards of review or otherwise) to
repurchase the security at an agreed upon price and date. 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. The Portfolio's custodian, or a
duly appointed subcustodian, will hold 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 will be determined on each day the net asset value of the
shares of each Portfolio is determined. If at any time the market value of the
collateral falls below the repurchase price of the repurchase agreement
(including any accrued interest), the Portfolio will promptly receive additional
collateral, so that the total collateral is in an amount at least equal to the
repurchase price plus accrued interest. Such transactions afford the Portfolio
the opportunity to earn a return on temporarily available cash. While the
underlying security may be a bill, certificate of indebtedness, note or bond
issued by an agency, authority or instrumentality of the United States
Government, the obligation of the seller is not guaranteed by the United States
Government.
REVERSE REPURCHASE AGREEMENTS--are the counterparts of repurchase agreements,
and are agreements by which the Portfolio sells a security and agrees to
repurchase the security from the buyer at an agreed upon price and future date.
The Portfolio will use the proceeds of the 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. Because certain of the incidents of ownership of the
security are retained by the Portfolio, reverse repurchase agreements might be
construed, for certain purposes, as a form of borrowing by the Portfolio from
the buyer, collateralized by the security. The Portfolio will enter into reverse
repurchase agreements only with banks. At the time the Fund enters into a
reverse repurchase agreement, cash, U.S. Government securities or other liquid
high-grade debt obligations having a value sufficient to make payments for the
securities to be repurchased will be segregated, and will be maintained
throughout the period of the obligation.
CERTIFICATES OF DEPOSIT--are certificates issued against funds deposited in a
bank, are for a definite period of time, earn a specified rate of return, and
are normally negotiable.
BANKERS' ACCEPTANCES--are short-term credit instruments issued by corporations
to finance the import, export, transfer or storage of goods. They are termed
"accepted" when a bank guarantees their payment at maturity. These instruments
reflect the obligations of both the bank and drawer to pay the face amount of
the instrument at maturity.
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COMMERCIAL PAPER--refers to promissory notes issued by corporations to finance
their short-term credit needs.
VARIABLE AMOUNT MASTER DEMAND NOTES--refer to short-term, unsecured promissory
notes issued by corporations to finance short-term needs. They allow the
investment of fluctuating amounts by the Portfolio at varying market rates of
interest pursuant to direct arrangements between the Portfolio, 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, Advantus Capital, will monitor the
creditworthiness of the borrower throughout the term of the variable amount
master demand note. The Fund will only invest in variable amount master demand
notes issued by companies which at the date of investment have an outstanding
debt issue rated AAA or AA by Standard & Poor's or Aaa or Aa by Moody's and
which Advantus Capital has determined present minimal risk of loss to the Fund.
Advantus Capital will look generally at the financial strength of the issuing
company as "backing" for the note and not to any security interest or
supplemental source such as a bank letter of credit. A master demand note will
be valued by Advantus Capital each day the Fund's net asset value is determined,
which value will generally be equal to the face value of the note plus accrued
interest unless the financial position of the issuer is such that its ability to
repay the note when due is in question.
CORPORATE OBLIGATIONS--includes bonds and notes issued by corporations in
order to finance longer term credit needs.
ILLIQUID SECURITIES AND RULE 144A PAPER--each Portfolio of the Fund may invest
up to 15% of its net assets (10% of net assets in the case of Money Market
Portfolio) in securities or other assets which are illiquid. An investment is
generally considered 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
sold only subject to statutory restrictions and delays or if registered under
the 1933 Act.
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,
Advantus Capital and the Fund believe that a similar market exists for
commercial paper issued pursuant to the private placement exemption of Section
4(2) of the 1933 Act. The Fund may invest without limitation in these forms of
restricted securities if such securities are deemed by Advantus Capital to be
liquid in accordance with standards established by the Fund's Board of
Directors. Under these guidelines, Advantus Capital 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 preset 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.
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APPENDIX B
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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
but may vary among pools. For example, in addition to fixed-rate, fixed-term
mortgages, the Fund may purchase pools of variable rates 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.
- --------------------------------------------------------------------------------
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 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
Mortgage Securities Portfolio. The compounding effect from reinvestments of
monthly payments received by the Mortgage Securities Portfolio will increase the
yield to that Portfolio compared to bonds that pay interest semi-annually.
- --------------------------------------------------------------------------------
GOVERNMENTAL AND GOVERNMENT- -
RELATED GUARANTORS
The principal governmental (i.e., backed by the
full faith and credit of the United States Government) guarantor of
mortgage-related securities is the Government
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National Mortgage Association ("GNMA"). GNMA is a wholly-owned United States
Government corporation within the Department of Housing and Urban Development.
GNMA is authorized to guarantee, with the full faith and credit of the United
States 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
United States Government) guarantors include the Federal National Mortgage
Association and the Federal Home Loan Mortgage Association. The Federal National
Mortgage Association ("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 United States
Government.
The Federal Home Loan Mortgage Corporation ("FHLMC") is a corporate
instrumentality of the United States Government and was created by Congress in
1970 for the purpose of increasing the availability of mortgage credit for
residential housing. Its stock is owned by the twelve Federal Home Loan Banks.
FHLMC issues Participation Certificates ("PCs") which represent interests in
mortgage from FHLMC's national portfolio. FHLMC guarantees the timely payment of
interest and ultimate collection of principal but PCs are not backed by the full
faith and credit of the United States Government.
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PART B. INFORMATION REQUIRED IN A STATEMENT OF ADDITIONAL INFORMATION
-------------------------------------------------------------
<PAGE>
ADVANTUS SERIES FUND, INC.
Statement of Additional Information
Dated: May 1, 1997
This Statement of Additional Information is not a prospectus. Much of
the information contained in this Statement of Additional Information expands
upon subjects discussed in the Prospectus. Therefore, this Statement should
be read in conjunction with the Fund's current Prospectus, dated May 1, 1997,
which may be obtained by calling the Fund at (612) 665-3500, or writing
the Fund at Minnesota Mutual Life Center, 400 Robert Street North, St. Paul,
Minnesota 55101-2098.
________________________________________
Table of Contents
The Fund ............................................................ 2
Investment Restrictions ............................................. 3
Portfolio Turnover .................................................. 6
Directors and Executive Officers .................................... 7
Investment Advisory and Other Services .............................. 9
Portfolio Transactions and Allocation of Brokerage .................. 13
Purchase and Redemption of Shares ................................... 15
Fund Shares and Voting Rights ....................................... 15
Net Asset Value ..................................................... 16
Performance Data .................................................... 18
Taxes ............................................................... 23
Reports to Shareholders ............................................. 23
Independent Auditors ................................................ 23
Appendix I - Rating of Bonds and Commercial Paper ...................
<PAGE>
THE FUND
Advantus Series Fund, Inc. ("Fund"), a Minnesota corporation, is a no-load,
diversified, open-end management investment company. The Fund is a series fund,
which means that it has several different Portfolios. The investment adviser of
the Fund is Advantus Capital Management, Inc. ("Advantus Capital"). Advantus
Capital has entered into investment sub-advisory agreements under which various
investment managers provide investment services. Winslow Capital Management,
Inc. ("Winslow Management") serves as investment sub-adviser to the Fund's
Capital Appreciation Portfolio and Templeton Investment Counsel, Inc.
("Templeton Counsel") serves as investment sub-adviser to the Fund's
International Stock Portfolio. Julius Baer Investment Management Inc. serves as
investment sub-adviser to the Fund's International Bond Portfolio pursuant to an
investment sub-advisory agreement with Advantus Capital. Keystone Investment
Management Inc. serves as investment sub-adviser to the Fund's Micro-Cap Value
Portfolio pursuant to an investment sub-advisory agreement with Advantus
Capital. J.P. Morgan Investment Management Inc. serves as investment sub-
adviser to the Fund's Macro-Cap Value Portfolio pursuant to an investment sub-
advisory agreement with Advantus Capital. Wall Street Associates serves as
investment sub-adviser to the Fund's Micro-Cap Value Portfolio pursuant to an
investment sub-advisory agreement with Advantus Capital.
Currently, the shares of the Fund are sold only to The Minnesota Mutual
Life Insurance Company ("Minnesota Mutual") through certain of its separate
accounts to fund the benefits under variable annuity contracts and variable
life insurance policies (collectively, the "Contracts") issued by Minnesota
Mutual. The Fund may be used for other purposes in the future. The Fund
may also sell its shares to separate accounts of Northstar
Life Insurance Company, a wholly-owned subsidiary of Minnesota Mutual
domiciled in the state of New York. The separate accounts, which will be the
owners of the shares of the Fund, will invest in the shares of each Portfolio
in accordance with instructions received from the owners of the Contracts.
Minnesota Mutual, through its separate accounts which fund the
Contracts, owns 100% of the shares outstanding of each Portfolio of the Fund.
Minnesota Mutual, on October 22, 1985, provided the initial capital of the
Fund by purchasing 4,500,000 shares of the Growth Portfolio, Bond Portfolio,
Money Market Portfolio and Asset Allocation Portfolio for $4,500,000. On
April 28, 1987, Minnesota Mutual provided initial capital for additional
portfolios by purchasing 11,000,000 shares of the Mortgage Securities
Portfolio, Index 500 Portfolio and Capital Appreciation Portfolio for
$11,000,000. Those initial shares were not attributable to any of the
Contracts and were redeemed by Minnesota Mutual during 1991. On April 27,
1992, Minnesota Mutual provided initial capital for the International Stock
Portfolio by purchasing 10,000,000 shares of the Portfolio for $10,000,000.
Those initial shares, together with the additional shares attributable to
them as a result of the reinvestment of dividends and capital gains
distributions, are not attributable to any of the Contracts. In addition,
Minnesota Mutual provided initial capital in the amount of $3,000,000 on
April 22, 1993, for the Small Company Portfolio and, as a result, those
initial shares, together with additional shares attributable to them as a
result of reinvestment of dividends and capital gains distributions, are not
attributable to any of the Contracts. On May 2, 1994, Minnesota Mutual
provided initial capital for the four Maturing Government Bond Portfolios and
the Value Stock Portfolio and those initial shares, together with the
additional shares attributable to them as the result of the reinvestment of
dividends and capital gains distributions, are not attributable to any of the
Contracts. After Minnesota Mutual's initial contribution of $3,400,000,
representing 3,400,000 shares of the Maturing Government Bond Portfolio -
1998, its contribution of $2,600,000, representing 2,600,000 shares of the
Maturing Government Bond Portfolio - 2002, its contribution of $1,900,000
representing 1,900,000 shares of the Maturing Government Bond Portfolio -
2006, its contribution of $1,100,000 representing 1,100,000 shares of the
Maturing Government Bond Portfolio - 2010, and its contribution of
$3,000,000, representing 3,000,000 shares of the Value Stock Portfolio, those
shares represented 100% of the issued and outstanding shares for those
Portfolios as of May 2, 1994. Additional Portfolios have been created but no
initial capital has been provided as of the date of the Prospectus and
Statement of Additional Information.
Contract owners should consider that the investment experience of the
Portfolio or Portfolios they select will affect the value of and the benefits
provided under the Contract. See the Prospectus for the Contracts for a
description of the relationship between increases or decreases in the net
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asset value of Fund shares (and any distributions on such shares) and the
benefits provided under a Contract.
INVESTMENT RESTRICTIONS
The Fund has adopted the following restrictions relating to the investment
of the assets of the Portfolios.
The restrictions numbered 1 through 10 and the statement dealing with
senior securities are fundamental and may not be changed without the affirmative
vote of a majority of the outstanding voting securities of each Portfolio
affected by the change. With respect to the submission of a change in an
investment restriction to the holders of the Fund's outstanding voting
securities, such matter shall be deemed to have been effectively acted upon with
respect to a particular Portfolio if a majority of the outstanding voting
securities of such Portfolio vote for the approval of such matter,
notwithstanding (1) that such matter has not been approved by the holders of a
majority of the outstanding voting securities of any other Portfolio affected by
such matter, and (2) that such matter has not been approved by the vote of a
majority of the outstanding voting securities of the Fund. For this purpose and
under the Investment Company Act of 1940, a majority of the outstanding voting
shares of each Portfolio means the lesser of (i) 67% of the voting shares
represented at a meeting at which more than 50% of the outstanding voting shares
are represented or (ii) more than 50% of the outstanding voting shares.
Restrictions numbered 11-17 are not fundamental and may be changed by the
Fund's Board of Directors.
The Fund may not issue senior securities except to the extent that the
borrowing of money in accordance with restriction 3 or the entering into reverse
repurchase agreements as described in restriction 6 may constitute the issuance
of a senior security, and each Portfolio, except as may be noted, will not:
1. With respect to at least 75% of the value of the total assets in the
Portfolio, invest more than 5% of the value of such assets in the
securities of any one issuer (except securities issued or guaranteed by
the United States Government, its agencies or instrumentalities and bank
obligations) or invest in more than 10% of the voting securities of any
one issuer. This limitation shall not apply to the International Bond
Portfolio.
For additional information with respect to investment of assets in the
Money Market Portfolio, see the additional description in this Statement
of Additional Information under the heading entitled "Net Asset Value."
2. Purchase the securities of issuers conducting their principal business
activity in a single industry, if immediately after such purchase the
value of its investments in such industry would exceed 25% of the value
of the Portfolio's total assets, provided that (a) telephone, gas, and
electric public utilities are each regarded as separate industries and
(b) banking, savings and loan associations, savings banks and finance
companies as a group will not be considered a single industry for the
purpose of this limitation. There is no limitation with respect to the
concentration of investments in securities issued or guaranteed by the
United States Government, its agencies or instrumentalities, or
certificates of deposit and bankers acceptances of United States banks
and savings and loan associations and this limitation shall not apply in
the Mortgage Securities Portfolio to investments in the mortgage and
mortgage-finance industry (in which more than 25% of the value of the
Portfolio's
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<PAGE>
total assets will, except for temporary defensive positions, be
invested) and this limitation shall not apply to the International
Bond Portfolio.
3. Borrow money, except from banks for temporary or emergency purposes,
including the meeting of redemption requests which might otherwise
require the untimely disposition of securities. Borrowing in the
aggregate by any particular Portfolio may not exceed 10% of the value of
the Portfolio's total assets at the time the borrowing is made and a
Portfolio may not make additional investments during any period that its
borrowings exceed 5% of the value of the Portfolio's total assets. For
purposes of this restriction, "borrowing" shall not include reverse
repurchase agreements.
4. Lend securities in excess of 20% of the value of its total assets. For
the purposes of this restriction, collateral arrangements with respect
to options, forward currency and futures transactions will not be deemed
to involve loans of securities.
5. Purchase securities on margin (but it may obtain such short-term credits
as may be necessary for the clearance of purchases and sales of
securities); or make short sales except where, by virtue of ownership of
other securities, it has the right to obtain, without payment of further
consideration, securities equal in kind and amount to those sold, and
only to the extent that the Portfolio's short positions will not at the
time of any short sales aggregate in total sale prices more than 10% of
its total assets. For purposes of this restriction, collateral
arrangements with respect to options, forward currency and futures
transactions will not be deemed to involve the use of margin.
6. Enter into reverse repurchase agreements if such investments, taken
together with borrowings represented by senior securities of the
Portfolio, exceed 33 1/3% of the total assets of the Portfolio less
liabilities other than obligations under such borrowings and reverse
repurchase agreements.
7. Act as an underwriter of securities, except to the extent the Fund may
be deemed to be an underwriter in connection with the disposition of
Portfolio securities.
8. Purchase or sell real estate, except that each Portfolio may invest in
securities secured by real estate or interests therein or securities
issued by companies which invest in real estate or interests therein.
9. Buy or sell oil, gas or other mineral leases, rights or royalty
contracts or commodities or commodity contracts, including futures
contracts except that the International Stock Portfolio may purchase and
sell futures contracts on financial instruments and indices and options
on such futures contracts and it may purchase and sell futures contracts
on foreign securities and options on such futures contracts. This
restriction does not prevent the Portfolios from purchasing securities
of companies investing in any of the foregoing.
10. Lend money to other persons except by the purchase of obligations in
which the Portfolio is authorized to invest and by entering into
repurchase agreements. For the purposes of this restriction, collateral
arrangements with respect to options, forward currency and future
transactions will not be deemed to involve loans of securities.
Securities lending may be specifically authorized for a Portfolio as
described in the Prospectus.
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<PAGE>
11. Knowingly invest more than 15% of the value of its net assets in
securities or other investments, including repurchase agreements
maturing in more than seven days, that are illiquid or otherwise not
readily marketable; provided, however, the Money Market Portfolio shall
not invest in excess of 10% of its net assets in such illiquid
securities.
12. Pledge, hypothecate, mortgage or transfer (except as provided in
restrictions 4 and 6) as security for indebtedness any securities held
by the Fund, except in an amount of not more than 10% of the value of
any Portfolio's total assets and then only to secure borrowings
permitted by restrictions 3 and 5. For purposes of this restriction,
collateral arrangements with respect to options, forward currency and
futures transactions will not be deemed to involve a pledge of assets.
13. Purchase foreign securities not publicly traded in the United States
except that: (i) each of the Growth Portfolio, Small Company Portfolio
and Value Stock Portfolio may invest up to 10% of the value of its total
assets in securities of foreign issuers, (ii) the Money Market Portfolio
may invest in obligations of Canadian chartered banks, London branches
of United States banks and United States branches or agencies of foreign
banks, and (iii) the Asset Allocation Portfolio may invest in such
securities subject to the restrictions applicable to those four
Portfolios. The provisions of this restriction apply to all Portfolios
other than the International Stock Portfolio and the International
Bond Portfolio.
14. Purchase securities of other investment companies with an aggregate
value in excess of 5% of the Portfolio's total assets, except in
connection with a merger, consolidation, acquisition or reorganization,
or by purchase in the open market of securities of closed-end companies
where no underwriter or dealer's commission or profit, other than
customary broker's commission, is involved, and if immediately
thereafter not more than 10% of the value of the Portfolio's total
assets would be invested in such securities.
15. Issue or acquire puts, calls, or combinations thereof, except to the
extent a Portfolio is specifically authorized to engage in such
activities as reflected in the Prospectus.
16. Purchase securities for the purpose of exercising control or management.
17. Participate on a joint (or a joint and several) basis in any trading
account in securities (but this does not prohibit the "bunching" of
orders for the sale or purchase of Portfolio securities with the other
Portfolios or with other accounts advised by Advantus Capital or its
Sub-Advisers, to reduce brokerage commissions or otherwise to achieve
best overall execution).
If a percentage restriction is adhered to at the time of an investment, a
later increase or decrease in the investment's percentage of the value of a
Portfolio's total assets resulting from a change in such values or assets will
not constitute a violation of the percentage restriction.
Several other limitations apply with respect to the investment activities
of the Portfolios. These limitations, which arise from the requirements of
various states in which the underlying contracts are offered, have been adopted
by the Fund in order to secure compliance. As a result of these further
limitations, some investment practices otherwise permitted under those
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<PAGE>
restrictions described above in paragraphs 1, 3 and 6 are no longer allowed. In
particular, the Fund has agreed that as long as the underlying contracts are
offered in such states the Fund (i) will not purchase or otherwise acquire the
voting security of any issuer if as a result of such acquisition all of the
Fund's Portfolios in the aggregate will own more than 10% of the total issued
and outstanding voting securities of such issuer, and (ii) will limit its
borrowing for any particular Portfolio to (a) 10% of the Portfolio's total
assets when borrowing for any general purpose and (b) 25% of the Portfolio's
total assets when borrowing as a temporary measure to facilitate redemptions.
For the purpose of these aggregate limitations on borrowing, reverse repurchase
agreements will be considered to be borrowings.
PORTFOLIO TURNOVER
Each Portfolio has a different expected annual rate of portfolio turnover,
which is calculated by dividing the lesser of purchases or sales of Portfolio
securities during the fiscal year by the monthly average of the value of the
Portfolio's securities (excluding from the computation all securities with
maturities at the time of acquisition of one year or less). A high rate of
turnover in a Portfolio generally involves correspondingly greater brokerage
commission expenses, which must be borne directly by the 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 each Portfolio's shares
and by requirements which enable the Fund to receive favorable tax treatment.
The portfolio turnover rates associated with each Portfolio will, of course, be
affected by the level of purchases and redemptions of shares of each Portfolio.
However, because rate of portfolio turnover is not a limiting factor, particular
holdings may be sold at any time, if in the opinion of Advantus Capital such a
sale is advisable.
The Money Market Portfolio, consistent with its investment objective, will
attempt to maximize yield through trading. This may involve selling 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. Since the Portfolio's assets
will be invested in securities with short maturities and the Portfolio will
manage its assets as described above, the Portfolio's holdings of money market
instruments will turn over several times a year. However, this does not
generally increase the Portfolio's brokerage costs, since brokerage commissions
as such are not usually paid in connection with the purchase or sale of the
instruments in which the Portfolio invests since such securities will be
purchased on a net basis.
It is anticipated that the annual portfolio turnover rates for the
equity portfolios will not exceed 100%, and that the annual portfolio
turnover rates for the Bond, Capital Appreciation, Mortgage Securities and
International Bond Portfolios will not exceed 200%. In the Asset Allocation
Portfolio, portfolio turnover rate for the common stock and other equity
securities held by it will approximate the portfolio turnover rate of the
Growth Portfolio generally. Similarly, the portfolio turnover rate of the
Asset Allocation Portfolio with respect to bonds and other debt securities
with maturities generally exceeding one year will approximate the portfolio
turnover of the Bond Portfolio. In addition, portfolio turnover will be
increased in the Asset Allocation Portfolio to the extent that emphasis in
its holdings may shift from one type of security to another. Turnover will,
therefore, be dependent as well upon economic conditions or general levels of
securities prices. For each of the last three calendar years, the portfolio
turnover rates for the various Portfolios were as follows:
-6-
<PAGE>
<TABLE>
<CAPTION>
Portfolio Turnover Rate
-----------------------
Portfolio 1996 1995 1994
--------- ---- ---- ----
<S> <C> <C> <C>
Growth 154.7% 91.9% 42.0%
Bond 154.0 205.4 166.2
Money Market N/A N/A N/A
Asset Allocation 120.1 157.0 123.6
Mortgage Securities 70.0 133.7 197.3
Index 500 15.2 4.8 5.9
Capital Appreciation 62.9 51.1 68.4
International Stock 11.5 20.5 12.9
Small Company 74.4 61.3 28.1
Maturing Government Bond -
1998 Portfolio 18.1 9.0 -0-
2002 Portfolio 21.9 -0- 11.6
2006 Portfolio 25.7 10.0 -0-
2010 Portfolio 71.0 -0- 14.5
Value Stock 88.6 164.2 49.5
</TABLE>
DIRECTORS AND EXECUTIVE OFFICERS
The names, addresses, principal occupations, and other affiliations of
directors and executive officers of the Fund are given below:
Position with Principal Occupation and other
Name, Age and Address the Fund Affiliations (past 5 years)
- --------------------- ------------- -----------------------------
Charles E. Arner, 74 Director Retired; Vice Chairman of
E-1218 First National The First National Bank of
Bank Building Saint Paul from November
St. Paul, Minnesota 55101 1983 through June 1984;
Chairman and Chief Executive
Officer of The First National
Bank of Saint Paul from
October 1980 through November
1983
Ellen S. Berscheid, Ph.D., 60 Director Regents' Professor of
Department of Psychology Psychology, University of
University of Minnesota Minnesota
N309 Elliott Hall
Minneapolis, Minnesota 55455
Frederick P. Feuerherm*, 50 Treasurer and Second Vice President of The
The Minnesota Mutual Life Director Minnesota Mutual Life
Insurance Company Insurance Company; Vice
400 Robert Street North President and Assistant
St. Paul, Minnesota 55101 Secretary of MIMLIC
Asset Management Company
Ralph D. Ebbott, 69 Director Retired; Vice President and
409 Birchwood Avenue Treasurer, Minnesota Mining
White Bear Lake, and Manufacturing Company
Minnesota 55110 through June 1989
-7-
<PAGE>
Paul H. Gooding*, 56 President and Vice President and Treasurer
The Minnesota Mutual Life Director of The Minnesota Mutual Life
Insurance Company Insurance Company; President
400 Robert Street North and Treasurer of MIMLIC Asset
St. Paul, Minnesota 55101 Management Company
Donald F. Gruber, 52 Secretary Senior Counsel of The
The Minnesota Mutual Life Minnesota Mutual Life
Insurance Company Insurance Company
400 Robert Street North
St. Paul, Minnesota 55101
*Denotes directors of the Fund who are "interested persons" (as defined in the
Investment Company Act of 1940) of the Fund or Advantus Capital.
The Fund has an Executive Committee, elected by the Board of Directors, to
exercise the powers of the Board in the management of the business and affairs
of the Fund when the Board is not in session. The Executive Committee is
composed of Messrs. Gooding and Feuerherm.
No compensation is paid by the Fund to any of its officers or directors
who is affiliated with Advantus Capital. Each director of the Fund who is
not affiliated with Advantus Capital or the prior adviser, MIMLIC Asset
Management Company, was compensated by the Fund during the fiscal year ended
December 31, 1996 in accordance with the following table:
<TABLE>
<CAPTION>
Pension or Total
Retirement Compensation
Benefits Estimated from
Accrued Annual Fund and
as Part Benefits Fund Complex
Compensation of Fund Upon Paid to
Name of Director from the Fund Expenses Retirement Directors(1)
- ---------------- ------------- ----------- ---------- ------------
<S> <C> <C> <C> <C>
Charles E. Arner $8,256 N/A N/A $10,500
Ellen S. Berscheid $8,256 N/A N/A $10,500
Ralph D. Ebbott $8,256 N/A N/A $10,500
</TABLE>
(1) Each Director of the Fund who is not affiliated with MIMLIC Management
or Advantus Capital is also a director of the other eleven investment
companies of which MIMLIC Management's wholly-owned subsidiary, Advantus
Capital, is the investment adviser (twelve investment companies in
total-the "Fund Complex"). Such directors receive compensation in
connection with all such investment companies which, in the aggregate,
is equal to $5,000 per year and $3,000 per
-8-
<PAGE>
meeting attended (and reimbursement of travel expenses to attend directors'
meetings). The portion of such compensation borne by the Fund is a pro
rata portion based on the ratio that the Fund's total net assets bears to
the total net assets of the Fund Complex.
INVESTMENT ADVISORY AND OTHER SERVICES
ADVISER--GENERALLY
Advantus Capital has been the investment adviser and manager of the Fund
since May 1, 1997. It acts as such pursuant to a written agreement
periodically approved by the directors or shareholders of the Fund. The
address of Advantus Capital is that of the Fund. Winslow Management serves
as investment sub-adviser to the Fund's Capital Appreciation Portfolio
pursuant to an investment sub-advisory agreement with Advantus Capital.
Templeton Counsel serves as investment sub-adviser to the Fund's
International Stock Portfolio pursuant to an investment sub-advisory
agreement with Advantus Capital. Julius Baer Investment Management Inc.
serves as investment sub-adviser to the Fund's International Bond Portfolio
pursuant to an investment sub-advisory agreement with Advantus Capital.
Keystone Investment Management Inc. serves as investment sub-adviser to the
Fund's Micro-Cap Value Portfolio pursuant to an investment sub-advisory
agreement with Advantus Capital. J.P. Morgan Investment Management Inc.
serves as investment sub-adviser to the Fund's Macro-Cap Value Portfolio
pursuant to an investment sub-advisory agreement with Advantus Capital. Wall
Street Associates serves as investment sub-adviser to the Fund's Micro-Cap
Value Portfolio pursuant to an investment sub-advisory agreement with
Advantus Capital.
CONTROL AND MANAGEMENT OF ADVISER
Advantus Capital is a wholly-owned subsidiary of MIMLIC Management. MIMLIC
Management is a subsidiary of Minnesota Mutual. Minnesota Mutual was organized
in 1880, and has assets of approximately $11.3 billion. Paul H. Gooding,
President and a director of Advantus Capital is a Vice President and Treasurer
of Minnesota Mutual. Frederick P. Feuerherm, Vice President, Assistant
Secretary and a director of MIMLIC Management is a Second Vice President of
Minnesota Mutual. Messrs. Gooding and Feuerherm are also Directors of the Fund.
INVESTMENT ADVISORY AGREEMENT
Advantus Capital acts as investment adviser and manager of the Fund
under an Investment Advisory Agreement dated May 1, 1997, which became
effective the same date when approved by shareholders on April 24, 1997, and
which was last approved by the Board of Directors (including a majority of
the directors who are not parties to the contract, or interested persons of
any such party) on January 14, 1997. Prior to that time, the Fund obtained
advisory services from MIMLIC Asset Management Company ("MIMLIC Management"),
a subsidiary of Minnesota Mutual. Advantus Capital is a subsidiary of MIMLIC
Management. The same portfolio managers who previously provided investment
advisory services to the Fund through MIMLIC Management continue to provide
the same services through Advantus Capital. Advantus Capital commenced its
business in June 1994, and provides investment advisory services to eleven
other Advantus funds and various private accounts. The address of all these
firms is 400 Robert Street North, St. Paul, Minnesota 55101.
-9-
<PAGE>
The Investment Advisory Agreement will terminate automatically in the
event of assignment. In addition, the Agreement is terminable at any time,
without penalty, by the Board of Directors of the Fund or by vote of a
majority of the Fund's outstanding voting securities on 60 days' written
notice to Advantus Capital, and by Advantus Capital on 60 days' written
notice to the Fund. Unless sooner terminated, the 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 either by 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 interested persons of
any party to the Agreement, cast in person at a meeting called for the
purpose of voting on such approval. The required shareholder approval of any
continuance of the Agreement shall be effective with respect to any
Portfolio if a majority of the outstanding voting securities of the class of
capital stock of that Portfolio votes to approve such continuance,
notwithstanding that such continuance may not have been approved by a
majority of the outstanding voting securities of the Fund.
If the shareholders of a class of capital stock of any Portfolio fail to
approve any continuance of the Agreements, Advantus Capital will continue to
act as investment adviser with respect to such Portfolio pending the required
approval of its continuance, or a new contract with Advantus Capital or a
different adviser or other definitive action; provided, that the compensation
received by Advantus Capital in respect of such Portfolio during such period
will be no more than its actual costs incurred in furnishing investment advisory
and management services to such Portfolio or the amount it would have received
under the Agreement in respect of such Portfolio, whichever is less.
The Agreements may be amended by the parties only if such amendment is
specifically approved by the vote of a majority of the outstanding voting
securities of the Fund and by the vote of a majority of the directors of the
Fund who are not interested persons of any party to the Agreement cast in person
at a meeting called for the purpose of voting on such approval. The required
shareholder approval shall be effective with respect to any Portfolio if a
majority of the outstanding voting securities of the class of capital stock of
that Portfolio vote to approve the amendment, notwithstanding that the amendment
may not have been approved by a majority of the outstanding voting securities of
the Fund.
SUB-ADVISER - WINSLOW MANAGEMENT
Winslow Capital Management, Inc. ("Winslow Management"), a Minnesota
corporation with principal offices at 4720 IDS Tower, 80 South Eighth Street,
Minneapolis, Minnesota 55402 has been retained under an investment
sub-advisory agreement to provide investment advice and, in general, to
conduct the management and investment program of the Capital Appreciation
Portfolio, subject to the general control of the Board of Directors of the
Fund. Winslow Management is a registered investment adviser under the
Investment Advisers Act of 1940. The firm was established by its investment
principals with a focus on providing management services to growth equity
investment accounts. Winslow Management has one other investment company
client for which it acts as the investment adviser. Other assets currently
under management are managed for corporate, endowment, foundation, retirement
system and individual clients.
-10-
<PAGE>
Certain clients of Winslow Management may have investment objectives and
policies similar to that of the Capital Appreciation Portfolio. Winslow
Management may, from time to time, make recommendations which result in the
purchase or sale of a particular security by its other clients simultaneously
with the Capital Appreciation Portfolio. 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 Winslow Management to allocate advisory
recommendations and the placing of orders in a manner which is deemed equitable
by Winslow Management to the accounts involved, including the Capital
Appreciation Portfolio. When two or more of the clients of Winslow Management
(including the Capital Appreciation Portfolio) are purchasing the same security
on a given day from the same broker-dealer, such transactions may be averaged as
to price.
INVESTMENT SUB-ADVISORY AGREEMENT
Winslow Management acts as investment sub-adviser to the Fund's Capital
Appreciation Portfolio under an Investment Sub-Advisory Agreement (the
"Winslow Management Agreement") with Advantus Capital dated May 1, 1997,
which became effective the same date and was approved by shareholders of the
Capital Appreciation Portfolio on April 24, 1997. The Winslow Management
Agreement was approved by the Board of Directors of the Fund, including a
majority of the Directors who are not a party to the Winslow Management
Agreement or interested persons of any such party, on January 14, 1997. The
Winslow Management Agreement will terminate automatically upon the
termination of the Investment Advisory Agreement and in the event of its
assignment. In addition, the Winslow Management 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 Capital Appreciation Portfolio's
outstanding voting securities on 60 days' written notice to Winslow
Management, and by Winslow Management on 60 days' written notice to Advantus
Capital. Unless sooner terminated, the Winslow Management 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 Capital Appreciation Portfolio, 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
Winslow Management Agreement, cast in person at a meeting called for the
purpose of voting on such approval.
Information concerning the services performed by Advantus Capital under
the Agreement, by Winslow Management under the Winslow Management Agreement, and
the fees payable and expenses borne by the Fund are set forth in the Prospectus,
which information is incorporated herein by reference.
SUB-ADVISER - TEMPLETON COUNSEL
Templeton Investment Counsel, Inc., (hereinafter "Templeton Counsel"), a
Florida corporation with principal offices at 500 East Broward Boulevard,
Ft. 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 Stock Portfolio, subject to
the general control of the Board of Directors of the Fund. Templeton Counsel is
an indirect, wholly-owned subsidiary of Templeton
-11-
<PAGE>
Worldwide, Inc., Ft. 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 Stock Portfolio. 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 the
International Stock Portfolio. 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 Stock Portfolio. When two
or more of the clients of Templeton Counsel (including the International Stock
Portfolio) are purchasing the same security on a given day from the same broker-
dealer, such transactions may be averaged as to price.
INVESTMENT SUB-ADVISORY AGREEMENT - TEMPLETON COUNSEL
Templeton Counsel acts as an investment sub-adviser to the Fund's
International Stock Portfolio under an Investment Sub-Advisory Agreement (the
"Templeton Agreement") with Advantus Capital dated May 1, 1997, which became
effective the same date it was approved by shareholders of the International
Stock Portfolio on April 24, 1997. The Templeton 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 Templeton Agreement or interested
persons of any such party, on January 14, 1997. The Templeton Agreement will
terminate automatically upon the termination of the Investment Advisory and
Supplemental Investment Advisory Agreements 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 Stock Portfolio'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 Stock Portfolio, 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.
Information concerning the services performed by Advantus Capital under
the agreement, by Templeton Counsel under the Templeton Agreement and the
fees payable and expenses borne by the Fund are set forth in the prospectus,
which information is incorporated herein by reference.
SUB-ADVISER - JULIUS BAER INVESTMENT MANAGEMENT INC.
Julius Baer Investment Management Inc. ("JBIM"), with principal offices
at 330 Madison Avenue, New York, New York 10017, 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
Bond Portfolio, subject to the general control of the Board of Directors of
the Fund. JBIM is a majority owned subsidiary of Julius Baer Securities,
Inc., a registered broker-dealer and investment adviser, which in turn is a
wholly-owned subsidiary of Baer Holding Ltd. Julius Baer Securities, Inc.
owns 93% of the outstanding stock of JBIM and 7% is owned by three employees
of JBIM. JBIM has been registered as an investment adviser since April of
1983. Directly and through Julius Baer Securities, Inc., JBIM provides
investment management services to a wide variety of individual and
institutional clients, including registered investment companies.
INVESTMENT SUB-ADVISORY AGREEMENT
JBIM acts as investment sub-adviser to the Fund's International Bond
Portfolio under an Investment Sub-Advisory Agreement (the "JBIM Agreement")
with Advantus Capital dated May 1, 1997. The WSA Agreement was approved by
the Board of Directors of the Fund, including a majority of the Directors who
are not a party to the JBIM Agreement or interested persons of any such
party, on February 12, 1997.
The JBIM Agreement will terminate automatically upon the termination of
the Investment Advisory Agreement and in the event of its assignment. In
addition, the JBIM 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 International Bond Portfolio's outstanding voting securities
on 60 days' written notice to JBIM and by JBIM on 60 days' written notice to
Advantus Capital. Unless sooner terminated, the JBIM 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 International Bond Portfolio, 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
JBIM Agreement, cast in person at a meeting called for the purpose of voting
on such approval.
Information concerning the services performed by Advantus Capital under
the Investment Advisory Agreement, by JBIM under the JBIM Agreement and the
fees payable and expenses borne by the Fund are set forth in the Prospectus,
which information is incorporated herein by reference.
SUB-ADVISER - KEYSTONE INVESTMENT MANAGEMENT COMPANY
Keystone Investment Management Company ("Keystone Investment"), with
principal offices at 200 Berkeley Street, Boston, Massachusetts 02116-5034
has been retained under an investment sub-advisory agreement to provide
investment advice and, in general, to conduct the management investment
program of the Micro-Cap Value Portfolio, subject to the general control of
the Board of Directors of the Fund. Keystone Investment is an investment
adviser domiciled in Delaware.
Keystone Investment has provided investment advisory and management services to
investment companies and private accounts since 1932. Keystone Investment is a
wholly-owned subsidiary of Keystone Investments, Inc. Keystone Investments
provides accounting, bookkeeping, legal, personnel and general corporate
services to Keystone Investment, its affiliates, and the Keystone Investments
Families of Funds. Both Keystone and Keystone Investments, Inc. are located at
200 Berkeley Street, Boston, Massachusetts 02116-5034.
On December 11, 1996, Keystone Investments, Inc. succeeded to the business of a
corporation with the same name, but under different ownership. Keystone
Investments, Inc. is a wholly-owned subsidiary of First Union National Bank of
North Carolina ("FUNB"). FUNB is a subsidiary of First Union Corporation
("First Union"), the sixth largest bank holding company in the United States
based on total assets as of September 30, 1996.
First Union is headquartered in Charlotte, North Carolina, and had $133.9
billion in consolidated assets as of September 30, 1996. First Union had its
subsidiaries provide a broad range of financial services to individuals and
businesses throughout the United States. The Capital Management Group of FUNB,
together with Lieber & Company and Evergreen Asset Management Corp., wholly-
owned subsidiaries of FUNB, manage or otherwise oversee the investment of over
$50 billion in assets belonging to a wide range of clients, including the
Evergreen Family of Funds.
INVESTMENT SUB-ADVISORY AGREEMENT
Keystone Management acts as investment sub-adviser to the Fund's
Micro-Cap Value Portfolio under an Investment Sub-Advisory Agreement (the
"Keystone Agreement") with Advantus Capital dated May 1, 1997. The Keystone
Agreement was approved by the Board of Directors of the Fund, including a
majority of the Directors who are not a party to the Keystone Agreement or
interested persons of any such party, on February 12, 1997.
The Keystone Agreement will terminate automatically upon the termination
of the Investment Advisory Agreement and in the event of its assignment. In
addition, the Keystone 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 Micro-Cap Value Portfolio's outstanding voting securities on
60 days' written notice to Keystone Management and by Keystone Management on
60 days' written notice to Advantus Capital. Unless sooner terminated, the
Keystone 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 Micro-Cap Value
Portfolio, 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 Keystone Agreement, cast in person at a meeting called for the
purpose of voting on such approval.
Information concerning the services performed by Advantus Capital under
the Investment Advisory Agreement, by Keystone Management under the Keystone
Agreement and the fees payable and expenses borne by the Fund are set forth
in the Prospectus, which information is incorporated herein by reference.
SUB-ADVISER - J.P. MORGAN INVESTMENT MANAGEMENT INC.
J.P. Morgan Investment Management Inc. ("Morgan Investment"), with
principal offices at 522 Fifth Avenue, New York, New York 10036, has been
retained under an investment sub-advisory agreement to provide investment
advice and, in general, to conduct the management investment program of the
Macro-Cap Value Portfolio, subject to the general control of the Board of
Directors of the Fund. Morgan Investment is a wholly-owned subsidiary of
J.P. Morgan & Co. Incorporated ("J.P. Morgan"), a bank holding company
organized under the laws of Delaware. Through offices in New York City and
abroad, J.P. Morgan, through Morgan Investment and other subsidiaries, offers
a wide range of services to governmental, institutional, corporate and
individual customers and acts as investment adviser to individual and
institutional clients.
INVESTMENT SUB-ADVISORY AGREEMENT
Morgan Investment acts as investment sub-adviser to the Fund's Macro-Cap
Value Portfolio under an Investment Sub-Advisory Agreement (the "Morgan
Management Agreement") with Advantus Capital dated May 1, 1997. The Morgan
Management Agreement was approved by the Board of Directors of the Fund,
including a majority of the Directors who are not a party to the Morgan
Management Agreement or interested persons of any such party, on February 12,
1997.
The Morgan Management Agreement will terminate automatically upon the
termination of the Investment Advisory Agreement and in the event of its
assignment. In addition, the Morgan Management 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 Macro-Cap Value Portfolio's
outstanding voting securities on 60 days' written notice to Morgan Management
and by Morgan Management on 60 days' written notice to Advantus Capital.
Unless sooner terminated, the Morgan Management 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 Macro-Cap Value Portfolio, 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 Morgan Management
Agreement, cast in person at a meeting called for the purpose of voting on
such approval.
Information concerning the services performed by Advantus Capital under
the Investment Advisory Agreement, by Morgan Management under the Morgan
Management Agreement and the fees payable and expenses borne by the Fund are
set forth in the Prospectus, which information is incorporated herein by
reference.
SUB-ADVISER - WALL STREET ASSOCIATES
Wall Street Associates ("WSA"), a California corporation with principal
offices at La Jolla Financial Building, Suite 100, 1200 Prospect Street, La
Jolla, California 92037, has been retained under an investment sub-advisory
agreement to provide investment advice and, in general, to conduct the
management investment program of the Micro-Cap Growth Portfolio, subject to
the general control of the Board of Directors of the Fund. WSA, founded in
1987, provides investment advisory services for institutional clients and
high net worth individuals. WSA is jointly and equally owned by its
founders, William Jeffery, III, Kenneth F. McCain and Richard S. Coons, who
also serve as fund managers.
INVESTMENT SUB-ADVISORY AGREEMENT
WSA acts as investment sub-adviser to the Fund's Micro-Cap Growth
Portfolio under an Investment Sub-Advisory Agreement (the "WSA Agreement")
with Advantus Capital dated May 1, 1997. The WSA Agreement was approved by
the Board of Directors of the Fund, including a majority of the Directors who
are not a party to the WSA Agreement or interested persons of any such party,
on February 12, 1997.
The WSA Agreement will terminate automatically upon the termination of
the Investment Advisory Agreement and in the event of its assignment. In
addition, the WSA 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 Micro-Cap Growth Portfolio's outstanding voting securities on
60 days' written notice to WSA and by WSA on 60 days' written notice to
Advantus Capital. Unless sooner terminated, the WSA 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 Micro-Cap Growth Portfolio, 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
WSA Agreement, cast in person at a meeting called for the purpose of voting
on such approval.
Information concerning the services performed by Advantus Capital under
the Investment Advisory Agreement, by WSA under the WSA Agreement and the
fees payable and expenses borne by the Fund are set forth in the Prospectus,
which information is incorporated herein by reference.
-12-
<PAGE>
ADMINISTRATIVE SERVICES
In addition, effective May 1, 1992, the Fund entered into an agreement with
Minnesota Mutual under which Minnesota Mutual provides accounting, legal and
other administrative services to the Fund. Prior to May 1, 1996, Minnesota
Mutual provided such services at a monthly cost of $1,500 per Portfolio.
Effective May 1, 1996, Minnesota Mutual provides such services at a monthly cost
of $2,400 per Portfolio.
PORTFOLIO TRANSACTIONS AND ALLOCATION OF BROKERAGE
ADVISER
Advantus Capital selects and (where applicable) negotiates commissions with
the brokers who execute the transactions for all Portfolios of the Fund,
except for those Portfolios which have entered into Sub-Advisory Agreements. 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 the quality and expertise of that brokerage and any
research services (as defined in the Securities Exchange Act of 1934), and
generally the Fund pays higher than the lowest commission rates available.
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 Fund enables 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 Fund. 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 Fund from these commissions.
There is no formula for the allocation by Advantus Capital of the Fund's
brokerage business to any broker-dealers for brokerage and research services.
However, Advantus Capital will authorize the 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.
To the extent research services are used by Advantus Capital in rendering
investment advice to the Fund, such services would tend to reduce Advantus
Capital's expenses. However, Advantus Capital does not believe that an exact
dollar amount can be assigned to these services. Research services received by
Advantus Capital from brokers or dealers executing transactions for the Fund
will be available also for the benefit of other portfolios managed by Advantus
Capital, and conversely, research services received by Advantus Capital in
respect of transactions for such other portfolios will be available for the
benefit of the Fund. Brokerage Commissions paid during 1996 were as follows:
Growth Portfolio, $974,688; Asset Allocation Portfolio, $569,804; Index 500
Portfolio, $106,973; Capital Appreciation Portfolio, $431,845; International
Stock Portfolio, $207,263; Small Company Portfolio, $777,160; and Value Stock
Portfolio, $275,395. Brokerage Commissions paid during 1995 were as follows:
Growth Portfolio, $474,096; Asset Allocation Portfolio, $412,885; Index 500
Portfolio, $32,651; Capital Appreciation Portfolio, $201,306; International
Stock Portfolio, $154,775; Small Company Portfolio, $85,238; and Value Stock
Portfolio, $136,701. Brokerage commissions paid during 1994 were as follows:
Growth Portfolio, $204,757; Asset Allocation Portfolio, $271,137; Index 500
Portfolio, $25,775; Capital Appreciation Portfolio, $194,531; International
Stock Portfolio, $158,373; Small Company Portfolio, $55,542; and Value Stock
Portfolio, $19,950. One hundred percent of the brokerage commissions paid by
the Portfolios during 1996, 1995 and 1994 was paid to brokers to whom such
transactions were directed in exchange for research services.
-13-
<PAGE>
Most transactions in money market instruments will be purchases from
issuers of or dealers in money market instruments acting as principal. There
usually will be no brokerage commissions paid by the Fund for such purchases
since securities will be 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 will reflect a fee paid to
the underwriter.
The Fund will not execute portfolio transactions through any affiliate,
except as described below. Advantus Capital believes that most research
services obtained by it generally benefit one or more of the investment
companies which it manages and also benefits 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.
In addition to providing investment management services to the Fund,
Advantus Capital provides investment advisory services for three insurance
companies, namely Minnesota Mutual and its subsidiary life insurance
companies and certain associated separate accounts. It also provides
investment advisory services to qualified pension and profit sharing plans,
corporations, partnerships, investment companies and various private
accounts. Frequently, investments deemed advisable for the Fund are also
deemed advisable for one or more of such accounts, so that Advantus Capital
may decide to purchase or sell the same security at or about the same time
for both the Fund and one of those accounts. In such circumstances, orders
for a purchase or sale of the same security for one or more of those accounts
may be combined with an order for the Fund, in which event the transactions
will be averaged as to price and normally allocated as nearly as practicable
in proportion to the amounts desired to be purchased or sold for each
account. While in some instances combined orders could adversely affect the
price or volume of a security, it is believed that the Fund's participation
in such transactions on balance will produce better net results for the Fund.
The Fund's acquisition during the fiscal year ended December 31, 1996, of
securities of its regular brokers or dealers or of the parent of those brokers
or dealers that derive more than 15 percent of gross revenue from securities-
related activities is presented below:
Value of Securities Owned
in the Portfolios at
Name of Issuer End of Fiscal Year
-------------- -------------------------
Provident Distributors, Inc. $40,944,000
Norwest Financial Inc. 12,244,000
Lehman Brothers 7,584,000
Morgan Stanley 1,855,000
Shearson Lehman Brothers 1,389,000
J.P. Morgan 713,000
Merrill Lynch 432,000
-14-
<PAGE>
SUB-ADVISERS
Except as indicated below, each of the advisory firms having a
sub-advisory relationship with Advantus Capital, in managing the affected
Portfolios, intends to follow the same brokerage practices as those described
above for Advantus Capital. Templeton Counsel, in managing the International
Stock Portfolio, follows the same basic brokerage practices as those
described above 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 Stock Portfolio. 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.
PURCHASE AND REDEMPTION OF SHARES
Shares of the Fund are currently offered continuously at prices equal to
the respective net asset values of the Portfolios, only to Minnesota Mutual and
its separate accounts. The Fund sells its shares to that company without the
use of any underwriter. It is possible that at some later date the Fund may
offer its shares to other investors and it reserves the right to do so.
Shares of the Fund are sold and redeemed at their net asset value next
computed after a purchase or redemption order is received by the Fund.
Depending upon the net asset values at that time, the amount paid upon
redemption may be more or less than the cost of the shares redeemed. Payment
for shares redeemed will generally be made within seven days after receipt of a
proper notice of redemption. The right to redeem shares or to receive payment
with respect to any redemption may only be suspended for any period during
which: (a) trading on the New York Stock Exchange is restricted as determined
by the Securities and Exchange Commission or such exchange is closed for other
than weekends and holidays; (b) an emergency exists, as determined by the
Securities and Exchange Commission, as a result of which disposal of Portfolio
securities or determination of the net asset value of a Portfolio is not
reasonably practicable; and (c) the Securities and Exchange Commission by order
permits postponement for the protection of shareholders.
FUND SHARES AND VOTING RIGHTS
The authorized capital of the Fund consists of one trillion shares of
capital stock (increased from ten billion shares on April 24, 1997) with a
par value of $.01 per share; with authorized shares of 100,000,000,000
allocated to each Portfolio. The remaining shares may be allocated by the
Board of Directors to any new or existing Portfolios.
-15-
<PAGE>
All shares of all Portfolios have equal voting rights, except that only
shares of a particular Portfolio are entitled to vote certain matters pertaining
only to that Portfolio. Pursuant to the Investment Company Act and the rules
and regulations thereunder, certain matters approved by a vote of all Fund
shareholders may not be binding on a Portfolio whose shareholders have not
approved such matter.
Each issued and outstanding share is entitled to one vote and to
participate equally in dividends and distributions declared by the respective
Portfolio and in net assets of such Portfolio upon liquidation or dissolution
remaining after satisfaction of outstanding liabilities. The shares of each
Portfolio, when issued, are fully paid and non-assessable, have no preemptive,
conversion, or similar rights, and are freely transferable. Fund shares do not
have cumulative voting rights, which means that the holders of more than half of
the Fund shares voting for election of directors can elect all of the directors
if they so choose. In such event, the holders of the remaining shares would not
be able to elect any directors.
The Fund will not hold periodically scheduled shareholder meetings.
Minnesota corporate law does not require an annual meeting. Instead, it
provides for the Board of Directors to convene shareholder meetings when it
deems appropriate. In addition, if a regular meeting of shareholders has not
been held during the immediately preceding fifteen months, a shareholder or
shareholders holding three percent or more of the voting shares of a Fund may
demand a regular meeting of shareholders of the Fund by written notice of demand
given to the chief executive officer or the chief financial officer of the Fund.
Within thirty days after receipt of the demand by one of those officers, the
Board of Directors shall cause a regular meeting of shareholders to be called
and held no later than ninety days after receipt of the demand, all at the
expense of the Fund. A special meeting may also be called at any time by the
chief executive officer, two or more directors, or a shareholder or shareholders
holding ten percent of the voting shares of the Fund. At a meeting called for
the purpose, shareholders may remove any director by a vote of two-thirds of the
outstanding shares. The Fund will assist shareholders seeking to call such a
meeting in communicating with other shareholders, provided they are at least ten
in number, have been shareholders for at least six months and hold in the
aggregate at least one percent of the outstanding shares or shares having a
value of at least $25,000, whichever is less. Additionally, the Investment
Company Act of 1940 requires shareholder votes for all amendments to fundamental
investment policies and restrictions, and for all investment advisory contracts
and amendments thereto.
NET ASSET VALUE
The net asset value of the shares of the Portfolios is computed once daily,
and, in the case of Money Market Portfolio, after the declaration of the daily
dividend, as of the primary closing time for business on the New York Stock
Exchange (as of the date hereof 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 such Fund's portfolio
securities will not materially affect the current net asset value of such Fund's
shares, (ii) days during which no such Fund's shares are tendered for redemption
and no order to purchase or sell such Fund's shares is received by such Fund and
(iii) customary national business holidays on which the New York Stock Exchange
is closed for trading (as of the date hereof, New Year's Day, Presidents' Day,
Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day). The net asset value per share of each Portfolio is computed by
adding the sum of the value of the securities held by
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<PAGE>
that Portfolio plus any cash or other assets that it holds, subtracting all of
its liabilities, and dividing the result by the total number of shares
outstanding in that Portfolio at that time. Expenses, including the investment
advisory fee payable to Advantus Capital, are accrued daily.
Securities held by the Fund are valued at their market value. Otherwise,
such securities are valued at fair value as determined in good faith by the
Board of Directors, with calculations made by persons acting pursuant to the
direction of the Board. However, debt securities of the International Stock
Portfolio with maturities of 60 days or less when acquired, or which
subsequently are within 60 days of maturity, and all securities in the Money
Market Portfolio, are valued at amortized cost.
All instruments held by the Money Market Portfolio are valued on an
amortized cost basis. This 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 fluctuating interest rates on the market
value of the instrument. While this method provides certainty in valuation, it
may result in periods during which the value of an instrument in the Portfolio,
as determined by amortized cost, is higher or lower than the price the Portfolio
would receive if it sold the instrument. During periods of declining interest
rates, the daily yield on shares of the Portfolio computed by dividing the
annualized daily income of the Portfolio by the net asset value computed as
described above may tend to be higher than a like computation made by a
portfolio with identical investments utilizing a method of valuation based upon
market prices and estimates of market prices for all of its securities.
The Money Market Portfolio values its portfolio securities at amortized
cost in accordance with Rule 2a-7 under the Investment Company Act of 1940, as
amended. 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 Money Market Portfolio and its
shareholders to maintain a stable net asset value per share for such Portfolio
of a constant $1.00 per share by virtue of the amortized cost method of
valuation. The Money Market Portfolio 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 Portfolio's shareholders, to establish procedures reasonably
designed, taking into account current market conditions and the Portfolio's
investment objective, to stabilize the Portfolio'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 Portfolio'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 reverse share splits,
redemptions in kind, selling portfolio instruments prior to maturity to realize
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.
-17-
<PAGE>
The Portfolio 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 Portfolio will limit its investments in the securities of any
one issuer to no more than 5% of Portfolio assets and it will limit investment
in securities of less than the highest rated categories to 5% of Portfolio
assets. Investment in the securities of any issuer of less than the highest
rated categories will be limited to the greater of 1% of Portfolio 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 Portfolio in 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.
PERFORMANCE DATA
CURRENT YIELD FIGURES FOR MONEY MARKET PORTFOLIO
Current annualized yield quotations for the Money Market Portfolio are
based on the Portfolio's net investment income for a seven-day or other
specified period and exclude any realized or unrealized gains or losses on
portfolio securities. Current annualized yield is computed by determining the
net change (exclusive of realized gains and losses from the sale of securities
and unrealized appreciation and depreciation) in the value of a hypothetical
account having a balance of one share at the beginning of the specified period,
dividing such net change in account value by the value of the account at the
beginning of the period, and annualizing this quotient on a 365-day basis. The
net change in account value reflects the value of any additional shares
purchased with dividends from the original share in the account during the
specified period, any dividends declared on such original share and any such
additional shares during the period, and expenses accrued during the period.
The Fund may also quote the effective yield of the Money Market Portfolio for a
seven-day or other specified period for which the current annualized yield is
computed by expressing the unannualized return on a compounded, annualized
basis. Purchasers of variable contracts issued by Minnesota Mutual should
recognize that the yield on the assets relating to such a contract which are
invested in shares of the Money Market Portfolio would be lower than the Money
Market Portfolio's yield for the same period since charges assessed against such
assets are not reflected in the Portfolio's yield. The yield and effective
yield of the Money Market Portfolio for the seven-day period ended December 31,
1996 were 4.77% and 4.89%, respectively.
CURRENT YIELD FIGURES FOR OTHER PORTFOLIOS
Yield quotations for Portfolios other than the Money Market and
International Stock Portfolios are determined by dividing the Portfolio's net
investment income per share for a 30-day period, excluding realized or
unrealized gains or losses, by the net asset value per share on the last day of
the period. In computing net investment income dividends are accrued daily
based on the stated dividend rate of each dividend-paying security, and interest
reflects an amortization of discount or premium on debt obligations (other than
installment debt obligations) based upon the market value of each
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<PAGE>
obligation on the last day of the preceding 30-day period. Undeclared earned
income (net investment income which at the end of the base period has not
been declared as a dividend but is expected to be declared shortly
thereafter) is subtracted from the net asset value per share on the last day
of the period. An annualized yield figure is determined under a formula
which assumes that the net investment income is earned and reinvested at a
constant rate and annualized at the end of a six-month period. For the
30-day period ended December 31, 1996, the yields of the Growth Portfolio,
Bond Portfolio, Asset Allocation Portfolio, Mortgage Securities Portfolio,
Index 500 Portfolio, Capital Appreciation Portfolio, Small Company Portfolio,
the 1998, 2002, 2006 and 2010 Maturing Government Bond Portfolios and Value
Stock Portfolio were 1.66%, 6.31%, 2.90%, 6.35%, 1.60%, -.18%, .06%, 5.4%,
6.24%, 6.56%, 6.38% and 1.01%, respectively. For the four Maturing Government
Bond Portfolios, such figures reflect the voluntary absorption of certain
Fund expenses by Minnesota Mutual described under "Investment Adviser" in the
Prospectus. In the absence of such absorption of expenses, the yield figures
for such Portfolios would have been 4.67%, 4.89%, 4.89% and 4.63%,
respectively.
TOTAL RETURN FIGURES FOR ALL PORTFOLIOS
Cumulative total return quotations for the Portfolios represent the total
return for the period since shares of the Portfolio became available for sale
pursuant to the Fund's registration statement. Cumulative total return is equal
to the percentage change between the net asset value of a hypothetical $1,000
investment at the beginning of the period and the net asset value of that same
investment at the end of the period with dividend and capital gain distributions
treated as reinvested.
The cumulative total return figures published by the Fund will reflect
Minnesota Mutual's voluntary absorption of certain Fund expenses (described
under "Investment Adviser" in the Prospectus). The cumulative total returns for
the Portfolios for the specified periods ended December 31, 1996 are shown in
the table below. The figures in parentheses show what the cumulative total
returns would have been had Minnesota Mutual not absorbed Fund expenses as
described above.
<TABLE>
<CAPTION>
From Inception Date of
to 12/31/96 Inception
----------- ---------
<S> <C> <C>
Growth Portfolio 236.7% (232.7%) 12/3/85
Bond Portfolio 149.1% (147.1%) 12/3/85
Money Market Portfolio 79.0% (73.2%) 12/3/85
Asset Allocation Portfolio 210.2% (209.3%) 12/3/85
Mortgage Securities Portfolio 125.4% (124.6%) 5/1/87
Index 500 Portfolio 227.8% (226.7%) 5/1/87
Capital Appreciation Portfolio 227.8% (223.4%) 5/1/87
International Stock Portfolio 83.4% (83.3%) 5/1/92
Small Company Portfolio 75.2% (75.1%) 5/3/93
Maturing Government Bond -
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<PAGE>
1998 Portfolio 20.9% (19.5%) 5/2/94
2002 Portfolio 27.6% (24.4%) 5/2/94
2006 Portfolio 33.3% (28.9%) 5/2/94
2010 Portfolio 36.0% (30.1%) 5/2/94
Value Stock Portfolio 82.2% (81.6%) 5/2/94
</TABLE>
Yield quotations for Portfolios other than the Money Market Portfolio and all
quotations of cumulative total return figures will be accompanied by average
annual total return figures for a one-year period and for the period since
shares of the Portfolio became available pursuant to the Fund's registration
statement. Average annual total return figures are the average annual
compounded rates of return required for an account with an initial investment of
$1,000 to equal the redemption value of the account at the end of the period.
The average annual total return figures published by the Fund will reflect
Minnesota Mutual's voluntary absorption of certain Fund expenses. Prior to
January 1, 1986, the Fund incurred no expenses. During 1986 and from January 1
to March 6, 1987 Minnesota Mutual voluntarily absorbed all fees and expenses of
any portfolio that exceeded .75% of the average daily net assets of such
portfolio. For the period subsequent to March 6, 1987, Minnesota Mutual
voluntarily absorbed the fees and expenses that exceeded .65% of the average
daily net assets of the Growth, Bond, Money Market, Asset Allocation and
Mortgage Securities Portfolios, .55% of the average daily net assets of the
Index 500 Portfolio, .90% of the average daily net assets of the Capital
Appreciation, Small Company and Value Stock Portfolios and expenses that exceed
1.00% of the average daily net assets of the International Stock Portfolio
exclusive of the advisory fee. In addition, Minnesota Mutual has voluntarily
agreed to absorb all fees and expenses that exceed .40% of average daily net
assets for each of the four Maturing Government Bond Portfolios; however, for
the Portfolios which mature in 1998 and 2002, Minnesota Mutual has voluntarily
agreed to absorb such fees and expenses which exceed .20% of average daily net
assets from the Portfolio's inception to April 30, 1998 and which exceed .40% of
average daily net assets thereafter.
The average annual rates of return for the Portfolios for the specified
periods ended December 31, 1996 are shown in the table below. The figures in
parentheses show what the average annual rates of return would have been had
Minnesota Mutual not absorbed Fund expenses as described above.
<TABLE>
<CAPTION>
Year Ended Five Years Ten Years From Inception Date of
12/31/96 Ended 12/31/96 Ended 12/31/96 to 12/31/96 Inception
-------- -------------- -------------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Growth Portfolio 17.2% (17.2%) 10.0% (10.0%) 12.7% (12.5%) N/A 12/3/85
Bond Portfolio 3.0% (3.0%) 6.7% (6.7%) 7.9% (7.8%) N/A 12/3/85
Money Market Portfolio 4.9% (4.9%) 4.0% (3.9%) 5.4% (5.1%) N/A 12/3/85
Asset Allocation Portfolio 12.5% (12.5%) 9.6% (9.6%) 11.2% (11.1%) N/A 12/3/85
Mortgage Securities Portfolio 5.3% (5.3%) 6.9% (6.9%) N/A 8.8% (8.7%) 5/1/87
Index 500 Portfolio 21.6% (21.6%) 14.7% (14.7%) N/A 13.1% (13.0%) 5/1/87
Capital Appreciation Portfolio 17.6% (17.6%) 11.4% (11.3%) N/A 13.1% (12.9%) 5/1/87
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<PAGE>
International Stock Portfolio 19.8% (19.8%) N/A N/A 13.9% (13.8%) 5/1/92
Small Company Portfolio 6.5% (6.5%) N/A N/A 16.5% (16.5%) 5/3/93
Maturing Government Bond-
1998 Portfolio 4.1% (4.1%) N/A N/A 7.4% (6.9%) 5/2/94
2002 Portfolio 1.7% (.9%) N/A N/A 9.5% (8.5%) 5/2/94
2006 Portfolio -1.2% (-2.2%) N/A N/A 11.4% (10.0%) 5/2/94
2010 Portfolio -3.4% (-3.5%) N/A N/A 12.2% (10.4%) 5/2/94
Value Stock Portfolio 31.0% (31.0%) N/A N/A 25.2% (25.0%) 5/2/94
</TABLE>
Purchasers of variable contracts issued by Minnesota Mutual should recognize
that the yield, cumulative total return and average annual total return on the
assets relating to such a contract which are invested in shares of any of the
above Portfolios would be lower than the yield, cumulative total return and
average annual total return of such Portfolio for the same period since charges
assessed against such assets are not reflected in the Portfolios' quotations.
PREDICTABILITY OF RETURN
ANTICIPATED VALUE AT MATURITY. The maturity values of zero-coupon bonds are
specified at the time the bonds are issued, and this feature, combined with the
ability to calculate yield to maturity, has made these instruments popular
investment vehicles for investors seeking reliable investments to meet long-term
financial goals.
Each Maturing Government Bond Portfolio consists primarily of zero-coupon bonds
but is actively managed to accommodate contract owner activity and to take
advantage of perceived market opportunities. Because of this active management
approach, each Maturing Government Bond Portfolio does not guarantee that a
certain price per share will be attained by the time a Portfolio is liquidated.
Instead, the Fund attempts to track the price behavior of a directly held zero-
coupon bond by:
(1) Maintaining a weighted average maturity within each Maturing
Government Bond Portfolio's target maturity year;
(2) Investing at least 90% of assets in securities that mature within
one year of that Portfolio's target maturity year [for example, a]
Portfolio with a maturity of ten years will be 90% composed of
securities having remaining maturities of nine, ten or eleven years
(rather than having half its securities with five-year maturities
and half with fifteen-year maturities];
(3) Investing a substantial portion of assets in Treasury STRIPS (the
most liquid Treasury zero);
(4) Under normal conditions, maintaining a nominal cash balance;
(5) Executing portfolio transactions necessary to accommodate net
contract owner purchases or redemptions on a daily basis; and
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<PAGE>
(6) Whenever feasible, contacting several U.S. government securities
dealers for each intended transaction in an effort to obtain the
best price on each transaction.
These measures enable the adviser to calculate an anticipated value at maturity
(AVM) for each share of a Maturing Government Bond Portfolio, calculated as of
the date of purchase of such share, that approximates the price per share that
such share will achieve by the weighted average maturity date of its Portfolio.
The AVM calculation for each Maturing Government Bond Portfolio is as follows:
2T
AVM = P(1 + AGR/2)
where P = the Portfolio's current price per share; T = the Portfolio's weighted
average term to maturity in years; and AGR = the anticipated growth rate.
This calculation assumes that the share owner will reinvest all dividend and
capital gain distributions. It also assumes an expense ratio and a portfolio
composition that remain constant for the life of the Maturing Government Bond
Portfolio. Because expenses and composition do not remain constant, however,
the Fund may calculate an AVM for each Maturing Government Bond Portfolio on any
day on which the Fund values its securities. Such an AVM is applicable only to
shares purchased on that date.
In addition to the measures described above, which the adviser believes are
adequate to assure close correspondence between the price behavior of each
Portfolio and the price behavior of directly held zero-coupon bonds with
comparable maturities, the Fund expects that each Portfolio will invest at least
90% of its net assets in zero-coupon bonds until it is within four years of its
target maturity year and at least 80% of its net assets in zero-coupon
securities within two to four years of its target maturity year. This
expectation may be altered if the market supply of zero-coupon securities
diminishes unexpectedly.
ANTICIPATED GROWTH RATE. The Fund may also calculate an anticipated growth rate
(AGR) for each Maturing Government Bond Portfolio on any day on which the Fund
values its securities. AGR is a calculation of the anticipated annualized rate
of growth for a Portfolio share, calculated from the date of purchase of such
share to the Portfolio's target maturity date. As is the case with calculations
of AVM, the AGR calculation assumes that the investor will reinvest all
dividends and capital gain distributions and that each Maturing Government Bond
Portfolio expense ratio and portfolio composition will remain constant. Each
Maturing Government Bond Portfolio AGR changes from day to day (i.e., a
particular AGR calculation is applicable only to shares purchased on that date),
due primarily to changes in interest rates and, to a lesser extent, to changes
in portfolio composition and other factors that affect the value of the
Portfolio's investments.
The Fund expects that a share owner who holds specific shares until a
Portfolio's weighted average maturity date, and who reinvests all dividends and
capital gain distributions, will realize an investment return and maturity value
on those shares that do not differ substantially from the AGR and AVM calculated
on the day such shares were purchased. The AGR and AVM calculated with respect
to shares purchased on any other date, however, may be materially different.
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TAXES
The Fund and each Portfolio qualified for the year ended December 31, 1996,
and intends to continue to qualify as a "regulated investment company" under the
provisions of Subchapter M of the Internal Revenue Code, as amended (the
"Code"). As a result of changes included in the Tax Reform Act of 1986, each
Portfolio of the Fund is treated as a separate entity for federal income tax
purposes. If each Portfolio of the Fund qualifies as a "regulated investment
company" and complies with the provisions of the Code relieving regulated
investment companies which distribute substantially all of their net income
(both ordinary income and capital gain) from federal income tax, each Portfolio
of the Fund will be relieved of such tax on the amounts distributed.
To qualify for treatment as a regulated investment company, each Portfolio
must, among other things, derive in each taxable year at least 90% of its gross
income from dividends, interest payments with respect to securities, and gains
(without deduction for losses) from the sale or other disposition of securities
and derive less than 30% of its gross income in each taxable year from gains
(without deduction for losses) from the sale or other disposition of securities
held for less than three months.
Each Portfolio of the Fund with outstanding shares which were purchased to
provide the Portfolio's initial capital (in an amount in excess of that
specified in the Code) and which are not attributable to any of the Contracts 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. Currently, only the International
Stock and Small Company Portfolios are subject to these distribution
requirements. In order to avoid the imposition of this excise tax, each
Portfolio generally must declare dividends by the end of a calendar year
representing 98 percent of that Portfolio'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 is a general summary of applicable provisions of the Code and
Treasury Regulations now in effect and as currently interpreted by the courts
and the Internal Revenue Service. The Code and these Regulations, as well as
current interpretations thereof, may be changed at any time by legislative,
judicial or administrative action.
As the sole shareholder of the Fund will be Minnesota Mutual and the
separate accounts of Minnesota Mutual, this statement does not discuss federal
income tax consequences to the shareholder. For tax information with respect to
an owner of a contract issued in connection with the separate accounts, see the
Prospectus for those contracts.
REPORTS TO SHAREHOLDERS
Annual and semi-annual reports containing financial statements of the Fund
will be sent to shareholders.
INDEPENDENT AUDITORS
The financial statements, as of and for the year ended December 31, 1996,
of the Fund are incorporated by reference in this Statement of Additional
Information from the Fund's Annual Report to Shareholders for the year ended
December 31, 1996. The financial statements of December 31, 1996, and the
Financial Highlights included in the Prospectus have been audited by KPMG
Peat Warwick LLP, 4200 Norwest Center, 90 South Seventh Street, Minneapolis,
Minnesota 55402, independent auditors, as indicated in their report with
respect thereto and are included herein in reliance upon such report and upon
the authority of such firm as experts in accounting and auditing.
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APPENDIX I
Rating of Bonds and Commercial Paper
The rating information which follows describes how the rating services
mentioned presently rate the described securities. No reliance is made upon the
rating firms as "experts" as that term is defined for securities law purposes.
Rather, reliance on this information is on the basis that such ratings have
become generally accepted in the investment business.
Rating of Bonds
Moody's
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 sometime in the future.
Bonds which are rated Baa are considered as 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.
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<PAGE>
Standard & Poor's
Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
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.
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.
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.
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.
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.
The Standard & Poor's Corporation applies indicators "+," no character, and
"-" to the above rating categories. The indicators show relative standing
within the major rating categories.
Rating of Commercial Paper
Purchases of corporate debt securities used for short-term investment,
generally called commercial paper, will be limited to the top grades of Moody's
and Standard & Poor's rating services.
Moody's
"P-1"
The rating P-1 is the highest commercial paper rating assigned by Moody's.
Among the factors considered by Moody's in assigning 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;
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<PAGE>
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; and
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.
Standard & Poor's
A Commercial paper issues assigned this highest rating are regarded as
having the greatest capacity for timely payment. Issues in this category are
delineated with the numbers 1, 2 and 3 to indicate the relative degree of
safety.
A-1 This designation indicates that the degree of safety regarding timely
payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics are denoted with a plus (+) sign
designation.
A-2 Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as high as for issues designated
"A-1."
A-3 Issues carrying this designation have a satisfactory capacity for
timely payment. They are, however, somewhat more vulnerable to the adverse
effects of changes in circumstances than obligations carrying the higher
designations.
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