<PAGE>
File Numbers 2-96990 and 811-4279
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment Number
----
Post-Effective Amendment Number 15
----
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment Number 13
----
---------------------
MIMLIC Series Fund, Inc.
(Exact Name of Registrant as Specified in Charter)
400 Robert Street North
St. Paul, Minnesota 55101-2098
(Address of Principal Executive Offices)
(612) 298-3500
(Registrant's Telephone Number, Including Area Code)
----------------------
Donald F. Gruber, Esq. Copy to:
Secretary J. Sumner Jones, Esq.
MIMLIC Series Fund, Inc. Jones & Blouch L.L.P.
400 Robert Street North 1025 Thomas Jefferson Street, N.W.
St. Paul, Minnesota 55101-2098 Suite 405 West
Washington, D.C. 20007
----------------------
IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE (check appropriate box)
immediately upon filing pursuant to paragraph (b)
---
on (date) pursuant to paragraph (b)
---
60 days after filing pursuant to paragraph (a)(1)
---
on (date) pursuant to paragraph (a)(1)
---
75 days after filing pursuant to paragraph (a)(2)
---
x on May 1, 1997 pursuant to paragraph (a)(2) of Rule 485.
---
IF APPROPRIATE, CHECK THE FOLLOWING BOX:
this post-effective amendment designates a new effective date for a
--- previously filed post-effective amendment.
Pursuant to Regulation 270.24f-2 under the Investment Company Act of 1940,
Registrant has previously elected to register an indefinite number of its common
shares under the Securities Act of 1933. The Rule 24f-2 Notice for Registrant's
most recent fiscal year was filed on February 27, 1996.
<PAGE>
MIMLIC Series Fund, Inc.
Cross Reference Sheet for Items required by Rule 404(a)
N-1A Item of Part A Caption in Prospectus
- ------------------- ---------------------
1 Cover Page
2 Not Applicable
3 Financial Highlights, Performance Data
4 The Fund
5 The Fund and Its Management
6 The Fund and Its Management, Dividends
and Distributions
7 Purchase and Redemption of Shares
8 Purchase and Redemption of Shares
9 Not Applicable
N-1A Item of Part B Caption in Statement of Additional Information
- ------------------- ----------------------------------------------
10 Cover Page
11 Table of Contents
12 Not Applicable
13 Investment Policies, Investment Restrictions
14 Directors and Executive Officers
15 The Fund
16 Investment Advisory and Other Services
17 Portfolio Transactions and Brokerage
18 Capital Stock and Ownership of Shares
19 Purchase and Redemption of Shares, Net Asset
Value
20 Taxes
21 Purchase and Redemption of Shares
22 Performance Data
23 Financial Statements
<PAGE>
PART A. INFORMATION REQUIRED IN A PROSPECTUS
-------------------------------------
<PAGE>
Prospectus Dated May 1, 1997
- --------------------------------------------------------------------------------
MIMLIC SERIES FUND, INC.
- ------------------------------
400 ROBERT STREET NORTH x ST. PAUL, MINNESOTA 55101 x 1-800-443-3677
- --------------------------------------------------------------------------------
-
MIMLIC Series Fund, Inc. (the "Fund"), a Minnesota corporation, is a
diversified, open-end management investment company, commonly known as a mutual
fund. 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, the Value Stock
Portfolio, four Maturing Government Bond Portfolios, maturing respectively in
1998, 2002, 2006 and 2010, the Macro-Cap Value Portfolio, the Index 400 Mid-Cap
Portfolio, the Small Company Value Portfolio, the Micro-Cap Value Portfolio, the
Micro-Cap Growth Portfolio and the International Bond Portfolio (herein referred
to as "Portfolios"). A separate series of the Fund's common stock is issued for
each Portfolio. Although the Macro-Cap Value, Index 400 Mid-Cap, Small Company
Value, Micro-Cap Value, Micro-Cap Growth and International Bond 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 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 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 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 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.
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
2
<PAGE>
value or future earnings and growth potential. Dividend income will be
incidental to the investment objective for this 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 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 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.
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 debt
securities issued by foreign governments, companies and supranational
entities.
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 20.
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 ,
1996, 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) 298-3500, 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>
- --------------------------------------------------------------------------------
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........................................ 31
INTERNATIONAL STOCK PORTFOLIO......................................... 31
SMALL COMPANY PORTFOLIO............................................... 35
VALUE STOCK PORTFOLIO................................................. 36
MATURING GOVERNMENT BOND PORTFOLIOS................................... 37
MACRO-CAP VALUE PORTFOLIO............................................. 40
INDEX 400 MID-CAP PORTFOLIO........................................... 41
SMALL COMPANY VALUE PORTFOLIO......................................... 44
MICRO-CAP VALUE PORTFOLIO............................................. 49
MICRO-CAP GROWTH PORTFOLIO............................................ 55
INTERNATIONAL BOND PORTFOLIO.......................................... 60
INVESTMENT RESTRICTIONS................................................... 64
THE FUND AND ITS MANAGEMENT............................................... 65
INVESTMENT ADVISER........................................................ 65
INVESTMENT SUB-ADVISERS................................................... 69
PURCHASE AND REDEMPTION OF SHARES......................................... 70
DIVIDENDS AND DISTRIBUTIONS............................................... 70
TAXES..................................................................... 71
CUSTODIANS................................................................ 71
THE STANDARD & POOR'S LICENSE............................................. 71
APPENDIX A................................................................ 73
APPENDIX B................................................................ 75
</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 Statement of
Additional Information. This information should be read in conjunction with the
financial statements and related notes of MIMLIC Series Fund, Inc., included in
the Statement of Additional Information.
GROWTH 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........................ $1.866 $1.912 $1.889 $1.864 $1.391 $1.406 $1.149 $1.017 $1.056
-------- -------- -------- ------- ------- ------- ------ ------ ------ ------
Income from investment
operations:
Net investment income..... .021 .019 .020 .026 .031 .010 .028 .032 .017
Net gains or losses on
securities (both
realized and
unrealized)............. .416 (.005) .063 .060 .442 (.007) .271 .129 .031
-------- -------- -------- ------- ------- ------- ------ ------ ------ ------
Total from investment
operations......... .437 .014 .083 .086 .473 .003 .299 .161 .048
-------- -------- -------- ------- ------- ------- ------ ------ ------ ------
Less distributions:
Dividends from net
investment income....... (.020) (.020) (.027) (.031) -- (.012) (.030) (.029) (.042)
Distributions from capital
gains................... (.073) (.040) (.033) (.030) -- (.006) (.012) -- (.045)
-------- -------- -------- ------- ------- ------- ------ ------ ------ ------
Total distributions... (.093) (.060) (.060) (.061) -- (.018) (.042) (.029) (.087)
-------- -------- -------- ------- ------- ------- ------ ------ ------ ------
Net asset value, end of
year........................ $2.210 $1.866 $1.912 $1.889 $1.864 $1.391 $1.406 $1.149 $1.017
-------- -------- -------- ------- ------- ------- ------ ------ ------ ------
-------- -------- -------- ------- ------- ------- ------ ------ ------ ------
Total return (a).............. 24.3% .8% 4.7% 4.8% 34.1% .2% 26.0% 15.9% 4.2%
Net assets, end of year (in
thousands).................. $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)........ .55% .56% .58% .58% .63% .65% .65% .65% .66%
Ratio of net investment income
to average daily net
assets (b).................. 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)................. 91.9% 42.0% 51.0% 22.4% 15.7% 19.2% 32.4% 34.1% 29.3%
<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, $9,202 and
$13,595 in expenses for the years ended December 31, 1990, 1989, 1988, 1987
and 1986, respectively. Had the portfolio paid all fees and expenses, the
ratio of expenses to average daily net assets would have been .65%, .76%,
.95%, 1.00% and 1.80%, respectively, and the ratio of net investment income
to average daily net assets would have been 2.70%, 2.63%, 2.75%, 2.25% and
1.55%, respectively.
</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...... $1.157 $1.300 $1.258 $1.264 $1.075 $1.080 $1.026 $1.027 $1.160
------- ------- ------- ------- ------- ------ ------ ------ ------ ------
Income from investment operations:
Net investment income............... .074 .042 .051 .053 .078 .083 .077 .073 .076
Net gains or losses on securities
(both realized and unrealized).... .147 (.100) .074 .024 .111 (.005) .053 (.001) (.054)
------- ------- ------- ------- ------- ------ ------ ------ ------ ------
Total from investment
operations................... .221 (.058) .125 .077 .189 .078 .130 .072 .022
------- ------- ------- ------- ------- ------ ------ ------ ------ ------
Less distributions:
Dividends from net investment
income............................ (.046) (.052) (.058) (.069) -- (.083) (.076) (.073) (.134)
Distributions from capital gains.... -- (.033) (.025) (.014) -- -- -- -- (.021)
------- ------- ------- ------- ------- ------ ------ ------ ------ ------
Total distributions............. (.046) (.085) (.083) (.083) -- (.083) (.076) (.073) (.155)
------- ------- ------- ------- ------- ------ ------ ------ ------ ------
Net asset value, end of year............ $1.332 $1.157 $1.300 $1.258 $1.264 $1.075 $1.080 $1.026 $1.027
------- ------- ------- ------- ------- ------ ------ ------ ------ ------
------- ------- ------- ------- ------- ------ ------ ------ ------ ------
Total return (a)........................ 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)............................ $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)............................ .58% .61% .64% .65% .65% .65% .65% .65% .67%
Ratio of net investment income to
average daily net assets (b).......... 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)................ 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, $6,676 and $2,746 in expenses for the years ended December 31,
1992, 1991, 1990, 1989, 1988, 1987 and 1986, 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%, .94% and
.97%, 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%, 7.37% and
7.05%, 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
------- ------- ------- ------- ------- ------ ------ ------ ------ ------
Income from investment operations:
Net investment income............... .053 .036 .027 .032 .053 .075 .082 .064 .054
------- ------- ------- ------- ------- ------ ------ ------ ------ ------
Total from investment
operations................... .053 .036 .027 .032 .053 .075 .082 .064 .054
------- ------- ------- ------- ------- ------ ------ ------ ------ ------
Less distributions:
Dividends from net investment
income............................ (.053) (.036) (.027) (.032) (.053) (.075) (.082) (.064) (.054)
------- ------- ------- ------- ------- ------ ------ ------ ------ ------
Total distributions............. (.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
------- ------- ------- ------- ------- ------ ------ ------ ------ ------
------- ------- ------- ------- ------- ------ ------ ------ ------ ------
Total return (a)........................ 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)............................ $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)............................ .64% .65% .65% .65% .65% .65% .65% .65% .66%
Ratio of net investment income to
average daily net assets (b).......... 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, $10,690 and $3,973 in expenses for the years
ended December 31, 1994, 1993, 1992, 1991, 1990, 1989, 1988, 1987 and 1986,
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%, 1.76% and 1.36%, 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%, 4.37% and 4.56%, 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.......................... $1.524 $1.589 $1.574 $1.558 $1.209 $1.232 $1.101 $1.046 $1.092
-------- -------- -------- -------- -------- ------- ------- ------- ------- -------
Income from investment
operations:
Net investment income....... .061 .047 .030 .034 .047 .061 .066 .059 .037
Net gains or losses on
securities (both realized
and unrealized)........... .308 (.069) .066 .070 .302 (.017) .156 .056 (.012)
-------- -------- -------- -------- -------- ------- ------- ------- ------- -------
Total from investment
operations........... .369 (.022) .096 .104 .349 .044 .222 .115 .025
-------- -------- -------- -------- -------- ------- ------- ------- ------- -------
Less distributions:
Dividends from net
investment income......... (.049) (.033) (.037) (.041) -- (.063) (.065) (.060) (.067)
Distributions from capital
gains..................... (.018) (.010) (.044) (.047) -- (.004) (.026) -- (.004)
-------- -------- -------- -------- -------- ------- ------- ------- ------- -------
Total distributions..... (.067) (.043) (.081) (.088) -- (.067) (.091) (.060) (.071)
-------- -------- -------- -------- -------- ------- ------- ------- ------- -------
Net asset value, end of year.... $1.826 $1.524 $1.589 $1.574 $1.558 $1.209 $1.232 $1.101 $1.046
-------- -------- -------- -------- -------- ------- ------- ------- ------- -------
-------- -------- -------- -------- -------- ------- ------- ------- ------- -------
Total return (a)................ 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).................... $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).......... .55% .56% .57% .60% .62% .65% .65% .65% .66%
Ratio of net investment income
to average daily net assets
(b)........................... 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)................... 157.0% 123.6% 85.7% 106.5% 78.6% 67.2% 93.0% 190.2% 99.5%
<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 $2,078, $13,305, $3,453, and $12,854
in expenses for the years ended December 31, 1989, 1988, 1987 and 1986,
respectively. Had the portfolio paid all fees and expenses, the ratio of
expenses to average daily net assets would have been .66%, .74%, .69% and
1.09%, respectively, and the ratio of net investment income to average
daily net assets would have been 6.22%, 5.66%, 4.82% and 4.30%,
respectively.
</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........................... $1.098 $1.218 $1.185 $1.196 $1.029 $1.018 $.976 $.979 $1.000
------- ------- ------- ------- ------- ------- ------- ------ ------ -----
Income from investment operations:
Net investment income.......... .081 .074 .054 .045 .069 .086 .084 .086 .050
Net gains or losses on
securities (both realized and
unrealized).................. .107 (.115) .052 .024 .098 .011 .047 (.002) (.019)
------- ------- ------- ------- ------- ------- ------- ------ ------ -----
Total from investment
operations.............. .188 (.041) .106 .069 .167 .097 .131 .084 .031
------- ------- ------- ------- ------- ------- ------- ------ ------ -----
Less distributions:
Dividends from net investment
income....................... (.079) (.054) (.055) (.056) -- (.085) (.084) (.087) (.051)
Distributions from capital
gains........................ -- (.025) (.018) (.024) -- (.001) (.005) -- (.001)
------- ------- ------- ------- ------- ------- ------- ------ ------ -----
Total distributions........ (.079) (.079) (.073) (.080) -- (.086) (.089) (.087) (.052)
------- ------- ------- ------- ------- ------- ------- ------ ------ -----
Net asset value, end of period..... $1.207 $1.098 $1.218 $1.185 $1.196 $1.029 $1.018 $.976 $.979
------- ------- ------- ------- ------- ------- ------- ------ ------ -----
------- ------- ------- ------- ------- ------- ------- ------ ------ -----
Total return (b)................... 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)....................... $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% .60% .63% .65% .65% .65% .65% .65% .65%(e)
Ratio of net investment income to
average daily net assets (c)..... 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)........... 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........................... $1.518 $1.532 $1.428 $1.454 $1.120 $1.204 $.950 $.853 $1.000
------- ------- ------- ------- ------- ------- ------- ------- ------ -----
Income from investment operations:
Net investment income.......... .031 .029 .026 .024 .034 .032 .026 .035 .020
Net gains or losses on
securities (both realized and
unrealized).................. .517 (.012) .110 .073 .300 (.080) .262 .103 (.148)
------- ------- ------- ------- ------- ------- ------- ------- ------ -----
Total from investment
operations.............. .548 .017 .136 .097 .334 (.048) .288 .138 (.128)
------- ------- ------- ------- ------- ------- ------- ------- ------ -----
Less distributions:
Dividends from net investment
income....................... (.031) (.026) (.025) (.032) -- (.035) (.024) (.036) (.018)
Distributions from capital
gains........................ (.012) (.005) (.007) (.091) -- (.001) (.010) (.005) (.001)
------- ------- ------- ------- ------- ------- ------- ------- ------ -----
Total distributions........ (.043) (.031) (.032) (.123) -- (.036) (.034) (.041) (.019)
------- ------- ------- ------- ------- ------- ------- ------- ------ -----
Net asset value, end of period..... $2.023 $1.518 $1.532 $1.428 $1.454 $1.120 $1.204 $.950 $.853
------- ------- ------- ------- ------- ------- ------- ------- ------ -----
------- ------- ------- ------- ------- ------- ------- ------- ------ -----
Total return (b)................... 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)....................... $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)................... .47% .50% .55% .55% .55% .55% .55% .55% .55%(e)
Ratio of net investment income to
average daily net assets (c)..... 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)........... 4.8% 5.9% 4.8% 6.1% 26.4% 4.3% 8.8% 8.0% 5.7%
<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.
</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................. $1.808 $1.797 $1.682 $1.684 $1.198 $1.265 $.954 $.899 $1.000
-------- -------- -------- ------- -------- ------- ------- ------ ------ -----
Income from investment
operations:
Net investment income... (.003) -- .001 .004 .009 .010 .008 .006 .006
Net gains or losses on
securities (both
realized and
unrealized)........... .406 .039 .167 .078 .488 (.035) .355 .063 (.081)
-------- -------- -------- ------- -------- ------- ------- ------ ------ -----
Total from
investment
operations....... .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......... (.051) (.026) (.048) (.075) (.008) (.033) (.045) (.008) (.021)
-------- -------- -------- ------- -------- ------- ------- ------ ------ -----
Total
distributions.... (.051) (.028) (.053) (.084) (.011) (.042) (.052) (.014) (.026)
-------- -------- -------- ------- -------- ------- ------- ------ ------ -----
Net asset value, end of
period.................... $2.160 $1.808 $1.797 $1.682 $1.684 $1.198 $1.265 $.954 $.899
-------- -------- -------- ------- -------- ------- ------- ------ ------ -----
-------- -------- -------- ------- -------- ------- ------- ------ ------ -----
Total return (c)............ 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)............ $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)...... .80% .83% .86% .90% .90% .90% .90% .90% .90%(f)
Ratio of net investment
income to average daily
net assets (d)............ (.15)% (.09)% .12% .42% .92% 1.15% 1.03% .91% 1.19%(f)
Portfolio turnover rate
(excluding short-term
securities)............... 51.1% 68.4% 95.9% 138.8% 70.5% 57.9% 89.1% 103.0% 121.6%
<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.
</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.............. $1.235 $1.310 $.919 $1.000
-------- -------- -------- ------- ------
Income from investment operations:
Net investment income......................... .033 .011 .016 .010
Net gains or losses on securities (both
realized and unrealized).................... .142 (.015) .389 (.077)
-------- -------- -------- ------- ------
Total from investment operations.......... .175 (.004) .405 (.067)
-------- -------- -------- ------- ------
Less distributions:
Dividends from net investment income.......... -- (.029) (.007) (.010)
Excess distributions of net investment
income...................................... -- -- -- (.002)
Tax return of capital......................... -- (.001) -- --
Distributions from capital gains.............. -- (.041) (.007) --
Excess distributions of net realized gains.... -- -- -- (.002)
-------- -------- -------- ------- ------
Total distributions....................... -- (.071) (.014) (.014)
-------- -------- -------- ------- ------
Net asset value, end of period.................... $1.410 $1.235 $1.310 $.919
-------- -------- -------- ------- ------
-------- -------- -------- ------- ------
Total return (b).................................. 14.2% (.3)% 44.2% (6.8)%(d)
Net assets, end of period (in thousands).......... $140,770 $107,490 $61,106 $17,401
Ratio of expenses to average daily net
assets (c)...................................... 1.04% 1.24% 1.55% 2.00%(e)
Ratio of net investment income to average daily
net assets (c).................................. 2.69% 1.68% 1.04% 2.10%(e)
Portfolio turnover rate (excluding short-term
securities)..................................... 20.3% 12.9% 12.7% 11.7%
<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.
</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.............. $1.226 $1.157 $1.000
------ ------ ------ ------
Income from investment operations:
Net investment income......................... .002 .002 --
Net gains or losses on securities (both
realized and unrealized)..................... .392 .069 .173
------ ------ ------ ------
Total from investment operations.......... .394 .071 .173
------ ------ ------ ------
Less distributions:
Dividends from net investment income.......... (.002) (.002) --
Distributions from net realized gains......... (.016) -- (.015)
Excess distributions of net realized gains.... -- -- (.001)
------ ------ ------ ------
Total distributions....................... (.018) (.002) (.016)
------ ------ ------ ------
Net asset value, end of period.................... $1.602 $1.226 $1.157
------ ------ ------ ------
------ ------ ------ ------
Total return (b).................................. 32.1% 6.2% 17.4%(c)
Net assets, end of period (in thousands).......... $ 98,895 $ 51,105 $13,043
Ratio of expenses to average daily net
assets (d)...................................... .84% .89% .90%(e)
Ratio of net investment income (loss) to average
daily net assets (d)............................ .15% .24% (.02)%(e)
Portfolio turnover rate (excluding short-term
securities)..................................... 61.3% 28.1% 34.9%
<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.
</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.............. $.945 $.989
-------- -------- ------
Income from investment operations:
Net investment income......................... .059 .043
Net gains or losses on securities (both
realized and unrealized)..................... .092 (.043)
-------- -------- ------
Total from investment operations.......... .151 --
-------- -------- ------
Less distributions:
Dividends from net investment income.......... (.058) (.044)
Distributions from capital gains.............. -- --
-------- -------- ------
Total distributions....................... (.058) (.044)
-------- -------- ------
Net asset value, end of period.................... $1.038 $.945
-------- -------- ------
-------- -------- ------
Total return (b).................................. 16.0% .1%(c)
Net assets, end of period (in thousands).......... $5,057 $3,402
Ratio of expenses to average daily net assets
(d)............................................. .20% .20%(e)
Ratio of net investment income to average daily
net assets (d).................................. 6.22% 6.45%(e)
Portfolio turnover rate (excluding short-term
securities)..................................... 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 $22,794 and $21,714 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 .72% and 1.12%,
respectively, and the ratio of net investment income to average daily net
assets would have been 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.............. $.932 $.977
-------- -------- -----
Income from investment operations:
Net investment income......................... .072 .047
Net gains or losses on securities (both
realized and unrealized)..................... .161 (.044)
-------- -------- -----
Total from investment operations.......... .233 .003
-------- -------- -----
Less distributions:
Dividends from net investment income.......... (.072) (.048)
Tax return of capital......................... (.002) --
Distributions from capital gains.............. -- --
-------- -------- -----
Total distributions....................... (.074) (.048)
-------- -------- -----
Net asset value, end of period.................... $1.091 $.932
-------- -------- -----
-------- -------- -----
Total return (b).................................. 25.0% .3%(c)
Net assets, end of period (in thousands).......... $ 3,049 $ 2,575
Ratio of expenses to average daily net assets
(d)............................................. .20% .20%(e)
Ratio of net investment income to average daily
net assets (d).................................. 6.52% 7.18%(e)
Portfolio turnover rate (excluding short-term
securities)..................................... -- 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 $24,709 and $23,298 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 1.06% and 1.52%,
respectively and the ratio of net investment income to average daily net
assets would have been 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.............. $.923 $.970
-------- -------- -----
Income from investment operations:
Net investment income......................... .069 .047
Net gains or losses on securities (both
realized and unrealized)..................... .251 (.046)
-------- -------- -----
Total from investment operations.......... .320 .001
-------- -------- -----
Less distributions:
Dividends from net investment income.......... (.069) (.048)
Distributions from capital gains.............. -- --
-------- -------- -----
Total distributions....................... (.069) (.048)
-------- -------- -----
Net asset value, end of period.................... $ 1.174 $ .923
-------- -------- -----
-------- -------- -----
Total return (b).................................. 34.7% .1%(c)
Net assets, end of period (in thousands).......... $ 2,570 $ 1,860
Ratio of expenses to average daily net assets
(d)............................................. .40% .40%(e)
Ratio of net investment income to average daily
net assets (d).................................. 6.56% 7.45%(e)
Portfolio turnover rate (excluding short-term
securities)..................................... 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 $25,199 and $24,803 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 1.56% and 2.37%,
respectively and the ratio of net investment income to average daily net
assets would have been 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.............. $.910 $.962
-------- -------- ------
Income from investment operations:
Net investment income......................... .070 .049
Net gains or losses on securities (both
realized and unrealized)..................... .304 (.052)
-------- -------- ------
Total from investment operations.......... .374 (.003)
-------- -------- ------
Less distributions:
Dividends from net investment income.......... (.070) (.049)
Distributions from capital gains.............. -- --
-------- -------- ------
Total distributions....................... (.070) (.049)
-------- -------- ------
Net asset value, end of period.................... $1.214 $.910
-------- -------- ------
-------- -------- ------
Total return (b).................................. 41.2% (.3)%(c)
Net assets, end of period (in thousands).......... $1,384 $1,071
Ratio of expenses to average daily net assets
(d).............................................. .40% .40%(e)
Ratio of net investment income to average daily
net assets (d)................................... 6.58% 7.79%(e)
Portfolio turnover rate (excluding short-term
securities)...................................... -- 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 $26,308 and $25,888 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 2.68% and 4.01%,
respectively and the ratio of net investment income to average daily net
assets would have been 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.............. $1.044 $1.010
-------- -------- ------
Income from investment operations:
Net investment income......................... .010 .008
Net gains or losses on securities (both
realized and unrealized)..................... .331 .038
-------- -------- ------
Total from investment operations.......... .341 .046
-------- -------- ------
Less distributions:
Dividends from net investment income.......... (.010) (.009)
Distributions from capital gains.............. (.063) (.003)
-------- -------- ------
Total distributions....................... (.073) (.012)
-------- -------- ------
Net asset value, end of period.................... $1.312 $1.044
-------- -------- ------
-------- -------- ------
Total return (b).................................. 33.0% 4.6%(c)
Net assets, end of period (in thousands).......... $31,825 $8,771
Ratio of expenses to average daily net assets
(d).............................................. .89% .90%(e)
Ratio of net investment income to average daily
net assets (d)................................... 1.25% 2.07%(e)
Portfolio turnover rate (excluding short-term
securities)...................................... 164.2% 49.5%
<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.
</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 % and %, 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) 298-3500.
- --------------------------------------------------------------------------------
THE FUND
- ------------------------------------
MIMLIC Series Fund, Inc., (the "Fund") is a diversified, open-end
management investment company incorporated under Minnesota law on February 21,
1985. 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 North Star Life Insurance
Company, a wholly-owned life insurance subsidiary of Minnesota Mutual domiciled
in the state of New York.
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, the Value Stock Portfolio, four
Maturing Government Bond Portfolios (maturing respectively in 1998, 2002, 2006
and 2010), the Macro-Cap Value Portfolio, the Index 400 Mid-Cap Portfolio, the
Small Company Value Portfolio, the Micro-Cap Value Portfolio, the Micro-Cap
Growth Portfolio and the International Bond 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 into an investment sub-advisory agreement with
Winslow Capital Management, Inc. ("Winslow Management"), a
20
<PAGE>
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
Counsel"), 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 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
Keystone Investment Management Company, ("Keystone Management"), a Delaware
corporation with primary offices in Boston, Massachusetts, under which Keystone
provides advisory services to the Micro-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. 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.
Currently, Fund shares may be 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. 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 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.
21
<PAGE>
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 MIMLIC
Management, 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 MIMLIC Management'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. 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
22
<PAGE>
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 "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
23
<PAGE>
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 MIMLIC Management'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 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-
24
<PAGE>
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 MIMLIC
Management 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. Selling securities prior to
their maturity may result in the Portfolio's realizing gains and losses.
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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 in money market instruments. No minimum percentage has been
established for any of the
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sectors. Major changes in investment mix may occur several times within a year
or over several years, depending upon market and economic conditions.
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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 MIMLIC
Management.
At times the Portfolio may invest in mortgage-related securities not meeting
the foregoing investment quality standards when deemed by MIMLIC Management 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. MIMLIC
Management 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 MIMLIC Management; 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 MIMLIC Management), 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 Portfolio).
In periods of declining interest rates,
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<PAGE>
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 MIMLIC Management 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 credit losses and provide investment grade ratings.
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<PAGE>
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 underlying the CMO of which a Z tranche is a part.
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<PAGE>
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.
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 MIMLIC Management is representative of
the performance of publicly traded common stocks. The
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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 MIMLIC
Management determines to be necessary or appropriate for the Portfolio to
approximate the performance of the Index. To assist in such determination MIMLIC
Management has entered into an agreement with Wilshire Associates which permits
MIMLIC Management 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.
MIMLIC Management 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. MIMLIC Management anticipates that the deviation in each sector of
the Portfolio will not exceed .14%. 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
MIMLIC Management, 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 MIMLIC Management
determines that the investment has been impaired substantially by the financial
condition of or extraordinary events involving the stock's issuer.
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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
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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 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
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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 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,
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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 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
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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 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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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 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 MIMLIC
Management 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. MIMLIC
Management 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 MIMLIC Management 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
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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 MIMLIC Management. 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 MIMLIC
Management will consider such event in the determination of whether the
Portfolio should continue to hold the security.
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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.
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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.
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
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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 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
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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.
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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
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
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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 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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INDEX 400 MID-CAP -
PORTFOLIO
The Index 400 Mid-Cap Portfolio seeks to provide investment results
generally
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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 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 maximizing the level of the Portfolio's assets used to
track 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
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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
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. A stock index futures contract is an agreement between two parties to take
or make delivery of an amount of cash equal to a specified dollar amount times
the difference between the stock index value at the close of trading of the
contract and the price at which the futures contract is originally struck.
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 10% 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
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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 Fund'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 Fund's custodian, or a duly
appointed subcustodian, holds the securities underlying any repurchase agreement
in a segregated account or such securities may be part of the Federal Reserve
Book Entry System. The market value of the collateral underlying the repurchase
agreement is determined on each business day. If at any time the market value of
the collateral falls below the repurchase price of the repurchase agreement
(including any accrued interest), the 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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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
MIMLIC Management to be "value" securities. Small 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 MIMLIC Management 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 MIMLIC
Management 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
MIMLIC Management, 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 MIMLIC Management 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 MIMLIC Management to be well above average, debt
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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 MIMLIC Management 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 MIMLIC
Management 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 MIMLIC Management
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 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. MIMLIC 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.
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.
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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.
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
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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. See "Investment Restrictions," below. 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 United States 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 10% 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
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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 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
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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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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 either
capitalization and which, in the opinion of Advantus Capital, 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
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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
Advantus Capital or the sub-adviser to be "value" securities. 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 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 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 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
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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. 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, 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
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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. See "Investment Restrictions," below. 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 10% of its net assets in securities or other assets which are illiquid. An
investment is generally deemed to be "illiquid" if
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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 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
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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 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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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 adviser and 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 advisers also
seek 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 Portfolio will primarily purchase securities which, at the time
of purchase, are issued by "micro-cap" companies and are considered by the
adviser and 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 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.
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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 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 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
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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. See "Investment Restrictions" below. 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 10% 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
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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 agreements are agreements by which the Portfolio
purchases a security and obtains a simultaneous commitment from the seller (a
member bank of the
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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 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 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
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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 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
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<PAGE>
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 obligations and
could be subject to extended clearance and settlement periods.
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<PAGE>
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 at the time that
the Portfolio enters into the contract. To assure that the Portfolio's forward
currency
62
<PAGE>
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 OPINIONS. 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.
- --------------------------------------------------------------------------------
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
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<PAGE>
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. 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
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.
- --------------------------------------------------------------------------------
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
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<PAGE>
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.
- --------------------------------------------------------------------------------
INVESTMENT
ADVISER
- ------------------------------------
The Fund's investment adviser is Advantus Capital.
Advantus Capital commenced its current business in January, 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 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, 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,
Mortgage Securities and Value Stock 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 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. The International Bond Portfolio pays Advantus Capital a fee equal
to an annual rate of .60% 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
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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, MIMLIC Management 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 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
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 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. From its advisory fee for the International
Bond Portfolio, Advantus Capital pays JBIM a fee equal to .35% of all daily net
assets under its Investment Sub-Advisory Agreement.
The advisory fees paid by the Capital Appreciation, International Stock, Small
Company, Value Stock, Small Company Value and Global Bond Portfolios are not
higher than the advisory fees paid by many funds with similar investments and
investment policies, but they are higher than that paid by most funds to their
investment advisers. For these fees, 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 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 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 $ 905,136 $ 678,415
BOND 435,045 245,068
MONEY MARKET 126,630 93,032
ASSET ALLOCATION 1,538,272 1,309,477
MORTGAGE SECURITIES 322,465 318,510
INDEX 500 388,206 263,397
CAPITAL APPRECIATION 1,071,527 739,240
INTERNATIONAL STOCK 955,095 715,345
SMALL COMPANY 552,670 226,241
VALUE STOCK 141,207 25,425
MATURING GOVERNMENT
BOND --
1998 PORTFOLIO 2,184 1,179
2002 PORTFOLIO 1,441 879
2006 PORTFOLIO 5,450 3,149
2010 PORTFOLIO 2,888 1,791
</TABLE>
The Fund pays all its costs and expenses which are not assumed by MIMLIC
Management. 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 MIMLIC Management 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. MIMLIC Management 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. MIMLIC Management also bears all costs under its
agreement with Wilshire Associates for the use by MIMLIC Management, 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 MIMLIC Management
who are primarily responsible for the day-to-day management of each of the
Fund's Portfolios, other than the Index 500 Portfolio, the length of time
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<PAGE>
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 VICE PRESIDENT, PORTFOLIO MANAGEMENT/RESEARCH, TEMPLETON
STOCK VICE PRESIDENT, INVESTMENT COUNSEL, INC., SINCE 1993; PRIOR THERETO FROM MAY
TEMPLETON INVESTMENT 1990, VICE PRESIDENT, PACIFIC FINANCIAL RESEARCH, BEVERLY
COUNSEL, INC. HILLS, CALIFORNIA
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
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
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
MACRO-CAP MICHAEL J. KELLY OCTOBER 1, 1997 INSTITUTIONAL PORTFOLIO MANAGER
VALUE VICE PRESIDENT, J.P.
MORGAN INVESTMENT
MANAGEMENT INC.
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
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
</TABLE>
67
<PAGE>
<TABLE>
<CAPTION>
PORTFOLIO MANAGER PRIMARY PORTFOLIO
PORTFOLIO AND TITLE MANAGER SINCE BUSINESS EXPERIENCE DURING PAST FIVE YEARS
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
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
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
</TABLE>
Subsequent to March 6, 1987, 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 Portfolio, .90%
of average daily net assets for the Capital Appreciation, Small Company, Value
Stock and Small Company Value Portfolios, 1.25% of average daily net assets for
the Global Bond Portfolio and 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
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-
BOND -0- -0-
MONEY MARKET -0- 13,734
ASSET ALLOCATION -0- -0-
MORTGAGE SECURITIES -0- -0-
INDEX 500 -0- -0-
CAPITAL APPRECIATION -0- -0-
INTERNATIONAL STOCK -0- -0-
SMALL COMPANY -0- 9,532
VALUE STOCK 11,610 22,503
MATURING GOVERNMENT BOND --
1998 PORTFOLIO 22,794 21,714
2002 PORTFOLIO 24,709 23,298
2006 PORTFOLIO 25,199 24,803
2010 PORTFOLIO 26,308 25,888
</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
- ------------------------------------
Winslow Capital Management, Inc. (hereinafter "Winslow
Management"), a Minnesota
68
<PAGE>
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 recent
entrant into the advisory business, having begun business in June of 1992.
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.
An additional experienced principal joined the firm in October of 1993. 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.
Prior to October 1, 1992, investment sub-advisory services were provided to
the Capital Appreciation Portfolio by Alliance Capital Management L.P., which
had provided such services since the Portfolio's inception.
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.
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.
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.
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
69
<PAGE>
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.
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.
70
<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 the Growth Portfolio, the Bond 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, the Value Stock Portfolio and each of
the four Maturing Government Bond Portfolios 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 the Growth, Bond,
Asset Allocation, Mortgage Securities, Index 500, Capital Appreciation,
International Stock, Small Company, Value Stock and the four Maturing Government
Bond Portfolios will be declared at least annually and reinvested in additional
full and fractional shares of those Portfolios. 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.
71
<PAGE>
- --------------------------------------------------------------------------------
TAXES
- ------------------------------------
The Fund qualified for the year ended December 31, 1995 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.
Since Minnesota Mutual 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,
Macro-Cap Value, Index 400 Mid-Cap, Small Company Value, Micro-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
72
<PAGE>
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 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.
73
<PAGE>
- --------------------------------------------------------------------------------
APPENDIX A
- ------------------------------------
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.
73
<PAGE>
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, MIMLIC Management, 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 MIMLIC Management has determined present minimal risk of loss to the Fund.
MIMLIC Management 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 MIMLIC Management 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--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,
MIMLIC Management 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 MIMLIC Management to be
liquid in accordance with standards established by the Fund's Board of
Directors. Under these guidelines, MIMLIC Management 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.
74
<PAGE>
- --------------------------------------------------------------------------------
APPENDIX B
- ------------------------------------
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
75
<PAGE>
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.
76
<PAGE>
PART B. INFORMATION REQUIRED IN A STATEMENT OF ADDITIONAL INFORMATION
-------------------------------------------------------------
<PAGE>
MIMLIC 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) 298-3500, 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 ................... 24
<PAGE>
THE FUND
MIMLIC 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 MIMLIC Asset Management Company ("MIMLIC
Management"). MIMLIC Management 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. 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. 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. 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. 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.
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 also sell its shares to separate accounts of North Star
Life Insurance Company, a New York wholly-owned subsidiary of Minnesota
Mutual. 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 Value Stock Portfolio and the four Maturing
Government Bond Portfolios 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 $3,000,000,
representing 3,000,000 shares of the Value Stock Portfolio, its 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, and its contribution of $1,100,000 representing 1,100,000
shares of the Maturing Government Bond Portfolio - 2010, 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
-2-
<PAGE>
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 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.
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
-3-
<PAGE>
total assets will, except for temporary defensive positions, be
invested).
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.
-4-
<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.
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.
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 MIMLIC Management, or, in
the case of the Capital Appreciation and International Stock Portfolios,
by Winslow Management and Templeton Counsel, respectively, 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
-5-
<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 MIMLIC Management 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 91.9% 42.0%
Bond 205.4 166.2
Money Market N/A N/A
Asset Allocation 157.0 123.6
Mortgage Securities 133.7 197.3
Index 500 4.8 5.9
Capital Appreciation 51.1 68.4
International Stock 20.5 12.9
Small Company 61.3 28.1
Value Stock 164.2 49.5
Maturing Government Bond -
1998 Portfolio 9.0 -0-
2002 Portfolio -0- 11.6
2006 Portfolio 10.0 -0-
2010 Portfolio -0- 14.5
</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 Vice President, Second Vice President of The
The Minnesota Mutual Life Treasurer and Minnesota Mutual Life
Insurance Company Director 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, Vice President and Treasurer
The Minnesota Mutual Life Treasurer and of The Minnesota Mutual Life
Insurance Company Director 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 MIMLIC Asset Management Company
("MIMLIC Management").
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 MIMLIC Management. Each director of the Fund who is not
affiliated with MIMLIC Management 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
Ellen S. Berscheid
Ralph D. Ebbott
</TABLE>
(1) Each Director of the Fund who is not affiliated with MIMLIC Management is
also a director of the other nine investment companies of which MIMLIC
Management's wholly-owned subsidiary, Advantus Capital Management, Inc., is
the investment adviser (ten 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 $1,000 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. 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.
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. 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. 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.
CONTROL AND MANAGEMENT OF ADVISER
MIMLIC Management is a wholly-owned subsidiary of Minnesota Mutual, which
was organized in 1880, and has assets of approximately $11.3 billion. Paul H.
Gooding, President, Treasurer, and a director of MIMLIC Management 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 Agreements are 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 Agreements 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 Agreements, cast in person at a meeting called for the
purpose of voting on such approval. The required shareholder approval of any
continuance of the Agreements 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 recent entrant into the advisory business, having begun business
in June of 1992. 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. An additional experienced principal joined the firm
in October of 1993. 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.
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Prior to October 1, 1992, investment sub-advisory services were provided to
the Capital Appreciation Portfolio by Alliance Capital Management L.P., which
had provided such services since the Portfolio's inception.
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
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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 - 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 - 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 - 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.
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.
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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
MIMLIC Management selects and (where applicable) negotiates commissions
with the brokers who execute the transactions for all Portfolios of the Fund,
except the Capital Appreciation and International Stock Portfolios. The primary
criteria for the selection of a broker is the ability of the broker, in the
opinion of MIMLIC Management, 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, MIMLIC Management
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 seller 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 MIMLIC Management,
the Fund enables MIMLIC Management to supplement its own investment research
activities and allows MIMLIC Management 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
MIMLIC Management, MIMLIC Management 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 MIMLIC Management of the Fund's
brokerage business to any broker-dealers for brokerage and research services.
However, MIMLIC Management 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 MIMLIC Management
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 MIMLIC
Management's overall responsibilities with respect to the accounts as to which
it exercises investment discretion.
To the extent research services are used by MIMLIC Management in
rendering investment advice to the Fund, such services would tend to reduce
MIMLIC Management's expenses. However, MIMLIC Management does not believe
that an exact dollar amount can be assigned to these services. Research
services received by MIMLIC Management from brokers or dealers executing
transactions for the Fund will be available also for the benefit of other
portfolios managed by MIMLIC Management, and conversely, research services
received by MIMLIC Management 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, $____; Asset
Allocation Portfolio, $_____; Index 500 Portfolio $_____; Capital
Appreciation Portfolio, $_____; International Stock Portfolio, $_____; Small
Company Portfolio, $_____; and Value Stock Portfolio, $_____. 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,
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$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 1995, 1994 and 1993 was
paid to brokers to whom such transactions were directed in exchange for
research services.
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
-------------- -------------------------
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SUB-ADVISERS
Winslow Management, in managing the Capital Appreciation Portfolio,
intends to follow the same brokerage practices as those described above for
Advantus Capital.
SUB-ADVISER - TEMPLETON COUNSEL
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.
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<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
-16-
<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 MIMLIC Management, 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 ___% and ___%, 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 Value Stock Portfolio and the 1998, 2002, 2006 and 2010 Maturing
Government Bond Portfolios were _____ and ______, respectively. 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 _____, 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 12/31/95 Inception
----------- ---------
<S> <C> <C>
Growth Portfolio 12/3/85
Bond Portfolio 12/3/85
Money Market Portfolio 12/3/85
Asset Allocation Portfolio 12/3/85
Mortgage Securities Portfolio 5/1/87
Index 500 Portfolio 5/1/87
Capital Appreciation Portfolio 5/1/87
International Stock Portfolio 5/1/92
Small Company Portfolio 5/3/93
Value Stock Portfolio 5/2/94
Maturing Government Bond -
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<PAGE>
1998 Portfolio 5/2/94
2002 Portfolio 5/2/94
2006 Portfolio 5/2/94
2010 Portfolio 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 12/3/85
Bond Portfolio 12/3/85
Money Market Portfolio 12/3/85
Asset Allocation Portfolio 12/3/85
Mortgage Securities Portfolio 5/1/87
Index 500 Portfolio 5/1/87
Capital Appreciation Portfolio 5/1/87
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<PAGE>
International Stock Portfolio 5/1/92
Small Company Portfolio 5/3/93
Value Stock Portfolio 5/2/94
Maturing Government Bond-
1998 Portfolio 5/2/94
2002 Portfolio 5/2/94
2006 Portfolio 5/2/94
2010 Portfolio 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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<PAGE>
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 included in this Statement of Additional Information have been audited
by KPMG Peat Marwick LLP, 4200 Norwest Center, 90 South Seventh Street,
Minneapolis, Minnesota 55402, independent auditors, as indicated in their report
in this Statement of Additional Information, and are included herein in reliance
upon such report and upon the authority of such firm as experts in accounting
and auditing.
-23-
<PAGE>
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.
-24-
<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;
-25-
<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.
-26-
<PAGE>
PART C
OTHER INFORMATION
<PAGE>
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) (i) Audited Financial Statements of the MIMLIC Series Fund, Inc. as
of December 31, 1996, are included in Part B of this filing and
consist of the following:
To be supplied by subsequent amendment.
(b) Exhibits:
(1) (A) Articles of Incorporation - Previously filed as
Exhibit 24(b)(1)(A) to Registrant's Form N-1A,
File Number 2-96990, is hereby incorporated by
reference.
(B) Articles of Amendment dated October 22, 1985 -
Previously filed as Exhibit 24(b)(1)(B) to
Registrant's Form N-1A, File Number 2-96990,
Pre-Effective Amendment Number 1, is hereby
incorporated by reference.
(C) Articles of Amendment dated April 28, 1987 -
Previously filed as Exhibit 24(b)(1)(C) to
Registrant's Form N-1A, File Number 2-96990,
Post-Effective Amendment Number 4, is hereby
incorporated by reference.
(D) Articles of Amendment dated May 24, 1991 -
Previously filed as Exhibit 24(b)(1)(C) to
Registrant's N-1A, File Number 2-96990,
Post-Effective Amendment Number 9, is hereby
incorporated by reference.
(2) Bylaws - Previously filed as Exhibit 24(b)(2) to
Registrant's Form N-1A, File Number 2-96990, is hereby
incorporated by reference.
<PAGE>
(5) (A) Form of Investment Advisory Agreement between
the Registrant and MIMLIC Asset Management
Company - Previously filed as Exhibit
24(b)(5)(A) to Registrant's Form N-1A, File
Number 2-96990, Post-Effective Amendment Number
1, is hereby incorporated by reference.
(B) Supplemental Investment Advisory Agreement
between the Registrant and MIMLIC Asset
Management Company - Previously filed as Exhibit
24(b)(5)(B) to Registrant's Form N-1A, File
Number 2-96990, Post-Effective Amendment Number
3, is hereby incorporated by reference.
(C) (i) Prior Investment Sub-Advisory Agreement between
MIMLIC Asset Management Company and Winslow
Capital Management, Inc. - Previously filed as
Exhibit 24(b)(5)(C) to Registrant's N-1A, File
Number 2-96990, Post-Effective Amendment Number
10, is hereby incorporated by reference.
<PAGE>
(C)(ii) Current Investment Sub-Advisory Agreement between
MIMLIC Asset Management Company and Winslow
Capital Management, Inc. - Previously filed as
Exhibit 24(b)(5)(C)(ii) to Registrant's N-1A,
File Number 2-96990, Post-Effective Amendment
Number 14, is hereby incorporated by reference.
(D) Second Supplemental Investment Advisory
Agreement between the Registrant and MIMLIC
Asset Management Company - Previously filed as
Exhibit 24(b)(5)(D) to Registrant's N-1A, File
Number 2-96990, Post-Effective Amendment Number
9, is hereby incorporated by reference.
(E) Investment Sub-Advisory Agreement between
MIMLIC Asset Management Company and Templeton
Investment Counsel, Inc. - Previously filed as
Exhibit 24(b)(5)(E) to Registrant's N-1A, File
Number 2-96990, Post-Effective Amendment Number
10, is hereby incorporated by reference.
(F) Third Supplemental Investment Advisory
Agreement between the Registrant and MIMLIC
Asset Management Company - Previously filed as
Exhibit 24(b)(5)(F) to Registrant's N-1A, File
Number 2-96990, Post-Effective Amendment Number
10, is hereby incorporated by reference.
(G) Fourth Supplemental Investment Advisory
Agreement between the Registrant and MIMLIC
Asset Management Company - Previously filed as
Exhibit 24(b)(5)(G) to Registrant's Form N-1A,
File Number 2-96990, Post-Effective Amendment
Number 11, is hereby incorporated by reference.
(H) Fifth Supplemental Investment Advisory Agreement
between the Registrant and MIMLIC Asset Management
Company - Previously filed as Exhibit 24(b)(5)(H)
to Registrant's Form N-1A, File Number 2-96990,
Post-Effective Amendment Number 14, is hereby
incorporated by reference.
(I) Investment Sub-Advisory Agreement between MIMLIC
Asset Management Company and Voyageur Fund
Managers, Inc. - Previously filed as Exhibit
24(b)(5)(I) to Registrant's Form N-1A, File
Number 2-96990, Post-Effective Amendment Number
14, is hereby incorporated by reference.
(J) Investment Sub-Advisory Agreement between
Voyageur Fund Managers, Inc. and Lazard London
International Investment Management,
Limited - Previously filed as Exhibit 24(b)(5)(J)
to Registrant's Form N-1A, File Number 2-96990,
Post-Effective Amendment Number 14, is hereby
incorporated by reference.
(K) Investment Advisory Agreement between the
Registrant and Advantus Capital Management, Inc.
(L) Investment Sub-Advisory Agreement between Advantus
Capital Management, Inc. and J.P. Morgan
Investment Management Inc.
(M) Investment Sub-Advisory Agreement between Advantus
Capital Management, Inc. and Keystone Investment
Management, Inc.
(N) Investment Sub-Advisory Agreement between Advantus
Capital Management, Inc. and Wall Street
Associates
(O) Investment Sub-Advisory Agreement between Advantus
Capital Management, Inc. and Julius Baer
Investment Management Inc.
(8) (A) (i) Form of Custodian Agreement between the
Registrant and First Trust National Association
- Previously filed as Exhibit 24(b)(8)(A) to
Registrant's N-1A, File Number 2-96990,
Post-Effective Amendment Number 10, is hereby
incorporated by reference.
(A) (ii) Amendment to Custodian Agreement between the
Registrant and First Trust National
Association - Previously filed as
Exhibit 24(b)(8)(A)(ii) to Registrant's N-1A,
File Number 2-96990, Post-Effective
Amendment Number 14, is hereby incorporated by
reference.
(B) (i) Form of Custodian Agreement between the
Registrant and Norwest Bank Minnesota, N.A. -
Previously filed as Exhibit 24(b)(8)(B) to
Registrant's N-1A, File Number 2-96990,
Post-Effective Amendment Number 10, is hereby
incorporated by reference.
(B) (ii) Amendment to the Custodian Agreement between
the Registrant and Norwest Bank Minnesota, N.A.
- Previously filed as Exhibit 24(b)(8)(B)(ii)
to Registrant's N-1A, File Number 2-96990,
Post-Effective Amendment Number 12, is hereby
incorporated by reference.
(C) Form of Custodian Agreement between the
Registrant and Bankers Trust Company -
Previously filed as Exhibit 24(b)(8)(C) to
Registrant's N-1A, File Number 2-96990,
Post-Effective Amendment Number 10, is hereby
incorporated by reference.
(D) Form of Custodian Agreement between the
Registrant and Bankers Trust Company.
(9) Form of Service Agreement between MIMLIC Asset Management
Company and Wilshire Associates - Previously filed as
Exhibit 24(b)(9) to Registrant's Form N-1A, File Number
2-96990, Post-Effective Amendment Number 3, is hereby
incorporated by reference.
<PAGE>
(10) Opinion and Consents
(A) Opinion and Consent of Doherty, Rumble & Butler
P.A.-Previously filed as Exhibit 24(b)(10)(A)
to Registrant's Form N-1A, File Number 2-96990,
Pre-Effective Amendment Number 1, is hereby
incorporated by reference.
(11) Consent of KPMG Peat Marwick LLP.
(13) Form of Letter of Investment Intent - Previously filed as
Exhibit 24(b)(13) to Registrant's Form N-1A, File Number
2-96990, Pre-Effective Amendment Number 1, shall be
incorporated by reference.
(16) Schedules for Computation of Performance Quotation
(A) Growth Portfolio (formerly the "Stock"
Portfolio) Performance Calculations, previously
filed as this Exhibit to Registrant's Form
N-1A, File Number 2-96990, Post-Effective
Amendment Number 7, shall be incorporated by
reference.
(B) Bond Portfolio Performance Calculations,
previously filed as this Exhibit to
Registrant's Form N-1A, File Number 2-96990,
Post-Effective Amendment Number 7, shall be
incorporated by reference.
(C) Money Market Portfolio Performance
Calculations, previously filed as this Exhibit
to Registrant's Form N-1A, File Number 2-96990,
Post-Effective Amendment Number 7, shall be
incorporated by reference.
(D) Asset Allocation Portfolio (formerly the
"Managed" Portfolio) Performance Calculations,
previously filed as this Exhibit to
Registrant's Form N-1A, File Number 2-96990,
Post-Effective Amendment Number 7, shall be
incorporated by reference.
(E) Mortgage Securities Portfolio Performance
Calculations, previously filed as this Exhibit
to Registrant's Form N-1A, File Number 2-96990,
Post-Effective Amendment Number 7, shall be
incorporated by reference.
(F) Index 500 Portfolio (formerly the "Index"
Portfolio) Performance Calculations, previously
filed as this Exhibit to Registrant's Form
N-1A, File Number 2-96990, Post-Effective
Amendment Number 7, shall be incorporated by
reference.
(G) Capital Appreciation Portfolio (formerly the
"Aggressive Growth" Portfolio) Performance
Calculations - Previously filed as this Exhibit
to Registrant's Form N-1A, File Number 2-96990,
Post-Effective Amendment Number 7, shall be
incorporated by reference.
(H) International Stock Portfolio Performance
Calculations - Previously filed as this Exhibit
to Registrant's Form N-1A, File Number 2-96990,
Post-Effective
<PAGE>
Amendment Number 10, shall be incorporated by
reference.
(I) Small Company Portfolio Performance
Calculations - Previously filed as Exhibit
24(b)(16)(I) to Registrant's Form N-1A, File
Number 2-96990, Post-Effective Amendment Number
12, is hereby incorporated by reference.
(J) Value Stock Portfolio Performance Calculations
- Previously filed as Exhibit 24(b)(16)(J) to
Registrant's Form N-1A, File Number 2-96990,
Post-Effective Amendment Number 12, is hereby
incorporated by reference.
(K) Maturing Government Bond - 1998 Portfolio
Performance Calculations - Previously filed as
Exhibit 24(b)(16)(K) to Registrant's Form N-1A,
File Number 2-96990, Post-Effective Amendment
Number 12, is hereby incorporated by reference.
(L) Maturing Government Bond - 2002 Portfolio
Performance Calculations - Previously filed as
Exhibit 24(b)(16)(L) to Registrant's Form N-1A,
File Number 2-96990, Post-Effective Amendment
Number 12, is hereby incorporated by reference.
(M) Maturing Government Bond - 2006 Portfolio
Performance Calculations - Previously filed as
Exhibit 24(b)(16)(M) to Registrant's Form N-1A,
File Number 2-96990, Post-Effective Amendment
Number 12, is hereby incorporated by reference.
(N) Maturing Government Bond - 2010 Portfolio
Performance Calculations - Previously filed as
Exhibit 24(b)(16)(N) to Registrant's Form N-1A,
File Number 2-96990, Post-Effective Amendment
Number 12, is hereby incorporated by reference.
(17) Financial Data Schedules - To be supplied by subsequent amendment
<PAGE>
(19) Power of Attorney to sign Registration Statement executed
by Directors of Registrant
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE DEPOSITOR OR
REGISTRANT
Wholly-owned subsidiaries of The Minnesota Mutual Life Insurance Company:
MIMLIC Asset Management Company
The Ministers Life Insurance Company
MIMLIC Corporation
Minnesota Fire and Casualty Company
Northstar Life Insurance Company (New York)
Robert Street Energy, Inc.
Open-end registered investment company offering shares solely to separate
accounts of The Minnesota Mutual Life Insurance Company:
MIMLIC Series Fund, Inc.
Wholly-owned subsidiaries of MIMLIC Asset Management Company:
MIMLIC Sales Corporation
Advantus Capital Management, Inc.
Wholly-owned subsidiaries of MIMLIC Corporation:
DataPlan Securities, Inc. (Ohio)
MIMLIC Imperial Corporation
MIMLIC Funding, Inc.
MIMLIC Venture Corporation
Personal Finance Company (Delaware)
Wedgewood Valley Golf, Inc.
Ministers Life Resources, Inc.
Enterprise Holding Corporation
HomePlus Agency, Inc.
Wholly-owned subsidiaries of Enterprise Holding Corporation:
Oakleaf Service Corporation
Lafayette Litho, Inc.
Financial Ink Corporation
Concepts in Marketing Research Corporation
Concepts in Marketing Services Corporation
Wholly-owned subsidiary of Minnesota Fire and Casualty Company:
HomePlus Insurance Company
<PAGE>
Majority-owned subsidiaries of MIMLIC Imperial Corporation:
J. H. Shoemaker Advisory Corporation
Consolidated Capital Advisors, Inc.
Majority-owned subsidiary of MIMLIC Sales Corporation:
MIMLIC Insurance Agency of Ohio, Inc. (Ohio)
Fifty percent-owned subsidiary of MIMLIC Imperial Corporation:
C.R.I. Securities, Inc.
Majority-owned subsidiaries of The Minnesota Mutual Life Insurance Company:
MIMLIC Life Insurance Company (Arizona)
MIMLIC Cash Fund, Inc.
Advantus Cornerstone Fund, Inc.
Advantus Enterprise Fund, Inc.
Advantus International Balanced Fund, Inc.
Advantus Venture Fund, Inc.
Advantus Index 500 Fund, Inc.
Less than majority owned, but greater than 25% owned, subsidiaries of The
Minnesota Mutual Life Insurance Company:
Advantus Money Market Fund, Inc.
Less than 25% owned subsidiaries of The Minnesota Mutual Life Insurance Company:
Advantus Horizon Fund, Inc.
Advantus Spectrum Fund, Inc.
Advantus Mortgage Securities Fund, Inc.
Advantus Bond Fund, Inc.
Unless indicated otherwise parenthetically, each of the above
corporations is a Minnesota corporation.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES
As of the date of filing of this amendment to the Registration
Statement:
Number of
Title of Class Record Holders
-------------- --------------
Growth Portfolio 7
Bond Portfolio 7
Money Market Portfolio 7
Asset Allocation Portfolio 7
Mortgage Securities Portfolio 7
Index 500 Portfolio 7
Capital Appreciation Portfolio 5
International Stock Portfolio 6
Small Company Portfolio 7
Value Stock Portfolio 6
Maturing Government Bond - 1998 Portfolio 4
Maturing Government Bond - 2002 Portfolio 4
<PAGE>
Maturing Government Bond - 2006 Portfolio 4
Maturing Government Bond - 2010 Portfolio 4
ITEM 27. INDEMNIFICATION
The Articles of Incorporation and Bylaws of the Registrant provide
that the Registrant shall indemnify such persons, for such expenses and
liabilities, in such manner, under circumstances, to the full extent permitted
by Section 302A.521, Minnesota Statutes, as now enacted or hereafter amended,
provided that no such indemnification may be made if it would be in violation of
Section 17(h) of the Investment Company Act of 1940, as now enacted, or
hereafter amended. Section 302A.521 of the Minnesota Statutes, as now enacted,
provides that a corporation shall indemnify a person made or threatened to be
made a party to a proceeding by reason of the former or present official
capacity of the person against judgments, penalties, fines, settlements and
reasonable expenses, including attorneys' fees and disbursements, incurred by
the person in connection with the proceeding, if, with respect to the acts or
omissions of the person complained of in the proceeding, the person has not been
indemnified by another organization for the same judgments, penalties, fines,
settlements and reasonable expenses incurred by the person in connection with
the proceeding with respect to the same acts or omissions; acted in good faith;
received no improper personal benefit and the Minnesota Statute dealing with
directors' conflicts of interest, if applicable, has been satisfied; in the case
of a criminal proceeding, had no reasonable cause to believe the conduct was
unlawful; and reasonably believed that the conduct was in the best interests of
the corporation or, in certain circumstances, reasonably believed that the
conduct was not opposed to the best interests of the corporation.
Insofar as indemnification for liability arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and the Registrant will be governed by the final
adjudication of such issue.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
(a) MIMLIC Asset Management Company
Directors and Officers Office with
of Investment Adviser Investment Adviser Other Business Connections
- ---------------------- ------------------ --------------------------
Paul H. Gooding President, Treasurer President, Secretary and
and Director Director, MIMLIC Corporation;
Director, MIMLIC Imperial
Corporation; Director, MIMLIC
Venture Corporation; Vice
President and Director, MIMLIC
Funding, Inc.; Vice President
and Director,
<PAGE>
Robert Street Energy, Inc.;
Chairman of the Board,
Director, Personal Finance
Company; Vice President and
Treasurer, The Minnesota Mutual
Life Insurance Company;
President and Director,
Advantus Capital Management,
Inc.
Guy M. de Lambert Vice President, President and Director,
Secretary and MIMLIC Venture Corporation;
Director Vice President, MIMLIC Funding,
Inc.; President and Secretary,
Robert Street Energy, Inc.;
President and Director,
Wedgewood Valley Golf, Inc.;
Second Vice President, The
Minnesota Mutual Life Insurance
Company; President and
Director, Personal Finance
Company
Frederick P. Feuerherm Vice President, Vice President, MIMLIC
Assistant Secretary Funding, Inc.; Second Vice
and Director President, The Minnesota Mutual
Life Insurance Company
Alan J. Notvik Vice President and President and Director,
Assistant Secretary MIMLIC Funding, Inc.; Second
Vice President, The Minnesota
Mutual Life Insurance Company
James P. Tatera Vice President and Vice President, MIMLIC
Assistant Secretary Funding, Inc.; Second Vice
President, The Minnesota Mutual
Life Insurance Company; Senior
Vice President, Treasurer and
Director, Advantus Capital
Management, Inc.
Loren Haugland Vice President None
Lynne Mills Vice President Vice President, Robert Street
Energy, Inc.; Second Vice
President, The Minnesota Mutual
Life Insurance Company
Marilyn Froelich Vice President None
Dianne Orbison Vice President Vice President, MIMLIC
Venture Corporation; Second
Vice President, The Minnesota
Mutual Life Insurance Company
Joseph R. Betlej Vice President Vice President, Secretary and
Director, Wedgewood Valley
Golf, Inc.; Vice President,
MIMLIC Venture Corporation
Kay L. Scow Vice President Vice President, Robert Street
Energy, Inc.
The Fund's investment adviser is MIMLIC Management. In addition to the
Fund, it manages investment advisory accounts for a number of insurance
<PAGE>
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.
(b) Winslow Capital Management, Inc.
Winslow Capital Management, Inc. acts as investment sub-adviser to the
Capital Appreciation Portfolio of the Registrant. The following are
Directors and officers of Winslow Capital Management, Inc., including their
other business connections which are of a substantial nature:
Position
Winslow Capital Other Business Connections
Name Management, Inc. During Last Two Years
- ---- ---------------- --------------------------
Clark J. Winslow President and President, Portfolio Manager
Director and Director, Winslow
Capital Management, Inc.
Gail M. Knappenberger Executive Vice Executive Vice President,
President and Portfolio Manager and
Director Director, Winslow Capital
Management, Inc.
Richard E. Pyle Executive Vice Executive Vice President,
President and Portfolio Manager and
Director Director, Winslow Capital
Management, Inc.
Jon R. Foust Managing Director Managing Director, Winslow
Capital Management, Inc.; Vice
President of Institutional
Marketing and Client Service,
Investment Advisers, Inc.
Lynne P. Pelos Vice President Vice President and Chief
Administrative Officer,
Winslow Capital Management,
Inc.
Gail L. Kummer Vice President Vice President and Trader,
Winslow Capital Management,
Inc.
Winslow Capital Management, Inc. has one other investment company client
for which it acts as the investment adviser. Assets currently under
management are also managed for corporate, foundation, endowment,
retirement system and individual clients.
(c) Templeton Investment Counsel, Inc.
Templeton Investment Counsel, Inc. ("TICI"), a Florida corporation with
offices at Broward Financial Centre, Suite 2100, Fort Lauderdale, Florida
33394-3091, is an indirect, wholly-owned subsidiary of Franklin Resources,
Inc.
<PAGE>
The following are Directors of TICI, located at the above-referenced
address unless otherwise indicated, and their principal occupations or other
business connections which are of a substantial nature:
Name, Address and
Position with TICI Principal Occupation
------------------ --------------------
Charles E. Johnson Senior Vice President and
Chairman Director of Franklin Resources, Inc.
777 Mariners Island Blvd. Resources, Inc.; President and
San Mateo, California Director of Templeton Worldwide, Inc.
Donald F. Reed President, CEO and Director of
Director and President Templeton Management Limited
Martin L. Flanagan Senior Vice President, Chief
Director and Executive Financial Officer and
Vice President Treasurer of Franklin
777 Mariners Island Blvd. Resources, Inc.
San Mateo, California
Gregory E. McGowan Attorney - International
Director and Executive Marketing
Vice President
Gary P. Motyl Equity Research and Portfolio
Director and Executive Management
Vice President
Elizabeth M. Knoblock Attorney
Senior Vice President,
Secretary and General Counsel
(d) 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 for the Macro-Cap Value Portfolio of the Fund.
Directors and Officers Office with Other Business
of Investment Adviser Investment Adviser Connections
- --------------------- ------------------ -----------
Cary Nicholas Potter Chairman & Director Morgan Guaranty Trust
Company, Managing Director
William Lyman Cobb, Jr. Director, Managing Morgan Guaranty Trust
Director and Vice Company; Managing Director
Chairman
Keith Morgan Schappert President, Director & Morgan Guaranty Trust
Managing Director Company, Managing Director
Jean Louis Pierre Director Morgan Guaranty Trust
Brunel Company; Managing Director
Steven Milan Soltis Director/Managing Morgan Guaranty Trust
Director Company, Managing
Director
Robert Anthony Anselmi Director/ General
Counsel Managing
Director & Secretary
John Robert Thomas Director
Kenneth Warren Anderson Director/Managing
Director
Michael Romano Granito Director/Managing Morgan Guaranty Trust
Director Company, Managing Director
Michael Ellmore Patterson Director J.P. Morgan & Co., Inc.
Vice Chairman and Director;
Morgan Guaranty Trust, Vice
Chairman and Director
Thomas Michael Luddy Managing Director Morgan Guaranty Trust
Company, Managing Director
George Edgar Austin Managing Director Morgan Guaranty Trust
Company, Managing Director
George Louis Gardella Managing Director Morgan Guaranty Trust
Company, Managing Director
(e) 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 for the Micro-Cap Value Portfolio of the
Fund.
Directors and Officers Office with Other Business
of Investment Adviser Investment Adviser Connections
- --------------------- ------------------ -----------
Albert H. Elfner, III Chairman of the Board, Keystone Group, Inc.;
Chief Executive COO/President
Officer/Director
Philip M. Byrne Senior Vice President Keystone Group, Inc.;
Sr. Vice President
Herbert L. Bishop, Jr. Senior Vice President
Donald C. Dates Senior Vice President
Gilman Gunn Senior Vice President
Edward F. Godfrey Senior Vice President, Keystone Group, Inc.;
Treasurer and Chief CFO, Senior Vice
Financial Officer President
James R. McCall President
Rosemary D. Senior Vice President,
Van Antwerp General Counsel and
Secretary
Christopher P. Conkey Senior Vice President Keystone Fixed Income
Advisers, Inc.; Vice
President
J. Gary Craven Senior Vice President
Richard Cryan Senior Vice President
Maureen E. Cullinane Senior Vice President
Betsy Hutchings Senior Vice President
Walter T. McCormick Senior Vice President
George F. Wilkins Senior Vice President
John D. Rogol Vice President and
Controller
John Addeo Vice President
Andrew Baldassarre Vice President
David Benhaim Vice President
Donald Bisson Vice President
Liu-Er Chen Vice President
Francis X. Claro Vice President
Kristine R. Cloyes Vice President
George E. Dlugos Vice President
Antonio T. Docal Vice President
Dana E. Erikson Vice President
Sami J. Karam Vice President
J. Kevin Kenely Vice President
George J. Kimball Vice President
Craig Lewis Vice President
JoAnn L. Lyndon Vice President
John C. Madden, Jr. Vice President
Eleanor H. Marsh Vice President
James D. Medredeff Vice President
Stanley M. Niksa Vice President
Jonathan A. Noonan Vice President
Robert E. O'Brien Vice President
Margery C. Parker Vice President
William H. Parsons Vice President
Joyce W. Petkovich Vice President
Gary E. Pzegeo Vice President
Daniel A. Rabasco Vice President
Harlen R. Sanderling Vice President
Kathy K. Wang Vice President
Judith A. Warners Vice President
Mary Willis Vice President
Peter Willis Vice President
Richard A. Wisentaner Vice President
Cheryle E. Wanble Vice President
Walter Zagrobski Vice President
(f) 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 for the
Micro-Cap Growth Portfolio of the Fund.
Directors and Officers Office with Other Business
of Investment Adviser Investment Adviser Connections
- --------------------- ------------------ -----------
William Jeffery, II Portfolio Manager
Chairman of Board
of Directors
Kenneth F. McCain Portfolio Manager
Director
Richard S. Coons Portfolio Manager
Director
(g) 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 for the International Bond Portfolio of the Fund.
Directors and Officers Office with Other Business
of Investment Adviser Investment Adviser Connections
- --------------------- ------------------ -----------
Peter J. Widmer Baer Holding,Ltd.;
Chairman Management
Committee Member
Jay A. Dirnberger Julius Baer Securities,
Managing Director Inc.; Vice President
Hans C. Mautner Corporate Property
Director Investors, President
and Trustee
Jonathan C. Minter
Managing Director,
London
Alessandro E. Fusina Ilander, Ltd.
President and Director
Cynthia Young
Corporate Secretary
ITEM 29. PRINCIPAL UNDERWRITERS
Not applicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
The physical possession of the accounts, books and other documents
required to be maintained by Section 31(a) of the Investment Company Act of 1940
and Rules 31a-1 to 31a-3 promulgated thereunder is maintained by Minnesota
Mutual, 400 Robert Street North, St. Paul, Minnesota 55101-2098; except that
the physical possession of certain accounts, books and other documents related
to the custody of the Registrant's securities is maintained
<PAGE>
by: (a) First Trust National Association, First Trust Center, 180 East Fifth
Street, St. Paul, Minnesota 55101, as to the Growth, Asset Allocation, Index
500, Capital Appreciation, Small Company, Value Stock, Macro-Cap Value, Index
400 Mid-Cap, Small Company Value, Micro-Cap Value and Micro-Cap Growth
Portfolios; (b) Norwest Bank Minnesota, N.A., 733 Marquette Avenue,
Minneapolis, Minnesota 55479, as to the International Stock Portfolio; and
(c) Bankers Trust Company, 280 Park Avenue, New York, New York 10017, as to
the Bond, Money Market, Mortgage Securities, the four Maturing Government
Bond Portfolios and the International Bond Portfolio.
ITEM 31. MANAGEMENT SERVICES
Not applicable.
ITEM 32. UNDERTAKINGS
(a) Not applicable.
(b) The Registrant hereby undertakes to file, using financial
statements which need not be certified, a Post-Effective Amendment
within four to six months from the effective date of the Registration
Statement for its Macro-Cap Value Portfolio, Index 400 Mid-Cap
Portfolio, Small Company Value Portfolio, Micro-Cap Value Portfolio,
Micro-Cap Growth Portfolio and International Bond Portfolio.
(c) The Registrant hereby undertakes to furnish, upon request and without
charge to each person to whom a prospectus is delivered, a copy of
the Registrant's latest annual report to shareholders containing the
information called for by Item 5A.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant has duly caused this Post-Effective
Amendment to its Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Saint Paul, and the State
of Minnesota, on the 14th day of February, 1997.
MIMLIC SERIES FUND, INC.
By _____________________________________
Paul H. Gooding, President
Pursuant to the requirements of the Securities Act of 1933, this Post-Effective
Amendment to the Registration Statement has been signed below by the following
persons in the capacities and on the date indicated.
Signature Title Date
--------- ----- ----
_______________________ President February 14, 1997
Paul H. Gooding and Director
Frederick P. Feuerherm* Director)
- ----------------------- )
Frederick P. Feuerherm )
)
Charles E. Arner* Director)
Charles E. Arner )
) By _________________________
) Paul H. Gooding
Ellen S. Berscheid* Director) Attorney-in-Fact
Ellen S. Berscheid )
) Dated: February 14, 1997
)
Ralph D. Ebbott* Director)
Ralph D. Ebbott )
______________
*Registrant's director executing power of attorney dated January 18, 1994, a
copy of which is filed herewith.
<PAGE>
EXHIBIT INDEX
Exhibit Number Description of Exhibit
- -------------- ----------------------
5(K) Investment Advisory Agreement between the Registrant and Advantus
Capital Management, Inc.
5(L) Investment Sub-Advisory Agreement between Advantus Capital
Management, Inc. and J.P. Morgan Investment Management Inc.
5(M) Investment Sub-Advisory Agreement between Advantus Capital
Management, Inc. and Keystone Investment Management, Inc.
5(N) Investment Sub-Advisory Agreement between Advantus Capital
Management, Inc. and Wall Street Associates.
5(O) Investment Sub-Advisory Agreement between Advantus Capital
Management, Inc. and Julius Baer Investment Management Inc.
8(D) Form of Custodian Agreement between the Registrant and Bankers
Trust Company.
(11) Consent of KPMG Peat Marwick LLP.
(19) Power of Attorney to sign Registration Statement executed by
Directors of Registrant.
<PAGE>
INVESTMENT ADVISORY AGREEMENT
THIS AGREEMENT, made this ____ day of ________, 1997, by and between
Advantus Series Fund, Inc., a Minnesota corporation (the "Fund") and Advantus
Capital Management, Inc., a Minnesota corporation ("Adviser");
WITNESSETH:
WHEREAS, the Fund is engaged in business as a diversified open-end
management investment company registered as such under the Investment Company
Act of 1940 (the "Investment Company Act") and offers for sale distinct series
of shares of common stock (each a "Portfolio"), each of which Portfolios pursues
its investment objectives through separate policies;
WHEREAS, the Adviser is engaged in rendering investment advisory services
and is registered as an investment adviser under the Investment Advisers Act of
1940;
WHEREAS, the Fund desires and intends to have one or more investment
advisers ("Sub-Advisers") provide investment advisory and portfolio management
services with respect to the Portfolios other than those Portfolios managed by
the Adviser; and
WHEREAS, the Fund desires to appoint the Adviser to provide investment
advisory and management services to the Fund and each Portfolio as now exists
and as hereafter may be established in the manner and on the terms hereinafter
set forth, and the Adviser is willing to furnish such services.
<PAGE>
NOW THEREFORE, in consideration of the premises and the mutual covenants
herein contained, the parties do hereby agree as follows:
Section 1. APPOINTMENT OF ADVISER
The Fund appoints the Adviser to act as the investment adviser to and
manager of the Fund and the Portfolios, to manage the investment and
reinvestment of the assets of those Portfolios and to administer each
Portfolio's affairs subject to the supervision of the Board of Directors of the
Fund on the terms and conditions set forth in this Agreement. The Adviser
accepts such appointment and agrees to render the services and to assume the
obligations set forth in this Agreement.
The Adviser will for all purposes provided in this Agreement be deemed to
be an independent contractor and will have no authority to act for or represent
the Fund in any way or otherwise be deemed an agent of the Fund, unless
otherwise expressly provided or authorized either in this Agreement or in
another writing by the Fund. The Fund retains the ultimate responsibility and
authority for direction and control of the services provided by the Adviser
pursuant to this Agreement.
Section 2. DUTIES OF THE ADVISER
The investment of the assets of the Fund shall at all times be subject to
the applicable provisions of the Articles of Incorporation, the Bylaws, the
Registration Statement, the current Prospectus and the Statement of Additional
Information of the Fund and shall conform to the investment objectives, policies
and restrictions of the Fund as set forth in such documents and as interpreted
from time to time by the Board of Directors of the Fund. Within the framework
of the
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<PAGE>
investment objectives, policies and restrictions of the Fund, the Adviser shall
have the sole and exclusive responsibility for the management of the Fund's
several Portfolios and the making and execution of all investment decisions for
the Fund and those Portfolios which the Adviser manages directly.
In carrying out its obligations to manage the investments and reinvestments
of the assets of the Portfolios of the Fund, the Adviser shall: (1) obtain and
evaluate pertinent economic, statistical, financial and other information
affecting the economy generally and individual companies or industries the
securities of which are included in the Fund's Portfolios or are under
consideration for inclusion therein; (2) formulate and implement a continuous
investment program for each Portfolio consistent with the investment objective
and related investment policies for each such Portfolio as set forth in the
Fund's registration statement, as amended; and (3) take such steps as are
necessary to implement the aforementioned investment programs by purchase and
sale of securities including the placing of orders for such purchases and sales.
The Adviser shall report to the Board of Directors of the Fund regularly at
such times and in such detail as the Board may from time to time determine to be
appropriate in order to permit the Board to determine the adherence of the
Adviser to the investment objectives, policies and restrictions of the Fund and
of each of its Portfolios.
The Adviser shall, at its own expense, furnish the Fund office space and
all necessary office facilities, equipment and personnel for servicing the
investments of the Fund. The Adviser shall arrange for officers or employees of
the Adviser to serve without compensation from the Fund as directors, officers
or employees of the Fund if duly elected or appointed to such positions by the
shareholders, directors or officers of the Fund.
-3-
<PAGE>
The Adviser shall maintain all records necessary in the operation of the
Fund including records pertaining to its shareholders and investments. The
Adviser hereby acknowledges that all such records are the property of the Fund,
and in the event that a transfer of management or investment advisory services
to someone other than the Adviser should ever occur, the Adviser will promptly
and at its own cost, take all steps necessary to segregate such records and
deliver them to the Fund.
Section 3. COMPENSATION FOR SERVICES
In payment for the investment advisory services to be rendered by the
Adviser hereunder, the Fund shall pay to the Adviser as full compensation for
all services hereunder a fee computed separately for each Portfolio at an annual
rate, as set forth in Schedule A to this Agreement.
The amount of the fees as set forth in Schedule A hereto will be deducted
on each business day from the value of each Portfolio of the Fund prior to
determining the Portfolio's net asset value for the day and it shall be
transmitted or credited to the Adviser. The fee shall be based on the net asset
values of all of the issued and outstanding shares of such Portfolio of the Fund
as determined as of the close of each business day pursuant to the Articles of
Incorporation, Bylaws and currently effective Prospectus and Statement of
Additional Information of the Fund.
Section 4. USE OF SUB-ADVISER
(a) Subject to the supervision and direction of the Board of Directors,
the Adviser will provide to the Fund investment management evaluation services
with respect to certain Portfolios principally by performing initial review of
prospective Sub-Advisers for those Portfolios and supervising and monitoring
Sub-Adviser performance thereafter. The Adviser agrees to report to
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<PAGE>
the Fund the results of its evaluation, supervision and monitoring functions and
to keep certain books and records of the Fund in connection therewith. The
Adviser further agrees to communicate performance expectations and evaluations
to the Sub-Advisers, and to recommend to the Fund whether agreements with Sub-
Advisers should be renewed, modified or terminated.
(b) The Adviser is responsible for informing the Sub-Advisers of the
investment objective(s), policies and restrictions of the Portfolio(s) for which
the Sub-Adviser is responsible, for informing or ascertaining that it is aware
of other legal and regulatory responsibilities applicable to the Sub-Adviser
with respect to the Portfolio(s) for which the Sub-Adviser is responsible, and
is not responsible for the specific actions (or inactions) of a Sub-Adviser in
the performance of the duties assigned to it.
(c) The Adviser shall enter into an agreement(s) ("Sub-Advisory
Agreement") with one or more Sub-Advisers for each Portfolio which the Adviser
does not manage directly. The Sub-Advisory Agreement between the Adviser and
any Sub-Adviser shall be subject to the approval of the Fund's Board of
Directors.
(d) The Adviser shall be responsible for the fees payable to and shall pay
the Sub-Adviser of each Portfolio the fee as specified in the Sub-Advisory
Agreement relating thereto.
Section 5. ALLOCATION OF EXPENSES
In addition to the fee described in Section 3 hereof, the Fund shall pay
all its costs and expenses which are not assumed by the Adviser. 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
the Adviser or any of its affiliates, expenses of the directors' and
-5-
<PAGE>
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. The Adviser 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.
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.
Section 6. FREEDOM TO DEAL WITH THIRD PARTIES
The Adviser shall be free to render services to others, including other
investment companies, similar to those rendered under this Agreement or of a
different nature except as such services may conflict with the services to be
rendered or the duties to be assumed hereunder. It is understood and agreed
that the officers, directors and employees of the Adviser are not prohibited
from engaging in any other business activity or from rendering services to any
other person, or
-6-
<PAGE>
from serving as partners, officers, directors or employees of any other firm or
corporation, including other investment companies.
Section 7. CONFLICTS OF INTEREST
It is understood that directors, officers, agents and stockholders of the
Fund are or may be interested in the Adviser as directors, officers,
stockholders, or otherwise; that directors, officers, agents and stockholders of
the Adviser are or may be interested in the Fund as directors, officers,
stockholders or otherwise; that the Adviser may be interested in the Fund; and
that the existence of any such dual interest shall not affect the validity
hereof or of any transactions hereunder except as otherwise provided in the
Articles of Incorporation of the Fund and the Adviser, respectively, or by
specific provision of applicable law.
Section 8. REGULATION
The Adviser shall submit to all regulatory and administrative bodies having
jurisdiction over the services provided pursuant to this Agreement any
information, reports or other material which any such body by reason of this
Agreement may request or require pursuant to applicable laws and regulations.
Section 9. DURATION AND TERMINATION OF AGREEMENT
This Agreement shall become effective upon its approval by the Shareholders
of the class of capital stock of each Portfolio, which shall be the date of its
execution first above written. This Agreement will continue in effect for a
period more than two years from the date of its execution only so long as such
continuance is specifically approved at least annually either by the Board of
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<PAGE>
Directors of the Fund or by the vote of a majority of the outstanding voting
securities of the Fund, provided that in either event such continuance shall
also be approved by the vote of a majority of the directors of the Fund who are
not interested persons (as defined in the Investment Company Act) of any party
to this Agreement cast in person at a meeting called for the purpose of voting
on such approval. The required Shareholder approval of this Agreement or of any
continuance of this Agreement shall be effective with respect to a Portfolio if
a majority of the outstanding voting securities of the class (as defined in Rule
18f-2(h) under the Investment Company Act) of capital stock of that Portfolio
votes to approve the Agreement or its continuance, notwithstanding that the
Agreement or its 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 to which
this Agreement relates fail to approve the Agreement or any continuance of the
Agreement, the Adviser will continue to act as investment adviser with respect
to such Portfolio pending the required approval of the Agreement or its
continuance, of a new contract with the Adviser or a different adviser or other
definitive action; provided, that the compensation received by the Adviser in
respect of the Portfolio during such period will be no more than its actual
costs incurred in furnishing investment advisory and management services to the
Portfolio or the amount it would have received under the Agreement in respect of
the Portfolio, whichever is less.
This Agreement may be terminated at any time, without the payment of any
penalty, by the Board of Directors of the Fund or by the vote of a majority of
the outstanding voting securities of the Fund or by the Adviser, on sixty days'
written notice to the other party. This Agreement will automatically terminate
in the event of its assignment (as defined in the Investment Company Act).
-8-
<PAGE>
Section 10. AMENDMENTS TO THE AGREEMENT
This Agreement 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 this 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
to which this Agreement relates 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.
Section 11. NOTICE OF INFORMATION
Each party hereto shall advise the others promptly of (a) any action of the
Securities and Exchange Commission or any authorities of any state or territory,
of which it has knowledge, affecting registration or qualification of the Fund,
and (b) the happening of any event which makes untrue any statement, or which
requires the making of any change, in the registration statement or prospectus
in order to make the statements therein not misleading.
Section 12. ENTIRE AGREEMENT
This Agreement contains the entire understanding and agreement of the
parties.
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<PAGE>
Section 13. HEADINGS
The headings in the sections of this Agreement are inserted for convenience
of reference only and shall not constitute a part hereof.
Section 14 RECEIPT OF NOTICES
Any notice under this Agreement shall be in writing, addressed, delivered
or mailed, postage prepaid, to the other party at such address as such other
party may designate in writing for the receipt of such notice.
IN WITNESS WHEREOF, the Fund and the Adviser have caused this Agreement to
be executed by their duly authorized officers as of the day and year first above
written.
Advantus Series Fund, Inc.
By
-----------------------------------------
Paul H. Gooding
President
Advantus Capital Management, Inc.
By
-----------------------------------------
Paul H. Gooding
President
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<PAGE>
SCHEDULE A
TO THE
INVESTMENT ADVISORY AGREEMENT
As compensation for the services to be rendered and the charges and
expenses to be assumed and paid by the Adviser, each Portfolio shall pay the
Adviser an annual fee based on the average daily net asset value of the
respective Portfolio in accordance with Section 3 of the Investment Advisory
Agreement and the following schedule:
Portfolio Fee Rate
- --------- --------
Money Market Portfolio 0.50%
Stock Portfolio 0.50%
Bond Portfolio 0.50%
Managed Portfolio 0.50%
Mortgage Securities Portfolio 0.50%
Index Portfolio 0.40%
Aggressive Growth Portfolio 0.75%
International Stock Portfolio 1.00% on the first $10 million in assets
0.90% on the next $15 million in assets
0.80% on the next $25 million in assets
0.75% on the next $50 million in assets
0.65% on the next $100 million in assets
Small Company Portfolio 0.75%
Maturing Government Bond-1998
Portfolio 0.05% from inception to April 30, 1998
0.25% from May 1, 1998 and thereafter
Maturing Government Bond-2002
Portfolio 0.05% from inception to April 30, 1998
0.25% from May 1, 1998 and thereafter
Maturing Government Bond-2006
Portfolio 0.25%
Maturing Government Bond-2010
Portfolio 0.25%
Value Stock Portfolio 0.50%
<PAGE>
Small Company Value Portfolio 0.75%
Index 400 Mid-Cap Portfolio 0.40%
Micro-Cap Value Portfolio 1.25%
Macro-Cap Value Portfolio 0.70%
Micro-Cap Growth Portfolio 1.10%
International Bond Portfolio 0.60%
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<PAGE>
INVESTMENT SUB-ADVISORY AGREEMENT
THIS AGREEMENT, made this 1st day of May, 1997, by and between Advantus
Capital Management, Inc., a Minnesota corporation, registered as an Investment
Adviser under the Investment Advisers Act of 1940 (the "Adviser") and J.P.
Morgan Investment Management Inc., a Delaware corporation, registered as an
Investment Adviser under the Investment Advisers Act of 1940 (the "Sub-
Adviser").
WHEREAS, the Adviser is the Investment Adviser to Advantus Series Fund,
Inc., formerly MIMLIC Series Fund, Inc., (the "Fund"), an open-end diversified
management investment company organized as a series fund, registered under the
Investment Company Act of 1940, as amended (the "1940 Act"); and
WHEREAS, the Adviser desires to retain the Sub-Adviser to furnish it with
portfolio selection and related research and statistical services, as may be
provided in this Agreement in connection with the Adviser's investment advisory
activities on behalf of the Fund's Macro-Cap Value Portfolio (hereinafter
"Portfolio"), and the Sub-Adviser desires to furnish such services to the
Adviser;
NOW, THEREFORE, in consideration of the premises and the terms and
conditions hereinafter set forth, it is agreed as follows:
1. APPOINTMENT OF SUB-ADVISER
In accordance with and subject to the Investment Advisory Agreement between
the Fund and the Adviser dated May 1, 1997, the Adviser hereby appoints the Sub-
Adviser to perform portfolio selection services described herein for investment
and reinvestment of the Portfolio, subject to the control and direction of the
Fund's Board of Directors, for the period and on the terms hereinafter set
forth. The Sub-Adviser accepts such appointment and agrees to furnish the
services hereinafter set forth for the compensation herein provided. The Sub-
Adviser shall for all purposes herein be deemed to be an independent contractor
and shall, except as expressly provided or authorized, have no authority to act
for or represent the Fund or the Adviser in any way or otherwise be deemed an
agent of the Fund or the Adviser.
2. OBLIGATIONS OF AND SERVICES TO BE PROVIDED BY THE SUB-ADVISER
(a) The Sub-Adviser shall provide the following services and assume the
following obligations with respect to the Portfolio of the Fund:
(1) The investment of the assets of the Portfolio shall at all times be
subject to the applicable provisions of the Articles of
Incorporation, the Bylaws, the Registration Statement, the current
Prospectus and the Statement of Additional Information of the Fund
and shall conform to
<PAGE>
the investment objectives, policies and restrictions of the
Portfolio as set forth in such documents and as interpreted from
time to time by the Board of Directors of the Fund and by the
Adviser, including diversification of the holdings of the Portfolio
as a segregated asset account in accordance with Section 817 of the
Internal Revenue Code, as amended (the "Code"), and Regulation
Section 1.817-5 thereunder, provided that Advantus and Minnesota
Mutual shall be responsible for ensuring that the Fund as a whole
is "adequately diversified" if and to the extent required by
Section 817(h) of the Code and Regulation 1.817-5 thereunder.
Within the framework of the investment objectives, policies and
restrictions of the Portfolio, and subject to the supervision of
the Adviser, the Sub-Adviser shall have the sole and exclusive
responsibility for the making and execution of all investment
decisions for the Portfolio. Advantus agrees to promptly inform
the Sub-Adviser if such objective, policies or restrictions change
and to deliver to the Sub-Adviser updated documents, if prepared.
In addition the Adviser agrees, on an ongoing basis, to provide the
Sub-Adviser as promptly as practicable copies of all amendments and
supplements to the Prospectus, Statement of Additional Information
and Articles of Incorporation of the Fund.
(2) In carrying out its obligations to manage the investments and
reinvestments of the assets of the Portfolio, the Sub-Adviser
shall: (1) obtain and evaluate pertinent economic, statistical,
financial and other information affecting the economy generally and
individual companies or industries the securities of which are
included in the Portfolio or are under consideration for inclusion
therein; (2) formulate and implement a continuous investment
program for the Portfolio consistent with the investment objective
and related investment policies for such Portfolio as set forth in
the Fund's registration statement, as amended; and (3) take such
steps as are necessary to implement the aforementioned investment
program by purchase and sale of securities including the placing,
or directing the placement through an affiliate of the Sub-Adviser,
of orders for such purchases and sales.
(3) In connection with the purchase and sale of securities of the
Portfolio, the Sub-Adviser shall arrange for the transmission to
the Adviser and the Custodian for the Fund on a daily basis such
confirmation, trade tickets and other documents as may be necessary
to enable them to perform their administrative responsibilities
with respect to the Portfolio. With respect to portfolio
securities to be purchased or sold through the Depository Trust
Company, the Sub-Adviser shall arrange for the automatic
transmission of the I.D. confirmation of the trade to the Custodian
of the Portfolio. The Sub-Adviser shall render such reports to the
Adviser and/or to the Fund's Board of Directors
2
<PAGE>
concerning the investment activity and portfolio composition of the
Portfolio in such form and at such intervals as the Adviser or the
Board may from time to time require.
(4) The Sub-Adviser shall, in the name of the Fund, place or direct the
placement of orders for the execution of portfolio transactions in
accordance with the policies with respect thereto, as set forth in
the Fund's Registration Statement, as amended from time to time,
and under the 1933 Act and the 1940 Act. In connection with the
placement of orders for the execution of the Fund's portfolio
transactions, the Sub-Adviser shall create and maintain all
necessary brokerage records of the Fund in accordance with all
applicable law, rules and regulations, including but not limited
to, records required by Section 31(a) of the 1940 Act. All records
shall be the property of the Fund and shall be available for
inspection and use by the Securities and Exchange Commission, the
Fund or any person retained by the Fund. Where applicable, such
records shall be maintained by the Sub-Adviser for the period and
in the place required by Rule 31a-2 under the 1940 Act.
(5) In placing orders or directing the placement of orders for the
execution of portfolio transactions, the Sub-Adviser shall select
brokers and dealers for the execution of the Portfolio's
transactions. In selecting brokers or dealers to execute such
orders, the Sub-Adviser is expressly authorized to consider the
fact that a broker or dealer has furnished statistical, research or
other information or services which enhance the Sub-Adviser's
investment research and portfolio management capability generally.
It is further understood in accordance with Section 28(e) of the
Securities Exchange Act of 1934, as amended, that the Sub-Adviser
may negotiate with and assign to a broker a commission which may
exceed the commission which another broker would have charged for
effecting the transaction if the Sub-Adviser determines in good
faith that the amount of commission charged was reasonable in
relation to the value of brokerage and/or research services (as
defined in Section 28(e)) provided by such broker, viewed in terms
either of the Portfolio or the Sub-Adviser's overall
responsibilities to the Sub-Adviser's discretionary accounts.
(b) The Sub-Adviser shall use the same skill and care in providing services
to the Fund as it uses in providing services to fiduciary accounts for which it
has investment responsibility. The Sub-Adviser will conform with all applicable
rules and regulations of the Securities and Exchange Commission.
3
<PAGE>
3. EXPENSES
During the terms of this Agreement, the Sub-Adviser will pay all expenses
incurred by it in connection with its activities under this Agreement.
4. COMPENSATION
In payment for the investment sub-advisory services to be rendered by the
Sub-Adviser in respect of the Portfolio hereunder, the Adviser shall pay to the
Sub-Adviser as full compensation for all services hereunder a fee computed at an
annual rate which shall be a percentage of the average daily value of the net
assets of the Portfolio. The fee shall be accrued daily and shall be based on
the net asset values of all of the issued and outstanding shares of the
Portfolio as determined as of the close of each business day pursuant to the
Articles of Incorporation, Bylaws and currently effective Prospectus and
Statement of Additional Information of the Fund. The fee shall be payable in
arrears on the last day of each calendar month.
The amount of such annual fee, as applied to the average daily value of the
net assets of the Portfolio shall be as described in the schedule below:
Assets Fee
------ ---
Total Portfolio Assets .45%
5. RENEWAL AND TERMINATION
This Agreement shall continue in effect for a period more than two years
from the date of this Agreement, only so long as such continuance is
specifically approved at least annually by a vote of the holders of the majority
of the outstanding voting securities of the Portfolio, or by a vote of the
majority of the Fund's Board of Directors. And further provided that such
continuance is also approved annually by a vote of the majority of the Fund's
Board of Directors who are not parties to this Agreement or interested persons
of parties hereto, cast in person at a meeting called for the purpose of voting
on such approval. This Agreement may be terminated at any time without payment
of penalty: (i) by the Fund's Board of Directors or by a vote of a majority of
the outstanding voting securities of the class of capital stock of the Portfolio
on sixty days' prior written notice, or (ii) by either party hereto upon sixty
days' prior written notice to the other. This Agreement will terminate
automatically upon any termination of the Investment Advisory Agreement between
the Fund and the Adviser or in the event of its assignment, with notice provided
to the Sub-Adviser in such event. The terms "interested person," "assignment"
and "vote of a majority of the outstanding voting securities" shall have the
meanings set forth in the 1940 Act.
4
<PAGE>
6. GENERAL PROVISIONS
(a) The Sub-Adviser may rely on information reasonably believed by it to be
accurate and reliable. Except as may otherwise be provided by the 1940 Act,
neither the Sub-Adviser nor its officers, directors, employees or agents shall
be subject to any liability for any error of judgment or mistake of law or for
any loss arising out of any investment or other act or omission in the
performance by the Sub-Adviser of its duties under this Agreement or for any
loss or damage resulting from the imposition by any government or exchange
control restrictions which might affect the liquidity of the Portfolio's assets,
or from acts or omissions of custodians or securities depositories, or from any
war or political act of any foreign government to which such assets might be
exposed, provided that nothing herein shall be deemed to protect, or purport to
protect, the Sub-Adviser against any liability to the Fund or to its
shareholders to which the Sub-Adviser would otherwise be subject by reason of
willful misfeasance, bad faith or gross negligence in the performance of its
duties hereunder, or by reason of the Sub-Adviser's reckless disregard of its
obligations and duties hereunder (each such act or omission shall be referred to
as "Disqualifying in Conduct"). The Sub-Adviser shall not be deemed to have
engaged in Disqualifying Conduct if it complies with the Guidelines and acts in
reliance on the Report, and the Sub-Adviser's failure to act in accordance
therewith shall not constitute evidence that it engaged in Disqualifying
conduct.
(b) The Adviser agrees on an on-going basis to provide or cause to be
provided to the Sub-Adviser guidelines, the Fund's investment objective(s) and
policies stated in the Prospectus, the Statement and the Articles of
Incorporation to be revised as provided below (the "Guidelines"), setting forth
limitations, by dollar amount or percentage of net assets, on the types of
securities in which the Fund is permitted to invest or investment activities in
which the Fund is permitted to engage. Among other matters, the Guidelines
shall set forth clearly the limitations imposed upon the Fund as a result of
relevant diversification requirements under state and federal law pertaining to
insurance products, including, without limitation, the provisions of Section
817(h) of the Internal Revenue Code of 1986, as amended (the "Code"). The
Guidelines shall remain in effect until 12:00 p.m. on the third business day
following actual receipt by the Sub-Adviser of a written notice, denominated
clearly as such, setting forth revised Guidelines. The Adviser agrees to cause
to be delivered to a person designated in writing for such purpose by the Sub-
Adviser each day, by ______p.m., New York time, a written report dated the date
of its delivery (the "Report") with respect to the funds' compliance for its
current fiscal year with the short-three test set forth in Section 851(b) (3) of
the Code (the "short-three test"). The Report shall include in chart form the
fund's gross income (within the meaning of Section 851 of the Code) from the
beginning of the current fiscal year to the date of the Report and its
cumulative income and gains described in Section 851(b) (3) of the Code for such
period. If the Report is not timely delivered, the Sub-Adviser shall be
permitted to rely on the most recent Report delivered to it. The Company and
the Adviser agree that the Sub-Adviser may rely on the Guidelines and the Report
without independent verification of their accuracy.
5
<PAGE>
(c) The Adviser and the Fund's Board of Directors understand that the value
of investments made for the Account may go up as well as down, is not guaranteed
and that investment decisions will not always be profitable. The Adviser has
not made and is not making any guarantees, including any guarantee as to any
specific level of performance of the Portfolio. The Adviser and the Fund's
Board of Directors acknowledge that this Portfolio is designed for the described
investment objective and is not intended as a complete investment program. They
also understand that investment decisions made on behalf of the Portfolio by
Sub-Adviser are subject to various market and business risks.
(d) This Agreement shall not become effective unless and until it is
approved by the Board of Directors of the Fund, including a majority of the
members who are not "interested persons" to parties to this Agreement, by a vote
cast in person at a meeting called for the purpose of voting such approval, and
by a majority of the outstanding voting securities of the class of capital stock
of the Portfolio.
(e) The Adviser understands that the Sub-Adviser now acts, will continue to
act, or may act in the future, as investment adviser to fiduciary and other
managed accounts, including other investment companies, and the Adviser has no
objection to the Sub-Adviser so acting, provided that the Sub-Adviser duly
performs all obligations under this Agreement. The Adviser also understands
that the Sub-Adviser may give advice and take action with respect to any of its
other clients or for its own account which may differ from the timing or nature
of action taken by the Sub-Adviser with respect to the Fund. Nothing in this
Agreement shall impose upon the Sub-Adviser any obligation to purchase or sell
or to recommend for purchase or sale, with respect to the Fund, any security
which the Sub-Adviser or its shareholders, directors, officers, employees or
affiliates may purchase or sell for its or their own account(s) or for the
account of any other client.
(f) Except to the extent necessary to perform its obligations hereunder,
nothing herein shall be deemed to limit or restrict the right of the Sub-
Adviser, or the right of any of its officers, directors or employees who may
also be an officer, director or employee of the Fund, or persons otherwise
affiliated with the Fund (within the meaning of the 1940 Act) to engage in any
other business or to devote time and attention to the management or other
aspects of any other business, whether of a similar or dissimilar nature, or to
render services of any kind to any other trust, corporation, firm, individual or
association.
(g) Each party agrees to perform such further acts and execute such further
documents as are necessary to effectuate the purposes hereof. This Agreement
shall be construed and enforced in accordance with and governed by the laws of
the State of Minnesota. The captions in this Agreement are included for
convenience only and in no way define or delimit any of the provisions hereof or
otherwise affect their construction or effect.
(h) Any notice under this Agreement shall be in writing, addressed and
delivered or mailed postage pre-paid to the appropriate party at the following
address: The Adviser and the Fund at 400 Robert Street North, St. Paul,
Minnesota 55101-2098, and the Sub-
6
<PAGE>
Adviser at J. P. Morgan Investment Management Inc., 522 Fifth Avenue, New York,
New York 10036, Attention: David Fermo.
(i) Sub-Adviser agrees to notify Adviser of any change in Sub-Adviser's
officers and directors within a reasonable time after such change.
7. INDEMNIFICATION
The Adviser agrees to indemnify and hold harmless the Sub-Adviser from and
against any and all claims, losses, liabilities or damages (including reasonable
attorneys' fees and other related expenses), howsoever arising, from or in
connection with this Agreement or the performance by the Sub-Adviser of its
duties hereunder, provided, however, that nothing contained herein shall require
that the Sub-Adviser be indemnified for Disqualifying Conduct.
8. DISCLOSURE
Neither the Company nor the Adviser shall, without the prior written
consent of the Sub-Adviser, make representations regarding or reference to the
Sub-Adviser or any affiliates in any disclosure document, advertisement, sales
literature or other promotional materials.
IN WITNESS WHEREOF, the parties have duly executed this Agreement on the
date first above written.
ADVANTUS CAPITAL MANAGEMENT, INC.
By:
------------------------------
Its:
-----------------------------
J. P. MORGAN INVESTMENT MANAGEMENT INC.
By:
------------------------------
Its:
-----------------------------
7
<PAGE>
INVESTMENT SUB-ADVISORY AGREEMENT
THIS AGREEMENT, made this 1st day of May, 1997, by and between Advantus
Capital Management, Inc., a Minnesota corporation, registered as an Investment
Adviser under the Investment Advisers Act of 1940 (the "Adviser") and Keystone
Investment Management Company Inc., a North Carolina corporation, registered as
an Investment Adviser under the Investment Advisers Act of 1940 (the "Sub-
Adviser").
WHEREAS, the Adviser is the Investment Adviser to Advantus Series Fund,
Inc., formerly MIMLIC Series Fund, Inc., (the "Fund"), an open-end diversified
management investment company organized as a series fund, registered under the
Investment Company Act of 1940, as amended (the "1940 Act"); and
WHEREAS, the Adviser desires to retain the Sub-Adviser to furnish it with
portfolio selection and related research and statistical services in connection
with the Adviser's investment advisory activities on behalf of the Fund's Micro-
Cap Value Portfolio (hereinafter "Portfolio"), and the Sub-Adviser desires to
furnish such services to the Adviser;
NOW, THEREFORE, in consideration of the premises and the terms and
conditions hereinafter set forth, it is agreed as follows:
1. APPOINTMENT OF SUB-ADVISER
In accordance with and subject to the Investment Advisory Agreement between
the Fund and the Adviser dated May 1, 1997, the Adviser hereby appoints the Sub-
Adviser to perform portfolio selection services described herein for investment
and reinvestment of the Portfolio, subject to the control and direction of the
Fund's Board of Directors, for the period and on the terms hereinafter set
forth. The Sub-Adviser accepts such appointment and agrees to furnish the
services hereinafter set forth for the compensation herein provided. The Sub-
Adviser shall for all purposes herein be deemed to be an independent contractor
and shall, except as expressly provided or authorized, have no authority to act
for or represent the Fund or the Adviser in any way or otherwise be deemed an
agent of the Fund or the Adviser.
2. OBLIGATIONS OF AND SERVICES TO BE PROVIDED BY THE SUB-ADVISER
(a) The Sub-Adviser shall provide the following services and assume the
following obligations with respect to the Portfolio of the Fund:
(1) The investment of the assets of the Portfolio shall at all times be
subject to the applicable provisions of the Articles of
Incorporation, the Bylaws, the Registration Statement, the current
Prospectus and the Statement of Additional Information of the Fund
and shall conform to
<PAGE>
the investment objectives, policies and restrictions of the
Portfolio as set forth in such documents and as interpreted from
time to time by the Board of Directors of the Fund and by the
Adviser, including diversification of the holdings of the Portfolio
as a segregated asset account in accordance with Section 817 of the
Internal Revenue Code, as amended (the "Code"), and Regulation
Section 1.817-5 thereunder, provided that Advantus and Minnesota
Mutual shall be responsible for ensuring that the Fund as a whole
is "adequately diversified" if and to the extent required by
Section 817(h) of the Code and Regulation 1.817-5 thereunder.
Within the framework of the investment objectives, policies and
restrictions of the Portfolio, and subject to the supervision of
the Adviser, the Sub-Adviser shall have the sole and exclusive
responsibility for the making and execution of all investment
decisions for the Portfolio. Advantus agrees to promptly inform
the Sub-Adviser if such objective, policies or restrictions change
and to deliver to the Sub-Adviser updated documents, if prepared.
(2) In carrying out its obligations to manage the investments and
reinvestments of the assets of the Portfolio, the Sub-Adviser
shall: (1) obtain and evaluate pertinent economic, statistical,
financial and other information affecting the economy generally and
individual companies or industries the securities of which are
included in the Portfolio or are under consideration for inclusion
therein; (2) formulate and implement a continuous investment
program for the Portfolio consistent with the investment objective
and related investment policies for such Portfolio as set forth in
the Fund's registration statement, as amended; and (3) take such
steps as are necessary to implement the aforementioned investment
program by purchase and sale of securities including the placing,
or directing the placement through an affiliate of the Sub-Adviser,
of orders for such purchases and sales.
(3) In connection with the purchase and sale of securities of the
Portfolio, the Sub-Adviser shall arrange for the transmission to
the Adviser and the Custodian for the Fund on a daily basis such
confirmation, trade tickets and other documents as may be necessary
to enable them to perform their administrative responsibilities
with respect to the Portfolio. With respect to portfolio
securities to be purchased or sold through the Depository Trust
Company, the Sub-Adviser shall arrange for the automatic
transmission of the I.D. confirmation of the trade to the Custodian
of the Portfolio. The Sub-Adviser shall render such reports to the
Adviser and/or to the Fund's Board of Directors concerning the
investment activity and portfolio composition of the Portfolio in
such form and at such intervals as the Adviser or the Board may
from time to time require.
2
<PAGE>
(4) The Sub-Adviser shall, in the name of the Fund, place or direct the
placement of orders for the execution of portfolio transactions in
accordance with the policies with respect thereto, as set forth in
the Fund's Registration Statement, as amended from time to time,
and under the 1933 Act and the 1940 Act. In connection with the
placement of orders for the execution of the Fund's portfolio
transactions, the Sub-Adviser shall create and maintain all
necessary brokerage records of the Fund in accordance with all
applicable law, rules and regulations, including but not limited
to, records required by Section 31(a) of the 1940 Act. All records
shall be the property of the Fund and shall be available for
inspection and use by the Securities and Exchange Commission, the
Fund or any person retained by the Fund. Where applicable, such
records shall be maintained by the Sub-Adviser for the period and
in the place required by Rule 31a-2 under the 1940 Act.
(5) In placing orders or directing the placement of orders for the
execution of portfolio transactions, the Sub-Adviser shall select
brokers and dealers for the execution of the Portfolio's
transactions. In selecting brokers or dealers to execute such
orders, the Sub-Adviser is expressly authorized to consider the
fact that a broker or dealer has furnished statistical, research or
other information or services which enhance the Sub-Adviser's
investment research and portfolio management capability generally.
It is further understood in accordance with Section 28(e) of the
Securities Exchange Act of 1934, as amended, that the Sub-Adviser
may negotiate with and assign to a broker a commission which may
exceed the commission which another broker would have charged for
effecting the transaction if the Sub-Adviser determines in good
faith that the amount of commission charged was reasonable in
relation to the value of brokerage and/or research services (as
defined in Section 28(e)) provided by such broker, viewed in terms
either of the Portfolio or the Sub-Adviser's overall
responsibilities to the Sub-Adviser's discretionary accounts.
(b) The Sub-Adviser shall use the same skill and care in providing services
to the Fund as it uses in providing services to fiduciary accounts for which it
has investment responsibility. The Sub-Adviser will conform with all applicable
rules and regulations of the Securities and Exchange Commission.
3. EXPENSES
During the terms of this Agreement, the Sub-Adviser will pay all expenses
incurred by it in connection with its activities under this Agreement.
3
<PAGE>
4. COMPENSATION
In payment for the investment sub-advisory services to be rendered by the
Sub-Adviser in respect of the Portfolio hereunder, the Adviser shall pay to the
Sub-Adviser as full compensation for all services hereunder a fee computed at an
annual rate which shall be a percentage of the average daily value of the net
assets of the Portfolio. The fee shall be accrued daily and shall be based on
the net asset values of all of the issued and outstanding shares of the
Portfolio as determined as of the close of each business day pursuant to the
Articles of Incorporation, Bylaws and currently effective Prospectus and
Statement of Additional Information of the Fund. The fee shall be payable in
arrears on the last day of each calendar month.
The amount of such annual fee, as applied to the average daily value of the
net assets of the Portfolio shall be as described in the schedule below:
Assets Fee
------ ---
Total Portfolio Assets 1.00%
5. RENEWAL AND TERMINATION
This Agreement shall continue in effect for a period more than two years
from the date of this Agreement, only so long as such continuance is
specifically approved at least annually by a vote of the holders of the majority
of the outstanding voting securities of the Portfolio, or by a vote of the
majority of the Fund's Board of Directors. And further provided that such
continuance is also approved annually by a vote of the majority of the Fund's
Board of Directors who are not parties to this Agreement or interested persons
of parties hereto, cast in person at a meeting called for the purpose of voting
on such approval. This Agreement may be terminated at any time without payment
of penalty: (i) by the Fund's Board of Directors or by a vote of a majority of
the outstanding voting securities of the class of capital stock of the Portfolio
on sixty days' prior written notice, or (ii) by either party hereto upon sixty
days' prior written notice to the other. This Agreement will terminate
automatically upon any termination of the Investment Advisory Agreement between
the Fund and the Adviser or in the event of its assignment. The terms
"interested person," "assignment" and "vote of a majority of the outstanding
voting securities" shall have the meanings set forth in the 1940 Act.
6. GENERAL PROVISIONS
(a) The Sub-Adviser may rely on information reasonably believed by it to be
accurate and reliable. Except as may otherwise be provided by the 1940 Act,
neither the Sub-Adviser nor its officers, directors, employees or agents shall
be subject to any liability for any error of judgment or mistake of law or for
any loss arising out of any investment or other act or omission in the
performance by the Sub-Adviser of its duties under this Agreement or for any
loss or damage resulting from the imposition by any government or
4
<PAGE>
exchange control restrictions which might affect the liquidity of the
Portfolio's assets, or from acts or omissions of custodians or securities
depositories, or from any war or political act of any foreign government to
which such assets might be exposed, provided that nothing herein shall be deemed
to protect, or purport to protect, the Sub-Adviser against any liability to the
Fund or to its shareholders to which the Sub-Adviser would otherwise be subject
by reason of willful misfeasance, bad faith or gross negligence in the
performance of its duties hereunder, or by reason of the Sub-Adviser's reckless
disregard of its obligations and duties hereunder.
(b) The Adviser and the Fund's Board of Directors understand that the value
of investments made for the Account may go up as well as down, is not guaranteed
and that investment decisions will not always be profitable. The Adviser has
not made and is not making any guarantees, including any guarantee as to any
specific level of performance of the Portfolio. The Adviser and the Fund's
Board of Directors acknowledge that this Portfolio is designed for the described
investment objective and is not intended as a complete investment program. They
also understand that investment decisions made on behalf of the Portfolio by
Sub-Adviser are subject to various market and business risks.
(c) This Agreement shall not become effective unless and until it is
approved by the Board of Directors of the Fund, including a majority of the
members who are not "interested persons" to parties to this Agreement, by a vote
cast in person at a meeting called for the purpose of voting such approval, and
by a majority of the outstanding voting securities of the class of capital stock
of the Portfolio.
(d) The Adviser understands that the Sub-Adviser now acts, will continue to
act, or may act in the future, as investment adviser to fiduciary and other
managed accounts, including other investment companies, and the Adviser has no
objection to the Sub-Adviser so acting, provided that the Sub-Adviser duly
performs all obligations under this Agreement. The Adviser also understands
that the Sub-Adviser may give advice and take action with respect to any of its
other clients or for its own account which may differ from the timing or nature
of action taken by the Sub-Adviser with respect to the Fund. Nothing in this
Agreement shall impose upon the Sub-Adviser any obligation to purchase or sell
or to recommend for purchase or sale, with respect to the Fund, any security
which the Sub-Adviser or its shareholders, directors, officers, employees or
affiliates may purchase or sell for its or their own account(s) or for the
account of any other client.
(e) Except to the extent necessary to perform its obligations hereunder,
nothing herein shall be deemed to limit or restrict the right of the Sub-
Adviser, or the right of any of its officers, directors or employees who may
also be an officer, director or employee of the Fund, or persons otherwise
affiliated with the Fund (within the meaning of the 1940 Act) to engage in any
other business or to devote time and attention to the management or other
aspects of any other business, whether of a similar or dissimilar nature, or to
render services of any kind to any other trust, corporation, firm, individual or
association.
5
<PAGE>
(f) Each party agrees to perform such further acts and execute such further
documents as are necessary to effectuate the purposes hereof. This Agreement
shall be construed and enforced in accordance with and governed by the laws of
the State of Minnesota. The captions in this Agreement are included for
convenience only and in no way define or delimit any of the provisions hereof or
otherwise affect their construction or effect.
(g) Any notice under this Agreement shall be in writing, addressed and
delivered or mailed postage pre-paid to the appropriate party at the following
address: The Adviser and the Fund at 400 Robert Street North, St. Paul,
Minnesota 55101-2098, and the Sub-Adviser at Keystone Investment Management
Company Inc., at 200 Berkeley Street, Boston, Massachusetts, 02116-5034.
(h) Sub-Adviser agrees to notify Adviser of any change in Sub-Adviser's
officers and directors within a reasonable time after such change.
IN WITNESS WHEREOF, the parties have duly executed this Agreement on the
date first above written.
ADVANTUS CAPITAL MANAGEMENT, INC.
By:
---------------------------
Its:
--------------------------
KEYSTONE INVESTMENT MANAGEMENT COMPANY, INC.
By:
---------------------------
Its:
--------------------------
6
<PAGE>
INVESTMENT SUB-ADVISORY AGREEMENT
THIS AGREEMENT, made this 1st day of May, 1997, by and between Advantus
Capital Management, Inc., a Minnesota corporation, registered as an Investment
Adviser under the Investment Advisers Act of 1940 (the "Adviser") and Wall
Street Associates, a California corporation, registered as an Investment Adviser
under the Investment Advisers Act of 1940 (the "Sub-Adviser").
WHEREAS, the Adviser is the Investment Adviser to Advantus Series Fund,
Inc., formerly MIMLIC Series Fund, Inc., (the "Fund"), an open-end diversified
management investment company organized as a series fund, registered under the
Investment Company Act of 1940, as amended (the "1940 Act"); and
WHEREAS, the Adviser desires to retain the Sub-Adviser to furnish it with
portfolio selection and related research and statistical services in connection
with the Adviser's investment advisory activities on behalf of the Fund's Micro-
Cap Growth Portfolio (hereinafter "Portfolio"), and the Sub-Adviser desires to
furnish such services to the Adviser;
NOW, THEREFORE, in consideration of the premises and the terms and
conditions hereinafter set forth, it is agreed as follows:
1. APPOINTMENT OF SUB-ADVISER
In accordance with and subject to the Investment Advisory Agreement between
the Fund and the Adviser dated May 1, 1997, the Adviser hereby appoints the Sub-
Adviser to perform portfolio selection services described herein for investment
and reinvestment of the Portfolio, subject to the control and direction of the
Fund's Board of Directors, for the period and on the terms hereinafter set
forth. The Sub-Adviser accepts such appointment and agrees to furnish the
services hereinafter set forth for the compensation herein provided. The Sub-
Adviser shall for all purposes herein be deemed to be an independent contractor
and shall, except as expressly provided or authorized, have no authority to act
for or represent the Fund or the Adviser in any way or otherwise be deemed an
agent of the Fund or the Adviser.
2. OBLIGATIONS OF AND SERVICES TO BE PROVIDED BY THE SUB-ADVISER
(a) The Sub-Adviser shall provide the following services and assume the
following obligations with respect to the Portfolio of the Fund:
(1) The investment of the assets of the Portfolio shall at all times be
subject to the applicable provisions of the Articles of
Incorporation, the Bylaws, the Registration Statement, the current
Prospectus and the Statement of Additional Information of the Fund
and shall conform to
<PAGE>
the investment objectives, policies and restrictions of the
Portfolio as set forth in such documents and as interpreted from
time to time by the Board of Directors of the Fund and by the
Adviser, including diversification of the holdings of the Portfolio
as a segregated asset account in accordance with Section 817 of the
Internal Revenue Code, as amended (the "Code"), and Regulation
Section 1.817-5 thereunder, provided that Advantus and Minnesota
Mutual shall be responsible for ensuring that the Fund as a whole
is "adequately diversified" if and to the extent required by
Section 817(h) of the Code and Regulation 1.817-5 thereunder.
Within the framework of the investment objectives, policies and
restrictions of the Portfolio, and subject to the supervision of
the Adviser, the Sub-Adviser shall have the sole and exclusive
responsibility for the making and execution of all investment
decisions for the Portfolio. Advantus agrees to promptly inform
the Sub-Adviser if such objective, policies or restrictions change
and to deliver to the Sub-Adviser updated documents, if prepared.
(2) In carrying out its obligations to manage the investments and
reinvestments of the assets of the Portfolio, the Sub-Adviser
shall: (1) obtain and evaluate pertinent economic, statistical,
financial and other information affecting the economy generally and
individual companies or industries the securities of which are
included in the Portfolio or are under consideration for inclusion
therein; (2) formulate and implement a continuous investment
program for the Portfolio consistent with the investment objective
and related investment policies for such Portfolio as set forth in
the Fund's registration statement, as amended; and (3) take such
steps as are necessary to implement the aforementioned investment
program by purchase and sale of securities including the placing,
or directing the placement through an affiliate of the Sub-Adviser,
of orders for such purchases and sales.
(3) In connection with the purchase and sale of securities of the
Portfolio, the Sub-Adviser shall arrange for the transmission to
the Adviser and the Custodian for the Fund on a daily basis such
confirmation, trade tickets and other documents as may be necessary
to enable them to perform their administrative responsibilities
with respect to the Portfolio. With respect to portfolio
securities to be purchased or sold through the Depository Trust
Company, the Sub-Adviser shall arrange for the automatic
transmission of the I.D. confirmation of the trade to the Custodian
of the Portfolio. The Sub-Adviser shall render such reports to the
Adviser and/or to the Fund's Board of Directors concerning the
investment activity and portfolio composition of the Portfolio in
such form and at such intervals as the Adviser or the Board may
from time to time require.
2
<PAGE>
(4) The Sub-Adviser shall, in the name of the Fund, place or direct the
placement of orders for the execution of portfolio transactions in
accordance with the policies with respect thereto, as set forth in
the Fund's Registration Statement, as amended from time to time,
and under the 1933 Act and the 1940 Act. In connection with the
placement of orders for the execution of the Fund's portfolio
transactions, the Sub-Adviser shall create and maintain all
necessary brokerage records of the Fund in accordance with all
applicable law, rules and regulations, including but not limited
to, records required by Section 31(a) of the 1940 Act. All records
shall be the property of the Fund and shall be available for
inspection and use by the Securities and Exchange Commission, the
Fund or any person retained by the Fund. Where applicable, such
records shall be maintained by the Sub-Adviser for the period and
in the place required by Rule 31a-2 under the 1940 Act.
(5) In placing orders or directing the placement of orders for the
execution of portfolio transactions, the Sub-Adviser shall select
brokers and dealers for the execution of the Portfolio's
transactions. In selecting brokers or dealers to execute such
orders, the Sub-Adviser is expressly authorized to consider the
fact that a broker or dealer has furnished statistical, research or
other information or services which enhance the Sub-Adviser's
investment research and portfolio management capability generally.
It is further understood in accordance with Section 28(e) of the
Securities Exchange Act of 1934, as amended, that the Sub-Adviser
may negotiate with and assign to a broker a commission which may
exceed the commission which another broker would have charged for
effecting the transaction if the Sub-Adviser determines in good
faith that the amount of commission charged was reasonable in
relation to the value of brokerage and/or research services (as
defined in Section 28(e)) provided by such broker, viewed in terms
either of the Portfolio or the Sub-Adviser's overall
responsibilities to the Sub-Adviser's discretionary accounts.
(b) The Sub-Adviser shall use the same skill and care in providing services
to the Fund as it uses in providing services to fiduciary accounts for which it
has investment responsibility. The Sub-Adviser will conform with all applicable
rules and regulations of the Securities and Exchange Commission.
3. EXPENSES
During the terms of this Agreement, the Sub-Adviser will pay all expenses
incurred by it in connection with its activities under this Agreement.
3
<PAGE>
4. COMPENSATION
In payment for the investment sub-advisory services to be rendered by the
Sub-Adviser in respect of the Portfolio hereunder, the Adviser shall pay to the
Sub-Adviser as full compensation for all services hereunder a fee computed at an
annual rate which shall be a percentage of the average daily value of the net
assets of the Portfolio. The fee shall be accrued daily and shall be based on
the net asset values of all of the issued and outstanding shares of the
Portfolio as determined as of the close of each business day pursuant to the
Articles of Incorporation, Bylaws and currently effective Prospectus and
Statement of Additional Information of the Fund. The fee shall be payable in
arrears on the last day of each calendar month.
The amount of such annual fee, as applied to the average daily value of the
net assets of the Portfolio shall be as described in the schedule below:
Assets Fee
------ ---
Total Portfolio Assets .85%
5. RENEWAL AND TERMINATION
This Agreement shall continue in effect for a period more than two years
from the date of this Agreement, only so long as such continuance is
specifically approved at least annually by a vote of the holders of the majority
of the outstanding voting securities of the Portfolio, or by a vote of the
majority of the Fund's Board of Directors. And further provided that such
continuance is also approved annually by a vote of the majority of the Fund's
Board of Directors who are not parties to this Agreement or interested persons
of parties hereto, cast in person at a meeting called for the purpose of voting
on such approval. This Agreement may be terminated at any time without payment
of penalty: (i) by the Fund's Board of Directors or by a vote of a majority of
the outstanding voting securities of the class of capital stock of the Portfolio
on sixty days' prior written notice, or (ii) by either party hereto upon sixty
days' prior written notice to the other. This Agreement will terminate
automatically upon any termination of the Investment Advisory Agreement between
the Fund and the Adviser or in the event of its assignment. The terms
"interested person," "assignment" and "vote of a majority of the outstanding
voting securities" shall have the meanings set forth in the 1940 Act.
6. GENERAL PROVISIONS
(a) The Sub-Adviser may rely on information reasonably believed by it to be
accurate and reliable. Except as may otherwise be provided by the 1940 Act,
neither the Sub-Adviser nor its officers, directors, employees or agents shall
be subject to any liability for any error of judgment or mistake of law or for
any loss arising out of any investment or other act or omission in the
performance by the Sub-Adviser of its duties under this Agreement or for any
loss or damage resulting from the imposition by any government or
4
<PAGE>
exchange control restrictions which might affect the liquidity of the
Portfolio's assets, or from acts or omissions of custodians or securities
depositories, or from any war or political act of any foreign government to
which such assets might be exposed, provided that nothing herein shall be deemed
to protect, or purport to protect, the Sub-Adviser against any liability to the
Fund or to its shareholders to which the Sub-Adviser would otherwise be subject
by reason of willful misfeasance, bad faith or gross negligence in the
performance of its duties hereunder, or by reason of the Sub-Adviser's reckless
disregard of its obligations and duties hereunder.
(b) The Adviser and the Fund's Board of Directors understand that the value
of investments made for the Account may go up as well as down, is not guaranteed
and that investment decisions will not always be profitable. The Adviser has
not made and is not making any guarantees, including any guarantee as to any
specific level of performance of the Portfolio. The Adviser and the Fund's
Board of Directors acknowledge that this Portfolio is designed for the described
investment objective and is not intended as a complete investment program. They
also understand that investment decisions made on behalf of the Portfolio by
Sub-Adviser are subject to various market and business risks.
(c) This Agreement shall not become effective unless and until it is
approved by the Board of Directors of the Fund, including a majority of the
members who are not "interested persons" to parties to this Agreement, by a vote
cast in person at a meeting called for the purpose of voting such approval, and
by a majority of the outstanding voting securities of the class of capital stock
of the Portfolio.
(d) The Adviser understands that the Sub-Adviser now acts, will continue to
act, or may act in the future, as investment adviser to fiduciary and other
managed accounts, including other investment companies, and the Adviser has no
objection to the Sub-Adviser so acting, provided that the Sub-Adviser duly
performs all obligations under this Agreement. The Adviser also understands
that the Sub-Adviser may give advice and take action with respect to any of its
other clients or for its own account which may differ from the timing or nature
of action taken by the Sub-Adviser with respect to the Fund. Nothing in this
Agreement shall impose upon the Sub-Adviser any obligation to purchase or sell
or to recommend for purchase or sale, with respect to the Fund, any security
which the Sub-Adviser or its shareholders, directors, officers, employees or
affiliates may purchase or sell for its or their own account(s) or for the
account of any other client.
(e) Except to the extent necessary to perform its obligations hereunder,
nothing herein shall be deemed to limit or restrict the right of the Sub-
Adviser, or the right of any of its officers, directors or employees who may
also be an officer, director or employee of the Fund, or persons otherwise
affiliated with the Fund (within the meaning of the 1940 Act) to engage in any
other business or to devote time and attention to the management or other
aspects of any other business, whether of a similar or dissimilar nature, or to
render services of any kind to any other trust, corporation, firm, individual or
association.
5
<PAGE>
(f) Each party agrees to perform such further acts and execute such further
documents as are necessary to effectuate the purposes hereof. This Agreement
shall be construed and enforced in accordance with and governed by the laws of
the State of Minnesota. The captions in this Agreement are included for
convenience only and in no way define or delimit any of the provisions hereof or
otherwise affect their construction or effect.
(g) Any notice under this Agreement shall be in writing, addressed and
delivered or mailed postage pre-paid to the appropriate party at the following
address: The Adviser and the Fund at 400 Robert Street North, St. Paul,
Minnesota 55101-2098, and the Sub-Adviser at Wall Street Associates, 1200
Prospect Street, Suite 100, La Jolla, California 92037, Attention: Dirk
Anderson.
(h) Sub-Adviser agrees to notify Adviser of any change in Sub-Adviser's
officers and directors within a reasonable time after such change.
IN WITNESS WHEREOF, the parties have duly executed this Agreement on the
date first above written.
ADVANTUS CAPITAL MANAGEMENT, INC.
By:
------------------------------
Its:
-----------------------------
WALL STREET ASSOCIATES
By:
------------------------------
Its:
-----------------------------
6
<PAGE>
INVESTMENT SUB-ADVISORY AGREEMENT
THIS AGREEMENT, made this 1st day of May, 1997, by and between Advantus
Capital Management, Inc., a Minnesota corporation, registered as an Investment
Adviser under the Investment Advisers Act of 1940 (the "Adviser") and Julius
Baer Investment Management Inc., a Delaware corporation, registered as an
Investment Adviser under the Investment Advisers Act of 1940 (the "Sub-
Adviser").
WHEREAS, the Adviser is the Investment Adviser to Advantus Series Fund,
Inc., formerly MIMLIC Series Fund, Inc., (the "Fund"), an open-end diversified
management investment company organized as a series fund, registered under the
Investment Company Act of 1940, as amended (the "1940 Act"); and
WHEREAS, the Adviser desires to retain the Sub-Adviser to furnish it with
portfolio selection and related research and statistical services in connection
with the Adviser's investment advisory activities on behalf of the Fund's
International Bond Portfolio (hereinafter "Portfolio"), and the Sub-Adviser
desires to furnish such services to the Adviser;
NOW, THEREFORE, in consideration of the premises and the terms and
conditions hereinafter set forth, it is agreed as follows:
1. APPOINTMENT OF SUB-ADVISER
In accordance with and subject to the Investment Advisory Agreement between
the Fund and the Adviser dated May 1, 1997, the Adviser hereby appoints the Sub-
Adviser to perform portfolio selection services described herein for investment
and reinvestment of the Portfolio, subject to the control and direction of the
Fund's Board of Directors, for the period and on the terms hereinafter set
forth. The Sub-Adviser accepts such appointment and agrees to furnish the
services hereinafter set forth for the compensation herein provided. The Sub-
Adviser shall for all purposes herein be deemed to be an independent contractor
and shall, except as expressly provided or authorized, have no authority to act
for or represent the Fund or the Adviser in any way or otherwise be deemed an
agent of the Fund or the Adviser.
2. OBLIGATIONS OF AND SERVICES TO BE PROVIDED BY THE SUB-ADVISER
(a) The Sub-Adviser shall provide the following services and assume the
following obligations with respect to the Portfolio of the Fund:
(1) The investment of the assets of the Portfolio shall at all times be
subject to the applicable provisions of the Articles of
Incorporation, the Bylaws, the Registration Statement, the current
Prospectus and the Statement of Additional Information of the Fund
and shall conform to
<PAGE>
the investment objectives, policies and restrictions of the
Portfolio as set forth in such documents and as interpreted from
time to time by the Board of Directors of the Fund and by the
Adviser, including diversification of the holdings of the Portfolio
as a segregated asset account in accordance with Section 817 of the
Internal Revenue Code, as amended (the "Code"), and Regulation
Section 1.817-5 thereunder, provided that Advantus and Minnesota
Mutual shall be responsible for ensuring that the Fund as a whole
is "adequately diversified" if and to the extent required by
Section 817(h) of the Code and Regulation 1.817-5 thereunder.
Within the framework of the investment objectives, policies and
restrictions of the Portfolio, and subject to the supervision of
the Adviser, the Sub-Adviser shall have the sole and exclusive
responsibility for the making and execution of all investment
decisions for the Portfolio. Advantus agrees to promptly inform
the Sub-Adviser if such objective, policies or restrictions change
and to deliver to the Sub-Adviser updated documents, if prepared.
(2) In carrying out its obligations to manage the investments and
reinvestments of the assets of the Portfolio, the Sub-Adviser
shall: (1) obtain and evaluate pertinent economic, statistical,
financial and other information affecting the economy generally and
individual companies, governments or industries the securities of
which are included in the Portfolio or are under consideration for
inclusion therein; (2) formulate and implement a continuous
investment program for the Portfolio consistent with the investment
objective and related investment policies for such Portfolio as set
forth in the Fund's registration statement, as amended; and (3)
take such steps as are necessary to implement the aforementioned
investment program by purchase and sale of securities including the
placing, or directing the placement through an affiliate of the
Sub-Adviser, of orders for such purchases and sales.
(3) In connection with the purchase and sale of securities of the
Portfolio, the Sub-Adviser shall arrange for the transmission to
the Adviser and the Custodian for the Fund on a daily basis such
confirmation, trade tickets and other documents as may be necessary
to enable them to perform their administrative responsibilities
with respect to the Portfolio. With respect to portfolio
securities to be purchased or sold through the Depository Trust
Company, the Sub-Adviser shall arrange for the automatic
transmission of the I.D. confirmation of the trade to the Custodian
of the Portfolio. The Sub-Adviser shall render such reports to the
Adviser and/or to the Fund's Board of Directors concerning the
investment activity and portfolio composition of the Portfolio in
such form and at such intervals as the Adviser or the Board may
from time to time require.
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<PAGE>
(4) The Sub-Adviser shall, in the name of the Fund, place or direct the
placement of orders for the execution of portfolio transactions in
accordance with the policies with respect thereto, as set forth in
the Fund's Registration Statement, as amended from time to time,
and under the 1933 Act and the 1940 Act. In connection with the
placement of orders for the execution of the Fund's portfolio
transactions, the Sub-Adviser shall create and maintain all
necessary brokerage records of the Fund in accordance with all
applicable law, rules and regulations, including but not limited
to, records required by Section 31(a) of the 1940 Act. All records
shall be the property of the Fund and shall be available for
inspection and use by the Securities and Exchange Commission, the
Fund or any person retained by the Fund. Where applicable, such
records shall be maintained by the Sub-Adviser for the period and
in the place required by Rule 31a-2 under the 1940 Act.
(5) In placing orders or directing the placement of orders for the
execution of portfolio transactions, the Sub-Adviser shall select
brokers and dealers for the execution of the Portfolio's
transactions. In selecting brokers or dealers to execute such
orders, the Sub-Adviser is expressly authorized to consider the
fact that a broker or dealer has furnished statistical, research or
other information or services which enhance the Sub-Adviser's
investment research and portfolio management capability generally.
It is further understood in accordance with Section 28(e) of the
Securities Exchange Act of 1934, as amended, that the Sub-Adviser
may negotiate with and assign to a broker a commission which may
exceed the commission which another broker would have charged for
effecting the transaction if the Sub-Adviser determines in good
faith that the amount of commission charged was reasonable in
relation to the value of brokerage and/or research services (as
defined in Section 28(e)) provided by such broker, viewed in terms
either of the Portfolio or the Sub-Adviser's overall
responsibilities to the Sub-Adviser's discretionary accounts.
(b) The Sub-Adviser shall use the same skill and care in providing services
to the Fund as it uses in providing services to fiduciary accounts for which it
has investment responsibility. The Sub-Adviser will conform with all applicable
rules and regulations of the Securities and Exchange Commission.
3. EXPENSES
During the terms of this Agreement, the Sub-Adviser will pay all expenses
incurred by it in connection with its activities under this Agreement.
3
<PAGE>
4. COMPENSATION
In payment for the investment sub-advisory services to be rendered by the
Sub-Adviser in respect of the Portfolio hereunder, the Adviser shall pay to the
Sub-Adviser as full compensation for all services hereunder a fee computed at an
annual rate which shall be a percentage of the average daily value of the net
assets of the Portfolio. The fee shall be accrued daily and shall be based on
the net asset values of all of the issued and outstanding shares of the
Portfolio as determined as of the close of each business day pursuant to the
Articles of Incorporation, Bylaws and currently effective Prospectus and
Statement of Additional Information of the Fund. The fee shall be payable in
arrears on the last day of each calendar month.
The amount of such annual fee, as applied to the average daily value of the
net assets of the Portfolio shall be as described in the schedule below:
Assets Fee
------ ---
Total Portfolio Assets .35%
5. RENEWAL AND TERMINATION
This Agreement shall continue in effect for a period more than two years
from the date of this Agreement, only so long as such continuance is
specifically approved at least annually by a vote of the holders of the majority
of the outstanding voting securities of the Portfolio, or by a vote of the
majority of the Fund's Board of Directors. And further provided that such
continuance is also approved annually by a vote of the majority of the Fund's
Board of Directors who are not parties to this Agreement or interested persons
of parties hereto, cast in person at a meeting called for the purpose of voting
on such approval. This Agreement may be terminated at any time without payment
of penalty: (i) by the Fund's Board of Directors or by a vote of a majority of
the outstanding voting securities of the class of capital stock of the Portfolio
on sixty days' prior written notice, or (ii) by either party hereto upon sixty
days' prior written notice to the other. This Agreement will terminate
automatically upon any termination of the Investment Advisory Agreement between
the Fund and the Adviser or in the event of its assignment. The terms
"interested person," "assignment" and "vote of a majority of the outstanding
voting securities" shall have the meanings set forth in the 1940 Act.
6. GENERAL PROVISIONS
(a) The Sub-Adviser may rely on information reasonably believed by it to be
accurate and reliable. Except as may otherwise be provided by the 1940 Act,
neither the Sub-Adviser nor its officers, directors, employees or agents shall
be subject to any liability for any error of judgment or mistake of law or for
any loss arising out of any investment or other act or omission in the
performance by the Sub-Adviser of its duties under this Agreement or for any
loss or damage resulting from the imposition by any government or
4
<PAGE>
exchange control restrictions which might affect the liquidity of the
Portfolio's assets, or from acts or omissions of custodians or securities
depositories, or from any war or political act of any foreign government to
which such assets might be exposed, provided that nothing herein shall be deemed
to protect, or purport to protect, the Sub-Adviser against any liability to the
Fund or to its shareholders to which the Sub-Adviser would otherwise be subject
by reason of willful misfeasance, bad faith or gross negligence in the
performance of its duties hereunder, or by reason of the Sub-Adviser's reckless
disregard of its obligations and duties hereunder.
(b) The Adviser and the Fund's Board of Directors understand that the value
of investments made for the Account may go up as well as down, is not guaranteed
and that investment decisions will not always be profitable. The Adviser has
not made and is not making any guarantees, including any guarantee as to any
specific level of performance of the Portfolio. The Adviser and the Fund's
Board of Directors acknowledge that this Portfolio is designed for the described
investment objective and is not intended as a complete investment program. They
also understand that investment decisions made on behalf of the Portfolio by
Sub-Adviser are subject to various market and business risks.
(c) This Agreement shall not become effective unless and until it is
approved by the Board of Directors of the Fund, including a majority of the
members who are not "interested persons" to parties to this Agreement, by a vote
cast in person at a meeting called for the purpose of voting such approval, and
by a majority of the outstanding voting securities of the class of capital stock
of the Portfolio.
(d) The Adviser understands that the Sub-Adviser now acts, will continue to
act, or may act in the future, as investment adviser to fiduciary and other
managed accounts, including other investment companies, and the Adviser has no
objection to the Sub-Adviser so acting, provided that the Sub-Adviser duly
performs all obligations under this Agreement. The Adviser also understands
that the Sub-Adviser may give advice and take action with respect to any of its
other clients or for its own account which may differ from the timing or nature
of action taken by the Sub-Adviser with respect to the Fund. Nothing in this
Agreement shall impose upon the Sub-Adviser any obligation to purchase or sell
or to recommend for purchase or sale, with respect to the Fund, any security
which the Sub-Adviser or its shareholders, directors, officers, employees or
affiliates may purchase or sell for its or their own account(s) or for the
account of any other client.
(e) Except to the extent necessary to perform its obligations hereunder,
nothing herein shall be deemed to limit or restrict the right of the Sub-
Adviser, or the right of any of its officers, directors or employees who may
also be an officer, director or employee of the Fund, or persons otherwise
affiliated with the Fund (within the meaning of the 1940 Act) to engage in any
other business or to devote time and attention to the management or other
aspects of any other business, whether of a similar or dissimilar nature, or to
render services of any kind to any other trust, corporation, firm, individual or
association.
5
<PAGE>
(f) Each party agrees to perform such further acts and execute such further
documents as are necessary to effectuate the purposes hereof. This Agreement
shall be construed and enforced in accordance with and governed by the laws of
the State of Minnesota. The captions in this Agreement are included for
convenience only and in no way define or delimit any of the provisions hereof or
otherwise affect their construction or effect.
(g) Any notice under this Agreement shall be in writing, addressed and
delivered or mailed postage pre-paid to the appropriate party at the following
address: The Adviser and the Fund at 400 Robert Street North, St. Paul,
Minnesota 55101-2098, and the Sub-Adviser at Julius Baer Investment Management,
Inc., 330 Madison Avenue, 12th Floor, New York, New York 10017, Attention: Mr.
Jay Dirnberger.
(h) Sub-Adviser agrees to notify Adviser of any change in Sub-Adviser's
officers and directors within a reasonable time after such change.
IN WITNESS WHEREOF, the parties have duly executed this Agreement on the
date first above written.
ADVANTUS CAPITAL MANAGEMENT, INC.
By:
---------------------------
Its:
--------------------------
JULIUS BAER INVESTMENT MANAGEMENT INC.
By:
---------------------------
Its:
--------------------------
6
<PAGE>
BANKERS TRUST COMPANY
One Bankers Trust Plaza, New York, New York 10006
Mailing Address:
P.O. Box 318, Church Street Station
New York, New York 10008-0318
Mutual Fund/Corporation/Series
CUSTODIAN AGREEMENT
AGREEMENT dated as of January 2, 1997 between BANKERS TRUST COMPANY (the
"Custodian") and MIMLIC SERIES FUND, INC. of St. Paul, Minnesota (the
"Customer").
WHEREAS, the Customer may be organized with one or more series of shares,
each of which shall represent an interest in a separate portfolio of Securities
and Cash (each as hereinafter defined) (all such existing and additional series
now or hereafter listed on Exhibit A being hereafter referred to individually as
a "Portfolio" and collectively, as the "Portfolios"); and
WHEREAS, the Customer desires to appoint the Custodian on behalf of the
Portfolios under the terms and conditions set forth in this Agreement, and the
Custodian has agreed to so act as custodian.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
herein contained, the parties hereto agree as follows:
1. EMPLOYMENT OF CUSTODIAN. The Customer hereby employs the Custodian as
custodian of all assets of each Portfolio which are delivered to and accepted by
the Custodian or any Subcustodian (as that theorem is defined in Section 4) (the
"Property") pursuant to the terms and conditions set forth herein. Without
limitation, such Property shall include stocks and other equity interest of
every type, evidences of indebtedness, other instruments representing same or
rights or obligations to receive, purchase, deliver or sell same and other non-
cash investment property of a Portfolio which is acceptable for deposit
("Securities") and cash from any source and in any currency ("Cash"). The
Custodian shall not be responsible for any property of a Portfolio held or
received by the Customer or others and not delivered to the Custodian or any
Subcustodian.
2. MAINTENANCE OF SECURITIES AND CASH AT CUSTODIAN AND SUBCUSTODIAN
LOCATIONS. Pursuant to Instructions, the Customer shall direct the Custodian to
(a) settle Securities transactions and maintain cash in the country or other
jurisdiction in which the principal trading market for such Securities is
located, where such Securities are to be presented for payment or where such
Securities are acquired and (b) maintain cash and cash equivalents in such
countries in amounts reasonably necessary to effect the Customer's transactions
in such Securities. Instructions to settle Securities transactions in any
country shall be deemed to authorize the holding of such Securities and Cash in
that country.
3. CUSTODY ACCOUNT. The Custodian agrees to establish and maintain one or
more custody accounts on its books each in the name of a Portfolio (each, an
"Account") for any and all Property from time to time received and accepted by
the Custodian or any Subcustodian for the account of such Portfolio. Upon
delivery by the Customer to the Custodian of any Property belonging to a
Portfolio, the Customer shall, by Instruction (as hereinafter devised in Section
14), specifically indicate which Portfolio such Property
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<PAGE>
belongs or if such Property belongs to more than one Portfolio shall allocate
such Property to the appropriate Portfolio. The Custodian shall allocate such
Property to the Accounts in accordance with the Instructions; PROVIDED THAT the
Custodian shall have the right, in its sole discretion, to refuse to accept any
Property that is not in proper form for deposit for any reason. The Customer on
behalf of each Portfolio, acknowledges its responsibility as a principal for all
of its obligations to the Custodian arising under or in connection with this
Agreement, warrants its authority to deposit in the appropriate Account any
Property received therefor by the Custodian or Subcustodian and to give, and
authorize others to give, instructions relative thereto. The Custodian may
delivery securities of the same class in place of those deposited in the
Account.
The Custodian shall hold, keep safe and protect as custodian for each
Account, on behalf of the Customer, all Property in such Account. All
transactions, including, but not limited to, foreign exchange transactions,
involving the Property shall be executed or settled solely in accordance with
Instructions (which shall specifically reference the Account for which such
transaction is being settled), except that until the Custodian receives
Instruction to the contrary, the Custodian will:
(a) collect all interest and dividends an all other income and payments,
whether paid in cash or in kind, on the Property, as the same become
payable and credit the same to the appropriate Account:
(b) present for payment all Securities held in an Account which are
called, redeemed or retired or otherwise become payable and all
coupons and other income items which call for payment upon
presentation to the extent that the Custodian or Subcustodian is
actually aware of such opportunities and hold the cash received in
such Account pursuant to this Agreement;
(c) (i) exchange Securities where the exchange is purely ministerial
(including, without limitation, the exchange of temporary securities
for those in definitive form and the exchange of warrants, or other
documents or entitlement to securities, for the Securities themselves)
and (ii) when notification of a tender or exchange offer (other than
ministerial exchanges described in (i)above) is received for an
Account, endeavor to receive Instructions provided that if such
Instructions are not received in time for the Custodian to take timely
action, no action shall be taken with respect thereto;
(d) whenever notification of a rights entitlement or a fractional interest
resulting from a rights issue, stock dividend of stock split is
received for an Account and such rights entitlement or fractional
interest bears an expiration date, if after endeavoring to obtain
Instructions such Instructions are not received in time for the
Custodian to take timely actions or if actual notice of such actions
was received too late to seek Instructions, sell in the discretion of
the Custodian (which sale the Customer hereby authorizes the Custodian
to make) such rights entitlement or fractional interest and credit the
Account with the net proceeds of such sale;
(e) execute in the Customer's name for an Account, whenever the Custodian
deems it appropriate, such ownership and other certificates and other
certificates as may be required to obtain the payment of income from
the Property in such Account;
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<PAGE>
(f) pay for each Account, any and all taxes and levies in the nature of
taxes imposed on interest, dividends or other similarly income on the
Property in such Account by any governmental authority. In the event
there is in sufficient Cash available in such Account to pay such
taxes and levies, the Custodian shall notify the Customer of the
amount of the shortfall and the Customer, as its option, may deposit
additional Cash in such Account or take steps to have sufficient Cash
available. The Customer agrees, when and if requested by the
Custodian and required in connection with the payment of any such
taxes to cooperate wit the Custodian in furnishing information,
executing documents or otherwise; and
(g) appoint brokers and agent for any of the ministerial transactions
involving the Securities described in (a) - (f), including, without
limitation, affiliates of the Custodian or any Subcustodian.
4. SUBCUSTODIANS AND SECURITIES SYSTEMS. The Customer authorizes and
instructs the Custodian to hold the Property in each Account in custody accounts
which have been established by the Custodian with (a) one of its U.S. branches
or another U.S. banks or trust company or branch thereof located in the U.S.
which is itself qualified under the Investment Company Act of 1940, as amended
("1940 Act"), to act as custodian (individually, a "U.S. Subcustodian"), or a
U.S. securities depository or clearing agency or system in which the Custodian
or a U.S. Subcustodian participates (individually, a "U.S. Securities System")
or (b) one of its non - U.S. branches or majority-owned non-U.S. subsidiaries,
an non-U.S. branch or majority-owned subsidiary of a U.S. bank or a non-U.S.
bank or trust company, acting as custodian (individually, a "non-U.S.
Subcustodian"; U.S. Subcustodians and non-U.S. Subcustodians, collectively,
"Subcustodians"), or a non-U.S. depository or clearing agency or system in which
the Custodian or any Subcustoidan participates (individually, a "non-U.S.
Securities System"; U.S. Securities System and non-U.S. Securities System,
collectively, Securities System"), PROVIDED that in each case in which a U.S.
Subcustodian or U.S. Securities System is employed, each such Subcustoidan or
Securities System shall have been approved by Instructions; PROVIDED FURTHER
that in each case in which a non-U.S. Subcustoidan or non-U.S. Securities System
is employed, (a) such Subcustodian or Securities System either is (i) a
"qualified U.S. bank" as defined by Rule 17f-5 under the 1940 Act ("Rule 17f-5")
or (ii) an "eligible foreign custodian" within the meaning of Rule 17f-5 or such
Subcustodian or Securities System is the subject of an order granted by the U.S.
Securities and Exchange Commission ("SEC") exempting such agent or the
subcustody arrangements thereto from all or part of the provisions of Rule 17f-5
and (b) the agreement between the Custodian and such non-U.S. Subcustodian has
been approved by Instructions; it being understood that the Custodian shall have
not liability or responsibility for determining whether the approval of any
Subcustodian or Securities System has been proper under the 1940 Act or any rule
or regulation thereunder.
Upon receipt of Instructions, the Custodian agrees to cease the employment
of any Subcustoidan or Securities System with respect to the Customer, and if
desirable and practicable, appoint a replacement Subcustodian or securities
system in accordance with the provisions of this Section. In addition, the
Custodian may, at any time in its discretion, upon written notification to the
Customer, terminate the employment of any Subcustodian of Securities System.
Upon request of the Customer, the Custodian shall delivery to the Customer
annually a certificate stating: (a) the identity of each non-U.S. Subcustodian
and non-U.S. Securities System then acting on behalf of the Custodian and the
name and address of the governmental agency or other regulatory authority that
supervises or regulates such non-U.S. Subcustodian
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<PAGE>
and non-U.S. Securities System; (b) the countries in which each non-U.S.
Subcustoidan or non-U.S. Securities System is located; and (c) so long as Rule
17f-5 requires the Customer's Board of Directors to directly approve its foreign
custody arrangements, such other information relating to such non-U.S.
Subcustodians and non-U.S. Securities Systems as may reasonably be requested by
the Customer to ensure compliance with Rule 17f-5. So long as Rule 17f-5
requires the Customer's Board of Directors to directly approve its foreign
custody arrangements, the Custodian also shall furnish annually to the Customer
information concerning such non-U.S. Subcustodians and non-U.S. Securities
Systems similarly in kind an scope as that furnished to the Customer in
connection with the initial approval of this Agreement. Custodian agrees to
promptly notify the Customer if, in the normal course of its custodial
activities, the Custodian has reason to believe that any non-U.S. Subcustodian
or non-U.S. Securities System has ceased to be a qualified U.S. bank or an
eligible foreign custodian each within the meaning of Rule 17f-5 or has ceased
to be subject to an exemptive order from the SEC.
5. USE OF SUBCUSTODIAN. With respect to Property in an Account which is
maintained by the Custodian in the custody of a Subcustodian employed pursuant
to Section 4:
(a) The Custodian will identify on its books as belonging to the Customer
on behalf of a Portfolio, and Property held by such Subcustodian.
(b) Any Property in the Account held by a Subcustodian will be subject
only to the instructions of the Custodian or its agents.
(c) Property deposited with a Subcustodian will be maintained in an
account holding only assets for customers of the Custodian.
(d) Any agreement the Custodian shall enter into with a non-U.S.
Subcustoidan with respect to the holding of Property shall require
that (i) the Account will be adequately indemnified of its losses
adequately insured; (ii) the Securities are not subject to any right,
charge, security interest, lien or claim of any kind in favor of such
Subcustodian or its creditors except a claim for payment in accordance
with such agreement for their safe custody or administration and
expenses related thereto, (iii) beneficial ownership of such
Securities be freely transferable without the payment of money or vale
other than for safe custody or administration and expenses related
thereto, (iv) adequate records will be maintained identifying the
Property held pursuant to such Agreement as belonging to the
Custodian, on behalf of its customers and (v) to the extent permitted
by applicable law, officers of or auditors employed by, or other
representatives or designated by, the Custodian, including the
independent public accountants of or designated by, the Customer be
given access to the books and records of such Subcustodian relating to
its actions under its agreement pertaining to any Property held by it
thereunder or confirmation of or pertinent information contained in
such books and records be furnished to such persons designated by the
Custodian.
6. USE OF SECURITIES SYSTEM. With respect to Property in the Account(s)
which are maintained by the Custodian or any Subcustodian in the custody of a
Securities System employed pursuant to Section 4:
(a) The Custodian shall, and the Subcustodian will be required by its
agreement with the Custodian to, identify on its books such
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Property as being held for the account of the Custodian or
Subcustodian for its customers.
(b) Any Property held in a Securities System for the account of the
Custodian or a Subcustodian will be subject only to the instructions
of the Custodian or such Subcustodian, as the case may be.
(c) Property deposited with a Securities System will be maintained in an
account holding only assets for customers of the Custodian of
Subcustodian, as the case may be, unless precluded by applicable law,
rule or regulation.
(d) The Custodian shall provide the Customer with any report obtained by
the Custodian on the Securities System's accounting system, internal
accounting control and procedures for safeguarding securities
deposited in the Securities System.
7. AGENTS. The Custodian may any time or times in its sole discretion
appoints (or remove) any other U.S. banks or trust company with is itself
qualified under the 1940 Act to act as custodian, as its agent to carry out such
of the provisions of this Agreement as the Custodian may from time to time
direct; PROVIDED, however, that the appointment of any agent shall not relieve
the Custodian of its responsibilities or liabilities hereunder.
8. RECORDS, OWNERSHIP OF PROPERTY, STATEMENTS, OPINIONS OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS.
(a) The ownership of the Property whether Securities, Cash and/or other
property, and whether held by the Custodian of a Subcustodian or in a Securities
System as authorized herein, shall be clearly recorded on the Custodian's books
as belonging to the appropriate Account and not for the Custodian's own
interest. The Custodian shall keep accurate and detailed accounts of all
investments, receipts, disbursements and other transactions for each Account.
All accounts, books and records of the Custodian relating thereto shall be open
to inspection and audit at all reasonable times during normal business hours by
any person designated by the Customer. All such accounts shall be maintained
and preserved in the form reasonably requested by the Customer. The Custodian
will supply to the Customer from time to time, as mutually agreed upon, a
statement in respect to any Property in an Account held by the Custodian or by a
Subcustodian. In the absence of the filing in writing with the Custodian by the
Customer of exceptions or objections to any such statement within sixty (60)
days of the mailing thereof, the Customer shall be deemed to have approved such
statement and in such case or upon written approval of the Customer of any such
statement, such statement shall be presumed to be for all purposes correct with
respect to all information set forth therein.
(b) The Custodian shall take all reasonable action as the Customer may
request to obtain from year to year favorable opinions from the Customer's
independent certified public accountants with respect to the Custodian's
activities hereunder in connection with the preparation of the Customer's Form
N-1A and the Customer's Form N-SAR or other periodic reports to the SEC and with
respect to any other requirements of the SEC.
(c) At the request of the Customer, the Custodian shall delivery to the
Customer a written report prepared by the Custodian's independent certified
public accountants with respect to the services provided by the Custodian under
this Agreement, including, without limitation, the Custodian's accounting
system, internal accounting control and procedures for safeguarding Cash and
Securities, including Cash and Securities deposited and/or maintained
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in a securities system or with a Subcustodian. Such report shall be of
sufficient scope and in sufficient detail as may reasonably be required by the
Customer and as may reasonably be obtained by the Custodian.
(d) The Customer may elect to participate in any of the electronic on-line
service and communications systems offered by the Custodian which can provide
the Customer, on a daily basis, with the ability to view on-line or to print on
hard copy various reports of Account activity and of Securities and/or Cash
being held in any Account. To the extent that such service shall include market
values of Securities in an Account, the Customer hereby acknowledges that the
Custodian now obtains and may in the future obtain information on such values
from outside sources that the Custodian considers to be reliable and the
Customer agrees that the Custodian (i) does not very or represent or warrant
either the reliability or such service nor the accuracy or completeness of any
such information furnished or obtained by or through such service and (ii) shall
be without liability in selecting and utilizing such service or furnishing any
information derived therefrom.
9. HOLDING OF SECURITIES, NOMINEES, ETC. Securities in an Account which
are held by the Custodian or any Subcustodian may be held by such entity in the
name of the Customer, on behalf of a Portfolio, in the Custodian's or
Subcustodian's name, in the name of the Custodian's or Subcustodian's nominee,
or in bearer form. Securities that are hold by a Subcustodian or which are
eligible for deposit in a Securities System as provided above may be maintained
with the Subcustodian or the Securities System in an account for the Custodian's
or Subcustodian's customers, unless prohibited by law, rule, or regulation. The
Custodian or Subcustodian, as the case may be, may combine certificates
representing Securities held in an Account with certificates of the same issue
held by it as fiduciary or as a custodian. In the event that any Securities in
the name of the Custodian or its nominee or held by a Subcustodian and
registered in the name or such Subcustodian or its nominee are called for
partial redemption by the issuer of such Security, the Custodian may, subject to
the rules or regulations pertaining to allocation of any Securities System in
which such Securities have been deposited, allot or cause to be allotted, the
called portion of the respective beneficial holders of such class of security in
any manner the Custodian deems to be fair and equitable.
10. PROXIES,ETC. With respect to any proxies, notices, reports or other
communications relative to any of the Securities in any Account, the Custodian
shall perform such services and only such services relative thereto as are (i)
set forth in Section 3 of this Agreement, (ii) described in Exhibit B attached
hereto (as such service therein described may be in effect from time to time)
(the "Proxy Service") and (iii) as may otherwise be agreed upon between the
Custodian and the Customer. The liability and responsibility of the Custodian
in connection with the Proxy Service referred to in (ii) of the immediately
preceding sentence and in connection with any additional services which the
Custodian and the Customer may agree upon as provided in (iii) of the
immediately preceding sentence shall be as set forth in the description of the
Proxy Service and as may be agreed upon by the Custodian and the Customer in
connection with the furnishing of any such additional service and shall not be
affected by any other term of this Agreement. Neither the Custodian nor its
nominees or agents shall vote upon or in respect of any of the Securities in an
Account, execute any form of proxy to vote thereon, or give any consent or take
any action (except as provided in Section 3) with respect thereto except upon
the receipt of Instructions relative thereto.
11. SEGREGATED ACCOUNT. To assist the Customer in complying with the
requirements of the 1940 Act and the rules and regulations thereunder, the
Custodian shall, upon receipt of Instructions, establish and maintain a
segregated account or accounts on its books for an on behalf of a Portfolio.
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<PAGE>
12. SETTLEMENT PROCEDURES. Securities will be transferred, exchanged or
delivered by the Custodian or a Subcustodian upon receipt by the Custodian of
Instructions which include all information required by the Custodian.
Settlement and payment for Securities received for an Account and delivery of
Securities out of such Account may be effected in accordance with the customary
or established securities trading or securities processing practices and
procedures in the jurisdiction or market in which the transaction occurs,
including, without limitation, delivery Securities to the purchaser thereof or
to a dealer therefor (or an agent for such purchaser or dealer) against a
receipt with the exception of receiving later payment for such Securities from
such purchaser or dealer, as such practices and procedures may be modified or
supplemented in accordance with the standard operating procedures of the
Custodian in effect from time to time for that jurisdiction or market. The
Custodian shall not be liable for any loss which results from effecting
transactions in accordance with the customary or established securities trading
or securities processing practices and procedures in the applicable jurisdiction
or market.
Notwithstanding that the Custodian may settle purchases and sales against,
or credit income to, and Account, on a contractual basis, as outline in the
Investment Manager User Guide provided to the Customer by the Custodian, the
Custodian may, as its sole option, reverse such credits or debits to the
appropriate Account in the event that the transaction does not settle, or the
income is not received in a timely manner, and the Customer agrees to hold the
Custodian harmless from any losses which may result therefrom.
Except as otherwise may be agreed upon by the parties hereto, the Custodian
shall not be required to comply with Instructions to settle the purchase of any
Securities for an Account unless there is sufficient Cash in such Account at the
time or to settle the sale of any Securities in such Account unless such
Securities are in deliverable form. Notwithstanding the foregoing, if the
purchase price of such securities exceeds the amount of Cash in an Account at
the time of settlement of such purchase, the Custodian may, in its sole
discretion solely for the purpose of facilitating the settlement of such
purchase of securities for prompt delivery for such Account. The Customer
agrees to immediately repay the amount of any such overdraft in the ordinary
course of business and further agrees to indemnify and hold the Custodian
harmless from and against any and all losses, costs, including, without
limitation the cost of funds, and expenses incurred in connection with such
overdraft. The Customer agrees that it will not use the Account to facilitate
the purchase of securities without sufficient funds in the Account (which funds
shall not include the proceeds of the sale of the purchased securities).
13. PERMITTED TRANSACTIONS. The Customer agrees that it will cause
transactions to be made pursuant to this Agreement only upon Instructions in
accordance with Section 14 and only for the purposes listed below.
(a) In connection with the purchase or sale of Securities at prices as
confirmed by Instructions.
(b) When Securities are called, redeemed or retired, or otherwise become
payable.
(c) In exchange for or upon conversion into other securities alone or
other securities and cash pursuant to any plan or merger, consolidation,
reorganization, recapitalization or readjustment.
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<PAGE>
(d) Upon conversion of Securities pursuant to their terms into other
securities.
(e) Upon exercise of subscription, purchase or other similar rights
represented by Securities.
(f) For the payment of interest, taxes, management or supervisory fees,
distributions or operating expenses.
(g) In connection with any borrowings by the Customer requiring a pledge
of Securities, but only against receipt of amounts borrowed.
(h) In connection with any loans, but only against receipt of collateral
as specified in Instructions which shall reflect any restrictions applicable to
the Customer.
(i) For the purpose of redeeming shares of the capital stock of the
Customer against delivery of the shares to be redeemed to the Custodian, a
Subcustodian or the Customer's transfer agent.
(j) For the purpose of redeeming in kind shares of the Customer against
delivery of the shares to be redeemed to the Custodian, a Subcustodian or the
Customer's transfer agent.
(k) For delivery in accordance with the provisions of any agreement among
the Customer, on behalf of a Portfolio, the Custodian and a broker-dealer
registered under the Securities Exchange Act of 1934 and a member of the
National Association of Securities Dealers, Inc., relating to compliance with
the rules of The Options Clearing Corporation, the Commodities Futures Trading
Commission and of any registered national securities exchange, or of any similar
organization or organizations, regarding escrow or other arrangements in
connection with transactions by the Customer.
(l) For release of Securities to designated brokers under covered call
options, provided, however, that such Securities shall be released only upon
payment to the Custodian of monies for the premium due and a receipt for the
Securities which are to be held in escrow. Upon exercise of the option, or at
expiration, the Custodian will receive the Securities previously deposited from
broker. The Custodian will act strictly in accordance with Instructions in the
delivery of Securities to be held in escrow and will have no responsibility or
liability for any such Securities which are not returned promptly when due other
than to make proper request for such return.
(m) For spot or forward foreign exchange transactions to facilitate
security trading or receipt of income from Securities related transactions.
(n) Upon the termination of this Agreement as set forth in Section 20.
(o) For other proper purposes.
The Customer agrees that the Custodian shall have no obligation to verify
the purpose for which a transaction is being effected.
14. INSTRUCTIONS. The term "Instructions" means instructions from the
Customer in respect of any of the Custodian's duties hereunder which have been
received by the Custodian at its address set forth in Section 21 below (i) in
writing (including, without limitation, facsimile transmission) or by tested
telex signed or given by such one or more person or persons as the Customer
shall have from time to time authorized in writing to give the particular class
of Instructions in question and whose name and (if applicable) signature and
office address have been filed with the Custodian, or (ii) which have been
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<PAGE>
transmitted electronically through an electronic on-line service and
communications system offered by the Custodian or other electronic instruction
system acceptable to the Custodian, or (iii) a telephonic or oral communication
by one or more persons as the Customer shall have from time to time authorized
to give the particular class of Instructions in question and whose name has been
filed with the Custodian; or (iv) upon receipt of such other form of
instructions as the Customer may from time to time authorize in writing and
which the Custodian has agreed in writing to accept. Instructions in the form
of oral communications shall be confirmed by the Customer by tested telex or
writing in the manner set forth in clause (i) above, but the lack of such
confirmation shall in no way affect any action taken by the Custodian in
reliance upon such oral instructions prior to the Custodian's receipt of such
confirmation. Instructions may relate to specific transaction or to types or
classes of transactions, and may be in the form of standing instructions.
The Custodian shall have the right to assume in the absence of notice to
the contrary from the Customer that any person whose name is on file with the
Custodian pursuant to this Section has been authorized by the Customer to give
the Instructions in question and that such authorization has not been revoked.
The Custodian may act upon and conclusively rely on, without any liability to
the Customer or any other person or entity for any losses resulting therefrom,
any Instructions reasonably believed by it to be furnished by the proper person
or persons as provided above.
15. STANDARD OF CARE. The Custodian shall be responsible for the
performance of only such duties as are set forth herein or contained in
Instructions given to the Custodian which are not contrary to the provisions of
this Agreement. The Custodian will use reasonable care with respect to the
safekeeping of Property in each Account and, except as otherwise expressly
provided herein, in carrying out its obligations under this Agreement. So long
as and to the extent that it has exercised reasonable care, the Custodian shall
not be responsible for the title, validity or genuineness of any Property or
other property or evidence of title thereto received by it or delivered by it
pursuant to this Agreement and shall be held harmless in acting upon, and may
conclusively rely on, without liability for any loss resulting therefrom, any
notice, request, consent, certificate or other instrument reasonably believed by
it to be genuine and to be signed or furnished by the proper party or parties,
including, without limitation, Instructions, and shall be indemnified by the
Customer for any losses, damages, costs and expenses (including, without
limitation, the fees and expenses of counsel) incurred by the Custodian and
arising out of action taken or omitted with reasonable care by the Custodian
hereunder or under any Instructions. The Custodian shall be liable to the
Customer for any act or omission to act of any Subcustodian to the same extent
as if the Custodian committed such act itself. With respect to a Securities
System, the Custodian shall only be responsible or liable for losses arising
from employment of such Securities System caused by the Custodian's own failure
to exercise reasonable care. In the event of any loss to the Customer by reason
of the failure of the Custodian or a Subcustodian to utilize reasonable care,
the Custodian shall be liable to the Customer to the extent of the Customer's
actual damages at the time such loss was discovered without reference to any
special conditions or circumstances. in no event shall the Custodian be liable
for any consequential or special damages. The Custodian shall be entitled to
rely, and may act, on advice of counsel (who may be counsel for the Customer) on
all matters and shall be without liability for any action reasonably taken or
omitted pursuant to such advice.
In the event the Customer subscribes to an electronic on-line service and
communications system offered by the Custodian, the Customer shall be fully
responsible for the security of the Customer's connecting terminal,
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<PAGE>
access thereto and the proper and authorized use thereof and the initiation and
application of continuing effective safeguards with respect thereto and agree to
defend and indemnify the Custodian and hold the Custodian harmless from and
against any and all losses, damages, costs and expenses (including the fees and
expenses of counsel) incurred by the Custodian as a result of any improper or
unauthorized use of such terminal by the Customer or by any others.
All collections of the funds or other property paid or distributed in
respect of Securities in an Account, including funds involved in third-party
foreign exchange transactions, shall be made at the risk of the Customer.
Subject to the exercise of reasonable care, the Custodian shall have no
liability for any loss occasioned by delay in the actual receipt of notice by
the Custodian or by a Subcustodian of any payment, redemption or other
transaction regarding Securities in each Account in respect of which the
Custodian has agreed to take action as provided in Section 3 hereof. The
Custodian shall not be liable for any loss resulting from, or caused by, or
resulting from acts or governmental authorities (whether de jure or de facto),
including, without limitation, nationalization, expropriation, and the
imposition of currency restrictions; devaluations of or fluctuations in the
value of currencies; changes in laws and regulations applicable to the baking or
securities industry; market conditions that prevent the orderly execution of
securities transactions or affect the value of Property; acts of war, terrorism,
insurrection or revolution; strikes or work stoppages; the inability of a local
clearing and settlement system to settle transactions for reasons beyond the
control of the Custodian; hurricane, cyclone, earthquake, volcanic eruption,
nuclear fusion, fission or radioactivity, or other acts of God.
The Custodian shall have no liability in respect of any loss, damage or
expense suffered by the Customer, insofar as such loss, damage or expense arises
from the performance of the Custodian's duties hereunder by reason of the
Custodian's reliance upon records that were maintained for the Customer by
entities other than the Custodian prior to the Custodian's employment under this
Agreement.
The provisions of this Section shall survive termination of this Agreement.
16. INVESTMENT LIMITATIONS AND LEGAL OR CONTRACTUAL RESTRICTIONS OR
REGULATIONS. The Custodian shall not be liable to the Customer and the Customer
agrees to indemnify the Custodian and its nominees, for any loss, damage or
expense suffered or incurred by the Custodian or its nominees arising out of any
violation of any investment restriction or other restriction or limitation
applicable to the Customer or any Portfolio pursuant to any contract or any law
or regulation. The provisions of this Section shall survive termination of this
Agreement.
17. FEES AND EXPENSES. The Customer agrees to pay to the Custodian such
compensation for its services pursuant to this Agreement as may be mutually
agreed upon in writing from time to time and the Custodian's reasonable out-of-
pocket or incidental expenses in connection with the performance of this
Agreement, including (but without limitation) legal fees as described herein
and/or deemed necessary in the judgment of the Custodian to keep safe or protect
the Property in the Account. The initial fee schedule is attached hereto as
Exhibit C. The Customer hereby agrees to hold the Custodian harmless from any
liability or loss resulting from any taxes or other governmental charges, and
any expenses related thereto, which may be imposed, or assessed with respect to
any Property in an Account and also agrees to hold the Custodian, its
Subcustodians, and their respective nominees
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<PAGE>
harmless from any liability as a record holder of Property in such Account. The
Custodian is authorized to charge the applicable Account for such items and the
Custodian shall have a lien on the Property in the applicable Account for any
amount payable to the Custodian under this Agreement, including but not limited
to amounts payable pursuant to the last paragraph of Section 12 and pursuant to
indemnities granted by the Customer under this Agreement. The provisions of
this Section shall survive the termination of this Agreement.
18. TAX RECLAIMS. With respect to withholding taxes deducted and which
may be deducted from any income received from any Property in an Account, the
Custodian shall perform such services with respect thereto as are described in
Exhibit D attached hereto and shall in connection therewith be subject to the
standard of care set forth in such Exhibit D. Such standard of care shall not
be affected by any other term of this Agreement.
19. AMENDMENT, MODIFICATIONS, ETC. No provision of this Agreement may be
amended, modified or waived except in a writing signed by the parties hereto.
No waiver of any provision hereto shall be deemed a continuing waiver unless it
is so designed. No failure or delay on the part of either party in exercising
any power or right under this Agreement operates as a waiver, nor does any
single or partial exercise of any power or right preclude any other or further
exercise thereof or the exercise of any other power or right.
20. TERMINATION. (a) TERMINATION OF ENTIRE AGREEMENT. This Agreement
may be terminated by the Customer of the Custodian by ninety (90) days' written
notice to the other; PROVIDED that notice by the Customer shall specify the
names of the persons to whom the Custodian shall deliver the Securities in each
Account and to whom the Cash in such Account shall be paid. If notice of
termination is given by the Custodian, the Customer shall, within ninety (90)
days following the giving of such notice, deliver to the Custodian a written
notice specifying the names of the persons to whom the Custodian shall deliver
the Securities in each Account and to whom the Cash in such Account shall be
paid. In either case, the Custodian will deliver such Securities and Cash to
the persons so specified, after deducting therefrom any amounts which the
Custodian determines to be owed to it under Sections 12, 17, and 23. In
addition, the Custodian may in its discretion withhold from such delivery such
Cash and Securities as may be necessary to settle transactions pending at the
time of such delivery. The Customer grants to the Custodian a lien and right of
setoff against the Account and all Property held therein from time to time in
the full amount of the foregoing obligations. If within ninety (90) days
following the giving of a notice specifying the names of the persons to whom the
Custodian shall deliver the Securities in each Account and to whom the Cash in
such Account shall be paid, the Custodian, at its election, may deliver such
Securities and pay such Cash to a bank or trust company doing business in the
State of New York to be held and disposed of pursuant to the provisions of this
Agreement, or may continue to hold such Securities and Cash until a written
notice as aforesaid is delivered to the Custodian, provided that the Custodian's
obligations shall be limited to safekeeping.
(b) TERMINATION AS TO ONE OR MORE PORTFOLIOS. This Agreement may be
terminated by the Customer or the Custodian as to one or more Portfolios (but
less than all of the Portfolios) by delivery of an amended Exhibit A deleting
such Portfolios, in which case termination as to such deleted Portfolios shall
take effect ninety (90) days after the date of such delivery, or such earlier
time as mutually agreed. The execution and delivery of an amended Exhibit A
which deletes one or more Portfolios shall constitute a termination of this
Agreement only with respect to such deleted Portfolio(s), shall be governed by
the preceding provisions of Section 20 as to the identification of a successor
custodian and the delivery of Cash and Securities of the Portfolio(s) so deleted
to such successor custodian, and shall not affect the obligations of
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<PAGE>
the Custodian and the Customer hereunder with respect to the other Portfolios
set forth in Exhibit A, as amended from time to time.
21. NOTICES. Except as otherwise provided in this Agreement, all
requests, demands or other communications between the parties or notices in
connection herewith (a) shall be in writing, hand delivered or sent by telex,
telegram, cable, facsimile or other means of electronic communication agreed
upon by the parties hereto addressed, if to the Customer, to:
c/o MIMLIC Asset Management Company
400 Robert Street North
St. Paul, MN 55101-2098
Attention: Anne Marie Kaul
Phone: 612-223-4568
Fax: 612-223-5959
if to the Custodian, to:
14 Wall Street, 4th Floor
New York, NY 10005
Attention: Shing Tam
Phone: 212-618-2238
Fax: 212-618-2280
or in either case to such other address as shall have been furnished to the
receiving party pursuant to the provisions hereof and (b) shall be deemed
effective when received, or, in the case of a telex, when sent to the proper
number and acknowledged by a proper answerback.
22. SEVERAL OBLIGATIONS OF THE PORTFOLIOS. With respect to any
obligations of the Customer on behalf of each Portfolio and each of its related
Accounts arising out of this Agreement, the Custodian shall look for payment or
satisfaction of any obligation solely to the assets and property of the
Portfolio and such Accounts to which such obligation relates as though the
Customer had separately contracted with the Custodian by separate written
instrument with respect to each Portfolio and its related Accounts.
23. SECURITY FOR PAYMENT. To secure payment of all obligations due
hereunder, the Customer hereby grants to Custodian a continuing security
interest in and right of setoff against each Account and all Property held
therein from time to time in the full amount of such obligations; PROVIDED THAT,
if there is more than one Account and the obligations secured pursuant to this
Section can be allocated to a specific Account or the Portfolio related to such
Account, such security interest and right of setoff will be limited to Property
held for that Account only and its related Portfolio. Should the Customer fail
to pay promptly any amounts owed hereunder, Custodian shall be entitled to use
available Cash in the Account or applicable Account, as the case may be, and to
dispose of Securities in the Account or such applicable Account as is necessary.
In any such case and without limiting the foregoing, Custodian shall be entitled
to take such other action(s) or exercise such other options, powers and rights
as Custodian now or hereafter has as a secured creditor under the New York
Uniform Commercial Code or any other applicable law.
24. REPRESENTATIONS AND WARRANTIES.
(a) The Customer hereby represents and warrants to the Custodian that:
(i) The employment of the Custodian and the allocation of fees,
expenses and other charges to any Account as herein provided, is not
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<PAGE>
prohibited by law or any governing documents or contracts to which the Customer
is subject;
(ii) the terms of this Agreement do not violate any obligation by
which the Customer is bound, whether arising by contract, operation of law or
otherwise;
(iii) this Agreement has been duly authorized by appropriate action
and when executed and delivered will be binding upon the Customer and each
Portfolio in accordance with its terms; and
(iv) The Customer will deliver to the Custodian such evidence of such
authorization as the Custodian may reasonably require, whether by way of a
certified resolution or otherwise.
(b) The Custodian hereby represents and warrants to the Customer that:
(i) The terms of this Agreement do not violate any obligation by which
the Custodian is bound, whether arising by contract, operation of law or
otherwise;
(ii) this Agreement has been duly authorized by appropriate action and
when executed and delivered will be binding upon the Custodian in accordance
with its terms;
(iii) the Custodian will deliver to the Customer such evidence of such
authorization as the Customer may reasonably require, whether by way of a
certified resolution or otherwise; and
(iv) Custodian is qualified as a custodian under Section 26(a) of the
1940 Act and warrants that it will remain so qualified or upon ceasing to be so
qualified shall promptly notify the Customer in writing.
25. GOVERNING LAW AND SUCCESSORS AND ASSIGNS. This Agreement shall be
governed by the law of the State of New York and shall not be assignable by
either party, but shall bind the successors in interest of the Customer and the
Custodian.
26. PUBLICITY. Customer shall furnish to Custodian at its office referred
to in Section 21 above, prior to any distribution thereof, copies of any
material prepared for distribution to any persons who are not parties hereto
that refer in any way to the Custodian. Customer shall not distribute or permit
the distribution of such materials if Custodian reasonably objects in writing
within ten (10) business days of receipt thereof (or such other time as may be
mutually agreed) after receipt thereof. The provisions of this Section shall
survive the termination of this Agreement.
27. SUBMISSION TO JURISDICTION. Any suit, action or proceeding arising
out of this Agreement may be instituted in any State or Federal court sitting in
the City of New York, State of New York, United States of America, and the
Customer irrevocably submits to the non-exclusive jurisdiction of any such court
in any such suit, action or proceeding and waives, to the fullest extent
permitted by law, any objection which it may now or hereafter have to the laying
of venue of any such suit, action or proceeding brought in such a court and any
claim that such suit, action or proceeding was brought in an inconvenient forum.
28. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original. This Agreement shall
become effective when one or more counterparts have been signed and delivered by
each of the parties hereto.
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<PAGE>
29. CONFIDENTIALITY. The parties hereto agree that each shall treat
confidentially the terms and conditions of this Agreement and all information
provided by each party to the other regarding its business and operations. All
confidential information provided by a party hereto shall be used by any other
party hereto solely for the purpose of rendering services pursuant to this
Agreement and, except as may be required in carrying out this Agreement, shall
not be disclosed to any third party without the prior consent of such providing
party. The foregoing shall not be applicable to any information that is
publicly available when provided or thereafter becomes publicly available other
than through a breach of this Agreement, or that is required or requested to be
disclosed by any bank or other regulatory examiner of the Custodian, Customer,
or any Subcustodian, any auditor of the parties hereto, by judicial or
administrative process or otherwise by applicable law or regulation.
30. SEVERABILITY. If any provision of this Agreement is determined to be
invalid or unenforceable, such determination shall not affect the validity or
enforceability of any other provision of this Agreement.
31. HEADINGS. The headings of the paragraphs hereof are included for
convenience of reference only and do not form a part of this Agreement.
MIMLIC SERIES FUND, INC.
By /s/Frederick Feuerherm
----------------------------
Name: Frederick Feuerherm
-------------------------
Title: Treasurer
------------------------
BANKERS TRUST COMPANY
By /s/Richard M. Quintal
----------------------------
Name: Richard M. Quintal
-------------------------
Title: Managing Director
------------------------
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<PAGE>
EXHIBIT A
To Custodian Agreement dated as of January 2, 1997 between Bankers Trust
Company and MIMLIC Series Fund, Inc.
LIST OF PORTFOLIOS
The following is a list of Portfolios referred to in the first WHEREAS
clause of the above-referred to Custodian Agreement. Terms used herein as
defined terms unless otherwise defined shall have the meanings ascribed to them
in the above-referred to Custodian Agreement.
International Bond Portfolio
Dated as of: January 2, 1997 By /s/Frederick Feuerherm
----------------------------
Name: Frederick Feuerherm
-------------------------
Title: Treasurer
------------------------
BANKERS TRUST COMPANY
By /s/Richard M. Quintal
----------------------------
Name: Richard M. Quintal
-------------------------
Title: Managing Director
------------------------
<PAGE>
EXHIBIT B
To Custodian Agreement dated as of January 2, 1997 between Bankers Trust
Company and MIMLIC Series Fund, Inc.
PROXY SERVICE
The following is a description of the Proxy Service referred to in Section
10 of the above referred to Custodian Agreement. Terms used herein as defined
terms shall have the meanings ascribed to them therein unless otherwise defined
below.
The Custodian provides a service, described below, for the transmission of
corporate communications in connection with shareholder meetings relating to
Securities held in Argentina, Australia, Austria, Canada, Denmark, Finland,
France, Germany, Greece, Hong Kong, Indonesia, Ireland, Italy, Japan, Korea,
Malaysia, Mexico, Netherlands, New Zealand, Pakistan, Poland, Singapore, South
Africa, Spain, Sri Lanka, Sweden, united Kingdom, United States, and Venezuela.
For the United States and Canada, the term "corporate communications" means the
proxy statements or meeting agenda, proxy cards, annual reports and any other
meeting materials received by the Custodian. For countries other than the
United States and Canada, the term "corporate communications" means the meeting
agenda only and does not include any meeting circulars, proxy statements or any
other corporate communications furnished by the issuer in connection with such
meeting. Non-meeting related corporate communications are not included in the
transmission service to be provided by the Custodian except upon request as
provided below.
The Custodian's process for transmitting and translating meeting agendas
will be as follows:
1) If the meeting agenda is not provided by the issuer in the English
language, and if the language of such agenda is in the official
language of the country in which the related security is held, the
Custodian will as soon as practicable after receipt of the original
meeting agenda by a Subcustodian provide an English translation
prepared by that Subcustodian.
2) If an English translation of the meeting agenda is furnished, the
local language agenda will not be furnished unless requested.
Translations will be free translations and neither the Custodian nor any
Subcustodian will be liable or held responsible for the accuracy thereof or any
direct or indirect consequences arising therefrom, including without limitation
rising out of any action taken or omitted to be taken based thereon.
If requested, the Custodian will, on a reasonable efforts basis, endeavor
to obtain any additional corporate communication such as annual or interim
reports, proxy statement, meeting circulars, or local language agendas, and
provide them in the form obtained.
Timing in the voting process is important and, in that regard, upon receipt
by the Custodian of notice from a Subcustodian, the Custodian will provide a
notice to the Customer indicating the deadline for receipt of its instructions
to enable the voting process to take place effectively and efficiently. As
voting procedures will vary from market to market, attention to any required
procedures will be very important. Upon timely receipt of voting instructions,
the Custodian will promptly forward such instructions to
<PAGE>
the applicable Subcustodian. If voting instructions are not timely received,
the Custodian shall have not liability or obligation to take any action.
For Securities held in markets other than those set forth in the first
paragraph, the Custodian will not furnish the material described above or seek
voting instructions. However, if requested to exercise voting rights at a
specific meeting, the Custodian will endeavor to do so on a reasonable efforts
basis without any assurance that such rights will be so exercised at such
meeting.
If the Custodian or any Subcustodian incurs extraordinary expenses in
exercising voting rights related to any Securities pursuant to appropriate
instructions or direction (e.g., by way of illustration only and not by way of
limitation, physical presence is required at a meeting and/or travel expenses
are incurred), such expenses will be reimbursed out of the Account containing
such Securities unless other arrangements have been made for such reimbursement.
It is the intent of the Custodian to expand the Proxy Service to include
jurisdiction which are not currently included as set forth in the second
paragraph hereof. The Custodian will notify the Customer as to the inclusion of
additional countries or deletion of existing countries after their inclusion or
deletion and this Exhibit B will be deemed to be automatically amended to
include or delete such countries as the case may be.
Dated as of: January 2, 1997 By /s/Frederick Feuerherm
----------------------------
Name: Frederick Feuerherm
-------------------------
Title: Treasurer
------------------------
BANKERS TRUST COMPANY
By /s/Richard M. Quintal
----------------------------
Name: Richard M. Quintal
-------------------------
Title: Managing Director
------------------------
- 2 -
<PAGE>
EXHIBIT C
To Custodian Agreement dated as of January 2, 1997 between Bankers Trust
Company and MIMLIC Series Fund, Inc.
CUSTODY FEE SCHEDULE
1. Annual Asset Fee (based on market value per annum)
Tier I 2 BASIS POINTS
- Cedel (Eurobonds)
- Euroclear (Eurobonds)
Tier II 3 BASIS POINTS
- Canada
- Germany
- Italy
- Japan
- United Kingdom
Tier III 5 BASIS POINTS
- Australia - Luxembourg
- Austria - Netherlands
- Belgium - New Zealand
- Denmark - Norway
- France - Switzerland
- Ireland - Sweden
Tier IV 7 BASIS POINTS
- Hong Kong
- Indonesia
- Malaysia
- Mexico
- Philippines
- Singapore
- Spain
- Thailand
Tier V
Receive and Deliver
Country Annual Asset Fee Transactions
Argentina 40 Basis Points $150
Brazil 40 Basis Points $100
Chile 30 Basis Points $100
Columbia 30 Basis Points $100
Finland 15 Basis Points $100
Greece 40 Basis Points 20 Basis Points
Israel 25 Basis Points $100
Pakistan 30 Basis Points $150
Portugal 15 Basis Points $100
Shenzen/Shanghai 30 Basis Points $100
South Korea 15 Basis Points $100
Sri Lanka 15 Basis Points $100
Turkey 30 Basis Points $100
Venezuela 30 Basis Points $100
2. Account Charge - per month (per account) $100
1
<PAGE>
3. Trades - Receive and Deliver Transactions $30
For Tier I, II, III
4. Front End System FREE OF CHARGE
Notes:
- -----
- Fees are billed monthly
- Fees for the receipt of positions relating to the initial asset
transition will be waived with the exception of the United Kingdom,
Spain and Indonesia where re-registration fees will be assessed.
- Cash movements relating to third party FX trades will be assessed at
$25 per U.S. wire movement and $50 per non U.S. wire movement. For FX
trades concluded with BTCo., this charge will be waived.
- Fees for investment in countries not listed will be negotiated
separately.
- Account opening subject to credit approval.
This Exhibit C shall be amended upon delivery by the Custodian of a new Exhibit
C to the Customer and acceptance thereof by the Customer and shall be effective
as of the date of acceptance by the Customer or a date agreed upon between the
Custodian and the Customer.
2
<PAGE>
EXHIBIT D
To Custodian Agreement dated as of January 2, 1997 between Bankers Trust
Company and MIMLIC Series Fund, Inc.
TAX RECLAIMS
Pursuant to Section 18 of the above referred to Custodian Agreement, the
Custodian shall perform the following services with respect to withholding taxes
imposed or which may be imposed on income from Property in any Account. Terms
used herein as defined terms shall unless otherwise defined have the meanings
ascribed to them in the above referred to Custodian Agreement.
When withholding tax has been deducted with respect to income from any
Property in an Account, the Custodian will actively pursue on a reasonable
efforts basis the reclaim process, PROVIDED THAT the Custodian shall not be
required to institute any legal or administrative proceeding against any
Subcustodian or other person. The Custodian will provide fully detailed
advices/vouchers to support reclaims submitted to the local authorities by the
Custodian or its designee. In all cases of withholding, the Custodian will
provide full details to the Customer. If exemption from withholding at the
source can be obtained in the future, the Custodian will notify the Customer and
advise what documentation, if any, is required to obtain the exemption. Upon
receipt of such documentation from the Customer, the Custodian will file for
exemption on the Customer's behalf and notify the Customer when it has been
obtained.
In connection with providing the foregoing service, the Custodian shall be
entitled to apply categorical treatment of the Customer according to the
Customer's nationality, the particulars of its organization and other relevant
details that shall be supplied by the Customer. It shall be the duty of the
Customer to inform the Custodian of any change in the organization, domicile or
other relevant fact concerning tax treatment of the Customer and further to
inform the Custodian if the Customer is or becomes the beneficiary of any
special ruling or treatment not applicable to the general nationality and
category or entity of which the Customer is a part under general laws and treaty
provisions. The Custodian may rely on any such information provided by the
Customer.
In connection with providing the foregoing service, the Custodian may also
rely on professional tax services published by a major international accounting
firm and/or advice received from a Subcustodian in the jurisdictions in
question. In addition, the Custodian may seek the advice of counsel or other
professional tax advisers in such jurisdictions. The Custodian is entitled to
rely, and may act, on information set forth in such services and on advice
received form a Subcustodian, counsel or other professional tax advisers and
shall be without liability to the Customer for any action reasonably taken or
omitted pursuant to information contained in such services or such advice.
<PAGE>
Dated as of: January 2, 1997 By /s/Frederick Feuerherm
----------------------------
Name: Frederick Feuerherm
-------------------------
Title: Treasurer
------------------------
BANKERS TRUST COMPANY
By /s/Richard M. Quintal
----------------------------
Name: Richard M. Quintal
-------------------------
Title: Managing Director
------------------------
<PAGE>
KPMG Peat Marwick LLP Letterhead
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
MIMLIC Series Fund, Inc.:
We consent to the references to our Firm under the headings "FINANCIAL
HIGHLIGHTS" in Part A and "INDEPENDENT AUDITORS" for Part B of the
Registration Statement.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
February 14, 1997
<PAGE>
MIMLIC SERIES FUND, INC.
POWER OF ATTORNEY
TO SIGN REGISTRATION STATEMENT
The undersigned, Directors of MIMLIC Series Fund, Inc. (the "Fund"),
appoint Paul H. Gooding and Donald F. Gruber, and each of them individually, as
attorney-in-fact for the purpose of signing in their names and on their behalf
as Directors of the Fund and filing with the Securities and Exchange Commission
Registration Statements on Form N-1A, or any amendments thereto, for the purpose
of registering shares of Common Stock of the Portfolios of the Fund for sale by
the Fund and to register the Fund under the Investment Company Act of 1940.
Dated: January 18, 1994 ________________________________________
Charles E. Arner
________________________________________
Ellen S. Berscheid
________________________________________
Ralph D. Ebbott
________________________________________
Frederick P. Feuerherm
________________________________________
Paul H. Gooding
