<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 18
----
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment Number 16
----
---------------------
Advantus Series Fund, Inc.
Effective May 1, 1997 name will be Advantus 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) 665-3500
After December 31, 1998: (651) 665-3500
(Registrant's Telephone Number, Including Area Code)
----------------------
Copy to: Donald F. Gruber, Esquire
Michael J. Radmer, Esquire Assistant Secretary
Dorsey & Whitney LLP Advantus Series Fund, Inc.
220 South Sixth Street 400 Robert Street North
Minneapolis, Minnesota 55402-1498 St. Paul, Minnesota 55101-2098
----------------------
IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE (check appropriate box)
immediately upon filing pursuant to paragraph (b)
---
X on May 1, 1998 pursuant to paragraph (b) of Rule 485
---
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)
---
on (date) 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.
TITLE OF SECURITIES BEING REGISTERED:
Common shares, Series A through Q and Series S, T and V, Par Value $.01
Per Share
<PAGE>
Advantus Series Fund, Inc.
Cross Reference Sheet for Items required by Rule 495
N-1A Item of Part A Caption in Prospectus
- ------------------- ---------------------
1 Cover Page
2 Not Applicable
3 Financial Highlights; Performance Data
4 The Fund; Investment Objectives, Policies and
Risks; Other Investment Practices; Investment
Restrictions
5 The Fund and Its Management; Investment Adviser;
Manager of Managers Strategy; Investment
Sub-Advisers
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 The Fund
13 Investment Objectives and Policies; Investment
Restrictions
14 Directors and Executive Officers
15 The Fund
16 Investment Advisory and Other Services
17 Portfolio Transactions and Allocation of Brokerage
18 Fund Shares and Voting Rights
19 Purchase and Redemption of Shares; Net Asset
Value
20 Taxes
21 Purchase and Redemption of Shares
22 Performance Data
23 Independent Auditors
<PAGE>
PART A. INFORMATION REQUIRED IN A PROSPECTUS
-------------------------------------
<PAGE>
Prospectus Dated May 1, 1998
- --------------------------------------------------------------------------------
ADVANTUS SERIES FUND, INC.
- ---------------------------------
400 ROBERT STREET NORTH - ST. PAUL, MINNESOTA 55101 - 1-800-443-3677
- --------------------------------------------------------------------------------
-
Advantus Series Fund, Inc. (the "Fund") is a Minnesota corporation, each of
whose portfolios (except for the Global Bond Portfolio) is operated as a
diversified, open-end management investment company. The Global Bond Portfolio
is operated as a non-diversified, open-end management investment company. The
Fund provides for a range of investment objectives through twenty separate
investment portfolios: the Growth Portfolio, the Bond Portfolio, the Money
Market Portfolio, the Asset Allocation Portfolio, the Mortgage Securities
Portfolio, the Index 500 Portfolio, the Capital Appreciation Portfolio, the
International Stock Portfolio, the Small Company Portfolio, four Maturing
Government Fund Portfolios, maturing respectively, 1998, 2002, 2006 and 2010,
the Value Stock Portfolio, the Small Company Value Portfolio, the Global Bond
Portfolio, the Index 400 Mid-Cap Portfolio, the Macro-Cap Value Portfolio, the
Micro-Cap Growth Portfolio and the Real Estate Securities Portfolio (herein
referred to as "Portfolios"). A separate series of the Fund's common stock is
issued for each Portfolio.
Shares of the Fund are not offered directly to the public. They are sold to
The Minnesota Mutual Life Insurance Company ("Minnesota Mutual") in connection
with its variable life insurance policies and variable annuity contracts. The
Fund will also be used as the underlying investment medium for separate accounts
of the Northstar Life Insurance Company, a wholly-owned life insurance
subsidiary of Minnesota Mutual which is domiciled in the state of New York.
The 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 "S&P 500 Index"). All common stocks, including those in the S&P
500 Index, involve greater investment risk than debt securities. The fact
that a stock has been included in the S&P 500 Index affords no assurance
against declines in the price or yield performance of that stock. The
inclusion of a stock in the S&P 500 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 Capital Appreciation Portfolio seeks growth of capital. Investments
will be made based upon their potential for capital appreciation. Therefore,
current income will be incidental to the objective of capital growth.
Because of the market risks inherent in any equity investment, the selection
of securities on the basis of their appreciation possibilities cannot ensure
against possible loss in value.
The International Stock Portfolio seeks long-term capital growth. In
pursuit of this objective the International Stock Portfolio will follow a
policy of investing in stocks issued by companies, large and small, and debt
obligations of companies and governments outside the United States. Current
income will be incidental to the objective of capital growth. The Portfolio
is designed for persons seeking international diversification. Investors
should consider carefully the substantial risks involved in investing in
securities issued by companies and governments of foreign nations, which are
in addition to the usual risks inherent in domestic investments.
The Small Company Portfolio seeks the long-term accumulation of capital.
In pursuit of this objective, the Small Company Portfolio will follow a
policy of investing primarily in common and preferred stocks issued by small
companies, defined in terms of either market capitalization or gross
revenues. Investments in small companies usually involve greater investment
risks than fixed income securities or corporate equity securities generally.
Dividend income will be incidental to the investment objective for this
Portfolio.
The Maturing Government Bond Portfolios seek to provide as high an
investment return as is consistent with prudent investment risk for a
specified period of time ending on a specified liquidation date. In pursuit
of this objective each of the Maturing Government Bond Portfolios seeks to
return a reasonably assured targeted dollar amount, predictable at the time
of investment, on a specific target date in the future through investment in
a portfolio composed primarily of zero coupon securities. These are
securities that pay no cash income and are sold at a discount from their par
value at maturity. The current target dates for the maturities of these
Portfolios are 1998, 2002, 2006 and 2010, respectively.
The Value Stock Portfolio seeks the long-term accumulation of capital.
In pursuit of this objective, the Value Stock Portfolio will follow a policy
of investing primarily in the equity securities of companies which, in the
opinion of the adviser, have market values which appear low relative to
their underlying value or future earnings and growth potential. As it is
anticipated that the Portfolio will consist in large part of dividend-paying
common stocks, the production of income will be a secondary objective of the
Portfolio.
The Small Company Value Portfolio seeks the long-term accumulation of
capital. The Portfolio will follow a policy of investing primarily in the
equity securities of small companies, defined in terms of market
capitalization and which appear to have market values which are low relative
to their underlying value or future earnings and growth potential. Dividend
income will be incidental to the investment objective for this Portfolio.
The Global Bond Portfolio seeks to maximize current income consistent
with protection of principal. The Portfolio pursues its objective by
investing primarily in debt securities issued by issuers located anywhere in
the world. Prior to May 1, 1998, this Portfolio was known as the
International Bond Portfolio.
The Index 400 Mid-Cap Portfolio seeks to provide investment results
generally corresponding to the aggregate price and dividend performance of
publicly traded common stocks that comprise the Standard & Poor's 400 MidCap
Index (the "S&P 400 Index"). The Portfolio pursues its investment objective
by investing primarily in the 400 common stocks that comprise the S&P 400
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
2
<PAGE>
portfolio in this equity security area as part of an over-all investment
strategy. The inclusion of a stock in the S&P 400 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 Macro-Cap Value Portfolio seeks to provide high total return. It
pursues this objective by investing in equity securities that the
sub-adviser believes, through the use of dividend discount models, to be
undervalued relative to their long-term earnings power, creating a
diversified portfolio of equity securities which typically will have a
price/earnings ratio and a price to book ratio that reflects a value
orientation. The Portfolio seeks to enhance its total return relative to
that of the universe of large-sized U.S. companies.
The Micro-Cap Growth Portfolio seeks long-term capital appreciation. It
pursues this objective by investing primarily in equity securities of
smaller companies which the sub-adviser believes are in an early stage or
transitional point in their development and have demonstrated or have the
potential for above average revenue growth. It will invest primarily in
common stocks and stock equivalents of micro-cap companies, that is,
companies with a market capitalization of less than $300 million.
The Real Estate Securities Portfolio seeks above-average income and
long-term growth of capital. The Portfolio intends to pursue its objective
by investing primarily in equity securities of companies in the real estate
industry. The Portfolio seeks to provide a yield in excess of the yield of
the Standard & Poor's Corporation 500 Composite Stock Price Index.
There is no assurance that the investment objectives of any of the Fund's
Portfolios will be realized. See "Investment Objectives, Policies and Risks" on
page 21.
This Prospectus sets forth concisely the information that a prospective
investor should know before investing in the Fund, and it should be read and
kept for future reference. A Statement of Additional Information dated May 1,
1998, 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 writing the Fund at its principal office at Minnesota Mutual
Life Center, 400 Robert Street North, St. Paul, Minnesota 55101-2098 or by
calling (612) 665-3500; after December 31, 1998, (651) 665-3500.
3
<PAGE>
- --------------------------------------------------------------------------------
-
TABLE OF
CONTENTS
- ------------
<TABLE>
<S> <C>
FINANCIAL HIGHLIGHTS...................................................... 5
PERFORMANCE DATA.......................................................... 20
THE FUND.................................................................. 21
INVESTMENT OBJECTIVES, POLICIES AND RISKS................................. 22
GROWTH PORTFOLIO...................................................... 23
BOND PORTFOLIO........................................................ 23
MONEY MARKET PORTFOLIO................................................ 25
ASSET ALLOCATION PORTFOLIO............................................ 27
MORTGAGE SECURITIES PORTFOLIO......................................... 27
INDEX 500 PORTFOLIO................................................... 31
CAPITAL APPRECIATION PORTFOLIO........................................ 32
INTERNATIONAL STOCK PORTFOLIO......................................... 33
SMALL COMPANY PORTFOLIO............................................... 36
MATURING GOVERNMENT BOND PORTFOLIOS................................... 37
VALUE STOCK PORTFOLIO................................................. 39
SMALL COMPANY VALUE PORTFOLIO......................................... 40
GLOBAL BOND PORTFOLIO................................................. 43
INDEX 400 MID-CAP PORTFOLIO........................................... 50
MACRO-CAP VALUE PORTFOLIO............................................. 51
MICRO-CAP GROWTH PORTFOLIO............................................ 53
REAL ESTATE SECURITIES PORTFOLIO...................................... 55
OTHER INVESTMENT PRACTICES................................................ 56
INVESTMENT RESTRICTIONS................................................... 62
THE FUND AND ITS MANAGEMENT............................................... 63
INVESTMENT ADVISER........................................................ 64
MANAGER OF MANAGERS STRATEGY.............................................. 67
INVESTMENT SUB-ADVISERS................................................... 67
PURCHASE AND REDEMPTION OF SHARES......................................... 68
DIVIDENDS AND DISTRIBUTIONS............................................... 69
TAXES..................................................................... 69
COUNSEL AND INDEPENDENT AUDITORS.......................................... 69
CUSTODIANS................................................................ 70
YEAR 2000 COMPUTER PROBLEM................................................ 70
THE STANDARD & POOR'S LICENSE............................................. 70
APPENDIX A................................................................ 72
</TABLE>
No dealer, salesman or other person has been authorized to give any
information or to make any representations, other than those contained in this
Prospectus, in connection with the offer contained in this Prospectus, and, if
given or made, such other information or representations must not be relied upon
as having been authorized by the Fund or the Investment Adviser. This Prospectus
does not constitute an offering in any state in which such offering may not
lawfully be made.
4
<PAGE>
FINANCIAL HIGHLIGHTS
The following tables, for each Portfolio, which show certain per share data
for a share of capital stock outstanding during the periods and selected
information for each period, have been audited by KPMG Peat Marwick LLP,
independent auditors, as set forth in their report appearing in the Fund's
Annual Report to Shareholders for the year ended December 31, 1997, which has
been incorporated by reference in the Statement of Additional Information. This
information should be read in conjunction with the audited financial statements
contained in the Fund's Annual Report and incorporated by reference in the
Statement of Additional Information.
GROWTH PORTFOLIO
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------------------------
1997(E) 1996(d) 1995 1994 1993 1992 1991 1990 1989 1988
-------- --------- --------- --------- --------- -------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of year...... $ 2.34 $ 2.21 $ 1.87 $ 1.91 $ 1.89 $ 1.86 $ 1.39 $ 1.41 $ 1.15 $ 1.02
-------- --------- --------- --------- --------- -------- -------- -------- ------- -------
Income from investment
operations:
Net investment
income............. .02 .02 .02 .02 .02 .03 .03 .01 .03 .03
Net gains or losses
on securities (both
realized and
unrealized)........ .62 .32 .41 -- .06 .06 .44 (.01) .27 .13
-------- --------- --------- --------- --------- -------- -------- -------- ------- -------
Total from
investment
operations.... .64 .34 .43 -- .08 .09 .47 .30 .16
-------- --------- --------- --------- --------- -------- -------- -------- ------- -------
Less distributions:
Dividends from net
investment
income............. (.02) (.02) (.02) (.02) (.03) (.03) -- (.01) (.03) (.03)
Distributions from
capital gains...... .56 (.19) (.07) (.04) (.03) (.03) -- (.01) (.01) --
-------- --------- --------- --------- --------- -------- -------- -------- ------- -------
Total
distributions... (.58) (.21) (.09) (.06) (.06) (.06) -- (.02) (.04) (.03)
-------- --------- --------- --------- --------- -------- -------- -------- ------- -------
Net asset value, end of
year................... $ 2.40 $ 2.34 $ 2.21 $ 1.87 $ 1.91 $ 1.89 $ 1.86 $ 1.39 $ 1.41 $ 1.15
-------- --------- --------- --------- --------- -------- -------- -------- ------- -------
-------- --------- --------- --------- --------- -------- -------- -------- ------- -------
Total return (a)......... 33.4% 17.2% 24.3% .8% 4.7% 4.8% 34.1% .2% 26.0% 15.9%
Net assets, end of year
(in thousands)......... $330,816 $ 248,465 $ 201,678 $ 157,369 $ 125,745 $ 99,128 $ 75,518 $ 51,485 $ 7,809 $ 3,996
Ratio of expenses to
average daily net
assets (b)............. .55% .59% .55% .56% .58% .58% .63% .65% .65% .65%
Ratio of net investment
income to average daily
net assets (b)......... 1.16% 1.04% 1.04% 1.22% 1.21% 1.72% 2.11% 2.70% 2.74% 3.05%
Portfolio turnover rate
(excluding short-term
securities)............ 120.1% 154.7% 91.9% 42.0% 51.0% 22.4% 15.7% 19.2% 32.4% 34.1%
Average commission rate
on stock
transactions (c)....... $ .0400 $ .0617 N/A N/A N/A N/A N/A N/A N/A N/A
</TABLE>
<TABLE>
<S> <C>
<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 and $11,045 in expenses
for the years ended December 31, 1990, 1989 and 1988, respectively. Had the
portfolio paid all fees and expenses, the ratio of expenses to average
daily net assets would have been .65%, .76% and .95%, respectively, and the
ratio of net investment income to average daily net assets would have been
2.70%, 2.63% and 2.75%, respectively.
(c) Beginning in 1996, the Portfolio is required to disclose an average
brokerage commission rate. The rate is calculated by dividing the total
brokerage commissions paid on applicable purchases and sales of stocks for
the period by the number of related shares purchased and sold.
(d) On October 1, 1996, the Portfolio entered into a new sub-advisory agreement
with Voyageur Fund Managers, Inc. to perform sub-advisory services for the
Portfolio.
(e) Effective May 1, 1997, the sub-advisory agreement between MMILIC Management
and Voyageur was terminated. The Portfolio entered into a new investment
advisory agreement with Advantus Capital.
</TABLE>
5
<PAGE>
BOND PORTFOLIO
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------------------------
1997(C) 1996 1995 1994 1993 1992 1991 1990 1989 1988
-------- --------- --------- -------- -------- -------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
year........................ $ 1.28 $ 1.33 $ 1.16 $ 1.30 $ 1.26 $ 1.26 $ 1.08 $ 1.08 $ 1.03 $ 1.03
-------- --------- --------- -------- -------- -------- -------- ------- ------- -------
Income from investment
operations:
Net investment income..... .08 .06 .07 .04 .05 .05 .07 .08 .08 .07
Net gains or losses on
securities (both
realized and
unrealized)............. .04 (.03) .15 (.10) .07 .03 .11 -- .05 --
-------- --------- --------- -------- -------- -------- -------- ------- ------- -------
Total from investment
operations......... .12 .03 .22 (.06) .12 .08 .19 .08 .13 .07
-------- --------- --------- -------- -------- -------- -------- ------- ------- -------
Less distributions:
Dividends from net
investment income....... (.07) (.07) (.05) (.05) (.06) (.07) -- (.08) (.08) (.07)
Distributions from capital
gains................... -- (.01) -- (.03) (.02) (.01) -- -- -- --
-------- --------- --------- -------- -------- -------- -------- ------- ------- -------
Total distributions... (.07) (.08) (.05) (.08) (.08) (.08) -- (.08) (.08) (.07)
-------- --------- --------- -------- -------- -------- -------- ------- ------- -------
Net asset value, end of
year........................ $ 1.33 $ 1.28 $ 1.33 $ 1.16 $ 1.30 $ 1.26 $ 1.26 $ 1.08 $ 1.08 $ 1.03
-------- --------- --------- -------- -------- -------- -------- ------- ------- -------
-------- --------- --------- -------- -------- -------- -------- ------- ------- -------
Total return (a).............. 9.4% 3.0% 19.8% (4.6)% 10.3% 6.7% 17.6% 7.2% 12.7% 7.1%
Net assets, end of year (in
thousands).................. $139,824 $ 125,886 $ 101,045 $ 74,679 $ 43,927 $ 24,914 $ 13,088 $ 9,325 $ 6,080 $ 3,284
Ratio of expenses to average
daily net assets (b)........ .57% .56% .58% .61% .64% .65% .65% .65% .65% .65%
Ratio of net investment income
to average daily net
assets (b).................. 6.39% 6.36% 6.57% 6.12% 5.57% 6.56% 7.79% 8.29% 9.15% 7.88%
Portfolio turnover rate
(excluding short-term
securities)................. 200.0% 154.0% 205.4% 166.2% 166.8% 140.2% 93.8% 77.7% 117.7% 210.3%
</TABLE>
<TABLE>
<S> <C>
<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 and
$9,621 in expenses for the years ended December 31, 1992, 1991, 1990, 1989
and 1988, 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% and .98%, respectively, and the ratio of net investment income
to average daily net assets would have been 6.49%, 7.66%, 8.22%, 9.00% and
7.55%, respectively.
(c) Effective May 1, 1997, the Portfolio entered into a new investment
agreement with Advantus Capital Management, Inc. Prior to May 1, 1997 the
Portfolio had an investment advisory agreement with MIMLIC Asset Management
Company.
</TABLE>
6
<PAGE>
MONEY MARKET PORTFOLIO
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------------------
1997(C) 1996 1995 1994 1993 1992 1991 1990 1989 1988
-------- -------- -------- -------- -------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of year...... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- -------- ------- ------- ------- ------- -------
Income from investment
operations:
Net investment
income............. .05 .05 .05 .04 .03 .03 .05 .07 .08 .06
-------- -------- -------- -------- -------- ------- ------- ------- ------- -------
Total from
investment
operations.... .05 .05 .05 .04 .03 .03 .05 .07 .08 .06
-------- -------- -------- -------- -------- ------- ------- ------- ------- -------
Less distributions:
Dividends from net
investment
income............. (.05) (.05) (.05) (.04) (.03) (.03) (.05) (.07) (.08) (.06)
-------- -------- -------- -------- -------- ------- ------- ------- ------- -------
Total
distributions... (.05) (.05) (.05) (.04) (.03) (.03) (.05) (.07) (.08) (.06)
-------- -------- -------- -------- -------- ------- ------- ------- ------- -------
Net asset value, end of
year................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- -------- ------- ------- ------- ------- -------
-------- -------- -------- -------- -------- ------- ------- ------- ------- -------
Total return (a)......... 5.1% 4.9% 5.4% 3.7% 2.7% 3.2% 5.4% 7.7% 8.6% 6.6%
Net assets, end of year
(in thousands)......... $ 53,583 $ 51,461 $ 30,166 $ 23,107 $ 18,423 $13,591 $12,834 $ 9,555 $ 5,838 $ 2,471
Ratio of expenses to
average daily net
assets (b)............. .59% .60% .64% .65% .65% .65% .65% .65% .65% .65%
Ratio of net investment
income to average daily
net assets (b)......... 5.13% 4.81% 5.29% 3.71% 2.65% 3.17% 5.26% 7.46% 8.22% 6.52%
<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 and $11,919 in expenses for the years ended December 31,
1994, 1993, 1992, 1991, 1990, 1989 and 1988, 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% and 1.24%,
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% and 5.93%,
respectively.
(c) Effective May 1, 1997, the Portfolio entered into a new investment advisory
agreement with Advantus Capital Management, Inc. Prior to May 1, 1997 the
Portfolio had an investment advisory agreement with MIMLIC Asset Management
Company.
</TABLE>
7
<PAGE>
ASSET ALLOCATION PORTFOLIO
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------------------------------
1997(D) 1996 1995 1994 1993 1992 1991 1990 1989 1988
-------- --------- --------- --------- --------- --------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of year...... $ 1.87 $ 1.83 $ 1.52 $ 1.59 $ 1.57 $ 1.56 $ 1.21 $ 1.23 $ 1.10 $ 1.04
-------- --------- --------- --------- --------- --------- -------- -------- -------- --------
Income from investment
operations:
Net investment
income............. .05 .05 .06 .04 .03 .03 .05 .06 .07 .06
Net gains or losses
on securities (both
realized and
unrealized)........ .27 .16 .31 (.07) .07 .07 .30 (.02) .16 .06
-------- --------- --------- --------- --------- --------- -------- -------- -------- --------
Total from
investment
operations.... .32 .21 .37 (.03) .10 .10 .35 .04 .23 .12
-------- --------- --------- --------- --------- --------- -------- -------- -------- --------
Less distributions:
Dividends from net
investment
income............. (.05) (.06) (.05) (.03) (.04) (.04) -- (.06) (.07) (.06)
Distributions from
capital gains...... (.11) (.11) (.01) (.01) (.04) (.05) -- (.03) --
-------- --------- --------- --------- --------- --------- -------- -------- -------- --------
Total
distributions... (.16) (.17) (.06) (.04) (.08) (.09) -- (.06) (.10) (.06)
-------- --------- --------- --------- --------- --------- -------- -------- -------- --------
Net asset value, end of
year................... $ 2.03 $ 1.87 $ 1.83 $ 1.52 $ 1.59 $ 1.57 $ 1.56 $ 1.21 $ 1.23 $ 1.10
-------- --------- --------- --------- --------- --------- -------- -------- -------- --------
-------- --------- --------- --------- --------- --------- -------- -------- -------- --------
Total return (a)......... 19.0% 12.5% 25.0% (1.4)% 6.5% 7.3% 28.9% 3.6% 20.2% 11.1%
Net assets, end of year
(in thousands)......... $507,220 $ 414,709 $ 349,010 $ 272,629 $ 250,011 $ 150,998 $ 68,592 $ 35,455 $ 22,205 $ 15,161
Ratio of expenses to
average daily net
assets (b)............. .55% .54% .55% .56% .57% .60% .62% .65% .65% .65%
Ratio of net investment
income to average daily
net assets (b)......... 3.10% 3.09% 3.75% 3.31% 2.63% 3.68% 4.50% 5.71% 6.23% 5.75%
Portfolio turnover rate
(excluding short-term
securities)............ 140.2% 120.1% 157.0% 123.6% 85.7% 106.5% 78.6% 67.2% 93.0% 190.2%
Average commission rate
on stock transactions
(c).................... $ .0592 $ .0692 N/A N/A N/A N/A N/A N/A N/A N/A
<FN>
- ---------
(a) Total return figures are based on a share outstanding throughout the period
and assumes reinvestment of distributions at net asset value. Total return
figures do not reflect charges pursuant to the terms of the variable life
insurance policies and variable annuity contracts funded by separate
accounts that invest in the Fund's shares.
(b) Minnesota Mutual voluntarily absorbed $2,078 and $13,305 in expenses for
the years ended December 31, 1989 and 1988, respectively. Had the portfolio
paid all fees and expenses, the ratio of expenses to average daily net
assets would have been .66% and .74%, respectively, and the ratio of net
investment income to average daily net assets would have been 6.22% and
5.66%, respectively.
(c) Beginning in 1996, the Portfolio is required to disclose an average
brokerage commission rate. The rate is calculated by dividing the total
brokerage commissions paid on applicable purchases and sales of stocks for
the period by the total number of related shares purchased and sold.
(d) Effective May 1, 1997, the Portfolio entered into a new investment advisory
agreement with Advantus Capital Management, Inc. Prior to May 1, 1997 the
Portfolio had an investment advisory agreement with MIMLIC Asset Management
Company.
</TABLE>
8
<PAGE>
MORTGAGE SECURITIES PORTFOLIO
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------------------------
1997(C) 1996 1995 1994 1993 1992 1991 1990 1989 1988
-------- -------- -------- -------- -------- -------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period.... $ 1.19 $ 1.21 $ 1.10 $ 1.22 $ 1.19 $ 1.20 $ 1.03 $ 1.02 $ .98 $ .98
-------- -------- -------- -------- -------- -------- -------- -------- ------- -------
Income from investment
operations:
Net investment
income............. .07 .08 .08 .07 .06 .05 .07 .09 .08 .09
Net gains or losses
on securities (both
realized and
unrealized)........ .03 (.02) .11 (.11) .05 .02 .10 .01 .05 --
-------- -------- -------- -------- -------- -------- -------- -------- ------- -------
Total from
investment
operations.... .10 .06 .19 (.04) .11 .07 .17 .10 .13 .09
-------- -------- -------- -------- -------- -------- -------- -------- ------- -------
Less distributions:
Dividends from net
investment
income............. (.08) (.08) (.08) (.05) (.06) (.06) -- (.09) (.08) (.09)
Distributions from
capital gains...... -- -- -- (.03) (.02) (.02) -- -- (.01) --
-------- -------- -------- -------- -------- -------- -------- -------- ------- -------
Total
distributions... (.08) (.08) (.08) (.08) (.08) (.08) -- (.09) (.09) (.09)
-------- -------- -------- -------- -------- -------- -------- -------- ------- -------
Net asset value, end of
period................. $ 1.21 $ 1.19 $ 1.21 $ 1.10 $ 1.22 $ 1.19 $ 1.20 $ 1.03 $ 1.02 $ .98
-------- -------- -------- -------- -------- -------- -------- -------- ------- -------
-------- -------- -------- -------- -------- -------- -------- -------- ------- -------
Total return (a)......... 9.1% 5.3% 18.0% (3.4)% 9.3% 6.4% 16.3% 9.4% 13.5% 8.6%
Net assets, end of period
(in thousands)......... $ 99,233 $ 75,992 $ 69,746 $ 59,666 $ 63,902 $ 37,011 $ 16,520 $ 12,124 $ 8,172 $ 6,002
Ratio of expenses to
average daily net
assets (b)............. .59% .58% .58% .60% .63% .65% .65% .65% .65% .65%
Ratio of net investment
income to average daily
net assets (b)......... 7.08% 6.94% 7.09% 6.55% 5.87% 6.64% 8.02% 8.80% 8.84% 8.83%
Portfolio turnover rate
(excluding short-term
securities)............ 106.4% 70.0% 133.7% 197.3% 138.4% 96.2% 112.0% 5.2% 51.7% 10.1%
<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 $10,341, $16,372, $3,492, $3,393 and
$6,738 in expenses for the years ended December 31, 1992, 1991, 1990, 1989
and 1988, 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% and .76%, respectively, and the ratio of net investment income
to average daily net assets would have been 6.60%, 7.88%, 8.77%, 8.80% and
8.72%, respectively.
(c) Effective May 1, 1997, the Portfolio entered into a new investment advisory
agreement with Advantus Capital Management, Inc. Prior to May 1, 1997 the
Portfolio had an investment advisory agreement with MIMLIC Asset Management
Company.
</TABLE>
9
<PAGE>
INDEX 500 PORTFOLIO
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------------------------
1997(D) 1996 1995 1994 1993 1992 1991 1990 1989 1988
-------- --------- --------- -------- -------- -------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period.... $ 2.41 $ 2.02 $ 1.52 $ 1.53 $ 1.43 $ 1.45 $ 1.12 $ 1.20 $ .95 $ .85
-------- --------- --------- -------- -------- -------- -------- -------- -------- -------
Income from investment
operations:
Net investment
income............. .03 .03 .03 .03 .02 .02 .03 .03 .02 .04
Net gains or losses
on securities (both
realized and
unrealized)........ .73 .40 .51 (.01) .11 .07 .30 (.08) .26 .10
-------- --------- --------- -------- -------- -------- -------- -------- -------- -------
Total from
investment
operations.... .76 .43 .54 .02 .13 .10 .33 (.05) .28 .14
-------- --------- --------- -------- -------- -------- -------- -------- -------- -------
Less distributions:
Dividends from net
investment
income............. (.03) (.03) (.03) (.02) (.02) (.03) -- (.03) (.02) (.03)
Distributions from
capital gains...... (.04) (.01) (.01) (.01) (.01) (.09) -- -- (.01) (.01)
-------- --------- --------- -------- -------- -------- -------- -------- -------- -------
Total
distributions... (.07) (.04) (.04) (.03) (.03) (.12) -- (.03) (.03) (.04)
-------- --------- --------- -------- -------- -------- -------- -------- -------- -------
Net asset value, end of
period................. $ 3.10 $ 2.409 $ 2.02 $ 1.52 $ 1.532 $ 1.43 $ 1.45 $ 1.120 $ 1.20 $ .95
-------- --------- --------- -------- -------- -------- -------- -------- -------- -------
-------- --------- --------- -------- -------- -------- -------- -------- -------- -------
Total return (a)......... 32.4% 21.6% 36.8% 1.2% 9.8% 7.4% 29.8% (3.9)% 30.7% 16.0%
Net assets, end of period
(in thousands)......... $380,751 $ 204,395 $ 123,999 $ 73,432 $ 56,209 $ 35,620 $ 20,999 $ 18,204 $ 14,002 $ 6,225
Ratio of expenses to
average daily net
assets (b)............. .45% .45% .47% .50% .55% .55% .55% .55% .55% .55%
Ratio of net investment
income to average daily
net assets (b)......... 1.33% 1.77% 2.08% 2.34% 2.27% 2.42% 2.70% 3.16% 3.09% 4.06%
Portfolio turnover rate
(excluding short-term
securities)............ 8.3% 15.2% 4.8% 5.9% 4.8% 6.1% 26.4% 4.3% 8.8% 8.0%
Average commission rate
on stock transactions
(c).................... $ .0200 $ .0429 N/A N/A N/A N/A N/A N/A N/A N/A
<FN>
- ---------
(a) Total return figures are based on a share outstanding throughout the period
and assumes reinvestment of distributions at net asset value. Total return
figures do not reflect charges pursuant to the terms of the variable life
insurance policies and variable annuity contracts funded by separate
accounts that invest in the Fund's shares.
(b) Minnesota Mutual voluntarily absorbed $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 and 1988, 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% and .69%, respectively, and the ratio of net
investment income to average daily net assets would have been 2.39%, 2.63%,
3.14%, 3.03% and 3.92%, respectively.
(c) Beginning in 1996, the Portfolio is required to disclose an average
brokerage commission rate. The rate is calculated by dividing the total
brokerage commissions paid on applicable purchases and sales of stocks for
the period by the total number of related shares purchased and sold.
(d) Effective May 1, 1997, the Portfolio entered into a new investment advisory
agreement with Advantus Capital Management, Inc. Prior to May 1, 1997 the
Portfolio had an investment advisory agreement with MIMLIC Asset Management
Company.
</TABLE>
10
<PAGE>
CAPITAL APPRECIATION PORTFOLIO
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------------------------------
1997 (e) 1996 1995 1994 1993 1992 (a) 1991 1990 1989 1988
-------- --------- --------- --------- -------- -------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period.... $ 2.47 $ 2.16 $ 1.81 $ 1.80 $ 1.68 $ 1.68 $ 1.20 $ 1.26 $ .95 $ .90
-------- --------- --------- --------- -------- -------- -------- -------- ------- -------
Income from investment
operations:
Net investment income
(loss)............. -- -- -- -- -- -- -- .01 .01 --
Net gains or losses
on securities (both
realized and
unrealized)........ .62 .37 .40 .04 .17 .08 .49 (.03) .35 .06
-------- --------- --------- --------- -------- -------- -------- -------- ------- -------
Total from
investment
operations.... .62 .37 .40 .04 .17 .08 .49 (.02) .36 .06
-------- --------- --------- --------- -------- -------- -------- -------- ------- -------
Less distributions:
Dividends from net
investment
income............. -- -- -- -- -- -- -- (.01) (.01) --
Distributions from
capital gains...... (.24) (.06) (.05) (.03) (.05) (.08) (.01) (.03) (.04) (.01)
-------- --------- --------- --------- -------- -------- -------- -------- ------- -------
Total
distributions... (.24) (.06) (.05) (.03) (.05) (.08) (.01) (.04) (.05) (.01)
-------- --------- --------- --------- -------- -------- -------- -------- ------- -------
Net asset value, end of
period................. $ 2.85 $ 2.47 $ 2.16 $ 1.81 $ 1.80 $ 1.68 $ 1.68 $ 1.20 $ 1.26 $ .95
-------- --------- --------- --------- -------- -------- -------- -------- ------- -------
-------- --------- --------- --------- -------- -------- -------- -------- ------- -------
Total return (b)......... 28.3% 17.6% 22.8% 2.3% 10.4% 5.0% 41.8% (2.1)% 38.2% 7.8%
Net assets, end of period
(in thousands)......... $294,665 $ 214,468 $ 163,520 $ 115,607 $ 84,840 $52,365 $ 23,822 $ 10,241 $ 5,386 $ 2,184
Ratio of expenses to
average daily net
assets (c)............. .80% .85% .80% .83% .86% .90% .90% .90% .90% .90%
Ratio of net investment
income to average daily
net assets (c)......... (.12)% (.09)% (.15)% (.09)% .12% .42% .92% 1.15% 1.03% .91%
Portfolio turnover rate
(excluding short-term
securities)............ 74.00% 62.9% 51.1% 68.4% 95.9% 138.8% 70.5% 57.9% 89.1% 103.0%
Average commission rate
on stock transactions
(d).................... $ .0600 $ .0625 N/A N/A N/A N/A N/A N/A N/A N/A
<FN>
- ---------
(a) 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.
(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 $16,612, $15,552, $7,786, $8,899 and
$12,636 in expenses for the years ended December 31, 1992, 1991, 1990, 1989
and 1988, 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% and 1.62%, respectively, and the ratio of net investment
income to average daily net assets would have been .38%, .82%, 1.05%, .79%
and .19%, respectively.
(d) Beginning in 1996, the Portfolio is required to disclose an average
brokerage commission rate. The rate is calculated by dividing the total
brokerage commissions paid on applicable purchases and sales of stocks for
the period by the total number of related shares purchased and sold.
(e) Effective May 1, 1997, the Portfolio entered into a new investment advisory
agreement with Advantus Capital Management, Inc. Prior to May 1, 1997 the
Portfolio had an investment advisory agreement with MIMLIC Asset Management
Company.
</TABLE>
11
<PAGE>
INTERNATIONAL STOCK PORTFOLIO
<TABLE>
<CAPTION>
PERIOD FROM
MAY 1,
YEAR ENDED DECEMBER 31, 1992 (a) TO
------------------------------------------------------- DECEMBER 31,
1997(F) 1996 1995 1994 1993 1992
-------- --------- --------- --------- -------- --------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period.............. $ 1.60 $ 1.41 $ 1.24 $ 1.31 $ .92 $ 1.00
-------- --------- --------- --------- -------- ------
Income from investment operations:
Net investment income......................... .03 .03 .03 .01 .02 .01
Net gains or losses on securities (both
realized and unrealized).................... .15 .24 .14 (.01) .39 (.08)
-------- --------- --------- --------- -------- ------
Total from investment operations.......... .18 .27 .17 -- .41 (.07)
-------- --------- --------- --------- -------- ------
Less distributions:
Dividends from net investment income.......... (.05) (.04) -- (.03) -- (.01)
Excess distributions of net investment
income...................................... -- -- -- -- -- --
Tax return of capital......................... -- -- -- -- -- --
Distributions from capital gains.............. (.02) (.04) -- (.04) (.01) --
Excess distributions of net realized gains.... -- -- -- -- -- --
-------- --------- --------- --------- -------- ------
Total distributions....................... (.07) (.08) -- (.07) (.01) (.01)
-------- --------- --------- --------- -------- ------
Net asset value, end of period.................... $ 1.71 $ 1.60 $ 1.41 $ 1.24 $ 1.31 $ .92
-------- --------- --------- --------- -------- ------
-------- --------- --------- --------- -------- ------
Total return (b).................................. 11.9% 19.8% 14.2% (.3)% 44.2% (6.8)%
Net assets, end of period (in thousands).......... $287,170 $ 213,608 $ 140,770 $ 107,490 $ 61,106 $17,401
Ratio of expenses to average daily net
assets (c)...................................... .97% 1.06% 1.04% 1.24% 1.55% 2.00%(d)
Ratio of net investment income to average daily
net assets (c).................................. 2.29% 2.53% 2.69% 1.68% 1.04% 2.10%(d)
Portfolio turnover rate (excluding short-term
securities)..................................... 12.5% 11.5% 20.3% 12.9% 12.7% 11.7%
Average commission rate on stock
transactions (e)................................ $ .0123 $ .0160 N/A N/A N/A N/A
<FN>
- ---------
(a) The inception of the Portfolio was January 21, 1992. However, operations
did not commence until May 1, 1992 when shares of the portfolio became
effectively registered under the Securities Act of 1933.
(b) Total return figures are based on a share outstanding throughout the period
and assumes reinvestment of distributions at net asset value. Total return
figures do not reflect charges pursuant to the terms of the variable life
insurance policies and variable annuity contracts funded by separate
accounts that invest in the Fund's shares. For periods less than one year,
total return presented has not been annualized.
(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) Adjusted to an annual basis.
(e) Beginning in 1996, the Portfolio is required to disclose an average
commission rate. The rate is calculated by dividing the total brokerage
commissions paid on applicable purchases and sales of stocks during the
period by the total number of related shares purchased and sold. The
comparability of this information may be affected by the fact that
commission rates per share vary significantly among foreign countries.
(f) Effective May 1, 1997, the Portfolio entered into a new investment advisory
agreement with Advantus Capital Management, Inc. Prior to May 1, 1997 the
Portfolio had an investment advisory agreement with MIMLIC Asset Management
Company.
</TABLE>
12
<PAGE>
SMALL COMPANY PORTFOLIO
<TABLE>
<CAPTION>
PERIOD FROM
MAY 3,
YEAR ENDED DECEMBER 31, 1993 (a) TO
------------------------------------------ DECEMBER 31,
1997(F) 1996 1995 1994 1993
-------- --------- -------- -------- ------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period.... $ 1.54 $ 1.60 $ 1.23 $ 1.16 $ 1.00
-------- --------- -------- -------- ------
Income from investment operations:
Net investment income............... -- -- -- -- --
Net gains or losses on securities
(both realized and unrealized)..... .11 .10 .39 .07 .17
-------- --------- -------- -------- ------
Total from investment
operations................... .11 .10 .39 .07 .17
-------- --------- -------- -------- ------
Less distributions:
Dividends from net investment
income............................. -- -- -- -- --
Distributions from net realized
gains.............................. -- (.16) (.02) -- (.01)
Excess distributions of net realized
gains.............................. -- -- -- -- --
-------- --------- -------- -------- ------
Total distributions............. -- (.16) (.02) -- (.01)
-------- --------- -------- -------- ------
Net asset value, end of period.......... $ 1.65 $ 1.54 $ 1.60 $ 1.23 $ 1.16
-------- --------- -------- -------- ------
-------- --------- -------- -------- ------
Total return (b)........................ 7.8% 6.5% 32.1% 6.2% 17.4%
Net assets, end of period (in
thousands)............................ $182,917 $ 144,544 $ 98,895 $ 51,105 $13,043
Ratio of expenses to average daily net
assets (c)............................ .82% .81% .84% .89% .90%(d)
Ratio of net investment income (loss) to
average daily net assets (c).......... (.05)% .24% .15% .24% (.02)%(d)
Portfolio turnover rate (excluding
short-term securities)................ 63.8% 74.4% 61.3% 28.1% 34.9%
Average commission rate on stock
transactions (e)...................... $ .0535 $ .1045 N/A N/A N/A
<FN>
- ---------
(a) The inception of the Portfolio was January 26, 1993. However, operations
did not commence until May 3, 1993 when the shares of the portfolio became
effectively registered under the Securities Act of 1933.
(b) Total return figures are based on a share outstanding throughout the period
and assumes reinvestment of distributions at net asset value. Total return
figures do not reflect charges pursuant to the terms of the variable life
insurance policies and variable annuity contracts funded by separate
accounts that invest in the Fund's shares. For periods less than one year,
total return presented has not been annualized.
(c) 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.
(d) Adjusted to an annual basis.
(e) Beginning in 1996, the Portfolio is required to disclose an average
commission rate. The rate is calculated by dividing the total brokerage
commissions paid on applicable purchases and sales of stocks during the
period by the total number of related shares purchased and sold.
(f) Effective May 1, 1997, the Portfolio entered into a new investment advisory
agreement with Advantus Capital Management, Inc. Prior to May 1, 1997 the
Portfolio had an investment advisory agreement with MIMLIC Asset Management
Company.
</TABLE>
13
<PAGE>
MATURING GOVERNMENT BOND 1998 PORTFOLIO
<TABLE>
<CAPTION>
PERIOD FROM
MAY 2,
YEAR ENDED DECEMBER 31, 1994 (a) TO
--------------------------- DECEMBER 31,
1997(F) 1996 1995 1994
------- ------- ------- -------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period.............. $ 1.08 $ 1.038 $ .945 $ .989
------- ------- ------- -----
Income from investment operations:
Net investment income......................... .06 .058 .059 .043
Net gains or losses on securities (both
realized and unrealized)..................... -- (.015) .092 (.043)
------- ------- ------- -----
Total from investment operations.......... .06 .043 .151 --
------- ------- ------- -----
Less distributions:
Dividends from net investment income.......... (.06) (.001) (.058) (.044)
Distributions from capital gains.............. -- -- -- --
------- ------- ------- -----
Total distributions....................... (.06) (.001) (.058) (.044)
------- ------- ------- -----
Net asset value, end of period.................... $ 1.08 $ 1.080 $ 1.038 $ .945
------- ------- ------- -----
------- ------- ------- -----
Total return (b).................................. 6.1% 4.1% 16.0% .1%(c)
Net assets, end of period (in thousands).......... $6,236 $ 6,099 $ 5,057 $3,402
Ratio of expenses to average daily net assets
(d)............................................. .20% .20% .20% .20%(e)
Ratio of net investment income to average daily
net assets (d).................................. 6.08% 6.19% 6.22% 6.45%(e)
Portfolio turnover rate (excluding short-term
securities)..................................... 15.5% 18.1% 9.0% --
<FN>
- ---------
(a) The inception of the Portfolio was November 9, 1993. However, operations
did not commence until May 2, 1994 when shares of the portfolio became
effectively registered under the Securities Act of 1933.
(b) Total return figures are based on a share outstanding throughout the period
and assumes reinvestment of distributions at net asset value. Total return
figures do not reflect charges pursuant to the terms of the variable life
insurance policies and variable annuity contracts funded by separate
accounts that invest in the Fund's shares.
(c) Total return is presented for the period from May 2, 1994, commencement of
operations, to December 31, 1994.
(d) Minnesota Mutual voluntarily absorbed $34,208, $27,510, $22,794 and $21,714
in expenses for the years ended December 31, 1997, 1996 and 1995 and the
period from May 2, 1994 to December 31, 1994. Had the Portfolio paid all
fees and expenses, the ratio of expenses to average daily net assets would
have been .74%, .72%, .72% and 1.12%, respectively, and the ratio of net
investment income to average daily net assets would have been 5.54%, 5.67%,
5.70% and 5.53%, respectively.
(e) Adjusted to an annual basis.
(f) Effective May 1, 1997, the Portfolio entered into a new investment advisory
agreement with Advantus Capital Management, Inc. Prior to May 1, 1997 the
Portfolio had an investment advisory agreement with MIMLIC Asset Management
Company.
</TABLE>
14
<PAGE>
MATURING GOVERNMENT BOND 2002 PORTFOLIO
<TABLE>
<CAPTION>
PERIOD FROM
MAY 2,
YEAR ENDED DECEMBER 31, 1994 (a) TO
--------------------------- DECEMBER 31,
1997(E) 1996 1995 1994
------- ------- ------- -------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period.............. $ 1.05 $ 1.09 $ .93 $ .98
------- ------- ------- -----
Income from investment operations:
Net investment income......................... .06 .06 .07 .04
Net gains or losses on securities (both
realized and unrealized)..................... .02 (.04) .16 (.04)
------- ------- ------- -----
Total from investment operations.......... .08 .02 .23 --
------- ------- ------- -----
Less distributions:
Dividends from net investment income.......... (.05) (.06) (.07) (.05)
Tax return of capital......................... -- -- -- --
Distributions from capital gains.............. (.01) -- -- --
------- ------- ------- -----
Total distributions....................... (.06) (.06) (.07) (.05)
------- ------- ------- -----
Net asset value, end of period.................... $ 1.07 $ 1.05 $ 1.09 $ .93
------- ------- ------- -----
------- ------- ------- -----
Total return (b).................................. 8.5% 1.7% 25.0% .3%
Net assets, end of period (in thousands).......... $4,208 $ 3,900 $ 3,049 $2,575
Ratio of expenses to average daily net assets
(d)............................................. .20% .20% .20% .20%(d)
Ratio of net investment income to average daily
net assets (d).................................. 5.99% 6.52% 6.52% 7.18%(d)
Portfolio turnover rate (excluding short-term
securities)..................................... 36.9% 21.9% -- 11.6%
<FN>
- ---------
(a) The inception of the Portfolio was November 9, 1993. However, operations
did not commence until May 2, 1994 when shares of the portfolio became
effectively registered under the Securities Act of 1933.
(b) Total return figures are based on a share outstanding throughout the period
and assumes reinvestment of distributions at net asset value. Total return
figures do not reflect charges pursuant to the terms of the variable life
insurance policies and variable annuity contracts funded by separate
accounts that invest in the Fund's shares. For periods less than one year
total return presented has not been annualized.
(c) Minnesota Mutual voluntarily absorbed $36,833, $31,158, $24,709 and $23,298
in expenses for the years ended December 31, 1997, 1996 and 1995 and the
period from May 2, 1994 to December 31, 1994. Had the Portfolio paid all
fees and expenses, the ratio of expenses to average daily net assets would
have been 1.14%, 1.14%, 1.06% and 1.52%, respectively and the ratio of net
investment income to average daily net assets would have been 5.05%, 5.58%,
5.66% and 5.86%, respectively.
(d) Adjusted to an annual basis.
(e) Effective May 1, 1997, the Portfolio entered into a new investment advisory
agreement with Advantus Capital Management, Inc. Prior to May 1, 1997 the
Portfolio had an investment advisory agreement with MIMLIC Asset Management
Company.
</TABLE>
15
<PAGE>
MATURING GOVERNMENT BOND 2006 PORTFOLIO
<TABLE>
<CAPTION>
PERIOD FROM
MAY 2,
YEAR ENDED DECEMBER 31, 1994 (a) TO
--------------------------- DECEMBER 31,
1997(E) 1996 1995 1994
------- ------- ------- --------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period.............. $ 1.09 $ 1.17 $ .92 $ .97
------- ------- ------- -----
Income from investment operations:
Net investment income......................... .07 .06 .07 .05
Net gains or losses on securities (both
realized and unrealized)..................... .07 (.07) .25 (.05)
------- ------- ------- -----
Total from investment operations.......... .14 (.01) .32 --
------- ------- ------- -----
Less distributions:
Dividends from net investment income.......... (.06) (.06) (.07) (.05)
Distributions from capital gains.............. (.01) (.01) -- --
------- ------- ------- -----
Total distributions....................... (.07) (.07) (.07) (.05)
------- ------- ------- -----
Net asset value, end of period.................... $ 1.16 $ 1.09 $ 1.17 $ .92
------- ------- ------- -----
------- ------- ------- -----
Total return (b).................................. 12.6% (1.2)% 34.7% .1%
Net assets, end of period (in thousands).......... $3,900 $ 3,095 $ 2,570 $1,860
Ratio of expenses to average daily net assets
(c)............................................. .40% .40% .40% .40%(d)
Ratio of net investment income to average daily
net assets (c).................................. 6.23% 6.43% 6.56% 7.45%(d)
Portfolio turnover rate (excluding short-term
securities)..................................... 3.1% 25.7% 10.0% --
<FN>
- ---------
(a) The inception of the Portfolio was November 9, 1993. However, operations
did not commence until May 2, 1994 when shares of the portfolio became
effectively registered under the Securities Act of 1933.
(b) Total return figures are based on a share outstanding throughout the period
and assumes reinvestment of distributions at net asset value. Total return
figures do not reflect charges pursuant to the terms of the variable life
insurance policies and variable annuity contracts funded by separate
accounts that invest in the Fund's shares. For periods less than one year,
total return presented has not been annualized
(c) Minnesota Mutual voluntarily absorbed $37,425, $31,536, $25,199 and $24,803
in expenses for the years ended December 31, 1997, 1996 and 1995 and the
period from May 2, 1994 to December 31, 1994. Had the Portfolio paid all
fees and expenses, the ratio of expenses to average daily net assets would
have been 1.50%, 1.58%, 1.56% and 2.37%, respectively and the ratio of net
investment income to average daily net assets would have been 5.13%, 5.25%,
5.40% and 5.48%, respectively.
(d) Adjusted to an annual basis.
(e) Effective May 1, 1997, the Portfolio entered into a new investment advisory
agreement with Advantus Capital Management, Inc. Prior to May 1, 1997 the
Portfolio had an investment advisory agreement with MIMLIC Asset Management
Company.
</TABLE>
16
<PAGE>
MATURING GOVERNMENT BOND 2010 PORTFOLIO
<TABLE>
<CAPTION>
PERIOD FROM
MAY 2,
YEAR ENDED DECEMBER 31, 1994 (a) TO
--------------------------- DECEMBER 31,
1997(E) 1996 1995 1994
------- ------- ------- -------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period.............. $ 1.17 $ 1.21 $ .91 $ .96
------- ------- ------- -----
Income from investment operations:
Net investment income......................... .07 .05 .07 .05
Net gains or losses on securities (both
realized and unrealized)..................... .11 (.09) .30 (.05)
------- ------- ------- -----
Total from investment operations.......... .18 (.04) .37 --
------- ------- ------- -----
Less distributions:
Dividends from net investment income.......... (.05) -- (.07) (.05)
Distributions from capital gains.............. (.01) -- -- --
------- ------- ------- -----
Total distributions....................... (.06) -- (.07) (.05)
------- ------- ------- -----
Net asset value, end of period.................... $ 1.29 $ 1.17 $ 1.21 $ .91
------- ------- ------- -----
------- ------- ------- -----
Total return (b).................................. 17.9% (3.4)% 41.2% (.3)%
Net assets, end of period (in thousands).......... $3,176 $ 2,813 $ 1,384 $1,071
Ratio of expenses to average daily net assets
(c).............................................. .40% .40% .40% .40%(d)
Ratio of net investment income to average daily
net assets (c)................................... 6.18% 6.40% 6.58% 7.79%(d)
Portfolio turnover rate (excluding short-term
securities)...................................... 39.3% 71.0% -- 14.5%
<FN>
- ---------
(a) The inception of the Portfolio was November 9, 1993. However, operations
did not commence until May 2, 1994 when shares of the portfolio became
effectively registered under the Securities Act of 1933.
(b) Total return figures are based on a share outstanding throughout the period
and assumes reinvestment of distributions at net asset value. Total return
figures do not reflect charges pursuant to the terms of the variable life
insurance policies and variable annuity contracts funded by separate
accounts that invest in the Fund's shares. For the periods less than one
year, total return has not been annualized.
(c) Minnesota Mutual voluntarily absorbed $38,967, $33,042, $26,308 and $25,888
in expenses for the years ended December 31, 1997, 1996 and 1995 and the
period from May 2, 1994 to December 31, 1994. Had the Portfolio paid all
fees and expenses, the ratio of expenses to average daily net assets would
have been 1.85%, 2.18%, 2.68% and 4.01%, respectively and the ratio of net
investment income to average daily net assets would have been 4.73%, 4.62%,
4.30% and 4.18%, respectively.
(d) Adjusted to an annual basis.
(e) Effective May 1, 1997, the Portfolio entered into a new investment advisory
agreement with Advantus Capital Management, Inc. Prior to May 1, 1997 the
Portfolio had an investment advisory agreement with MIMLIC Asset Management
Company.
</TABLE>
17
<PAGE>
VALUE STOCK PORTFOLIO
<TABLE>
<CAPTION>
PERIOD FROM
MAY 2,
YEAR ENDED DECEMBER 31, 1994 (a) TO
------------------------------- DECEMBER 31,
1997(F) 1996 1995 1994
--------- -------- -------- ----------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period.............. $ 1.59 $ 1.31 $ 1.04 $ 1.01
--------- -------- -------- -----
Income from investment operations:
Net investment income......................... .01 .01 .01 --
Net gains or losses on securities (both
realized and unrealized)..................... .32 .39 .33 .04
--------- -------- -------- -----
Total from investment operations.......... .33 .40 .34 .04
--------- -------- -------- -----
Less distributions:
Dividends from net investment income.......... (.02) (.01) (.01) (.01)
Distributions from capital gains.............. (.17) (.11) (.06) --
--------- -------- -------- -----
Total distributions....................... (.19) (.12) (.07) (.01)
--------- -------- -------- -----
Net asset value, end of period.................... $ 1.73 $ 1.59 $ 1.31 $ 1.04
--------- -------- -------- -----
--------- -------- -------- -----
Total return (b).................................. 21.2% 31.0% 33.0% 4.6%
Net assets, end of period (in thousands).......... $ 208,093 $ 97,187 $ 31,825 $ 8,771
Ratio of expenses to average daily net assets
(c).............................................. .80% .83% .89% .90%(d)
Ratio of net investment income to average daily
net assets (c)................................... 1.13% 1.28% 1.25% 2.07%(d)
Portfolio turnover rate (excluding short-term
securities)...................................... 115.4% 88.6% 164.2% 49.5%
Average commission rate on stock
transactions (e)................................. $ .0537 $ .0672 N/A N/A
<FN>
- ---------
(a) The inception of the Portfolio was January 18, 1994. However, operations
did not commence until May 2, 1994 when shares of the portfolio became
effectively registered under the Securities Act of 1933.
(b) Total return figures are based on a share outstanding throughout the period
and assumes reinvestment of distributions at net asset value. Total return
figures do not reflect charges pursuant to the terms of the variable life
insurance policies and variable annuity contracts funded by separate
accounts that invest in the Fund's shares. For periods less than one year,
total return has not been annualized.
(c) 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.
(d) Adjusted to an annual basis.
(e) Beginning in 1996, the Portfolio is required to disclose an average
commission rate. The rate is calculated by dividing the total brokerage
commissions paid on applicable purchases and sales of stocks during the
period by the total number of related shares purchased and sold.
(f) Effective May 1, 1997, the Portfolio entered into a new investment advisory
agreement with Advantus Capital Management, Inc. Prior to May 1, 1997 the
Portfolio had an investment advisory agreement with MIMLIC Asset Management
Company.
</TABLE>
18
<PAGE>
SMALL COMPANY VALUE, GLOBAL BOND, INDEX 400 MID-CAP, MACRO-CAP VALUE AND
MICRO-CAP GROWTH PORTFOLIOS
<TABLE>
<CAPTION>
PERIOD FROM OCTOBER 1, 1997 TO
DECEMBER 31, 1997
(PERIOD FROM OCTOBER 15, 1997
TO DECEMBER 31, 1997
FOR MACRO-CAP VALUE PORTFOLIO
ONLY)
------------------------------
SMALL COMPANY GLOBAL
VALUE BOND
PORTFOLIO(A) PORTFOLIO(A)(G)
--------------- -------------
<S> <C> <C> <C>
Net asset value, beginning of period......................................................... $ 1.01 $ 1.00
----- ------
Income from investment operations:
Net investment loss...................................................................... -- (.02)
Net gains or losses on securities (both realized and unrealized)......................... .02 .02
----- ------
Total from investment operations..................................................... .02 --
----- ------
Less distributions:
Dividends from net investment income..................................................... -- (.01)
Excess distributions of net investment income............................................ -- (.01)
Distributions from net realized gains.................................................... -- --
----- ------
Total distributions.................................................................. -- (.02)
----- ------
Net asset value, end of period............................................................... $ 1.03 $ .98
----- ------
----- ------
Total return (c)............................................................................. 2.3% .1%
Net assets, end of period (in thousands)..................................................... $ 5,177 $ 25,019
Ratio of expenses to average daily net assets (d)(e)......................................... .90% 1.60%
Ratio of net investment income to average daily net assets (d)(e)............................ 1.13% 3.66%
Portfolio turnover rate (excluding short-term securities).................................... 13.0% 120.5%
Average commission rate on stock transactions (f)............................................ $ .0600 N/A
<CAPTION>
INDEX 400 MACRO-CAP MICRO-CAP
MID-CAP VALUE GROWTH
PORTFOLIO(A) PORTFOLIO(B) PORTFOLIO(A
)
----------- ----------- -----------
<S> <C> <C> <C>
Net asset value, beginning of period......................................................... $ 1.00 $ 1.00 $ 1.06
----- ----- -----
Income from investment operations:
Net investment loss...................................................................... -- -- --
Net gains or losses on securities (both realized and unrealized)......................... .01 (.02) (.14)
----- ----- -----
Total from investment operations..................................................... .01 (.02) (.14)
----- ----- -----
Less distributions:
Dividends from net investment income..................................................... -- (.01) --
Excess distributions of net investment income............................................ -- -- --
Distributions from net realized gains.................................................... -- -- (.03)
----- ----- -----
Total distributions.................................................................. -- (.01) (.03)
----- ----- -----
Net asset value, end of period............................................................... $ 1.01 $ .97 $ .89
----- ----- -----
----- ----- -----
Total return (c)............................................................................. .1% (2.1)% (13.2)
%
Net assets, end of period (in thousands)..................................................... $ 5,052 $ 4,923 $ 4,591
Ratio of expenses to average daily net assets (d)(e)......................................... .55% .85% 1.25%
Ratio of net investment income to average daily net assets (d)(e)............................ .89% 2.04% ) (.2
4)%
Portfolio turnover rate (excluding short-term securities).................................... 4.9% 36.7% 28.9%
Average commission rate on stock transactions (f)............................................ $ .0200 $ .0353 $ .0514
<FN>
- ---------
(a) The shares of the Portfolio became effectively registered under the
Securities Act of 1933 on May 1, 1997, but shares were not available to the
public until October 1, 1997.
(b) The shares of the Portfolio became effectively registered under the
Securities Act of 1933 on May 1, 1997, but shares were not available to the
public until October 15, 1997.
(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. For periods less than one year,
total return presented has not been annualized
(d) Minnesota Mutual voluntarily absorbed $11,517, $14,670, $22,940 and $11,102
in expenses for the period ended December 31, 1997, for the Small Company
Value, Index 400 Mid-Cap, Macro-Cap Value and Micro-Cap Growth Portfolios,
respectively. Had the Portfolios paid all fees and expenses, the ratio of
expenses to average daily net assets would have been 1.78%, 1.70%, 3.13%
and 2.03%, respectively and the ratio of net investment income to average
daily net assets would have been .25%, (.26%), (.24%) and (1.02%),
respectively.
(e) Adjusted to an annual basis.
(f) The Small Company Value, Index 400 Mid-Cap, Macro-Cap Value and Micro-Cap
Growth Portfolios are required to disclose an average brokerage commission
rate. The rate is calculated by dividing the total brokerage commissions
paid on applicable purchases and sales of stocks for the period by the
total number of related shares purchased and sold.
(g) Prior to May 1, 1998, the Global Bond Portfolio was named the
"International Bond Portfolio."
</TABLE>
19
<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 periods of one, five and ten years, or if a Portfolio has
not been in existence that long, 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,
1997 were 5.03% and 5.16%, 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. 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 periods of one, five and ten years, or
if a Portfolio has not been in existence that long, 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
20
<PAGE>
until the target maturity date, assuming no withdrawals or additional
investments. AVM is the estimated value of such an investment at the target
maturity date. AGR and AVM, like the Portfolios' historical total return data
discussed above, do not reflect any loads or contract charges deducted from
payments or from separate account assets. Daily calculations for each are
necessary because (i) the AGR and AVM calculations assume, among other things,
an expense ratio and portfolio composition that remains unchanged for the life
of each such Portfolio to the target date at maturity, and (ii) such
calculations are therefore meaningful as a measure of predictable return with
respect to particular shares only if such shares are held to the applicable
target maturity date and only with respect to shares purchased on the date of
such calculations (the AGR and AVM applicable to shares purchased on any other
date may be materially different). Those assumptions can only be hypothetical
given that owners of shares have the option to purchase or redeem those shares
on any business day, and will receive dividend and capital gain distributions
through the receipt of additional shares. A number of factors in addition to
shareholder activity can cause a Maturing Government Bond Portfolio's AGR and
AVM to change from day to day. These include the adviser's efforts to improve
total return through market opportunities, transaction costs, interest rate
changes and other events that affect the market value of the investments held in
each Maturing Government Bond Portfolio. Despite these factors, it is
anticipated that if specific shares of a Maturing Government Bond Portfolio are
held to the applicable target maturity date, then the AGR and AVM applicable to
such shares (i.e., calculated as of the date of purchase of such shares) will
vary from the actual return experienced by such shares within a narrow range.
ADDITIONAL PERFORMANCE INFORMATION. Further information about the performance
of the Fund is contained in the Fund's Annual Report to Shareholders, which may
be obtained without charge by writing the Fund at 400 Robert Street North, St.
Paul, Minnesota 55101-2098, or by calling (612) 665-3500; after December 31,
1998, (651) 665-3500.
- --------------------------------------------------------------------------------
THE FUND
- ------------------------------------
Advantus Series Fund, Inc. (the "Fund") was incorporated under
Minnesota law on February 21, 1985. Prior to May 1, 1997, the Fund was known as
MIMLIC Series Fund, Inc. The Minnesota Mutual Life Insurance Company ("Minnesota
Mutual") has established certain separate accounts for the purpose of issuing
variable annuity contracts and variable life insurance policies (collectively,
the "Contracts"). The Fund serves as the underlying investment medium for
amounts invested in the Contracts. The Fund will also be used as the underlying
investment medium for separate accounts of the Northstar Life Insurance Company,
a wholly-owned life insurance subsidiary of Minnesota Mutual which is domiciled
in the state of New York. The Fund may be used for other purposes in the future.
It is conceivable that in the future it may be disadvantageous for variable
life insurance separate accounts and variable annuity separate accounts to
invest in the Fund simultaneously. Although neither Minnesota Mutual nor the
Fund currently foresees any such disadvantages either to variable life insurance
policy owners or to variable annuity contract owners, the Fund's Board of
Directors intends to monitor events in order to identify any material conflicts
between such policy owners and contract owners and to determine what action, if
any, should be taken in response thereto. Such action could include the sale of
Fund shares by one or more of the separate accounts, which could have adverse
consequences. Material conflicts could result from, for example, (1) changes in
state insurance laws, (2) changes in federal income tax laws, (3) changes in the
investment management of any of the Portfolios of the Fund, or (4) differences
in voting instructions between those given by policy owners and those given by
contract owners. The costs of resolving any such material conflicts will be
borne solely by Minnesota Mutual.
The Fund is a series company, which means that it consists of several separate
Portfolios, each with its own investment objectives. Currently, there are twenty
such Portfolios: the Growth Portfolio, the Bond Portfolio, the Money Market
Portfolio, the Asset Allocation Portfolio, the Mortgage Securities Portfolio,
the Index 500 Portfolio, the Capital Appreciation Portfolio, the International
Stock Portfolio, the Small Company Portfolio, four Maturing Government Bond
Portfolios (maturing respectively in 1998, 2002, 2006 and 2010), the Value Stock
Portfolio, the Small Company Value Portfolio, the Global Bond Portfolio, the
Index 400 Mid-Cap Portfolio, the Macro-Cap Value Portfolio, the Micro-Cap Growth
Portfolio and the Real Estate Securities Portfolio. Each Portfolio issues a
separate class of the Fund's common stock. The investment adviser of the Fund is
Advantus Capital
21
<PAGE>
Management, Inc., a Minnesota corporation ("Advantus Capital").
The Fund and Advantus Capital have obtained an exemptive order from the
Securities and Exchange Commission which permits Advantus Capital to employ a
"manager of managers" strategy in connection with its management of the Fund.
The exemptive order permits Advantus Capital, subject to certain conditions, to
select new sub-advisers or change the terms of existing sub-advisory agreements
with the approval of the Fund's Board of Directors, but without obtaining
shareholder approval. Investors in the Fund (i.e., purchasers of the Contracts)
are electing, in effect, to have Advantus Capital either manage the investment
and reinvestment of a Portfolio's assets or select one or more sub-advisers best
suited to achieve that Portfolio's investment objectives. The order does not,
therefore, relieve Advantus Capital of ultimate responsibility for the
investment performance of each Portfolio employing sub-advisers. See "Manager of
Managers Strategy," below, for more information about the order and the
conditions to which it is subject.
Advantus Capital has entered into an investment sub-advisory agreement with
Winslow Capital Management, Inc. ("Winslow Management"), a Minnesota corporation
with principal offices in Minneapolis, Minnesota, under which Winslow Management
serves as investment sub-adviser to the Fund's Capital Appreciation Portfolio.
Advantus Capital has entered into an investment sub-advisory agreement with
Templeton Investment Counsel, Inc., a Florida corporation with principal offices
in Fort Lauderdale, Florida ("Templeton Cousel"), under which Templeton Counsel
serves as investment sub-adviser to the Fund's International Stock Portfolio.
Advantus Capital has entered into a sub-advisory agreement with Julius Baer
Investment Management Inc. ("Julius Baer"), a Delaware corporation with primary
offices in New York, New York, under which Julius Baer provides advisory
services to the Global Bond Portfolio. Advantus Capital has entered into a
sub-advisory agreement with J.P. Morgan Investment Management Inc. ("Morgan
Investment"), a Delaware corporation with primary offices in New York, New York,
under which Morgan Investment provides advisory services to the Macro-Cap Value
Portfolio. Advantus Capital has entered into a sub-advisory agreement with Wall
Street Associates ("Wall Street"), a California corporation with primary offices
in La Jolla, California, under which Wall Street provides advisory services to
the Micro-Cap Growth Portfolio.
Minnesota Mutual is a mutual life insurance company which is domiciled in
Minnesota and authorized to do business in 49 states. The Fund will also sell
its shares to separate accounts of Northstar Life Insurance Company, a
wholly-owned subsidiary of Minnesota Mutual which is domiciled in the state of
New York. Fund shares are not offered directly to and may not be purchased
directly by members of the public. Consequently, the terms "shareholder" and
"shareholders" in this Prospectus refer to these separate accounts.
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.
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.
22
<PAGE>
- --------------------------------------------------------------------------------
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.
The Portfolio's growth approach is based on sound fundamental investment
analysis in which individual stock selection is critical. Thus, the Portfolio's
holdings are selected on the basis of a fundamental analysis which seeks to
identify sound companies whose stock prices, in the opinion of Advantus Capital,
do not reflect their long-term growth potential.
Generally, the Portfolio invests in companies with strong long-term outlooks.
These quality issues are emphasized as a way to protect against downside risk
inherent in the stock market. However, the Portfolio may also seek to achieve
its objective by investing in companies which, in Advantus Capital's judgment,
have temporarily undervalued securities, or, because of new management, products
or markets or other factors, show promise of substantially improved results.
The assets of the Portfolio usually will be invested in a diversified
portfolio of equity securities, mainly common stocks, across all industry
sectors. Changes in investments will be made from time to time to take into
account changes in the outlook for particular industries or companies and in the
general level of common stock prices. The purchase of common stocks may occur in
rising or declining markets.
The Portfolio will typically maintain a fully invested position, but when
economic conditions or general levels of common stock prices are such that
investments of other types may be advantageous on the basis of combined
considerations of risk, income and appreciation, the Portfolio may temporarily
take a defensive position by investing a substantial portion of its assets in
bonds, notes or other evidences of indebtedness, including United States
Government securities, or may hold its assets in cash. Those investments may, or
may not, be convertible into stock. The Portfolio may also temporarily hold its
assets in cash or money market instruments pending investment in accordance with
its policies.
FOREIGN SECURITIES. The Portfolio may 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 ("ADRs"), are not subject to this 10% limitations.) See
"Other Investment Practices--Foreign Securities" for a discussion of the risks
associated with such securities.
- --------------------------------------------------------------------------------
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 Investors Service, Inc. ("Moody's"),
Standard & Poor's Corporation ("S&P"), or any other independent publicly-
recognized rating agency, or, if not rated, are of equivalent investment
quality as determined by the Portfolio's investment adviser. 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. See "Other Investment
Practices--Debt Securities" for further discussion of these instruments. 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. See "Debt Securities
and
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<PAGE>
Down-Graded Instruments" in the Statement of Additional Information.
- - 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 also invest up to 5% of its net assets in corporate bonds
and mortgage-backed securities rated BB or Ba by S&P or Moody's, respectively,
or rated at a comparable level by another independent publicly-recognized rating
agency, or, if not rated, are of equivalent investment quality as determined by
the Portfolio's investment adviser. See "Other Investment Practices--Low Rated
Securities" for a discussion of the risks associated with such securities.
The Portfolio may purchase other investment grade (i.e., BBB or higher)
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. 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.
See the discussion under "Mortgage Securities Portfolio," below, for further
information regarding these securities and the risks associated with them.
The Portfolio may also invest in collateralized mortgage obligations ("CMOs")
of the type eligible for purchase by the Mortgage Securities Portfolio,
including "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); and "interest only" or "principal only" stripped mortgage-backed
securities. See the discussion of CMOs and stripped mortgage-backed securities,
and the risks associated therewith, under the caption "Mortgage Securities
Portfolio," below.
The Portfolio may also purchase asset-backed securities, which usually
represent interests in pools of consumer loans (typically trade, credit card or
automobile receivables). The credit quality of most asset-backed securities
depends primarily on the credit quality of the assets underlying such
securities, how well the entity issuing the security is insulated from the
credit risk of the originator or any other affiliated entities, the quality of
the servicing of the receivables, and the amount and quality of any credit
support provided to the securities. The rate of principal payment on
asset-backed securities may depend on the rate of principal payments received on
the underlying assets which in turn may be affected by a variety of economic and
other factors. As a result, the yield on any asset-backed security may be
difficult to predict with precision and actual yield to maturity may be more or
less than the anticipated yield to maturity. Some asset-backed transactions are
structured with a "revolving period" during which the principal balance of the
asset-backed security is maintained at a fixed level, followed by a period of
rapid repayment. This structure is intended to insulate holders of the asset-
backed security from prepayment risk to a significant extent. Asset-backed
securities may be classified as pass-through certificates or collateralized
obligations.
Pass-through certificates are asset-backed securities which represent an
undivided fractional ownership interest in an underlying pool of assets.
Pass-through certificates usually provide for payments of principal and interest
received to be passed through to their holders, usually after deduction for
certain costs and expenses incurred in administering the pool. Because
pass-through
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<PAGE>
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 also purchase securities on a "when-issued" basis and
purchase or sell securities on a "forward commitment" basis. See "Other
Investment Practices--When-Issued Securities" and "Other Investment
Practices--Mortgage Dollar Rolls" for further information regarding these
investment practices.
The Portfolio may invest in debt securities issued by foreign governments and
companies, provided that such securities are U.S. dollar-denominated and
publicly-traded in the United States. Such securities do not present the same
currency risks as securities traded outside the United States and denominated in
a foreign currency. Investing in securities of foreign issuers may, nonetheless,
result in greater risk than that incurred in investing in securities of domestic
issuers. The obligations of foreign issuers may be affected by political or
economic instabilities. Financial information published by foreign companies may
be less reliable or complete than information disclosed by domestic companies
pursuant to United States Government securities laws, and may not have been
prepared in accordance with generally accepted account principles.
It is expected that the Bond Portfolio will invest in debt securities of
varying long-term maturities and from various industry classifications,
depending on Advantus Capital's evaluation of current and anticipated market
conditions, as well as industry outlook and company operations. Yields on debt
securities depend upon a number of factors, including the size of a particular
offering, maturities and ratings of the obligations and general economic,
monetary and market conditions. The market value of debt instruments will vary
depending on their respective yields and, as a result, the net asset value of
the Bond Portfolio will change from time to time as the general level of
interest rates change.
When economic conditions or general levels of debt security prices are such
that investments of other types may be advantageous on the basis of combined
considerations of risk, income and appreciation, the Portfolio may invest a
substantial portion of its assets in intermediate-term or short-term debt
securities including cash and money market instruments. The Portfolio may
temporarily hold its assets in cash or money market instruments pending
investment in accordance with its policies.
The Bond Portfolio will engage in portfolio transactions when Advantus Capital
believes that such transactions will help to achieve the Portfolio's overall
objectives. Portfolio securities may or may not be held to maturity.
- --------------------------------------------------------------------------------
MONEY MARKET -
PORTFOLIO
The investment objective of the Money Market Portfolio is to seek
maximum current income to the extent consistent with liquidity and the
preservation of capital. In pursuit of this objective the Money Market Portfolio
will follow a policy of investing in money market instruments and other debt
securities. The return produced by these securities will reflect fluctuations in
short-term interest rates.
The Portfolio is subject to the investment restrictions of Rule 2a-7 under the
Investment Company Act of 1940, as amended (the "1940 Act") in addition to its
other policies and restrictions discussed below. Pursuant to Rule 2a-7, the
Portfolio is required to invest exclusively in securities that mature within 397
days from the date of purchase
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<PAGE>
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. See
"Other Investment Practices--Repurchase Agreements" for further information
regarding these agreements and their risks.
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.
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
26
<PAGE>
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 "Other Investment Practices" for more information on certain of the Fund's
investment policies, including descriptions of money market obligations.
- --------------------------------------------------------------------------------
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,
collateralized mortgage obligations, stripped mortgage-backed securities, and
asset-backed securities, with maturities generally exceeding one year in
which the Bond and Mortgage Securities Portfolios may invest. The Portfolio
may also purchase such securities on a "when-issued" basis and purchase or
sell such securities on a "forward commitment" basis. See "Other Investment
Practices--When-Issued Securities" and "Other Investment Practices--Mortgage
Dollar Rolls" for further information.
- - Common stock and other equity securities in which any Portfolio of the Fund
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 sectors. Major changes in investment mix may occur
several times within a year or over several years, depending upon market and
economic conditions.
- --------------------------------------------------------------------------------
MORTGAGE SECURITIES -
PORTFOLIO
The investment objective of the Mortgage Securities Portfolio is to
seek a high level of current income consistent with prudent investment risk. In
pursuit of this objective the Mortgage Securities Portfolio will follow a policy
of investing primarily in a diversified portfolio of mortgage-related
securities. Prices of mortgage-related securities will tend to rise and fall
inversely with the rise and fall of the general level of interest rates.
The Fund anticipates that under normal circumstances at least 65% of the
Portfolio's assets will be invested in mortgage-related securities (except when
in a temporary defensive posture) of the following types:
- - Mortgage-related securities issued by United States Government owned or
sponsored corporations (purchases of these securities will be limited in
accordance with the diversification regulations for variable insurance
contracts issued under Section 817(h) of the Internal Revenue Code).
- - Mortgage-related securities rated A or better by Moody's or S&P or rated at a
comparable level by an independent publicly-recognized rating agency, or, if
not rated, are of equivalent investment quality as determined by Advantus
Capital.
- - Mortgage-related securities rated BBB or Baa by S&P or Moody's, respectively,
or rated at a comparable level by an independent publicly-recognized rating
agency, or, if not rated, are of equivalent investment quality as determined
by Advantus Capital; provided that no such investments will be made in excess
of 35% of the
27
<PAGE>
value of the Portfolio's total assets. 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. Advantus
Capital monitors continuously the ratings of securities held by the Portfolio
and the creditworthiness of their issuers. See "Other Investment
Practices--Debt Securities" for further discussion of these instruments.
- - Mortgage-related securities rated BB or Ba by S&P or Moody's, respectively,
or rated at a comparable level by another independent publicly-recognized
rating agency, or, if not rated, are of equivalent investment quality as
determined by Advantus Capital; provided that no such investments will be
made in excess of 5% of the Portfolio's net assets. See "Other Investment
Practices--Low Rated Securities" for a discussion of the risks associated
with such securities.
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, (iv) debt securities which, although not mortgage-related
securities, are rated BBB or Baa or better by S&P or Moody's, respectively, or
rated at a comparable level by another independent publicly-recognized rating
agency, or, if not rated, are of equivalent investment quality as determined by
Advantus Capital, provided that the aggregate amount invested by the Portfolio
in securities rated BBB or Baa or their equivalent, including both debt
securities and mortgage-related securities, will not exceed 35% of its total
assets, and (v) debt securities which, although not mortgage-related securities,
are rated BB or Ba by S&P or Moody's, respectively, or rated at a comparable
level by another independent publicly-recognized rating agency, or, if not
rated, are of equivalent investment quality as determined by Advantus Capital,
provided that the aggregate amount invested by the Portfolio in securities rated
BB or Ba or their equivalent, including both debt securities and
mortgage-related securities, will not exceed 5% of its net assets (See "Other
Investment Practices--Low Rated Securities"). When business or financial
conditions warrant, the Portfolio may take a temporary defensive position and
invest without limit in the foregoing securities, exclusive of securities rated
below investment grade.
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, 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.
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<PAGE>
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 A to this Prospectus.
Commercial banks, savings and loan institutions, private mortgage insurance
companies, mortgage bankers and other secondary market issuers also create
pass-through pools of conventional residential and commercial mortgage loans.
Such issuers may in addition be the originators and servicers of the underlying
mortgage loans as well as the guarantors of the mortgage-related securities.
Pools created by such nongovernmental issuers generally offer a higher rate of
interest than government and government-related pools because there are no
direct or indirect government guarantees of payments in the former pools.
However, payment of interest and principal of these pools is supported by
various forms of insurance, guarantees and credit enhancements, including
individual loan, title, pool and hazard insurance. The insurance and guarantees
are issued by government entities, private insurers, banks and other financial
institutions, and the mortgage poolers. Such insurance and guarantees and the
creditworthiness of the issuers thereof will be considered in determining
whether a mortgage-related security meets the Portfolio's investment quality
standards. There can be no assurance that the private insurers can meet their
obligations under the policies. The Portfolio may buy mortgage-related
securities without insurance or guarantees if through an examination of the loan
experience and practices of the poolers Advantus Capital determines that the
securities meet the Portfolio's quality and liquidity standards.
The Portfolio may invest in collateralized mortgage obligations ("CMOs"), in
which several different series of bonds or certificates secured by pools of
mortgage-backed securities or mortgage loans, are issued. The series differ from
each other in terms of the priority rights which each has to receive cash flows
with the CMO from the underlying collateral. Each CMO series may also be issued
in multiple classes. Each class of a CMO series, often referred to as a
"tranche," is usually issued at a specific coupon rate and has a stated
maturity. The underlying security for the CMO may consist of mortgage-backed
securities issued or guaranteed by U.S. Government agencies or whole loans. CMOs
backed by U.S. Government agency securities retain the credit quality of such
agency securities and therefore present minimal credit risk. CMOs backed by
whole loans typically carry various forms of credit enhancements to protect
against credit losses and provide investment grade ratings. Unlike traditional
mortgage pass-through securities, which simply pass through interest and
principal on a pro rata basis as received, CMOs allocate the principal and
interest from the underlying mortgages among the several classes or tranches of
the CMO in many ways. All residential, and some commercial, mortgage-related
securities are subject to prepayment risk. A CMO does not eliminate that risk,
but, by establishing an order of priority among the various tranches for the
receipt and timing of principal payments, it can reallocate that risk among the
tranches. Therefore, the stream of payments received by a CMO bondholder may
differ dramatically from that received by an investor holding a traditional
pass-through security backed by the same collateral.
The primary risk associated with any mortgage security is the uncertainty of
the timing of cash flows; specifically, uncertainty about the possibility of
either the receipt of unanticipated principal in falling interest rate
environments (prepayment or call risk) or the failure to receive anticipated
principal in rising interest rate environments (extension risk). In a CMO, that
uncertainty may be allocated to a greater or lesser degree to specific tranches
depending on the relative cash flow priorities of those tranches. By
establishing priority rights to receive and reallocate payments of prepaid
principal, the higher priority tranches are able to offer better call protection
and extension protection
29
<PAGE>
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. 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.
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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." The Portfolio may also
purchase securities on a "when-issued" basis and purchase or sell securities on
a "forward commitment" basis. See "Other Investment Practices--When-Issued
Securities" and "Other Investment Practices-- Mortgage Dollar Rolls" for further
information regarding these investment practices.
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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 "S&P 500 Index"). The S&P 500 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 S&P 500 Index,
involve greater investment risk than debt securities. The fact that a stock has
been included in the S&P 500 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 S&P 500 Index. There is no
minimum or maximum number of stocks included in the S&P 500 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 S&P 500
Index. In order to maintain adequate liquidity to meet its redemption demands,
the Portfolio may also invest up to 10% of its total assets in short-term
investments, including repurchase agreements, and stock index futures contracts.
The use of stock index futures contracts allows the Portfolio to maintain
liquidity while also increasing the level of the Portfolio's assets that reflect
the performance of the S&P 500 Index.
The Portfolio uses the S&P 500 Index as the standard performance comparison
because it represents over 70% of the total market value of all common stocks,
is well known to investors, and in the opinion of Advantus Capital is
representative of the performance of publicly traded common stocks. The S&P 500
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 S&P 500 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 S&P 500 Index having the highest statistical
weightings in the S&P 500 Index. Stocks in the S&P 500 Index are ranked in
accordance with their
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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 S&P 500 Index. However, the
Portfolio will not invest in all of the stocks below the specified level in the
ranking, but rather will invest only in those stocks, and in amounts, as
Advantus Capital determines to be necessary or appropriate for the Portfolio to
approximate the performance of the S&P 500 Index. The Portfolio's ability to
duplicate the performance of the S&P 500 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 S&P 500 Index to the maximum
practicable extent.
Advantus Capital monitors the tracking accuracy of the Portfolio to the S&P
500 Index by comparing the weightings of securities in the Portfolio to that of
the S&P 500 Index. A difference between the two results in a deviation error in
the Portfolio's composition. The amount of the Portfolio's deviation is reviewed
at least weekly and more frequently if such a review is indicated by significant
cash balance changes, market conditions or changes in the composition of the S&P
500 Index. If deviation accuracy is not maintained, the Portfolio will rebalance
its composition by selecting securities which, in the opinion of Advantus
Capital, will provide a more representative sampling of the capitalization of
the securities in the S&P 500 Index as a whole or a more representative sampling
of the sector diversification in the S&P 500 Index. This rebalancing may be
accomplished by either a purchase or sale of securities and is based upon an
analysis of the position of the Portfolio with respect to securities held by it,
the number of securities held, the industrial sectors represented and its
current cash balance.
Economic, financial, or market analysis will not be used in selecting
investments for the Portfolio, nor will adverse financial condition of a company
necessarily result in the sale of the company's stock by the Portfolio. However,
the Portfolio reserves the right to sell a stock held if Advantus Capital
determines that the investment has been impaired substantially by the financial
condition of or extraordinary events involving the stock's issuer.
SHORT-TERM INVESTMENTS. Although the Portfolio normally seeks to remain
substantially fully invested in common stocks, the Portfolio may invest
temporarily in certain high grade short-term fixed income securities or in
commercial paper or other cash equivalents rated A-1 by Standard & Poor's
Corporation or Prime-1 by Moody's Investors Service, Inc. Such investments may
be used to invest uncommitted cash balances or to maintain liquidity to meet
shareholder redemptions. These investments include: obligations of the U.S.
Government and its agencies or instrumentalities; commercial paper, bank
certificates of deposit, and bankers' acceptances; and repurchase agreements
collateralized by these securities.
STOCK INDEX FUTURES CONTRACTS. The Portfolio may utilize stock index futures
contracts, to a limited extent, 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. See "Other Investment
Practices--Stock Index Futures Contracts" for further discussion of these
securities and the risks associated with them.
ILLIQUID SECURITIES AND RULE 144A PAPER. The Portfolio is permitted to invest
up to 15% of its net assets in securities or other assets which are "illiquid".
The Portfolio may invest up to 20% of its net assets in certain "restricted
securities" if such securities are deemed by the Adviser to be liquid in
accordance with standards established by the Fund's Board of Directors. For a
detailed discussion of "illiquid" and "restricted securities" see "Other
Investment Practices--Illiquid Securities, Rule 144A Paper and Restricted
Securities."
REPURCHASE AGREEMENTS. The Portfolio may also enter into repurchase
agreements. See "Other Investment Practices--Repurchase Agreements" for a
discussion of the risks associated with such securities.
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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-
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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.
- --------------------------------------------------------------------------------
INTERNATIONAL STOCK -
PORTFOLIO
The investment objective of the International Stock Portfolio is
long-term capital growth. In pursuit of this objective the International Stock
Portfolio will follow a policy of investing in stocks issued by companies, large
and small, and debt obligations of companies and governments outside the United
States. Current income will be incidental to the objective of capital growth.
In pursuit of its investment objective, the Portfolio will normally maintain
at least 65% of its assets in common and preferred stocks. There is no
limitation on the percentage of the Portfolio's assets that may be invested in
any one country although the Portfolio will maintain an exposure to the equities
markets in at least three countries under normal circumstances.
The Portfolio has a flexible investment policy. The exercise of this flexible
policy may include decisions to purchase securities with substantial risk
characteristics and other decisions such as changing the emphasis on investments
from one nation to another and from one type of security to another. Some of
these decisions may later prove profitable and others may not. No assurance can
be given that profits, if any, will exceed losses.
Whenever, in the judgment of Templeton Counsel, market or economic conditions
warrant, the Portfolio may, for temporary defensive purposes, invest without
limit in U.S. Government securities, bank time deposits in the currency of any
major nation and commercial paper meeting the quality ratings set forth herein
and purchase from banks or broker-dealers Canadian or U.S. Government securities
with a simultaneous agreement by the seller to repurchase them within no more
than seven days at the original purchase price plus accrued interest.
The Portfolio is authorized to invest in debt securities that are rated BBB or
higher by Standard & Poor's Corporation ("S&P") and Baa or higher by Moody's
Investors Service, Inc. ("Moody's") or, if unrated, are of equivalent investment
quality as determined by Templeton Counsel. See "Other Investment
Practices--Debt Securities" for further discussion.
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
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likely to be higher. Further, the settlement period of securities transactions
in foreign markets may be longer than in domestic markets. In many foreign
countries there is less government supervision and regulation of business and
industry practices, stock exchanges, brokers and listed companies than in the
United States. The foreign securities markets of many of the countries in which
the Portfolio may invest may also be smaller, less liquid, and subject to
greater price volatility than those in the United States. Also, some countries
may withhold portions of interest, dividends and gains at the source. There are
further risk considerations, including possible losses through the holding of
securities in domestic and foreign custodial banks and depositories. The
Portfolio may invest in Eastern European countries, which involves special risks
that are described herein.
Certain of the recent political and economic developments in Eastern Europe,
including the introduction of aspects of a market economy in certain Eastern
European countries, are related to developments in what was formerly known as
the Soviet Union. Trends in Eastern Europe that may be considered favorable for
achievement of the Portfolio's investment objectives may be adversely affected
by political or social developments in the Soviet Union. So long as the
centralist political powers continue to exercise a significant or, in some
countries, dominant role in Eastern European countries, investments in such
countries will involve risks of nationalization, expropriation and confiscatory
taxation. The communist governments of a number of Eastern European countries
expropriated large amounts of private property in the past, in many cases
without adequate compensation, and there can be no assurance that such
expropriation will not occur in the future. In the event of such expropriation,
the Portfolio could lose a substantial portion of any investments it has made in
the affected countries. Further, no accounting standards exist in Eastern
European countries. Finally, even though certain Eastern European currencies may
be convertible into U.S. dollars, the conversion rates may be artificial to the
actual market values and may be adverse to the Portfolio's contract owners.
The Portfolio usually effects currency exchange transactions on a spot (i.e.,
cash) basis at the spot rate prevailing in the foreign exchange market. However,
some price spread on currency exchange will be incurred when the Portfolio
converts assets from one currency to another. Further, the Portfolio may be
affected either unfavorably or favorably by fluctuations in the relative rates
of exchange between the currencies of different nations.
The Portfolio may buy and sell index futures contracts with respect to any
non-U.S. stock index. The Portfolio may invest in index futures contracts for
hedging purposes only and not for speculation. A Portfolio may engage in such
transactions only to the extent that the total contract value of the futures
contracts do not exceed 5% of the Portfolio's total assets at the time when such
contracts are entered into. Successful use of stock index futures is subject to
the ability of Templeton Counsel to predict correctly movements in the direction
of the stock markets. No assurance can be given that Templeton Counsel's
judgment in this respect will be correct.
A stock index futures contract is a contract to buy or sell units of a stock
index at a specified future date at a price agreed upon when the contract is
made. The value of a unit is the current value of the stock index. During or in
anticipation of a period of market appreciation, the Portfolio may enter into a
"long hedge" of common stock which it proposes to add to its portfolio by
purchasing stock index futures for the purpose of reducing the effective
purchase price of such common stock. To the extent that the securities which the
Portfolio proposes to purchase increase in value in correlation with the stock
index 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
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a well-conceived hedge may be unsuccessful to some degree because of market
behavior or unexpected interest rate trends.
Futures exchanges may limit the amount of fluctuation permitted in certain
futures contract prices during a single trading day. The daily limit establishes
the maximum amount that the price of a futures contract may vary either up or
down from the previous day's settlement price at the end of the current trading
session. Once the daily limit has been reached in a futures contract subject to
the limit, no more trades may be made on that day at a price beyond that limit.
The daily limit governs only price movements during a particular trading day
and, therefore, does not limit potential losses because the limit may work to
prevent the liquidation of unfavorable positions. For example, futures prices
have occasionally moved to the daily limit for several consecutive trading days
with little or no trading, thereby preventing prompt liquidation of positions
and subjecting some holders of futures contracts to substantial losses.
There can be no assurance that a liquid market will exist at a time when the
Portfolio seeks to close out a futures position, and it would remain obligated
to meet margin requirements until the position is closed. The Portfolio intends
to purchase or sell futures only on exchanges or boards of trade where there
appears to be an active secondary market, but there is no assurance that a
liquid secondary market will exist for any particular contract or at any
particular time. In addition, many of the futures contracts available may be
relatively new instruments without a significant trading history. As a result,
there can be no assurance that an active secondary market will develop or
continue to exist.
Use of stock index futures for hedging may involve risks because of imperfect
correlations between movements in the prices of the stock index futures on the
one hand and movements in the prices of the securities being hedged or of the
underlying stock index on the other. Successful use of stock index futures by
the Portfolio for hedging purposes also depends upon Templeton Counsel's ability
to predict correctly movements in the direction of the market, as to which no
assurance can be given.
Warrants with cash extractions are permitted and may be used as investment
alternatives to equity shares. A warrant with a cash extraction consists of one
warrant and cash with a current value that closely approximates the current
value of an equivalent number of shares that would be delivered if the warrant
were exercised. These investment instruments may (1) provide attractive cash
yields and (2) minimize capital loss risk. Alternatively, perfect replication of
underlying share price movements may be hindered by warrant premiums which occur
because shorter-term investors value the leveraging power of naked warrants.
Given these circumstances, capital gains potential of warrants with cash
extractions may be less than that of underlying shares.
The International Stock Portfolio has authority to deal in forward foreign
exchange contracts between currencies of the different countries in which the
Portfolio will invest as a hedge against possible variations in the foreign
exchange rate between these currencies. This is accomplished through contractual
agreements to purchase or sell a specified currency at a specified future date
and price set at the time of the contract. The Portfolio's dealings in forward
foreign exchange contracts will be limited to hedging involving either specific
transactions or portfolio positions. Transaction hedging is the purchase or sale
of forward foreign currency with respect to specific receivables or 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
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will incur a gain or a loss to the extent that there has been movement in
forward contract prices. If the Portfolio engages in an offsetting transaction,
it may subsequently enter into a new forward contract to sell the foreign
currency. Should forward prices decline during the period between the Portfolio
entering into a forward contract for the sale of a foreign currency and the date
it enters into an offsetting contract for the purchase of the foreign currency,
the Portfolio will realize a gain to the extent the price of the currency it has
agreed to sell exceeds the price of the currency it has agreed to purchase.
Should forward prices increase, the Portfolio will suffer a loss to the extent
the price of the currency it has agreed to purchase exceeds the price of the
currency it has agreed to sell.
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SMALL COMPANY -
PORTFOLIO
The investment objective of the Small Company Portfolio is to seek
the long-term accumulation of capital. In pursuit of this objective, the Small
Company Portfolio will follow a policy of investing primarily in common and
preferred stocks issued by small companies, defined in terms of either market
capitalization or gross revenues. Investments in small companies usually involve
greater investment risks than fixed income securities or corporate equity
securities generally. Dividend income will be incidental to the investment
objective for this Portfolio.
Under normal circumstances, at least 65% of the Small Company Portfolio's
assets will be invested in small companies. Such companies may encompass
well-known and established companies as well as newer and relatively unknown
companies. Small companies will typically have a market capitalization of less
than $1.5 billion or annual gross revenues of less than $1.5 billion.
Market capitalization is the term which refers to the total market value of a
company's outstanding shares of common stock. Application of the market
capitalization or gross revenue tests will be made only at the time that the
Portfolio's initial position in the company is taken. Thus, for purposes of the
65% test any company deemed to be a small company at the time of the Portfolio's
initial position therein will be treated as a small company, regardless of
subsequent developments, so long as the Portfolio maintains a position in the
company.
Small companies may be in a relatively early stage of development or may
produce goods and services which have favorable prospects for growth due to
increasing demand or developing markets. Frequently, such companies have a small
management group and single product or product-line expertise that may result in
an enhanced entrepreneurial spirit and greater focus which allow such firms to
be successful. Management believes that such companies may develop into
significant business enterprises and that an investment in such companies offers
a greater opportunity for capital appreciation than an investment in larger more
established entities. However, small companies frequently retain a large part of
their earnings for research, development and investment in capital assets, so
that the prospects for immediate dividend income are limited.
Investments in small companies involve greater risks than equity securities
generally due to their small size and the fact that they may have limited
product lines, less access to the financial market for additional corporate
financings or less management 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 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
("ADRs"), are not subject to this 10% limitation.) See "Other Investment
Practices-- Foreign Securities" for a discussion of the risks associated with
such securities.
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
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evidences of indebtedness, including United States Government securities, or may
hold its assets in cash. Those investments may, or may not, be convertible into
stock. The Portfolio may also temporarily hold its assets in cash or money
market instruments pending investment in accordance with its policies.
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MATURING GOVERNMENT -
BOND PORTFOLIOS
The investment objective of each of the Maturing Government
Bond Portfolios is to provide as high an investment return as is consistent with
prudent investment risk for a specified period of time ending on a specified
liquidation date. In pursuit of this objective each of the Maturing Government
Bond Portfolios seeks to return a reasonably assured targeted dollar amount,
predictable at the time of investment, on a specific target date in the future
through investment in a portfolio composed primarily of zero coupon securities.
These are securities that pay no cash income and are sold at a discount from
their par value at maturity.
Each Maturing Government Bond Portfolio will invest in a portfolio of
securities consisting of: (a) debt obligations issued by the U.S. Treasury that
have been stripped of their unmatured interest coupons; and (b) receipts and
certificates for stripped debt obligations and stripped coupons, including U.S.
Government trust certificates (collectively "Stripped Treasury Securities").
These Stripped Treasury Securities are not anticipated to be in excess of 55% of
the assets of each Portfolio.
Each Maturing Government Bond Portfolio will also purchase other zero coupon
securities issued by the U.S. Government and its agencies and instrumentalities,
by Trusts where the payment of principal and interest to the Trust are
guaranteed by the United States, and by "mixed-ownership government
corporations" (collectively, "Stripped Government Securities"). In addition, the
Maturing Government Bond Portfolios will also purchase zero coupon securities
issued in the United States issued by domestic corporations which consist of
corporate debt obligations without interest coupons and, if available, interest
coupons that have been stripped from corporate debt obligations, and receipts
and certificates for such stripped debt obligations and stripped coupons
(collectively, "Stripped Corporate Securities"). Stripped Treasury Securities,
Stripped Government Securities and Stripped Corporate Securities are referred to
collectively herein as "Stripped Securities."
Each Maturing Government Bond Portfolio will mature on a specified target
date. The current Target Dates, as that term is defined herein, are in September
in the years 1998, 2002, 2006 and 2010.
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,
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including those obtained through reinvestment of dividends and distributions,
will experience a return consisting primarily of the amortization of discount on
the underlying securities in the Maturing Government Bond Portfolio. However,
the net asset value of the Portfolio's shares will increase or decrease with the
daily changes in the market value of that Maturing Government Bond Portfolio's
investments which will tend to vary inversely with changes in prevailing
interest rates. If shares of a Maturing Government Bond Portfolio are redeemed
prior to the maturity date of that Maturing Government Bond Portfolio, a
contract owner may experience a significantly different investment return than
was anticipated at the time of purchase.
The Maturing Government Bond Portfolios will also seek to minimize
reinvestment risk. Reinvestment risk arises from the uncertainty as to the total
return which will be realized from conventional interest-paying bonds due to the
fact that periodic interest, received in cash, will be reinvested in the future
at interest rates unknown at the time of the original purchase. With zero coupon
securities, however, there are no cash distributions to reinvest, so an owner of
such a security would bear no reinvestment risk if a zero coupon security was
held to maturity. Since each Maturing Government Bond Portfolio will not be
invested entirely in zero coupon securities maturing on the Target Date, there
will be some reinvestment risk.
Stripped Securities investments, like other investments in debt securities,
are subject to certain risks, including credit and market risks. Credit risk is
the function of the ability of an issuer of a security to maintain timely
interest payments and to pay the principal of a security upon maturity.
Securities purchased by the Maturing Government Bond Portfolios will be rated at
least single A or better by nationally recognized statistical rating agencies.
Securities rated single A are regarded as having an adequate capacity to pay
principal and interest, but with greater vulnerability to adverse economic
conditions and some speculative characteristics. The Maturing Government Bond
Portfolios will also attempt to minimize the impact of individual credit risks
by diversifying their portfolio investments.
Market risk is the risk of the price fluctuation of a security due primarily
to market interest rates prevailing generally in the economy. Market risk may
also include elements which take into account the underlying credit rating of an
issuer, the maturity length of a security, a security's yield, and general
economic and interest rate conditions. Stripped Securities do not make any
periodic payments of interest prior to maturity and the stripping of the
securities causes the Stripped Securities to be offered at a discount from their
face amounts. The market value of Stripped Securities and, therefore 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
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proceeds, the proceeds will be automatically invested in the Money Market
Portfolio and the contract owner will be notified of that allocation.
The investment adviser of the Portfolios will attempt to maintain the average
maturity of each Maturing Government Bond Portfolio within twelve months of that
Portfolio's Target Date. A Portfolio of securities consisting entirely of zero
coupon securities maturing on the Target Date with no cash or interest bearing
securities will have a maturity and duration which are equal.
Duration is the measure of the length of an investment and its price
volatility which takes into account, through present value analysis, the timing
and amount of any interest payments as well as the amount of the principal
repayment thus measuring volatility or price fluctuation. Duration is commonly
used by professional investment managers to help identify and control
reinvestment risk. Since each Maturing Government Bond Portfolio will not be
invested entirely in zero coupon securities maturing on the Target Date, there
will be some reinvestment risk. By balancing investments with slightly longer
and shorter durations, the investment adviser believes it can, under normal
circumstances, maintain a Maturing Government Bond Portfolio's average duration
within twelve months of the Maturing Government Bond Portfolio's Target Date and
thereby reduce its reinvestment risk.
Under federal income tax laws, a portion of the difference between the
purchase price of the zero coupon securities and their face value ("original
issue discount") is considered to be income to the Maturing Government Bond
Portfolios each year, even though such Portfolios will not receive cash payments
representing the discount from these securities. This original issue discount
will comprise a part of the net taxable investment income of the Maturing
Government Bond Portfolios which must be "distributed" to the insurance company
shareholder each year, whether or not such distributions are paid in cash. To
the extent such distributions are paid in cash, a Maturing Government Bond
Portfolio may have to generate the required cash from interest earned on
non-zero coupon securities or possibly from the disposition of zero coupon
securities.
The Maturing Government Bond Portfolios may not be appropriate for contract
owners who do not plan to have their premiums invested in shares of a Maturing
Government Bond Portfolio for a long term or until its maturity.
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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 Advantus
Capital believes are undervalued in relation to their potential for growth in
earnings and book value; or (c) companies which have recently changed management
or control and have the potential to achieve sharply improved earnings. Advantus
Capital may give emphasis on securities of companies that may be temporarily out
of favor or whose value is not yet recognized by the market.
Tests applied by the adviser to measure the value of securities will include
their price/earnings ratio, price/book ratio, price to cash flow ratio and
yield. A price/earnings ratio is the price of a share of stock divided by its
earnings per share and it is a measure of the market price of the security
relative to its earnings per share. A price/book ratio is the price of a share
of stock divided by its book value per share and it is a measure of the market
price of the security relative to its book value per share. A price to cash flow
ratio is the price of a share of stock divided by the firm's net income after
taxes, plus depreciation and other non-cash expenses, expressed on a per share
basis. Yield is the annual dividend of a share of stock divided by its market
price. Stocks will be selected by the adviser using statistical measures of
relative value. Returns on such stocks are likely to be influenced by the
recognition of their undervaluation by other investors and the market. Under
most circumstances, if Advantus Capital determines that a stock has reached an
over-valued position, it may be sold and replaced by securities which are deemed
to be undervalued in the marketplace.
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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 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
("ADRs"), are not subject to this 10% limitation.) See "Other Investment
Practices-- Foreign Securities" for a discussion of the risks associated with
such securities.
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. See "Other Investment Practices--
Convertible Securities" for a discussion of these instruments. The Portfolio
will limit its purchase of convertible debt securities to those that, at the
time of purchase, are rated at least B- by S&P or B3 by Moody's, or if not rated
by S&P or Moody's, are of equivalent investment quality as determined by
Advantus Capital. Debt securities rated below the four highest categories (i.e.,
below BBB) are not considered "investment grade" obligations. These securities
have predominately speculative characteristics and present more credit risk than
investment grade obligations. See "Other Investment Practices--Low Rated
Securities" for a further discussion of the risks associated with such
securities. 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.
After purchase by the Portfolio, a debt security may cease to be rated or its
rating may be reduced below the minimum required for purchase by the Portfolio.
Neither event will require a sale of such security by the Portfolio, but
Advantus Capital will consider such event in the determination of whether the
Portfolio should continue to hold the security. See "Debt Securities and
Down-Graded Instruments" in the Statement of Additional Information.
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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
Advantus Capital 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
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companies which could be described as follows: (a) companies whose securities
Advantus Capital believes are selling at low market valuations relative to the
securities markets in general, or companies that may currently be earning a very
low return on assets but which have the potential to earn higher returns; (b)
companies whose securities Advantus Capital believes are undervalued in relation
to their potential for improved operating performance and financial strength; or
(c) companies which have recently changed management or control and whose
securities, in the judgment of Advantus Capital, are therefore undervalued in
relation to their potential to achieve sharply improved operating performance.
Securities of companies that may be temporarily out of favor or whose value is
not yet recognized by the market may also be considered by Advantus Capital to
be value securities (see, "Value Securities" below).
The Small Company Value Portfolio will ordinarily invest at least 65% of the
value of its total assets in common stocks with the characteristics described
above. The balance of its assets may be invested in other equity securities,
including stocks with larger market capitalization whose long-term appreciation
potential is believed by Advantus Capital to be well above average, debt
obligations convertible into common stock and which may produce capital
appreciation, other corporate debt obligations, U.S. Government securities, cash
or cash equivalents. However, the Small Company Value Portfolio may temporarily
take a defensive position by investing a substantial portion of its assets in
bonds, notes or other evidences of indebtedness, including U.S. Government
securities and corporate debt securities, provided that such debt securities
(excluding debt securities convertible into common stock as described below) are
rated BBB or Baa or higher by S&P or Moody's, respectively, or may hold its
assets in cash. The Small Company Value Portfolio may also temporarily hold its
assets in cash or money market instruments pending investments in accordance
with its policies.
VALUE SECURITIES. Tests applied by Advantus Capital to measure the value of
securities will include their price/earnings ratio, price/book ratio, price to
cash flow ratio and yield. A price/earnings ratio is the price of a share of
stock divided by its earnings per share and it is a measure of the market price
of the security relative to its earnings per share. A price/book ratio is the
price of a share of stock divided by its book value per share and it is a
measure of the market price of the security relative to its book value per
share. Book value per share is generally equal to assets less liabilities
divided by the total number of outstanding shares (i.e., the "net worth" per
share). A price to cash flow ratio is the price of a share of stock divided by
the firm's net income after taxes, plus depreciation and other non-cash
expenses, expressed on a per share basis. Yield is the annual dividend of a
share of stock divided by its market price. Stocks will be selected by Advantus
Capital using statistical measures of relative value. Returns on such stocks are
likely to be influenced by the recognition of their undervaluation by other
investors and the market. Under most circumstances, if Advantus Capital
determines that a stock has reached an over-valued position, it may be sold and
replaced by securities which are deemed to be undervalued in the marketplace.
The Small Company Value Portfolio's investments in value securities will
typically be characterized by the purchase of securities with lower price to
normalized earnings ratios ("normalized earnings" are average earnings under
average business conditions), lower price to cash flow ratios and/or price to
book value ratios relative to the equity markets in general. This value approach
to investing may be considered to differ from a growth approach which would
consider the purchase of securities with an anticipated above-average earnings
growth potential over time. This distinction between these two approaches to
equity investing is important because historically there are periods in which
either growth or value investing may be successful approaches to total return in
the equity markets. Securities that meet the criteria of the Small Company Value
Portfolio may not be popular during certain market cycles.
SMALL COMPANIES. Companies characterized as "small" companies may encompass
well-known and established companies as well as newer and relatively unknown
companies, and will have, at the time of purchase, a market capitalization of
less than $1.5 billion.
Market capitalization is the term which refers to the total market value of a
company's outstanding shares of common stock. Application of the market
capitalization test will be made only at the time that the Portfolio's initial
position in the company is taken. Thus, for purposes of the 65% test, any
company deemed to be a small company at the time of the Portfolio's initial
position therein will be 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
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which have favorable prospects for growth due to increasing demand or developing
markets. Frequently, such companies have a small management group and single
product or product-line expertise that may result in an enhanced entrepreneurial
spirit and greater focus which allow such firms to be successful. Advantus
Capital believes that such companies may develop into significant business
enterprises and that an investment in such companies offers a greater
opportunity for capital appreciation than an investment in larger more
established entities. However, small companies frequently retain a large part of
their earnings for research, development and investment in capital assets, so
that the prospects for immediate dividend income are limited.
While historically securities issued by small capitalization companies have
produced better market results than the securities of larger issuers, there is
no assurance that they will continue to do so or that the Portfolio will invest
specifically in those companies which produce those results. Because of the
risks involved, Small Company Value Portfolio is not intended as a complete
investment program.
CONVERTIBLE SECURITIES. The Portfolio may invest in debt or preferred equity
securities convertible into or exchangeable for equity securities. See "Other
Investment Practices--Convertible Securities" for a discussion of these
instruments. 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. See "Other Investment Policies--Low Rated Securities" for a
discussion of the risks associated with such securities. 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 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. See "Other
Investment Practices--Debt Securities" for a discussion of these instruments.
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.
See "Other Investment Practices-- Options" and 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. See "Other Investment Practices--Loans
of Portfolio Securities."
WARRANTS. The Portfolio may invest in warrants; however, not more than 5% of
its assets (at the time of purchase) will be invested in warrants other than
warrants acquired in units or attached to other securities. Of such 5% not more
than 2% of the Portfolio assets at the time of purchase may be invested in
warrants that are not listed on the New York or American Stock Exchanges.
Warrants are pure speculation in that they have no voting rights, pay no
dividends and have no rights with respect to the assets of the corporation
issuing them. The prices of warrants do not necessarily move parallel to the
prices of the underlying securities.
ILLIQUID SECURITIES AND RULE 144A PAPER. The Portfolio is permitted to invest
up to 15% of its net assets in securities or other assets which are illiquid.
The Portfolio may invest without limitation in certain "restricted securities"
if such securities are deemed by the Adviser to be liquid in accordance with
standards established by the Fund's Board of Directors. For a detailed
discussion of "illiquid" and "restricted securities" see "Other Investment
Practices--Illiquid Securities, Rule 144A Paper and Restricted Securities."
FOREIGN SECURITIES. The Portfolio may 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 ("ADRs"), are not subject to this 10% limitation.) See
"Other Investment Practices--Foreign Securities" for a discussion of the risks
associated with such securities.
REPURCHASE AGREEMENTS. The Portfolio may also enter into repurchase
agreements. See "Other Investment Practices--Repurchase Agreements" for
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a discussion of the risks associated with such securities.
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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GLOBAL BOND -
PORTFOLIO
The Global Bond Portfolio seeks, as its investment objective, to
maximize current income, consistent with the protection of principal. The
Portfolio pursues its investment objective by investing primarily in debt
securities issued by issuers located anywhere in the world.
Prior to May 1, 1998, the Global Bond Portfolio was known as the International
Bond Portfolio and pursued its objective by investing primarily in a managed
portfolio of non-U.S. dollar debt securities issued by foreign governments,
companies and supranational entities. Effective after that date, pursuant to a
change in the investment practices of the Portfolio approved by the Board of
Directors, the Portfolio will seek to achieve its investment objective by
investing primarily in debt securities issued anywhere in the world. The
investment objective of the Portfolio remains unchanged.
Total investment return is the combination of income and capital appreciation.
The Advisers emphasize income in selecting securities for the Portfolio , but
also consider the potential for changes in value resulting from changes in
currency relationships, interest rates, individual issuers' credit standing and
other factors. The Portfolio seeks to maintain an average portfolio duration
ranging from three to eight years.
Foreign debt securities in which the Portfolio may invest include: (a)
obligations issued or guaranteed by foreign national governments, their
agencies, instrumentalities, or political subdivisions; (b) debt securities
issued or guaranteed by supranational organizations established or supported by
several national governments; (c) Brady Bonds; and (d) non-government foreign
debt securities. U.S. debt obligations in which the Portfolio may invest include
U.S. Government Securities, including mortgage-related securities, privately
issued mortgage-related securities, asset-backed securities and corporate debt
securities. The Portfolio may also invest in American Depository Receipts and
European Depository Receipts and in foreign index linked securities. A more
complete description of some of these types of securities is set forth under
"Risks and Characteristics of Securities and Investment Techniques."
The Portfolio will invest primarily in investment grade debt securities
(securities rated at least Baa by Moody's or BBB by S&P or, if unrated, of
comparable quality as determined by the Adviser or
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Sub-Adviser). Securities rated Baa are considered by Moody's as medium-grade
obligations which lack outstanding investment characteristics and in fact have
speculative characteristics as well, while securities rated BBB are regarded by
S&P as having an adequate capacity to pay principal and interest. However, the
Portfolio may invest up to 5% of its net asset in debt securities that are rated
below investment grade but rated B or higher by Moody's or S&P (or, if unrated,
determined by the Adviser or the Sub-Adviser to be of comparable quality). Such
securities are sometimes referred to as "high yield" or "junk" bonds. See "Other
Investment Practices-- Low Rated Securities" for a discussion of the risks of
investing in high yield securities. See Appendix I to the Statement of
Additional Information for a description of Moody's and S&P ratings applicable
to fixed income securities.
The Portfolio may invest in securities issued anywhere in the world, including
the United States. Under normal conditions, the Portfolio will be invested in at
least three different countries, one of which may be the United States. Subject
to the requirement that the Portfolio may not invest 25% or more of its total
assets in obligations issued by the government of any one country (other than
the United States), and subject to other tests (such as Code limitations) which
may be applicable or desirable for the Portfolio, there is no limit on the
amount the Portfolio may invest in any one country, or in securities denominated
in the currency of any one country, to take advantage of what the Sub-Adviser
believes to be favorable yields, currency exchange conditions or total
investment return potential. Depending on the Sub-Adviser's current opinion as
to the proper allocation of assets among domestic and foreign issuers,
investments in the securities of issuers located outside the United States will
normally vary between 25% and 75% of the Portfolio's assets.
The Portfolio may invest in securities denominated in the currencies of
countries that the Sub-Adviser considers to have stable governments and in debt
securities denominated in multi-national currency units, such as the European
Currency Unit ("ECU"). The ECU is a "basket" consisting of specified amounts of
the currencies of certain of the 12-member states of the European Community.
Securities of issuers within a given country may be denominated in the currency
of another country.
The Sub-Adviser will actively manage the allocation of the Portfolio's
investments among countries, geographic regions and currency denominations in an
attempt to achieve the Portfolio's objective. In allocating the Portfolio's
assets among various markets, the Sub-Adviser will consider such factors as the
relative yields and anticipated direction of interest rates in particular
markets, the level of inflation, liquidity and financial soundness of each
country or market, the general market and economic conditions existing in each
country or market, and the relationship of currencies of various countries to
the U.S. dollar and to each other. In its evaluations, the Sub-Adviser will
utilize its internal financial, economic, and credit analysis resources as well
as information obtained from other sources. The Portfolio's share price and
yield will fluctuate due to the movement of foreign currencies against the U.S.
dollar and changes in world wide interest rates and fixed-income markets. By
actively managing the portfolio and using currency hedging techniques, however,
the Sub-Adviser will attempt to reduce the risks.
The Portfolio may buy or sell interest rate futures contracts, options on
interest rate futures contracts and options on debt securities for the purpose
of hedging against changes in the value of securities which the Portfolio owns
or anticipates purchasing due to anticipated changes in interest rates. The
Portfolio also may engage in foreign currency exchange transactions by means of
buying and selling foreign currency options, foreign currency futures, and
options of foreign currency futures. Foreign currency exchange transactions may
be entered into for the purpose of hedging against foreign currency exchange
risk arising from the Portfolio's investment or anticipated investment in
securities denominated in foreign currencies. The Portfolio also may enter into
foreign currency forward contracts and buy or sell foreign currencies or foreign
currency options for purposes of increasing exposure to a particular foreign
currency or to shift exposure to foreign currency fluctuations from one country
to another. The Portfolio may enter into swap agreements for purposes of
attempting to obtain a particular investment return at a lower cost to the
Portfolio than if the Portfolio had invested directly in an instrument that
provided that desired return. In addition, the Portfolio may purchase and sell
securities on a when-issued or delayed-delivery basis and enter into forward
commitments to purchase securities, lend its securities to brokers, dealers and
other financial institutions to earn income, and enter into reverse repurchase
agreements as a means of borrowing money for investment purposes.
ILLIQUID SECURITIES AND RULE 144A PAPER The Portfolio is permitted to invest
up to 15% of its net
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assets in securities or other assets which are illiquid. The Portfolio may
invest up to 20% of its net assets in certain "restricted securities" if such
securities are deemed by the Adviser to be liquid in accordance with standards
established by the Fund's Board of Directors. For a detailed discussion of what
constitutes "illiquid" of "restricted" securities, see "Other Portfolio
Practices--Illiquid Securities, Rule 144A Paper and Restricted Securities".
GENERAL The different types of securities and investment techniques used by
the Funds all have attendant risks of varying degrees. For example, with respect
to debt securities, including money market instruments, there is the risk that
the issuer of a security may not be able to meet its obligation to make
scheduled interest or principal payments. In addition, the value of debt
securities generally rises and falls inversely with interest rates, and the
longer the maturity or duration of the debt security, the more volatile it may
be in terms of changes in current value. Because each Fund seeks a different
investment objective and has different investment policies, each is subject to
varying degrees of financial, market and credit risks. Therefore, investors
should carefully consider the investment objective, investment policies and
potential risks of any Fund before investing. Certain types of investments and
investment techniques that may be used by the Funds are described in greater
detail, including the risks of each, in this section.
U.S. GOVERNMENT SECURITIES The Portfolio may invest in U.S. Government
securities. U.S. Government securities are issued or guaranteed as to payment of
principal and interest by the U.S. Government, its agencies or
instrumentalities. The current market prices for such securities are not
guaranteed and will fluctuate as will the net asset value of the Portfolio. Some
U.S. Government securities, such as Treasury bills, notes and bonds and
securities guaranteed by the Government National Mortgage Association ("GNMA"),
are supported by the full faith and credit of the United States; others, such as
those of the Federal Home Loan Banks, are supported by the right of the issuer
to borrow from the U.S. Treasury; others, such as those of the Federal National
Mortgage Association ("FNMA"), are supported by the discretionary authority of
the U.S. Government to purchase the agency's obligations, and still others are
supported only by the credit of the instrumentality.
U.S. Government securities include securities that have no coupons, or have
been stripped of their unmatured interest coupons, individual interest coupons
from such securities that trade separately and evidences of receipt of such
securities. Such securities may pay no cash income and are purchased at a deep
discount from their value at maturity. Because interest on zero coupon
securities is not distributed on a current basis but is, in effect, compounded,
zero coupon securities tend to be subject to greater market risk than interest-
paying securities of similar maturities.
CORPORATE FIXED-INCOME SECURITIES The Portfolio may invest in corporate
fixed-income securities, which include corporate bonds, debentures, notes and
other similar corporate debt instruments, including convertible securities.
Fixed-income securities may be acquired with warrants attached. Corporate
income-producing securities may also include forms of preferred or preference
stock. The rate of return or return of principal on some fixed-income
obligations may be linked or indexed to the level of exchange rates between the
U.S. dollar and a foreign currency or currencies.
The Portfolio's investments in corporate fixed-income securities may also
include zero coupon, pay-in-kind and delayed interest securities. Zero coupon
securities pay no cash income to their holders until they mature and are issued
at substantial discounts from their value at maturity. When held to maturity,
their entire return comes from the difference between their purchase price and
their maturity value. Pay-in-kind securities pay interest through the issuance
to the holders of additional securities. Delayed interest securities are
securities that remain zero coupon securities until a predetermined date at
which time the stated coupon rate becomes effective and interest becomes payable
at regular intervals. Because interest on zero coupon, pay-in-kind and delayed
interest securities is not paid on a current basis, the values of securities of
this type are subject to greater fluctuations than the values of securities that
distribute income regularly and they may be more speculative than such
securities. Accordingly, the values of these securities may be highly volatile
as interest rates rise or fall. In addition, the Portfolio's investments in zero
coupon, pay-in-kind and delayed interest securities will result in special tax
consequences. Although zero coupon securities do not make interest payments, for
tax purposes a portion of the difference between a zero coupon security's
maturity value and its purchase price is taxable income of the Portfolio each
year.
MORTGAGE-RELATED SECURITIES The Portfolio's investments in U.S. Government
Securities may include investments in mortgage-related securities. In addition,
the Portfolio may invest in mortgage-related securities issued by private
issuers.
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Mortgage-related securities, as the term is used in this Prospectus, include
mortgage pass-through securities, adjustable rate mortgage securities and
derivative mortgage securities such as collateralized mortgage obligations. The
investment characteristics of mortgage-related securities differ from those of
traditional fixed-income securities. See the discussion of mortgage-related
securities, including collateralized mortgage obligations ("CMOs"), above, under
the caption "Mortgage Securities Portfolio." The Portfolio will invest in CMOs
but will not invest in CMO classes that the Adviser believes have risk
characteristics greater than those of the underlying collateral, including any
classes that have an imbedded leverage component. Classes in which the Portfolio
will not invest include "interest-only" or "IO" tranches, "principal only" or
"PO" tranches, "inverse floaters," "companion bonds," "Z-tranches" and "inverse
IOs." The Portfolio also will not invest in stripped mortgage-backed securities.
CMOs that are issued or guaranteed by the U.S. Government or by any of its
agencies or instrumentalities will be considered U.S. Government Securities by
the Portfolio, while other CMOs, even if collateralized by U.S. Government
Securities, will have the same status as other privately issued securities for
purposes of applying the Portfolio's investment policies.
ASSET-BACKED SECURITIES The Portfolio may invest in asset-backed securities.
Such securities represent the application of the securitization techniques used
to develop mortgage-related securities to a broad range of other assets. Through
the use of trusts and special purpose corporations, various types of assets,
primarily automobile and credit card receivables and home equity loans, are
being securitized in pass-through structures similar to the mortgage pass-
through structures described above or in a pay-through structure similar to the
CMO structure.
In general, the collateral supporting asset-backed securities is of shorter
maturity than mortgage loans and is less likely to experience substantial
prepayments. As with mortgage-related securities, asset-backed securities are
often backed by a pool of assets representing obligations of a number of
different parties and use various credit enhancement techniques.
Generally, asset-backed securities involve many of the risks associated with
mortgage-related securities; however, asset-backed securities involve certain
risks that are not posed by mortgage-related securities, resulting mainly from
the fact that asset-backed securities do not usually contain the complete
benefit of a security interest in the related collateral. For example, credit
card receivables generally are unsecured and the debtors are entitled to the
protection of a number of state and federal consumer credit laws, including the
bankruptcy laws, some of which may reduce the ability to obtain full payment. In
the case of automobile receivables, due to various legal and economic factors,
proceeds for repossessed collateral may not always be sufficient to support
payments on these securities.
FOREIGN SECURITIES Investing in foreign securities involves certain special
considerations which are not typically associated with investing in U.S.
securities.
The Portfolio may invest in foreign fixed income securities denominated in
U.S. dollars and may also invest in non-dollar denominated foreign securities.
Investing in the securities of foreign issuers involves special risks and
considerations not typically associated with investing in U.S. companies. These
include differences in accounting, auditing and financial reporting standards;
generally higher commission rates on foreign portfolio transactions; the
possibility of nationalization, expropriation or confiscatory taxation; adverse
changes in investment or exchange control regulations (which may include
suspension of the ability to transfer currency from a country); and political
instability which could affect U.S. investments in foreign countries.
Additionally, foreign securities and dividends and interest payable on those
securities may be subject to foreign taxes, including taxes withheld from
payments on those securities. Foreign securities often trade with less frequency
and volume than domestic securities and therefore may exhibit greater price
volatility. Additional costs associated with an investment in foreign securities
may include higher custodial fees than domestic custodial arrangements and
transaction costs of foreign currency conversions. Changes in foreign exchange
rates also will affect the value of securities denominated or quoted in
currencies other than the U.S. dollar.
The Portfolio may invest in American Depository Receipts ("ADRs") or other
similar securities, such as American Depository Shares, convertible into
securities of foreign issuers. These securities may not necessarily be
denominated in the same currency as the securities into which they may be
converted. ADRs are receipts typically issued by a U.S. bank or trust company
evidencing ownership of the underlying securities. Generally, ADRs, in
registered form, are designed for use in U.S. securities markets. As a result of
the absence of established securities markets and publicly owned corporations in
certain foreign countries as well as restrictions on direct investment by
foreign entities,
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the Portfolio may be able to invest in such countries solely or primarily
through ADRs or similar securities and government approved investment vehicles.
No more than 5% of the Portfolio's assets will be invested in ADRs sponsored by
persons other than the underlying issuers. Issuers of the stock of such
unsponsored ADRs are not obligated to disclose material information in the
United States and, therefore, there may not be a correlation between such
information and the market value of such ADRs.
The Portfolio may also invest in Global Depository Receipts and Global
Depository Shares which are typically issued in bearer form and are designed for
use in European and other international securities markets.
The Portfolio may invest in fixed-income securities issued or guaranteed by
supranational organizations. Such organizations are entities designated or
supported by a government or government entity to promote economic development,
and include, among others, the Asian Development Bank, the European Coal and
Steel Community, the European Economic Community and the World Bank. These
organizations do not have taxing authority and are dependent upon their members
for payments of interest and principal. Each supranational entity's lending
activities are limited to a percentage of its total capital (including "callable
capital" contributed by members at the entity's call), reserves and net income.
Securities issued by supranational organizations may be denominated in U.S.
dollars or in foreign currencies. Securities issued or guaranteed by
supranational organizations are considered by the Securities and Exchange
Commission to be securities in the same industry. Therefore, the Portfolio will
not concentrate 25% or more of the value of its assets in securities of a single
supranational organization.
The Portfolio may invest in Brady Bonds, which are created through the
exchange of existing commercial bank loans to foreign entities for new
obligations in connection with debt restructuring under a plan introduced by
former U.S. Secretary of the Treasury, Nicholas F. Brady (the "Brady Plan").
Brady Bonds have been issued only recently and, accordingly, do not have a long
payment history. They may be collateralized or uncollateralized and issued in
various currencies (although most are dollar-denominated) and they are actively
traded in the over-the-counter secondary market.
The Portfolio may invest up to 10% of its total assets in instruments that
return principal and/or pay interest to investors in amounts which are linked to
the level of a particular foreign index ("Foreign Index Linked Securities"). A
foreign index may be based upon the exchange rate of a particular currency or
currencies or the differential between two currencies, or the level of interest
rates in a particular country or countries or the differential in interest rates
between particular countries. In the case of Foreign Index Linked Securities
linking the principal amount to a foreign index, the amount of principal payable
by the issuer at maturity will increase or decrease in response to changes in
the level of the foreign index during the term of the Foreign Index Linked
Securities. In the case of Foreign Index Linked Securities linking the interest
component to a foreign index, the amount of interest payable will adjust
periodically in response to changes in the level of the foreign index during the
term of the Foreign Index Linked Security. Foreign Index Linked Securities may
be issued by a U.S. or foreign governmental agency or instrumentality or by a
private domestic or foreign issuer. Only Foreign Index Linked Securities issued
by foreign governmental agencies or instrumentalities or by foreign issuers will
be considered foreign securities for purposes of the Portfolio's investment
policies and restrictions.
Foreign Index Linked Securities may offer higher yields than comparable
securities linked to purely domestic indexes but also may be more volatile.
Foreign Index Linked Securities are relatively recent innovations for which the
market has not yet been fully developed and, accordingly, they typically are
less liquid than comparable securities linked to purely domestic indexes. In
addition, the value of Foreign Index Linked Securities will be affected by
fluctuations in foreign exchange rates or in foreign interest rates. If the
Adviser is incorrect in its prediction as to the movements in the direction of
particular foreign currencies or foreign interest rates, the return realized by
the Portfolio on Foreign Index Linked Securities may be lower than if the
Portfolio had invested in a similarly rated domestic security.
To the extent permitted by the investment objectives and policies of the
Portfolio, the Portfolio may purchase and sell put and call options on
securities and securities indexes and enter into futures contracts and use
options on futures contracts as further described below. The Portfolio also may
enter into swap agreements with respect to interest rates and securities
indexes. The Portfolio may use these techniques to hedge against changes in
interest rates or securities prices, to generate income, to facilitate
allocation of Portfolio's
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investments among asset classes or otherwise as part of their overall investment
strategies. The Portfolio will maintain segregated accounts consisting of cash,
U.S. Government Securities, or other high grade liquid debt obligations (or, as
permitted by applicable regulation, enter into certain offsetting positions) to
cover their obligations under options and futures contracts to avoid leveraging
of the Portfolio.
The Portfolio may purchase put options on securities to protect holdings on an
underlying or related security against a substantial decline in market value.
The Portfolio may purchase call options on securities to protect against
substantial increases in prices of securities the Portfolio intends to purchase
pending its ability to invest in such securities in an orderly manner. The
Portfolio may sell put or call options it has previously purchased, which could
result in a net gain or loss depending on whether the amount realized on the
sale is more or less than the premium and other transaction costs paid on the
put or call option which is sold. The Portfolio may write a call or put option
only if the option is "covered" by the Portfolio holding a position in the
underlying securities or by other means which would permit immediate
satisfaction of the Portfolio's obligation as writer of the option. Prior to
exercise or expiration, an option may be closed out by an offsetting purchase or
sale of an option of the same series.
The purchase and writing of options involves certain risks. During the option
period, the covered call writer has, in return for the premium on the option,
given up the opportunity to profit from a price increase above the exercise
price in the underlying securities, but, as long as its obligation as a writer
continues, has retained the risk of loss should the price of the underlying
security decline. The writer of an option has no control over the time when it
may be required to fulfill its obligation as a writer of the option. Once an
option writer has received an exercise notice, it cannot effect a closing
purchase transaction in order to terminate its obligation under the option and
must deliver the underlying securities at the exercise price. If a put or call
option purchased by the Portfolio is not sold when it has remaining value, and
if the market price of the underlying security, in the case of a put, remains
equal to or greater than the exercise price or, in the case of a call, remains
less than or equal to the exercise price, the Portfolio will lose its entire
investment in the option. Also, where a put or call option on a particular
security is purchased to hedge against price movements in a related security,
the price of the put or call option may move more or less than the price of the
related security. There can be no assurance that a liquid market will exist when
the Portfolio seeks to close out an option position. Furthermore, if trading
restrictions or suspensions are imposed on the options markets, the Portfolio
may be unable to close out a position.
The Portfolio may purchase and sell both exchange traded options and
over-the-counter options. Over-the-counter options differ from traded options in
that they are two-party contracts with price and other terms negotiated between
buyer and seller and generally do not have as much market liquidity as
exchange-traded options.
The Portfolio may enter into interest rate and index swap agreements for
purposes of attempting to obtain a particular desired return at a lower cost to
the Portfolio than if the Portfolio had invested directly in an instrument that
yielded that desired return. Swap agreements are two-party contracts entered
into primarily by institutional investors for periods ranging from a few weeks
to more than one year. In a standard "swap" transaction, two parties agree to
exchange the returns (or differentials in rates of return) earned or realized on
particular predetermined investments or instruments. The gross returns to be
exchanged or "swapped" between the parties are calculated with respect to a
"notional amount," i.e., the return on or increase in value of a particular
dollar amount invested at a particular interest rate or in a "basket" of
securities representing a particular index. Commonly used swap agreements
include interest rate caps, under which, in return for a premium, one party
agrees to make payments to the other to the extent that interest rates exceed a
specified rate, or "cap;" interest rate floors, under which, in return for a
premium, one party agrees to make payments to the other to the extent that
interest rates fall below a specified level, or "floor;" and interest rate
collars, under which a party sells a cap and purchases a floor or vice versa in
an attempt to protect itself against interest rate movements exceeding given
minimum or maximum levels.
The "notional amount" of the swap agreement is only a fictive basis on which
to calculate the obligations which the parties to a swap agreement have agreed
to exchange. Most swap agreements entered into by the Portfolio would calculate
the obligations of the parties to the agreement on a "net basis." Consequently,
the Portfolio's obligations (or rights) under a swap agreement will generally be
equal only to the net amount to be paid or received under the agreement based on
the relative values of
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the positions held by each party to the agreement (the "net amount"). The
Portfolio's obligations under a swap agreement will be accrued daily (offset
against amounts owed to the Portfolio) and any accrued but unpaid net amounts
owed to a swap counterparty will be covered by the maintenance of a segregated
account consisting of cash, U.S. Government Securities, or high grade debt
obligations, to avoid any potential leveraging of the Portfolio's securities.
The Portfolio will not enter into a swap agreement with any single party if the
net amount owed or to be received under existing contracts with that party would
exceed 5% of the Portfolio's assets.
Whether the Portfolio's use of swap agreements will be successful in
furthering its investment objective will depend on the Adviser's ability to
predict correctly whether certain types of investments are likely to produce
greater returns than other investments. Because they are two-party contracts and
because they may have terms of greater than seven days, swap agreements may be
considered to be illiquid. Moreover, the Portfolio bears the risk of loss of the
amount expected to be received under a swap agreement in the event of the
default or bankruptcy of a swap agreement counterparty. The Adviser will cause a
Portfolio to enter into swap agreements only with counterparties that would be
eligible for consideration as repurchase agreement counterparties under the
Fund's repurchase agreement guidelines. Certain restrictions imposed on the
Portfolio by the Internal Revenue Code may limit the Portfolio's ability to use
swap agreements. The swaps market is a relatively new market and is largely
unregulated. It is possible that developments in the swaps market, including
potential government regulation, could adversely affect a fund's ability to
terminate existing swap agreements or to realize amounts to be received under
such agreements.
The Portfolio may invest in interest rate futures contracts, stock index
futures contracts and options thereon ("futures options") that are traded on a
United States exchange or board of trade.
There are several risks associated with the use of futures and futures options
for hedging purposes. There can be no guarantee that there will be a correlation
between price movements in the hedging vehicle and in the portfolio securities
being hedged. An incorrect correlation could result in a loss on both the hedged
securities in the Portfolio and the hedging vehicle so that the portfolio return
might have been greater had hedging not been attempted. There can be no
assurance that a liquid market will exist at a time when the Portfolio seeks to
close out a futures contract or a futures option position. Most futures
exchanges and boards of trade limit the amount of fluctuation permitted in
futures contract prices during a single day; once the daily limit has been
reached on a particular contract, no trades may be made that day at a price
beyond that limit. In addition, certain of these instruments are relatively new
and without a significant trading history. As a result, there is no assurance
that an active secondary market will develop or continue to exist. Lack of a
liquid market for any reason may prevent the Portfolio from liquidating an
unfavorable position and the Portfolio would remain obligated to meet margin
requirements until the position is closed.
The Portfolio will only enter into futures contracts or futures options which
are standardized and traded on a U.S. exchange or board of trade, or similar
entity, or quoted on an automated quotation system. The Portfolio will use
financial futures contracts and related options only for "bona fide hedging"
purposes, as such term is defined in applicable regulations of the Commodity
Futures Trading Commission. With respect to positions in financial futures and
related options that do not qualify as "bona fide hedging" positions, the
Portfolio will enter such non-hedging positions only to the extent that
aggregate initial margin deposits plus premiums paid by it for open futures
option positions, less the amount by which any such positions are "in-the-
money," would not exceed 5% of the Portfolio's total assets.
Foreign currency exchange rates may fluctuate significantly over short periods
of time. They generally are determined by the forces of supply and demand in the
foreign exchange markets and the relative merits of investments in different
countries, actual or perceived changes in interest rates and other complex
factors, as seen from an international perspective. Currency exchange rates also
can be affected unpredictably by intervention by U.S. or foreign governments or
central banks or the failure to intervene, or by currency controls or political
developments in the U.S. or abroad.
The Portfolio may, in addition to buying and selling foreign currency futures
contracts and options on foreign currencies and foreign currency futures, enter
into forward foreign currency exchange contracts to reduce the risks of adverse
changes in foreign exchange rates. A forward foreign currency exchange contract
involves an obligation to purchase or sell a specific currency at a future date,
which may be any fixed number of days from the date of the contract agreed upon
by the parties, at a
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price set at the time of the contract. By entering into a forward foreign
currency contract, the Portfolio "locks in" the exchange rate between the
currency it will deliver and the currency it will receive for the duration of
the contract. As a result, the Portfolio reduces its exposure to changes in the
value of the currency it will deliver and increases its exposure to changes in
the value of the currency it will exchange into. The effect on the value of the
Portfolio is similar to selling securities denominated in one currency and
purchasing securities denominated in another. The Portfolio may enter into these
contracts for the purpose of hedging against foreign exchange risk arising from
the Portfolio's investment or anticipated investment in securities denominated
in foreign currencies. The Portfolio may also enter into these contracts for
purposes of increasing exposure to a foreign currency or to shift exposure to
foreign currency fluctuations from one country to another.
The Portfolio may enter into repurchase agreements with respect to any
securities which it may acquire consistent with its investment policies and
restrictions. See "Other Investment Practices-- Repurchase Agreements" for
further information regarding these agreements and the risks associated with
them.
The Portfolio may engage in "reverse repurchase agreements" with banks and
securities dealers. Reverse repurchase agreements will be used as a means of
borrowing for investment purposes. See "Other Investment Practices--Reverse
Repurchase Agreements" for further information, including a discussion of the
risks associated with reverse repurchase agreements.
The Portfolio may purchase securities on a "when-issued" basis and may
purchase or sell securities on a "forward commitment" basis. See "Other
Investment Practices--When-Issued Securities."
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INDEX 400 MID-CAP -
PORTFOLIO
The Index 400 Mid-Cap Portfolio seeks to provide investment results
generally corresponding to the aggregate price and dividend performance of
publicly traded common stocks that comprise the Standard & Poor's 400 MidCap
Index ("S&P 400 Index").
The Portfolio pursues its investment objective by investing primarily in the
400 common stocks that comprise the S&P 400 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 S&P 400
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 S&P 400 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 S&P 400
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 fact that a stock has been included in the S&P
400 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 S&P
400 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 Index, involve greater
investment risk than debt securities. Investors should also be aware that the
S&P 400 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 S&P 400 Index. There is no minimum
or maximum number of stocks included in the S&P 400 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 S&P 400 Index. Regardless
of the number, or relative weightings, of stocks included in the S&P 400 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 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
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investments, including repurchase agreements and stock index futures contracts.
The use of stock index futures contracts allows the Portfolio to maintain
liquidity while also increasing the level of the Portfolio's assets that reflect
the performance of the S&P 400 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 Index to the
extent feasible. This strategy distinguishes between "capitalization" securities
and "balancing" securities. Capitalization securities represent the very largest
capitalization securities in the S&P 400 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 Index.
From time to time, adjustments will be made in the Portfolio's holdings of
securities so as to respond to changes in the S&P 400 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 S&P
400 Index, investment adjustments will be made, as is practical, to account for
these circumstances.
Economic, financial or market analysis will not be used in selecting
investments for the Portfolio, nor will the adverse financial condition of a
company necessarily result in the sale of the company's stock by the Portfolio.
However, the Portfolio reserves the right to sell a stock held if Advantus
Capital determines that the investment has been impaired substantially by the
financial condition or extraordinary events involving the stock's issuer.
SHORT-TERM INVESTMENTS. Although the Portfolio normally seeks to remain
substantially fully invested in common stocks, the Portfolio may invest
temporarily in certain high grade short-term fixed income securities or in
commercial paper or other cash equivalents rated A-1 by Standard & Poor's
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, 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. See "Other Investment
Practices--Stock Index Futures Contracts" for further discussion of these
securities and the risks associated with them.
ILLIQUID SECURITIES AND RULE 144A PAPER. The Portfolio is permitted to invest
up to 15% of its net assets in securities or other assets which are illiquid.
The Portfolio may invest up to 20% of its net assets in certain restricted
securities if such securities are deemed by the Adviser to be liquid in
accordance with standards established by the Fund's Board of Directors. For a
detailed discussion of "illiquid" and "restricted securities" see "Other
Investment Practices--Illiquid Securities, Rule 144A Paper and Restricted
Securities."
REPURCHASE AGREEMENTS. The Portfolio may also enter into repurchase
agreements. See "Other Investment Practices--Repurchase Agreements" for a
discussion of the risks associated with such securities.
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MACRO-CAP VALUE -
PORTFOLIO
The Macro-Cap Value Portfolio seeks as its investment objective to
provide high total return. It pursues this objective by investing primarily in
selected common stocks of large U.S. corporations (defined as those with market
capitalizations typically above approximately $8 billion at the time of
purchase). There can be no assurance that the Portfolio will achieve its
investment objective.
J.P. Morgan seeks to enhance the Portfolio's total return relative to that of
the universe of large sized U.S. companies, typically represented by the S&P 500
Index, by investing in those securities that J.P. Morgan's dividend discount
model shows as undervalued relative to their long-term earnings power. The
median market capitalization of the Portfolio is currently expected to be above
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$12.5 billion and the average market capitalization is expected to be above $30
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 S&P 500 Index.
EQUITY INVESTMENTS. During ordinary market conditions, J.P. Morgan intends to
keep the Portfolio essentially fully invested with at least 65% of its assets
invested in common stocks having the characteristics described above. The common
stock in which the Portfolio may invest includes common stock of any class or
series or any similar equity interest, such as trust or limited partnership
interests. The Portfolio may also invest in other securities with equity
characteristics such as preferred stock, warrants, rights and convertible
securities. To a limited extent, the Portfolio may invest in equity securities
of foreign corporations. These equity investments may or may not pay dividends
and may or may not carry voting rights. The Portfolio invests in securities
listed on a securities exchange or traded in an over-the-counter (OTC) market,
and may invest in certain restricted or unlisted securities.
CONVERTIBLE SECURITIES. The convertible securities in which the Portfolio may
invest include any debt securities or preferred stock which may be converted
into common stock or which carry the right to purchase common stock. Convertible
securities entitle the holder to exchange the securities for a specified number
of shares of common stock, usually of the same company, at specified prices
within a certain period of time.
COMMON STOCK WARRANTS. The Portfolio may invest in common stock warrants that
entitle the holder to buy common stock from the issuer of the warrant at a
specific price (the strike price) for a specific period of time. The market
price of warrants may be substantially lower than the current market price of
the underlying common stock, yet warrants are subject to similar price
fluctuations. As a result, warrants may be more volatile investments than the
underlying common stock.
Warrants generally do not entitle the holder to dividends or voting rights
with respect to the underlying common stock and do not represent any rights in
the assets of the issuer company. A warrant will expire worthless if it is not
exercised on or prior to the expiration date.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. The Portfolio may purchase
securities on a when-issued or delayed delivery basis and may purchase or sell
securities on a "forward commitment" basis. 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. See "Other Investment
Practices--When-Issued Securities."
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. See "Other Investment Practices--Loans of
Portfolio Securities" for further information regarding such loans and their
risks.
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
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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.
- --------------------------------------------------------------------------------
MICRO-CAP GROWTH -
PORTFOLIO
The Micro-Cap Growth Portfolio seeks long-term capital appreciation.
It pursues this objective by investing primarily in equity securities of smaller
companies which the sub-adviser believes are in an early stage or transitional
point in their development and have demonstrated or have the potential for above
average revenue growth. It will invest primarily is common stocks and stock
equivalents of micro-cap companies, that is, companies with a market
capitalization of less than $300 million. Dividend income will be incidental to
the investment objective for this Portfolio.
The Micro-Cap Growth Portfolio will follow a policy of investing primarily in
the equity securities of "micro-cap" companies, defined in terms of
capitalization and which, in the opinion of the sub-adviser, have the potential
to gain market share in their industry, achieve and maintain high and consistent
profitability or produce increases in earnings. The sub-adviser also seeks
companies with strong company management and superior fundamental strength.
The typical capitalization of issues of securities purchased by the Portfolio
is expected to be between $75 million and $300 million. The median market
capitalization of securities in the Portfolio is expected to be less than $200
million under most circumstances. However, equity investment typically will
stress market capitalizations exceed $20 million with New York Stock Exchange,
American Stock Exchange and NASDAQ listing, or equivalent liquidity. While
micro-cap company securities may offer a greater capital appreciation potential
than investment in securities of larger companies, they may also present greater
risks. Micro-cap companies may have limited product lines, market and financial
resources, or may be depended on small or less experienced management groups. In
addition, the trading volume of micro-cap companies may be limited.
Historically, the market price for securities of micro-cap companies have been
more volatile than for securities of companies with greater capitalization. The
investment objective may not be changed without the approval of a majority of
the outstanding shares of the Portfolio.
The Micro-Cap Growth Portfolio will primarily purchase securities which, at
the time of purchase, are issued by "micro-cap" companies and are considered by
the sub-adviser to be "growth" securities. The Portfolio's growth approach is
based on sound fundamental investment analysis in which individual stock
selection is critical. Generally, the Portfolio invests in companies with strong
long-term outlooks. Investments will be based on fundamental and detailed
research and analysis, with particular emphasis on smaller capitalization growth
stocks with rapidly accelerating earnings, strong 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
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debt securities (excluding debt securities convertible into common stock as
described below) are rated BBB or Baa or higher by Standard & Poor's Corporation
("S&P") or Moody's Investors Services, Inc. ("Moody's"), respectively, or may
hold its assets in cash. The Micro-Cap Growth Portfolio may also temporarily
hold its assets in cash or money market instruments pending investment in
accordance with its policies.
MICRO-CAP COMPANIES. Companies characterized as "micro-cap " companies may
encompass well-known and established companies as well as newer and relatively
unknown companies, and will have, at the time of purchase, a market
capitalization of less than $300 million.
Market capitalization is the term which refers to the total market value of a
company's outstanding shares of common stock. Application of the market
capitalization or gross revenue tests will be made only at the time that the
Portfolio's initial position in the company is taken. Thus, for purposes of the
65% test, any company deemed to be a micro-cap company at the time of the
Portfolio's initial position therein will be treated as a micro-cap company,
until the market capitalization of that company exceeds $300 million.
Micro-cap companies may be in a relatively early stage of development or may
produce goods and services which have favorable prospects for growth due to
increasing demand or developing markets. Frequently, such companies have a small
management group and single product or product-line expertise that may result in
an enhanced entrepreneurial spirit and greater focus which allow such firms to
be successful. Wall Street Associates believe that such companies may develop
into significant business enterprises and that an investment in such companies
offers a greater opportunity for capital appreciation than an investment in
larger more established entities. However, small companies frequently retain a
large part of their earnings for research, development and investment in capital
assets, so that the prospects for immediate dividend income are limited.
While historically securities issued by small capitalization companies have
produced better market results than the securities of larger issuers, there is
no assurance that they will continue to do so or that the Portfolio will invest
specifically in those companies which produce those results. Because of the
risks involved, the Micro-Cap Growth Portfolio is not intended as a complete
investment program.
CONVERTIBLE SECURITIES. The Portfolio may invest in debt or preferred equity
securities convertible into or exchangeable for equity securities. See "Other
Investment Practices--Convertible Securities" for a discussion of these
instruments. 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. See "Other Investment Policies--Low Rated Securities" for a
discussion of the risks associated with such securities. 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 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. See "Other
Investment Practices--Debt Securities" for further discussion of these
instruments.
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.
See "Other Investment Practices-- Options" and 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. See "Other Investment Practices--Loans
of Portfolio Securities."
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
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the assets of the corporation issuing them. The prices of warrants do not
necessarily move parallel to the prices of the underlying securities.
ILLIQUID SECURITIES AND RULE 144A PAPER. The Portfolio is permitted to invest
up to 15% of its net assets in securities or other assets which are illiquid.
The Portfolio may invest without limitation in certain 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.
FOREIGN SECURITIES. The Portfolio may 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 ("ADRs"), are not subject to this 10% limitation.) See
"Other Investment Practices--Foreign Securities" for a discussion of the risks
associated with such securities.
REPURCHASE AGREEMENTS. The Portfolio may also enter into repurchase
agreements. See "Other Investment Practices--Repurchase Agreements" for a
discussion of the risks associated with such securities.
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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REAL ESTATE -
SECURITIES PORTFOLIO
The Real Estate Securities Portfolio seeks above-average
income and long-term growth of capital. The Portfolio intends to pursue its
objective by investing primarily in equity securities of companies in the real
estate industry. The Portfolio seeks to provide a yield in excess of the yield
of the Standard & Poor's Corporation 500 Composite Price Index (the "S&P 500
Index").
Under normal circumstances, therefore, at least 65% of the Portfolio's assets
will be invested in "real estate securities" or "real estate related
securities". The Portfolio will generally invest in real estate securities of
companies listed on a securities exchange or traded over-the-counter.
Investments are considered to be "real estate securities" if construction,
ownership, management, financing, and sale of residential, commercial or
industrial real estate account for not less than 50% of gross revenues or net
profits. Such companies include the following: real estate investment trusts
(REITs); brokers or real estate developers; and companies with significant real
estate holdings including, but not limited to, hotel chains, supermarkets, and
mining, lumber and paper companies. Investments are considered to be "real
estate related securities"
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if the issuer is engaged in businesses whose products and services are closely
related to the real estate industry, and publicly traded on an exchange or in
the over-the-counter market. Such issuers may include manufacturers and
distributors of building supplies; financial institutions that issue or service
mortgages, such as mortgage bankers; and entertainment or resort companies.
Equity securities in which the Portfolio may invest include common and preferred
stocks, convertible bonds, and warrants.
The Portfolio may also invest up to 35% of the total assets in securities of
companies outside the real estate industry. The Portfolio may invest this
portion of its assets in equity securities, convertible securities, or
investment grade fixed-income securities.
For temporary defensive purposes, the Portfolio may invest, without
limitation, in securities issued or guaranteed by the U.S. Government, its
agencies or instrumentalities ("U.S. Government Securities"); certificates of
deposit, demand and time deposits and bankers' acceptance of banks whose
deposits are insured by the Federal Deposit Insurance Corporation and have
assets of at least $1 billion, including U.S. branches of foreign banks and
foreign branches of U.S. Banks; and prime commercial paper, including master
demand notes; or the Portfolio may also temporarily hold its assets in cash or
money market instruments.
A real estate investment trust ("REIT") is a corporation or a business trust
that would otherwise be taxed as a corporation, which meets certain requirements
of the Internal Revenue Code of 1986, as amended (the "Code"). The Code permits
a qualifying REIT to deduct dividends paid, thereby effectively eliminating
corporate level federal income tax and making the REIT a pass- through vehicle
for federal income tax purposes. In order to qualify as a REIT, a company must
derive at least 75% of its gross income from real estate sources (rents,
mortgage interest, and gains from sale of real estate assets), 75% of its assets
must be in real estate, mortgages or REIT stock, and must distribute to
shareholders annually 95% or more of its otherwise taxable income.
REITs are sometimes informally characterized as equity REITs, mortgage REITs
and hybrid REITs. An equity REIT invests primarily in the fee ownership or
leasehold ownership of land and buildings and derives its income primarily from
rental income. A mortgage REIT invests primarily in mortgages on real estate,
and derives primarily from interest payments received on credit it has granted.
A hybrid REIT combines the characteristics of equity REITs and mortgage REITs.
It is anticipated, although not required, that under normal circumstances, a
majority of the fund investments in REITs will consist of equity REITs.
The Portfolio invests primarily in companies in the real estate industry and,
therefore, is subject to risks inherent in the ownership of real estate such as
volatility in operating cashflow due to increased operating costs, changing
economic conditions, fluctuations in rental income, overbuilding and increased
competition, casualty and condemnation losses, environmental liabilities,
government regulation and limitations, and obsolescence and physical
depreciation of buildings. Equity, mortgage and hybrid REITs are subject to
these risks in direct and indirect manners. Downturns in operating cashflow can
lower underlying real estate values, which can be exaggerated if there are any
geographic, economic region, or property type concentrations within the
Portfolio. Additionally, rising interest rate environments may cause investors
to demand a higher dividend yield rate, causing the value of the funds
investments to decline. Rising interest rates may expose a REIT to refinancing
risk, putting a property into jeopardy if it finds difficulty in finding
refinancing. Declining interest rates may cause mortgage borrowers to prepay,
and the accelerated prepayment may diminish the yield that the mortgage REIT may
expect on their investment. Mortgage REITs are also subject to the credit
quality of the borrowers they are extending credit. The REIT market is typically
considered a small capitalization market, subject to higher volatility of the
market price of securities issued by such REITs. REITs are subject to management
quality, requiring specialized skills to manage sometimes limited portfolios of
diverse property. Due to the connection of the Portfolio in the real estate
industry, these risks are more concentrated than in a more broadly diversified
equity portfolio.
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OTHER
INVESTMENT
PRACTICES
- ------------------------------------
The following investment practices apply to the Portfolios of
the Fund and should be read in conjunction with the respective
Portfolio's Investment Objectives, Policies and Risks. While the practices may
be used by all the Portfolios, those which have special applicability to
particular Portfolios are noted.
UNITED STATES GOVERNMENT OBLIGATIONS. United States Government obligations
are bills, certificates
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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. Repurchase agreements are agreements by which a
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 and 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 of other default of a seller of a repurchase agreement, a 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.
REVERSE REPURCHASE AGREEMENTS. 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 Find 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. Certificates of deposit are certificates issued
against funds deposited in a bank, are for a definite period of time, earn a
specific rate of return, and are normally negotiable.
BANKER'S ACCEPTANCES. Banker's 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
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and drawer to pay the face amount of the instrument at maturity.
COMMERCIAL PAPER. Commercial paper refers to promissory notes issued by
corporations to finance their short-term credit needs.
VARIABLE AMOUNT MASTER DEMAND NOTES. Variable amount master demand notes
refer to short-term, unsecured promissory notes issued by corporations to
finance short-term needs. They allow the investment of fluctuating amounts by
the Portfolio at varying market rates of interest pursuant to direct
arrangements between the Portfolio, as lender, and the borrower. Variable amount
master demand notes permit a series of short-term borrowings under a single
note. The lender has the right to increase the amount under the note at any time
up to the full amount provided by the note agreement. Both the lender and the
borrower have the right to reduce the amount of outstanding indebtedness at any
time. Because variable amount master demand notes are direct lending
arrangements between the lender and borrower, it is not generally contemplated
that such instruments will be traded and there is no secondary market for the
notes. Typically, agreements relating to such notes provide that the lender
shall not sell or otherwise transfer the note without the borrower's consent.
Thus, variable amount master demand notes are illiquid assets. Such notes
provide that the interest rate on the amount outstanding varies on a daily basis
depending upon a stated short-term interest rate barometer. The Fund's
investment adviser, Advantus Capital, will monitor the creditworthiness of the
borrower throughout the term of the variable amount master demand note. The Fund
will only invest in variable amount master demand notes issued by companies
which at the date of investment have an outstanding debt issue rated AAA or AA
by S&P or Aaa or Aa by Moody's and which Advantus Capital has determined present
minimal risk of loss to the Fund. Advantus Capital will look generally at the
financial strength of the issuing company as "backing" for the note and not to
any security interest or supplemental source such as a bank letter of credit. A
master demand note will be valued by Advantus Capital each day the Fund's net
asset value is determined, which value will generally be equal to the face value
of the note plus accrued interest unless the financial position of the issuer is
such that its ability to repay the note when due is in question.
CORPORATE OBLIGATIONS. Corporate obligations include bonds and notes issued
by corporations in order to finance longer term credit needs.
ILLIQUID SECURITIES AND RULE 144A PAPER. Each Portfolio of the Fund may
invest up to 15% of its net assets (10% of net assets in the case of Money
Market Portfolio) in securities or other assets which are illiquid. An
investment is generally considered to be "illiquid" if it cannot be disposed of
within seven days in the ordinary course of business at approximately the amount
at which the investment company is valuing the investment. "Restricted
securities" are securities which were originally sold in private placements and
which have not been registered under the Securities Act of 1933 (the "1933
Act"). Such securities generally have been considered illiquid by the staff of
the Securities and Exchange Commission (the "SEC"), since such securities may be
sold only subject to statutory restrictions and delays or if registered under
the 1933 Act.
The SEC has acknowledged, however, that a market exists for certain restricted
securities (for example, securities qualifying for resale to certain qualified
"institutional buyers" pursuant to Rule 144A under the 1933 Act). Additionally,
Advantus Capital and the Fund believe that a similar market exists for
commercial paper issued pursuant to the private placement exemption of Section
4(2) of the 1993 Act. The Fund may invest without limitation in these forms of
restricted securities if such securities are deemed by Advantus Capital to be
liquid in accordance with standards established by the Fund's Board of
Directors. Under these guidelines, Advantus Capital must consider (a) the
frequency of trades and quotes for the security, (b) the number of dealers
willing to purchase or sell the security and the number of other potential
purchasers, (c) dealer undertakings to make a market in the security; and (d)
the nature of the security and the nature of the marketplace trades (for
example, the time needed to dispose of the security, the method of soliciting
offers and the mechanics of transfer). At the preset time, it is not possible to
predict with accuracy how the markets for certain restricted securities will
develop. Investing in such restricted securities could have the effect of
increasing the level of the Fund's illiquidity to the extent that qualified
purchaser of the securities become, for a time, uninterested in purchasing these
securities.
FOREIGN SECURITIES. The Growth, Bond, Asset Allocation, International Stock,
Small Company, Value Stock, Small Company Value, Global Bond, Macro-Cap Value
and Micro-Cap Growth Portfolios each may invest in securities of foreign
issuers. See "International Stock Portfolio" and "Global Bond
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Portfolio," above, for a more detailed discussion of the investment practices of
those Portfolios.
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, a 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 a 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 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 purchasers 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.
WHEN-ISSUED SECURITIES. The Bond, Asset Allocation, Mortgage Securities,
Global Bond and Macro-Cap Value Portfolios may purchase securities on a
"when-issued" basis and may purchase or sell securities on a "forward
commitment" basis to hedge against anticipated changes in interest rates and
prices. When such transactions are negotiated, the price is fixed at the time
the commitment is made, but delivery and payment for the securities take place
at a later date. The Portfolio will not accrue income with respect to
when-issued or forward commitment securities prior to their stated delivery
date. At the time the Portfolio enters into a transaction on a when-issued or
forward commitment basis, a segregated account consisting of cash, or any
security that is not considered illiquid, equal to the value of the when-issued
or forward commitment securities will be established and maintained with the
custodian and will be marked to the market daily.
The Bond, Asset Allocation and Mortgage Securities Portfolios may also enter
into such transactions to generate incremental income. In some instances, the
third-party seller of when-issued or forward commitment securities may determine
prior to the settlement date that it will be unable or unwilling to meet its
existing transaction commitments without borrowing securities. If advantageous
from a yield perspective, the Portfolio may, in that event, agree to resell its
purchase commitment to the third-party seller at the current market price on the
date of sale and concurrently enter into another purchase commitment for such
securities at a later date. As an inducement for the Portfolio to "roll over"
its purchase commitment, the Portfolio may receive a negotiated fee. These
transactions, referred to as "mortgage dollar rolls," are entered into without
the intention of actually acquiring securities (see "Mortgage Dollar Rolls"
below).
The purchase of securities on a when-issued or forward commitment basis
exposes the Portfolio to risk because the securities may decrease in value prior
to their delivery. Purchasing securities on a when-issued or forward commitment
basis involves
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the additional risk that the return available in the market when the delivery
takes place will be higher than that obtained in the transaction itself. The
Portfolio's purchase of securities on a when-issued or forward commitment basis
while remaining substantially fully invested increases the amount of the
Portfolio's assets that are subject to market risk to an amount that is greater
than the Portfolio's net asset value, which could result in increased volatility
of the price of the Portfolio's shares. No more than 30% (15% in the case of
Macro-Cap Value Portfolio) of the value of the Portfolio's total assets will be
committed to when-issued or forward commitment transactions, and of such 30%, no
more than two-thirds (i.e., 20% of its total assets) may be invested in mortgage
dollar rolls (in the case of Bond, Asset Allocation and Mortgage Securities
Portfolios). See the Statement of Additional Information for further discussion
of when-issued securities.
MORTGAGE DOLLAR ROLLS. The Bond, Asset Allocation and Mortgage Securities
Portfolios may each invest in mortgage dollar rolls.
In connection with the Portfolio's ability to purchase securities on a
when-issued or forward commitment basis, these Portfolios may enter into
mortgage dollar rolls in which the Portfolio sells securities for delivery in
the current month and simultaneously contracts with the same counterparty to
repurchase similar (same type, coupon and maturity) but not identical securities
on a specified future date. In a mortgage dollar roll, the Portfolio gives up
the right to receive principal and interest paid on the securities sold.
However, the Portfolio would benefit to the extent of any difference between the
price received for the securities sold and the lower forward price for the
future purchase plus any fee income received. Unless such benefits exceed the
income, capital appreciation and gain or loss due to mortgage prepayments that
would have been realized on the securities sold as part of the mortgage dollar
roll, the use of this technique will diminish the investment performance of the
Portfolio compared with what such performance would have been without the use of
mortgage dollar rolls. The Portfolio will hold and maintain in a segregated
account until the settlement date cash or liquid securities in an amount equal
to the forward purchase price. The benefits derived from the use of mortgage
dollar rolls may depend upon the ability of the Portfolio's investment adviser
to predict correctly mortgage prepayments and interest rates. There is no
assurance that mortgage dollar rolls can be successfully employed. In addition,
the use of mortgage dollar rolls by the Portfolio while remaining substantially
fully invested increases the amount of the Portfolio's assets that are subject
to market risk to an amount that is greater than the Portfolio's net asset
value, which could result in increased volatility of the price of the
Portfolio's shares. See the Statement of Additional Information for further
discussion of mortgage dollar rolls.
LOW RATED SECURITIES. The Bond, Asset Allocation, Mortgage Securities, Value
Stock, Small Company Value, Global Bond and Micro-Cap Growth Portfolios may each
invest in "low rated securities."
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
Fund'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 Fund's shares. See the Statement of Additional Information for a description
of the ratings used by S&P and Moody's and for further discussion of low rated
debt securities.
LOANS OF PORTFOLIO SECURITIES. 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
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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.
INDEX DEPOSITARY RECEIPTS. Certain Portfolios of the Fund may each invest up
to 5% of its total assets in one or more types of depositary receipts ("DRs") as
a means of tracking the performance of a designated stock index while
maintaining liquidity. The Index 500 Portfolio may invest in S&P 500 Depositary
Receipts ("SPDRs"), which track the S&P 500 Index; the Index 400 Mid-Cap
Portfolio may invest in S&P MidCap 400 Depositary Receipts ("MidCap SPDRs"),
which track the S&P MidCap 400 Index; and other Portfolios which hold equity
securities may invest in SPDRs, MidCap SPDRs, "Dow Industrials Diamonds," which
track the Dow Jones Industrial Average, or in other DRs which track indexes,
provided that such investments are consistent with the Portfolio's investment
objective as determined by its investment adviser. Each of these securities
represents shares of ownership of a long term unit investment trust (a type of
investment company) that holds all of the stock included in the relevant
underlying index.
DRs carry a price which equals a specified fraction of the value of the
designated index and are exchange traded. As with other equity transactions,
brokers charge a commission in connection with the purchase of DRs. In addition,
an asset management fee is charged in connection with the underlying unit
investment trust (which is in addition to the asset management fee paid by the
Fund).
Trading costs for DRs are somewhat higher than those for stock index futures
contracts, but, because DRs trade like other exchange-listed equities, they
represent a quick and convenient method of maximizing the use of the Portfolio's
assets to track the return of a particular stock index. DRs share in the same
market risks as other equity investments.
CONVERTIBLE SECURITIES. The Value Stock and Small Company Value Portfolios
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 Advantus Capital.
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. See "Other Investment Practices--Debt
Securities" and "Other Investment Practices--Low Rated Securities" for a
discussion of the risks associated with these securities.
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 to the Statement of Additional Information for a description of the ratings
used by S&P and Moody's.
DEBT SECURITIES. The Fund's Portfolios may also invest in non-convertible
debt securities rated BBB or Baa or higher by S&P and Moody's, respectively (see
the discussion, above, of convertible securities). 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. To
the extent the Portfolio invests in debt securities rated BBB or Baa by S&P or
Moody's, respectively, it will be investing in securities which in fact have
speculative characteristics not associated with debt
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rated A or higher by S&P or Moody's, and for which adverse economic conditions
or changing circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal than is the case for debt in higher rated
categories.
After purchase by the Portfolio, a debt security may cease to be rated or its
rating may be reduced below the minimum required for purchase by the Portfolio.
Neither event will require a sale of such security by the Portfolio, but
Advantus Capital will consider such event in the determination of whether the
Portfolio should continue to hold the security. See "Debt Securities and
Down-Graded Instruments" in the Statement of Additional Information.
STOCK INDEX FUTURES CONTRACTS. The Index 500 and Index 400 Mid-Cap Portfolios
may utilize stock index futures contracts to a limited extent. Specifically, the
Portfolio may enter into stock index futures contracts provided that not more
than 5% of its assets are required as a margin deposit for such contracts and
provided that not more than 20% of its total assets (including assets held as
"cover" in segregated accounts or as margin deposits) are invested in stock
index futures obligations at any time. Futures contracts may be used for several
reasons: to simulate full investment in the underlying index while retaining a
cash balance for Portfolio management purposes, to facilitate trading or to
reduce transaction costs. While these securities can be used as leveraged
investments, the Portfolio may not use them to leverage its net assets.
The risk of loss associated with stock index futures contracts in some
strategies is potentially unlimited due both to the low margin deposits required
and the extremely high degree of leverage involved in futures pricing. As a
result, a relatively small price movement in a stock index futures contract may
result in an immediate and substantial loss or gain. However, the Portfolio will
not use stock index futures contracts for speculative purposes or to leverage
its net assets. The successful use of futures contracts by the Portfolio,
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 Portfolio'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.
OPTIONS. The Small Company Value, Micro-Cap Value and Micro-Cap Growth
Portfolios 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 forgoes the
opportunity to profit during the option period from an increase in the market
value of the underlying security above the exercise price. The Portfolio does
not write call options in an aggregate amount greater than 10% of its net
assets. The Portfolio purchases call options only to close out a position, and
will neither write nor purchase put options. The use of options contracts
involves additional risk of loss to the Portfolio, including the risk that the
Portfolio may incur a loss because the prices of the underlying securities do
not move as anticipated. See the Statement of Additional Information for a more
detailed discussion of options and the risks associated therewith.
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INVESTMENT
RESTRICTIONS
- ------------------------------------
The Fund is subject to a number of restrictions in pursuing
its investment objectives and policies. The following is a brief summary of
certain restrictions. Some of these restrictions are subject to exceptions not
stated here. Those exceptions and a complete list of the investment restrictions
applicable to the individual Portfolios and to the Fund are set forth in the
Statement of Additional Information.
Except for the restrictions specifically identified as fundamental, all
investment restrictions described in this Prospectus and in the Statement of
Additional Information are not fundamental, so that the Board of Directors may
change them without shareholder approval. Fundamental policies may not be
changed without the affirmative vote of a majority of the outstanding voting
securities.
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Fundamental policies applicable to all Portfolios include prohibitions on: (1)
investing more than 25% of the total assets of any Portfolio in the securities
of issuers conducting their principal business activity in the same industry
(with exceptions for United States Government securities and certain money
market instruments and, in the Mortgage Securities Portfolio, for investments in
the mortgage and mortgage-finance industry), (2) borrowing money, except for
temporary or emergency purposes and then not in excess of 10% of the value of
the total assets of the Portfolio at the time the borrowing is made (for
purposes of this restriction, "borrowing" shall not include reverse repurchase
agreements), (3) investing more than 5% of the value of a Portfolio's total
assets in the securities of any one issuer (excluding United States Government
securities and bank obligations) or investing in more than 10% of the voting
securities of any one issuer except that up to 25% of the value of each
Portfolio's total assets may be invested without regard to the restrictions of
this clause (3), (4) making short sales, except that each Portfolio may make
short sales "against the box" in amounts not in excess of 10% of such
Portfolio's total assets in certain unusual and defensive situations, and (5)
entering into reverse repurchase agreements if such investments taken together
with borrowings represented by senior securities exceed 33 1/3% of a Portfolio's
total assets less liabilities other than obligations under such borrowings and
reverse repurchase agreements. It should be noted, however, that the policies
described above in (1) and (3) are inapplicable to the International Bond
Portfolio, which by definition is non-diversified. At the time the Fund enters
into a reverse repurchase agreement, cash, U.S. Government securities or other
liquid high-grade debt obligations having a value sufficient to make payments
for the securities to be repurchased will be segregated, and will be maintained
throughout the period of the obligation.
Restrictions that apply to all Portfolios and that are not fundamental include
prohibitions on: (1) knowingly investing more than 15% of the value of the net
assets of any Portfolio (except the Money Market Portfolio, in which the
limitation shall be 10%) in "illiquid" securities (including repurchase
agreements maturing in more than seven days), (2) pledging, hypothecating,
mortgaging or transferring more than 10% of the total assets of any Portfolio as
security for indebtedness, and (3) purchasing securities of other investment
companies having a value in excess of 5% of a Portfolio's total assets, other
than in connection with a merger, consolidation or reorganization or if the
purchase involves securities of closed-end investment companies and does not
result in more than 10% of the value of a Portfolio's total assets to be
invested in such securities.
Each Portfolio may lend its securities so long as such loans do not represent
in excess of 20% of a Portfolio's total assets. This is a fundamental policy.
The procedure for lending securities is for the borrower to give the lending
Portfolio collateral consisting of cash or cash equivalents. The lending
Portfolio may invest the cash collateral and earn additional income or receive
an agreed upon fee from a borrower which has delivered cash equivalent
collateral. The Fund anticipates that securities will be loaned only under the
following conditions: (1) the borrower must furnish collateral equal at all
times to the market value of the securities loaned and the borrower must agree
to increase the collateral on a daily basis if the securities increase in value,
(2) the loan will be made in accordance with New York Stock Exchange Rules,
which presently require the borrower, after notice, to redeliver the securities
within five business days, (3) any cash collateral invested by a Portfolio will
be in short-term investments which give maximum liquidity so that the collateral
may be paid back to the borrower when the securities are returned, and (4) the
Portfolio making the loan may pay reasonable service, placement, custodian or
other fees in connection with loans of securities and share a portion of the
interest from these investments with the borrower of the securities. It is the
intention of the investment adviser to structure agreements dealing with the
lending of securities so that voting rights attached to those securities will be
retained by the Fund. For the purposes of these restrictions, collateral
arrangements with respect to options forward currency and futures transactions
will not be deemed to involve a pledge of assets.
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THE FUND AND
ITS MANAGEMENT
- ------------------------------------
The Fund was incorporated under Minnesota law on
February 21, 1985. The Fund is a series fund, which means that it has several
different Portfolios. Each of the Fund's Portfolios, except the Global Bond
Portfolio, operates as a diversified, open-end management investment company.
The Global Bond Portfolio operates as a non-diversified, open-end management
investment company. The business and affairs of the Fund are managed by its
Board of Directors.
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A separate class of the Fund's capital stock, par value of $.01 per share, is
issued for each Portfolio. A share of each class represents an undivided
interest in the assets of the Portfolio attributable to that class, and a
shareholder is entitled to a pro rata share of all dividends and distributions
arising from the net income and capital gains of each Portfolio or Portfolios in
which shares are held.
Shares of each Portfolio, including fractional shares, have equal rights with
regard to voting, redemptions, dividends, distributions and liquidations with
respect to that Portfolio. When issued, shares are fully paid and nonassessable
and do not have preemptive or conversion rights or cumulative voting rights. The
sole shareholder of the Fund and its Portfolios, Minnesota Mutual (through
certain of its separate accounts), will vote Fund shares allocated to its
separate accounts in accordance with instructions received from contract owners.
In the event no instructions are received from owners of the Contracts with
respect to shares of a Portfolio held by a sub-account of a separate account of
Minnesota Mutual, Minnesota Mutual will vote such shares in the same proportion
as shares of the Portfolio held by such sub-account for which instructions have
been received.
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INVESTMENT
ADVISER
- ------------------------------------
The Fund's investment adviser is Advantus Capital. Advantus
Capital commenced its current business in June of 1994. It 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. 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 $13.4 billion. The address of the Fund, Advantus Capital, MIMLIC
Management and Minnesota Mutual is 400 Robert Street North, St. Paul, Minnesota
55101.
Advantus Capital acts as an investment adviser to the Fund pursuant to the
Investment Advisory Agreement. Advantus Capital selects and reviews the Fund's
investments, either directly or through sub-advisers, and provides executive and
other personnel for the management of the Fund. The Fund's Board of Directors
supervises the affairs of the Fund as conducted by Advantus Capital. The Growth,
Bond, Money Market, Asset Allocation and Mortgage Securities Portfolios of the
Fund pay Advantus Capital a fee equal to an annual rate of .50% of average daily
net assets. The Index 500 and Index 400 Mid-Cap Portfolios pay Advantus Capital
a fee equal to an annual rate of .40% of average daily net assets. The Capital
Appreciation, Small Company, Value Stock, Small Company Value and Real Estate
Securities 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 Global Bond Portfolio pays Advantus Capital a fee equal to an annual
rate of .60% of average daily net assets and as the International Bond Portfolio
it paid an advisory fee of the same amount. The Macro-Cap Value Portfolio pays
Advantus Capital a fee equal to an annual rate of .70% of average daily net
assets. The Micro-Cap Growth Portfolio pays Advantus Capital a fee equal to an
annual rate of 1.10% of average daily net assets.
From its advisory fee for the Capital Appreciation Portfolio, Advantus Capital
pays Winslow Management a fee equal to .375% of all average daily net assets
under its Investment Sub-Advisory Agreement. From its advisory fee for the
International Stock Portfolio, Advantus Capital pays Templeton Counsel a fee
equal to .75% on the first $10 million of average daily net assets, .65% on the
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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 Global Bond
Portfolio (formerly the International Bond Portfolio), Advantus Capital
previously paid Julius Baer Investment Management Inc. ("JBIM") a fee equal to
.35% of all daily net assets from its advisory fee for the Global Bond
Portfolio. Advantus Capital will pay JBIM a fee equal to .30% of all daily net
assets under its Investment Sub-Advisory Agreement, beginning May 1, 1998. From
its advisory fee for the Macro-Cap Value Portfolio, Advantus Capital pays Morgan
Investment a fee equal to .45% of all daily net assets under its Investment
Sub-Advisory Agreement. From its advisory fee for the Micro-Cap Growth
Portfolio, Advantus Capital pays Wall Street Associates a fee equal to .85% of
all daily net assets under its Investment Sub-Advisory Agreement.
Advantus Capital acts as investment adviser and manager for the Fund, except
as those duties have been delegated pursuant to the investment sub-advisory
agreements. See "Manager of Managers Strategy" and "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 1997 1996 1995
- -------------------------------------------------------------
<S> <C> <C> <C>
GROWTH $1,466,591 $1,125,803 $ 905,136
BOND 673,785 555,501 435,045
MONEY MARKET 353,186 220,573 126,630
ASSET ALLOCATION 2,284,255 1,899,245 1,538,272
MORTGAGE SECURITIES 413,651 355,705 322,465
INDEX 500 1,171,693 645,280 388,206
CAPITAL APPRECIATION 1,879,870 1,435,461 1,071,527
INTERNATIONAL STOCK 1,856,022 1,293,012 955,095
SMALL COMPANY 1,223,927 937,728 552,670
MATURING GOVERNMENT
BOND --
1998 PORTFOLIO 3,136 2,632 2,184
2002 PORTFOLIO 1,959 1,657 1,441
2006 PORTFOLIO 8,471 6,682 5,450
2010 PORTFOLIO 6,719 4,631 2,888
VALUE STOCK 1,171,946 449,978 141,207
SMALL COMPANY VALUE 9,775 N/A N/A
GLOBAL BOND 41,149 N/A N/A
INDEX 400 MID-CAP 5,014 N/A N/A
MACRO-CAP VALUE 7,048 N/A N/A
MICRO-CAP GROWTH 15,671 N/A N/A
</TABLE>
The Fund pays all its costs and expenses which are not assumed by Advantus
Capital. These Fund expenses include, by way of example, but not by way of
limitation, all expenses incurred in the operation of the Fund including, among
others, interest, taxes, brokerage fees and commissions, fees of the directors
who are not employees of Advantus Capital or any of its affiliates, expenses of
directors' and shareholders' meetings, including the cost of printing and
mailing proxies, expenses of insurance premiums for fidelity and other coverage,
association membership dues, charges of custodians, auditing and legal expenses.
The Fund will also pay the fees and bear the expense of registering and
maintaining the registration of the Fund and its shares with the Securities and
Exchange Commission and registering or qualifying its shares under state or
other securities laws and the expense of preparing and mailing prospectuses and
reports to shareholders. Advantus Capital shall bear all advertising and
promotional expenses in connection with the distribution of the Fund's shares,
including paying for the printing of Prospectuses and Statements of Additional
Information for new shareholders, shareholder reports for new shareholders and
the costs of sales literature. Advantus Capital also bears all costs under its
agreement with Wilshire Associates for the use by Advantus Capital, in
connection with the Index 500 Portfolio, of Wilshire Associates' proprietary
index fund statistical sampling technique.
The names and titles of the portfolio managers employed by Advantus Capital,
or the Sub-Advisers, who are primarily responsible for the day-to-day management
of each of the Fund's Portfolios, other than the Index 500 and Index 400 Mid-Cap
Portfolios, the length of time employed in that position, and their other
business experience during the past five years are set forth below:
65
<PAGE>
<TABLE>
<CAPTION>
PORTFOLIO MANAGER PRIMARY PORTFOLIO
PORTFOLIO AND TITLE MANAGER SINCE BUSINESS EXPERIENCE DURING PAST FIVE YEARS
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
GROWTH THOMAS A. GUNDERSON JUNE 30, 1997 VICE PRESIDENT OF ADVANTUS CAPITAL; INVESTMENT OFFICER OF
VICE PRESIDENT AND MIMLIC MANAGEMENT
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 PAUL D. KERN MAY 1, 1998 VICE PRESIDENT OF ADVANTUS CAPITAL; INVESTMENT OFFICER OF
PORTFOLIO MANAGER MIMLIC MANAGEMENT
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 GARY R. CLEMONS JUNE 2, 1997 SENIOR VICE PRESIDENT, PORTFOLIO MANAGEMENT/ RESEARCH,
STOCK SENIOR VICE TEMPLETON INVESTMENT COUNSEL, INC., SINCE 1993; PORTFOLIO
PRESIDENT, TEMPLETON MANAGER/RESEARCH ANALYST, TEMPLETON QUANTITATIVE ADVISERS
INVESTMENT COUNSEL, FROM 1990 TO 1993
INC.
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 EQUITY
PORTFOLIO MANAGER
MATURING KENT R. WEBER APRIL 25, 1994 VICE PRESIDENT OF ADVANTUS CAPITAL; INVESTMENT OFFICER OF
GOVERNMENT VICE PRESIDENT AND MIMLIC MANAGEMENT
BOND -- 1998, PORTFOLIO MANAGER
2002, 2006
AND 2010
VALUE STOCK GARY A. ASTER MARCH 13, 1998 VICE PRESIDENT OF ADVANTUS CAPITAL; INVESTMENT OFFICER AND
VICE PRESIDENT AND EQUITY PORTFOLIO MANAGER OF MIMLIC MANAGEMENT; MANAGING
PORTFOLIO MANAGER DIRECTOR AND SECURITIES ANALYST, DAIN BOSWORTH, SEATTLE,
WASHINGTON, FROM JULY 1995 TO DECEMBER 1997; PORTFOLIO
MANAGER, SAFECO ASSET MANAGEMENT, SEATTLE, WASHINGTON, FROM
NOVEMBER 1984 TO JULY 1995
SMALL COMPANY GARY A. ASTER MARCH 13, 1998 VICE PRESIDENT OF ADVANTUS CAPITAL; INVESTMENT OFFICER AND
VALUE VICE PRESIDENT AND EQUITY PORTFOLIO MANAGER OF MIMLIC MANAGEMENT; MANAGING
PORTFOLIO MANAGER DIRECTOR AND SECURITIES ANALYST, DAIN BOSWORTH, SEATTLE,
WASHINGTON, FROM JULY 1995 TO DECEMBER 1997; PORTFOLIO
MANAGER, SAFECO ASSET MANAGEMENT, SEATTLE, WASHINGTON, FROM
NOVEMBER 1984 TO JULY 1995
GLOBAL BOND EDWARD C. DOVE OCTOBER 1, 1997 DIRECTOR, FIXED INCOME, JULIUS BAER INVESTMENT MANAGEMENT
(FORMERLY DIRECTOR, FIXED INC. ("JBIM") SINCE JANUARY 1995, PRIOR TO, FROM DECEMBER
INTERNATIONAL INCOME, JULIUS BAER 1992 TO DECEMBER 1994, SENIOR FIXED INCOME PORTFOLIO
BOND) INVESTMENT MANAGER, JBIM
MANAGEMENT INC.
MACRO-CAP MICHAEL J. KELLY OCTOBER 1, 1997 INSTITUTIONAL PORTFOLIO MANAGER
VALUE VICE PRESIDENT, J.P.
MORGAN INVESTMENT
MANAGEMENT INC.
MICRO-CAP WILLIAM JEFFERY, OCTOBER 1, 1997 PRINCIPAL AND PORTFOLIO MANAGERS
GROWTH III, KENNETH F.
MCCAIN AND RICHARD
S. COONS, PRINCIPALS
AND PORTFOLIO
MANAGERS, WALL
STREET ASSOCIATES
REAL ESTATE JOSEPH R. BETLEJ MAY 1, 1998 INVESTMENT OFFICER OF ADVANTUS CAPITAL; VICE PRESIDENT OF
SECURITIES INVESTMENT OFFICER MIMLIC MANAGEMENT
AND PORTFOLIO
MANAGER
</TABLE>
66
<PAGE>
Minnesota Mutual has voluntarily agreed to absorb all fees and expenses that
exceed .65% of average daily net assets for the Growth, Bond, Money Market,
Asset Allocation, and Mortgage Securities Portfolios, .55% of average daily net
assets for the Index 500 and Index 400 Mid-Cap Portfolios, .90% of average daily
net assets for the Capital Appreciation, Small Company, Value Stock, Small
Company Value and Real Estate Securities Portfolios, 1.60% of average daily net
assets of Global Bond Portfolio, .85% of average daily net assets of Macro-Cap
Value Portfolio, and 1.25% of average daily net assets of Micro-Cap Growth
Portfolio. In addition, Minnesota Mutual has voluntarily agreed to absorb
expenses that exceed 1.00% for the International Stock Portfolio, other than the
advisory fee which may not exceed 1.00%. In addition, Minnesota Mutual has
voluntarily agreed to absorb all fees and expenses that exceed .40% of average
daily net assets for each of the four Maturing Government Bond Portfolios;
however, for the Portfolios which mature in 1998 and 2002, Minnesota Mutual has
voluntarily agreed to absorb such fees and expenses which exceed .20% of average
daily net assets from the Portfolio's inception to April 30, 1998 and which
exceed .40% of average daily net assets thereafter. For each of the last three
calendar years, the expenses voluntarily absorbed by Minnesota Mutual for the
various Portfolios were as follows:
<TABLE>
<CAPTION>
EXPENSES VOLUNTARILY ABSORBED
PORTFOLIO 1997 1996 1995
- ------------------------------------------------------------------
<S> <C> <C> <C>
GROWTH $ -0- $ -0- $ -0-
BOND -0- -0- -0-
MONEY MARKET -0- -0- -0-
ASSET ALLOCATION -0- -0- -0-
MORTGAGE SECURITIES -0- -0- -0-
INDEX 500 -0- -0- -0-
CAPITAL APPRECIATION -0- -0- -0-
INTERNATIONAL STOCK -0- -0- -0-
SMALL COMPANY -0- -0- -0-
MATURING GOVERNMENT BOND --
1998 PORTFOLIO 34,208 27,510 22,794
2002 PORTFOLIO 36,833 31,158 24,709
2006 PORTFOLIO 37,425 31,536 25,199
2010 PORTFOLIO 38,967 33,042 26,308
VALUE STOCK -0- -0- 11,610
SMALL COMPANY VALUE 11,517 N/A N/A
GLOBAL BOND -0- N/A N/A
INDEX 400 MID-CAP 14,670 N/A N/A
MACRO-CAP VALUE 22,940 N/A N/A
MICRO-CAP GROWTH 11,102 N/A N/A
</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.
- --------------------------------------------------------------------------------
MANAGER OF
MANAGERS STRATEGY
- ------------------------------------
The Fund and Advantus Capital have obtained an
exemptive order from the Securities and Exchange Commission which permits
Advantus Capital to employ a "manager of managers" strategy in connection with
its management of the Fund. The exemptive order permits Advantus Capital,
subject to certain conditions, to select new sub-advisers with the approval of
the Fund's Board of Directors, but without obtaining shareholder approval. The
order also permits Advantus Capital to change the terms of agreements with the
sub-advisers or continue the employment of a sub-adviser after an event which
would otherwise cause the automatic termination of services. Shareholders would
be notified of any sub-adviser changes. Shareholders have the right to terminate
arrangements with a sub-adviser by vote of a majority of the outstanding shares
of a Portfolio. In the case of a Portfolio which employs more than one
sub-adviser, the order also permits the Fund to disclose such sub-adviser's fees
only in the aggregate or in its registration statement. Advantus Capital has the
ultimate responsibility for the investment performance of each Portfolio
employing sub-advisers due to its responsibility to oversee the sub-advisers and
recommend their hiring, termination, and replacement.
- --------------------------------------------------------------------------------
INVESTMENT
SUB-ADVISERS
- ------------------------------------
Each of the Fund's sub-advisers is registered as an
investment adviser under the Investment Advisers Act of 1940. Agreements with
the sub-advisers have heretofore been approved by the vote of a majority of the
outstanding voting securities of each Portfolio to be managed by the
sub-adviser.
67
<PAGE>
Winslow Capital Management, Inc. (hereinafter "Winslow Management"), a
Minnesota corporation with offices at 4720 IDS Tower, 80 South Eighth Street,
Minneapolis, Minnesota 55402 has been retained under an investment sub-advisory
agreement to provide investment advice and, in general, to conduct the
management and investment program of the Capital Appreciation Portfolio, subject
to the general control of the Board of Directors of the Fund. Winslow Management
is a registered investment adviser under the Investment Advisers Act of 1940.
The firm was established by its investment principals with a focus on providing
management services to growth equity investment accounts. Winslow Management has
one other investment company client for which it acts as the investment adviser.
Other assets currently under management are managed for corporate, endowment,
foundation, retirement system and individual clients.
Templeton Investment Counsel, Inc. (hereinafter "Templeton Counsel"), a
Florida corporation with principal offices at 500 East Broward Boulevard, Ft.
Lauderdale, Florida 33394, has been retained under an investment sub-advisory
agreement to provide investment advice and, in general, to conduct the
management investment program of the International Stock Portfolio, subject to
the general control of the Board of Directors of the Fund. Templeton Counsel is
an indirect, wholly-owned subsidiary of Templeton Worldwide, Inc., which in turn
is a wholly-owned subsidiary of Franklin Resources, Inc.
Julius Baer Investment Management Inc. ("JBIM"), with principal offices at 330
Madison Avenue, New York, New York 10017, has been retained under an investment
sub-advisory agreement to provide investment advice and, in general, to conduct
the management investment program of the Global Bond Portfolio, formerly 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.
J.P. Morgan Investment Management Inc. ("Morgan Investment"), with principal
offices at 522 Fifth Avenue, New York, New York 10036, has been retained under
an investment sub-advisory agreement to provide investment advice and, in
general, to conduct the management investment program of the Macro-Cap Value
Portfolio, subject to the general control of the Board of Directors of the Fund.
Morgan Investment is a wholly-owned subsidiary of J.P. Morgan & Co. Incorporated
("J.P. Morgan"), a bank holding company organized under the laws of Delaware.
Through offices in New York City and abroad, J.P. Morgan, through Morgan
Investment and other subsidiaries, offers a wide range of services to
governmental, institutional, corporate and individual customers and acts as
investment adviser to individual and institutional clients.
Wall Street Associates ("WSA"), a California corporation with principal
offices at La Jolla Financial Building, Suite 100, 1200 Prospect Street, La
Jolla, California 92037, has been retained under an investment sub-advisory
agreement to provide investment advice and, in general, to conduct the
management investment program of the Micro-Cap Growth Portfolio, subject to the
general control of the Board of Directors of the Fund. WSA, founded in 1987,
provides investment advisory services for institutional clients and high net
worth individuals. WSA is jointly and equally owned by its founders, William
Jeffery, III, Kenneth F. McCain and Richard S. Coons, who also serve as fund
managers.
- --------------------------------------------------------------------------------
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.
68
<PAGE>
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, Martin Luther King
Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Thanksgiving Day and Christmas Day).
Except with respect to securities of the Money Market Portfolio and of some
securities of the International Stock Portfolio, the Fund values its securities
as follows: A security listed or traded on an exchange is valued at its last
sale price (prior to the time as of which assets are valued) on the exchange
where it is principally traded. Lacking any such sales on the day of valuation,
the security is valued at the last bid price on that exchange. All other
securities for which over-the-counter market quotations are readily available
are valued on the basis of the last current bid price. When market quotations
are not readily available, securities are valued at fair value as determined in
good faith by the Board of Directors. Debt securities may be valued on the basis
of valuations furnished by a pricing service which utilizes electronic data
processing techniques to determine valuations for normal institutional-size
trading units of debt securities, without regard to sale or bid prices, when
such valuations are believed to more accurately reflect the fair market value of
such securities. Debt securities of the International Stock Portfolio with
maturities of 60 days or less when acquired, or which subsequently are within 60
days of maturity, and all securities in the Money Market Portfolio, are valued
at amortized cost.
- --------------------------------------------------------------------------------
DIVIDENDS AND
DISTRIBUTIONS
- ------------------------------------
It is the Fund's intention to distribute substantially all
of the net investment income, if any, of each Portfolio. For dividend purposes,
net investment income of each Portfolio, exclusive of the Money Market
Portfolio, will consist of all dividends or interest earned by the Portfolio
less expenses, including the investment advisory fee. Net investment income for
dividend purposes of the Money Market Portfolio will consist of the interest
earned on investments, plus or minus amortized purchase discount or premium,
plus or minus realized gains and losses, less expenses, including the investment
advisory fee. Dividends from the net investment income and the net realized
gains, if any, for each Portfolio, exclusive of the Money Market Portfolio, will
be declared at least annually and reinvested in additional full and fractional
shares of that Portfolio. Dividends from net investment income and net realized
capital gains, if any, for the Money Market Portfolio will be declared and
reinvested daily.
- --------------------------------------------------------------------------------
TAXES
- ------------------------------------
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.
The Fund and each Portfolio qualified for the year ended December 31, 1997 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 each Portfolio qualifies as a regulated investment company and
complies with the appropriate provisions of the Code, the Portfolio will be
relieved of federal income taxes on the amounts distributed.
Since Minnesota Mutual currently is the sole shareholder of the Fund, no
discussion is included here as to the federal income tax consequences at the
shareholder level. For information concerning the federal tax consequences to
purchasers of the Contracts, see the attached Prospectus for those Contracts.
- --------------------------------------------------------------------------------
COUNSEL AND
INDEPENDENT
AUDITORS
- ------------------------------------
The firm of Dorsey & Whitney LLP, 220 South Sixth Street,
Minneapolis, Minnesota 55402, is the general counsel for the
Fund. KPMG Peat Marwick LLP, 4200 Norwest Center, 90 South Seventh Street,
Minneapolis, Minnesota 55402, are the independent auditors for the Fund.
- --------------------------------------------------------------------------------
CUSTODIANS
- ------------------------------------
First Trust National Association, 180 East Fifth Street, St.
Paul,
69
<PAGE>
Minnesota 55101, acts as custodian of the securities held by the Growth, Asset
Allocation, Index 500, Capital Appreciation, Small Company, Value Stock, Small
Company Value, Index 400 Mid-Cap, Macro-Cap Value and Micro-Cap Growth
Portfolios. Bankers Trust Company, 280 Park Avenue, New York, New York 10017,
acts as custodian of the securities held by the Bond, Mortgage Securities, the
four Maturing Government Bond Portfolios and Global Bond Portfolio. The
custodian for the Money Market and International Stock Portfolios 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 Global 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.
- --------------------------------------------------------------------------------
YEAR 2000 COMPUTER
PROBLEM
- ------------------------------------
The services provided to our shareholders depend
on the smooth functioning of those computer systems provided by and to Advantus
Capital. Many computer software systems in use today cannot distinguish the year
2000 from the year 1900 because of the way dates are encoded, stored and
calculated. That failure could have a negative impact on our ability to provide
service to our shareholders. Advantus Capital and Minnesota Mutual have been
actively working on necessary changes to the computer systems for the Fund to
deal with the year 2000. Although there can be no assurance of complete success,
Advantus Capital believes that it will be able to resolve these issues on a
timely basis and that there will be no material adverse impact on its ability to
provide services to the Fund.
- --------------------------------------------------------------------------------
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 (collectively, the
"Portfolios") 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 Portfolios
or any member of the public regarding the advisability of investing in
securities generally or in the Portfolios particularly or the ability of the
Portfolios to track general stock market performance. S&P's only relationship to
the Portfolios is the licensing of certain trademarks and trade names of S&P and
of the S&P 500 Index and the S&P 400 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 Portfolios or the owners of the Fund into consideration in
determining, composing or calculating the S&P 500 Index or the S&P 400 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 Portfolios 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 Portfolios.
S&P DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF THE S&P 500
INDEX OR THE S&P 400 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
PORTFOLIOS, OWNERS OF THE FUND, OR ANY OTHER PERSON OR ENTITY FROM THE USE OF
THE S&P 500 INDEX, THE S&P 400 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
70
<PAGE>
PARTICULAR PURPOSE OR USE WITH RESPECT TO THE S&P 500 INDEX, THE S&P 400 INDEX
OR ANY DATA 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.
71
<PAGE>
- --------------------------------------------------------------------------------
APPENDIX A
- ------------------------------------
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.
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GOVERNMENTAL AND GOVERNMENT- -
RELATED GUARANTORS
The principal governmental (i.e., backed by the
full faith and credit of the United States Government) guarantor of
mortgage-related securities is the Government
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National Mortgage Association ("GNMA"). GNMA is a wholly-owned United States
Government corporation within the Department of Housing and Urban Development.
GNMA is authorized to guarantee, with the full faith and credit of the United
States Government, the timely payment of principal and interest on securities
issued by institutions approved by GNMA (such as savings and loan institutions,
commercial banks and mortgage bankers) and backed by pools of FHA-insured or
VA-guaranteed mortgages.
Government-related (i.e., not backed by the full faith and credit of the
United States Government) guarantors include the Federal National Mortgage
Association and the Federal Home Loan Mortgage Association. The Federal National
Mortgage Association ("FNMA") is a government-sponsored corporation owned
entirely by private stockholders. It is subject to general regulation by the
Secretary of Housing and Urban Development. FNMA purchases residential mortgages
from a list of approved seller/servicers which include state and
federally-chartered savings and loan associations, mutual savings banks,
commercial banks and credit unions and mortgage bankers. Pass-through securities
issued by FNMA are guaranteed as to timely payment of principal and interest by
FNMA but are not backed by the full faith and credit of the United States
Government.
The Federal Home Loan Mortgage Corporation ("FHLMC") is a corporate
instrumentality of the United States Government and was created by Congress in
1970 for the purpose of increasing the availability of mortgage credit for
residential housing. Its stock is owned by the twelve Federal Home Loan Banks.
FHLMC issues Participation Certificates ("PCs") which represent interests in
mortgage from FHLMC's national portfolio. FHLMC guarantees the timely payment of
interest and ultimate collection of principal but PCs are not backed by the full
faith and credit of the United States Government.
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PART B. INFORMATION REQUIRED IN A STATEMENT OF ADDITIONAL INFORMATION
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<PAGE>
ADVANTUS SERIES FUND, INC.
Statement of Additional Information
Dated: May 1, 1998
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, 1998,
which may be obtained by calling the Fund at (612) 665-3500, after December
31, 1998 (651)665-3500, or writing the Fund at Minnesota Mutual Life Center,
400 Robert Street North, St. Paul, Minnesota 55101-2098.
________________________________________
Table of Contents
The Fund ............................................................ 2
Investment Objectives and Policies .................................. 3
Investment Restrictions ............................................. 6
Portfolio Turnover .................................................. 9
Directors and Executive Officers .................................... 10
Investment Advisory and Other Services .............................. 12
Portfolio Transactions and Allocation of Brokerage .................. 18
Purchase and Redemption of Shares ................................... 20
Fund Shares and Voting Rights ....................................... 20
Net Asset Value ..................................................... 21
Performance Data .................................................... 23
Taxes ............................................................... 28
Reports to Shareholders ............................................. 28
Independent Auditors ................................................ 28
Appendix I - Rating of Bonds and Commercial Paper ................... 29
<PAGE>
THE FUND
Advantus Series Fund, Inc. ("Fund"), is a Minnesota corporation, each
of whose Portfolios operates as a no-load, diversified, open-end management
investment company, except that Global Bond Portfolio operates as a
non-diversified, open-end management investment company. Prior to a change
of its name on May 1, 1997, the Fund was known as MIMLIC Series Fund, Inc.
The Fund is a series fund, which means that it has several different
Portfolios. The investment adviser of the Fund is Advantus Capital
Management, Inc. ("Advantus Capital"). Advantus Capital has entered into
investment sub-advisory agreements under which various investment managers
provide investment services. Winslow Capital Management, Inc. ("Winslow
Management") serves as investment sub-adviser to the Fund's Capital
Appreciation Portfolio and Templeton Investment Counsel, Inc. ("Templeton
Counsel") serves as investment sub-adviser to the Fund's International Stock
Portfolio. Julius Baer Investment Management Inc. serves as investment
sub-adviser to the Fund's Global Bond Portfolio pursuant to an investment
sub-advisory agreement with Advantus Capital. J.P. Morgan Investment
Management Inc. serves as investment sub-adviser to the Fund's Macro-Cap
Value Portfolio pursuant to an investment sub-advisory agreement with
Advantus Capital. Wall Street Associates serves as investment sub-adviser to
the Fund's Micro-Cap Growth Portfolio pursuant to an investment sub-advisory
agreement with Advantus Capital.
Currently, the shares of the Fund are sold only to The Minnesota Mutual
Life Insurance Company ("Minnesota Mutual") through certain of its separate
accounts to fund the benefits under variable annuity contracts and variable
life insurance policies (collectively, the "Contracts") issued by Minnesota
Mutual. The Fund may be used for other purposes in the future. The Fund
may also sell its shares to separate accounts of Northstar
Life Insurance Company, a wholly-owned subsidiary of Minnesota Mutual
domiciled in the state of New York. The separate accounts, which will be the
owners of the shares of the Fund, will invest in the shares of each Portfolio
in accordance with instructions received from the owners of the Contracts.
Minnesota Mutual, through its separate accounts which fund the
Contracts, owns 100% of the shares outstanding of each Portfolio of the Fund.
Minnesota Mutual, on October 22, 1985, provided the initial capital of the
Fund by purchasing 4,500,000 shares of the Growth Portfolio, Bond Portfolio,
Money Market Portfolio and Asset Allocation Portfolio for $4,500,000. On
April 28, 1987, Minnesota Mutual provided initial capital for additional
portfolios by purchasing 11,000,000 shares of the Mortgage Securities
Portfolio, Index 500 Portfolio and Capital Appreciation Portfolio for
$11,000,000. Those initial shares were not attributable to any of the
Contracts and were redeemed by Minnesota Mutual during 1991. On April 27,
1992, Minnesota Mutual provided initial capital for the International Stock
Portfolio by purchasing 10,000,000 shares of the Portfolio for $10,000,000.
Those initial shares, together with the additional shares attributable to
them as a result of the reinvestment of dividends and capital gains
distributions, are not attributable to any of the Contracts. In addition,
Minnesota Mutual provided initial capital in the amount of $3,000,000 on
April 22, 1993, for the Small Company Portfolio and, as a result, those
initial shares, together with additional shares attributable to them as a
result of reinvestment of dividends and capital gains distributions, are not
attributable to any of the Contracts. On May 2, 1994, Minnesota Mutual
provided initial capital for the four Maturing Government Bond Portfolios and
the Value Stock Portfolio and those initial shares, together with the
additional shares attributable to them as the result of the reinvestment of
dividends and capital gains distributions, are not attributable to any of the
Contracts. After Minnesota Mutual's initial contribution of $3,400,000,
representing 3,400,000 shares of the Maturing Government Bond Portfolio -
1998, its contribution of $2,600,000, representing 2,600,000 shares of the
Maturing Government Bond Portfolio - 2002, its contribution of $1,900,000
representing 1,900,000 shares of the Maturing Government Bond Portfolio -
2006, its contribution of $1,100,000 representing 1,100,000 shares of the
Maturing Government Bond Portfolio - 2010, and its contribution of
$3,000,000, representing 3,000,000 shares of the Value Stock Portfolio, those
shares represented 100% of the issued and outstanding shares for those
Portfolios as of May 2, 1994.
<PAGE>
On September 24, 1997, Minnesota Mutual provided initial capital for the
International Bond Portfolio (now the Global Bond Portfolio) in the amount of
$25,000,000; the resulting initial shares, together with any 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. On
September 29, 1997, Minnesota Mutual provided initial capital for the Index
400 Mid-Cap Portfolio and the Small Company Value Portfolios in the amount of
$5,000,000 for each Portfolio; the resulting initial shares, together with
any 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. On October 15, 1997, Minnesota Mutual provided initial capital for
the Macro-Cap Value Portfolio in the amount of $5,000,000; the resulting
initial shares, together with any 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. On September 15, 1997, Minnesota
Mutual provided initial capital for the Micro-Cap Growth Portfolio in the
amount of $5,000,000; the resulting initial shares, together with any
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.
Contract owners should consider that the investment experience of the
Portfolio or Portfolios they select will affect the value of and the benefits
provided under the Contract. See the Prospectus for the Contracts for a
description of the relationship between increases or decreases in the net
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asset value of Fund shares (and any distributions on such shares) and the
benefits provided under a Contract.
INVESTMENT OBJECTIVES AND POLICIES
The investment objectives and policies of each of the Portfolios are set
forth in detail in the text of each Portfolio's Prospectus under "Investment
Objectives and Policies."
When-Issued Securities, Forward Commitments and Mortgage Dollar Rolls
The Bond, Asset Allocation, Mortgage Securities, Global Bond and
Macro-Cap Value Portfolios may each purchase securities offered on a
"when-issued" basis and may purchase or sell securities on a "forward
commitment" basis. When such transactions are negotiated, the price, which
is generally expressed in yield terms, is fixed at the time the commitment is
made, but delivery and payment for the securities takes place at a later
date. Normally, the settlement date occurs within two months after the
transaction, but delayed settlements beyond two months may be negotiated.
During the period between a commitment to purchase by the Portfolio and
settlement, no payment is made for the securities purchased by the Portfolio
and, thus, no interest accrues to the Portfolio from the transaction.
The use of when-issued transactions and forward commitments enables the
Portfolio to hedge against anticipated changes in interest rates and prices.
For instance, in periods of rising interest rates and falling prices, the
Portfolio might sell securities in its portfolio on a forward commitment basis
to limit its exposure to falling prices. In periods of falling interest rates
and rising prices, the Portfolio might sell a security in its portfolio and
purchase the same or a similar security on a when-issued or forward commitment
basis, thereby fixing the purchase price to be paid on the settlement date at an
amount below that to which the Portfolio anticipates the market price of such
security to rise and, in the meantime, obtaining the benefit of investing the
proceeds of the sale of its portfolio security at currently higher cash yields.
Of course, the success of this strategy depends upon the ability of the
Portfolio's investment adviser to correctly anticipate increases and decreases
in interest rates and prices of securities. If the adviser anticipates a rise
in interest rates and a decline in prices and, accordingly, the Portfolio sells
securities on a forward commitment basis in order to hedge against falling
prices, but in fact interest rates decline and prices rise, the Portfolio will
have lost the opportunity to profit from the price increase. If the adviser
anticipates a decline in interest rates and a rise in prices, and, accordingly,
the Portfolio sells a security in its portfolio and purchases the same or a
similar security on a when-issued or forward commitment basis in order to enjoy
currently high cash yields, but in fact interest rates increase and prices fall,
the Portfolio will have lost the opportunity to profit from investment of the
proceeds of the sale of the security at the increased interest rates. The
likely effect of this hedging strategy, whether the Portfolio's investment
adviser is correct or incorrect in its prediction of interest rate and price
movements, is to reduce the chances of large capital gains or losses and thereby
reduce the likelihood of wide variations in the Portfolio's net asset value.
When-issued securities and forward commitments may be sold prior to the
settlement date, but, except for mortgage dollar roll transactions, the
Portfolio enters into when-issued and forward commitments only with the
intention of actually receiving or delivering the securities, as the case may
be. The Portfolio may hold a when-issued security or forward commitment until
the settlement date, even if the Portfolio will incur a loss upon settlement.
To facilitate transactions in when-issued securities and forward commitments,
the Portfolio's custodian bank maintains, in a separate account of the
Portfolio, liquid assets, such as cash, short-term securities and other liquid
securities, having a value equal to, or greater than, any commitments to
purchase securities on a when-issued or forward commitment basis and, with
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respect to forward commitments to sell portfolio securities of the Portfolio,
the portfolio securities themselves. If the Portfolio, however, chooses to
dispose of the right to acquire a when-issued security prior to its acquisition
or dispose of its right to deliver or receive against a forward commitment, it
can incur a gain or loss. (At the time the Portfolio makes the commitment to
purchase or sell a security on a when-issued or forward commitment basis, it
records the transaction and reflects the value of the security purchased or, if
a sale, the proceeds to be received, in determining its net asset value.)
In connection with their ability to purchase securities on a when-issued
or forward commitment basis, the Bond, Asset Allocation and Mortgage
Securities Portfolios may enter into mortgage "dollar rolls." These
transactions are entered into in order to generate incremental income and
without the intention of actually acquiring securities. In such
circumstances the Portfolio agrees to resell its purchase commitment to the
third-party seller at the current market price on the date of sale and
concurrently enter into another purchase commitment for such securities at a
later date. The Portfolio may receive a negotiated fee as an inducement to
"roll over" its purchase commitment. For financial reporting and tax
purposes, mortgage dollar rolls are considered as two separate transactions:
one involving the sale of a security and a separate transaction involving a
purchase. The Portfolios do not currently intend to enter into mortgage
dollar rolls that are accounted for as a "financing" rather than as a
separate sale and purchase transactions.
Debt Securities and Down-Graded Instruments
Certain Portfolios may invest in non-convertible debt securities rated
BBB or Baa or higher by S&P or Moody's, respectively as described in the
Prospectus. Each of Bond, Asset Allocation and Mortgage Securities Portfolios
may also invest up to 5% of its total assets in debt securities rated BB or
Ba by S&P or Moody's, respectively. The Global Bond Portfolio may invest up
to 5% of its net assets in securities rated B or higher by S&P or Moody's.
The Value Stock, Small Company Value and Micro-Cap Growth Portfolios may
also invest in debt securities convertible into common stock which are rated
lower than BBB or Baa but which are rated at least B- by S&P or B3 by
Moody's. In each case, the respective Portfolio may also invest in securities
which are unrated if the Portfolio's investment adviser determines that such
securities are of equivalent investment quality to the rated securities
described above. In the case of "split-rated" securities, which result when
nationally-recognized rating agencies rate the security at different rating
levels (e.g., BBB by S&P and Ba by Moody's), it is the Portfolio's general
policy to classify such securities at the higher rating level where, in the
judgment of the Portfolio's investment adviser, such classification
reasonably reflects the security's quality and risk. (See the Portfolio's
Prospectus for information regarding these securities and the Portfolio's
policy regarding them.)
The market value of debt securities generally varies in response to changes
in interest rates and the financial condition of each issuer. During periods of
declining interest rates, the value of debt securities generally increases.
Conversely, during periods of rising interest rates, the value of such
securities generally declines. These changes in market value will be reflected
in each Portfolio's net asset value.
These Portfolios may, however, acquire debt securities which, after
acquisition, are down-graded by the rating agencies to a rating which is lower
than the applicable minimum rating described above. In such an event it is the
Portfolios' general policy to dispose of such down-graded securities except
when, in the judgment of a Portfolio's investment adviser, it is to the
Portfolio's advantage to continue to hold such securities. In no event,
however, will any Portfolio hold in excess of 5% of its net assets in securities
which have been down-graded subsequent to purchase where such down-
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graded securities are not otherwise eligible for purchase by the Portfolio.
This 5% is in addition to securities which the Portfolio may otherwise
purchase under its usual investment policies.
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 a
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 Portfolios
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 Portfolios 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, a 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.
OPTIONS
The Small Company Value and Micro-Cap Growth Portfolios 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. When the Portfolio writes a
covered call option, it gives the purchaser of the option the right to buy
the underlying security at the price specified in the option (the "exercise
price") at any time during the option period. If the option expires
unexercised, the Portfolio realizes income, typically in the form of
short-term capital gain, to the extent of the amount received for the option
(the "premium"). If the option is exercised, a decision over which the
Portfolio has no control, the Portfolio must sell the underlying security to
the option holder at the exercise price. By writing a covered option, the
Portfolio foregoes, in exchange for the premium less the commission ("net
premium"), the opportunity to profit during the option period from an
increase in the market value of the underlying security above the exercise
price. The Portfolio does not write call options in an aggregate amount
greater than 15% of its net assets.
The Portfolio purchases call options only to close out a postion. When
an option is written on securities held by the Portfolio and it appears that
the purchaser of that option is likely to exercise the option and purchase
the underlying security, it may be considered appropriate to avoid
liquidating the Portfolio's position, or the Portfolio may wish to extinguish
a call option sold by it so as to be free to sell the underlying security.
In such instances the Portfolio may purchase a call option on the same
security with the same exercise price and expiration date which had been
previously written. Such a purchase would have the effect of closing out the
option which the Portfolio has written. The Portfolio realizes a short-term
capital gain if the amount paid to purchase the call option is less than the
premium received for writing a similar option. Generally, the Portfolio
realizes a short-term loss if the amount paid to purchase the call option is
greater than the premium received for writing the option. If the underlying
security has substantially risen in value, it may be difficult or expensive
to purchase the call option for the closing transaction.
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<PAGE>
INVESTMENT RESTRICTIONS
The Fund has adopted the following restrictions relating to the investment
of the assets of the Portfolios.
The restrictions numbered 1 through 10 and the statement dealing with
senior securities are fundamental and may not be changed without the affirmative
vote of a majority of the outstanding voting securities of each Portfolio
affected by the change. With respect to the submission of a change in an
investment restriction to the holders of the Fund's outstanding voting
securities, such matter shall be deemed to have been effectively acted upon with
respect to a particular Portfolio if a majority of the outstanding voting
securities of such Portfolio vote for the approval of such matter,
notwithstanding (1) that such matter has not been approved by the holders of a
majority of the outstanding voting securities of any other Portfolio affected by
such matter, and (2) that such matter has not been approved by the vote of a
majority of the outstanding voting securities of the Fund. For this purpose and
under the Investment Company Act of 1940, a majority of the outstanding voting
shares of each Portfolio means the lesser of (i) 67% of the voting shares
represented at a meeting at which more than 50% of the outstanding voting shares
are represented or (ii) more than 50% of the outstanding voting shares.
Restrictions numbered 11-17 are not fundamental and may be changed by the
Fund's Board of Directors.
The Fund may not issue senior securities except to the extent that the
borrowing of money in accordance with restriction 3 or the entering into reverse
repurchase agreements as described in restriction 6 may constitute the issuance
of a senior security, and each Portfolio, except as may be noted, will not:
1. With respect to at least 75% of the value of the total assets in the
Portfolio, invest more than 5% of the value of such assets in the
securities of any one issuer (except securities issued or guaranteed by
the United States Government, its agencies or instrumentalities and bank
obligations) or invest in more than 10% of the voting securities of any
one issuer. This limitation shall not apply to the International Bond
Portfolio.
For additional information with respect to investment of assets in the
Money Market Portfolio, see the additional description in this Statement
of Additional Information under the heading entitled "Net Asset Value."
2. Purchase the securities of issuers conducting their principal business
activity in a single industry, if immediately after such purchase the
value of its investments in such industry would exceed 25% of the value
of the Portfolio's total assets, provided that (a) telephone, gas, and
electric public utilities are each regarded as separate industries and
(b) banking, savings and loan associations, savings banks and finance
companies as a group will not be considered a single industry for the
purpose of this limitation. There is no limitation with respect to the
concentration of investments in securities issued or guaranteed by the
United States Government, its agencies or instrumentalities, or
certificates of deposit and bankers acceptances of United States banks
and savings and loan associations and this limitation shall not apply in
the Mortgage Securities Portfolio to investments in the mortgage and
mortgage-finance industry (in which more than 25% of the value of the
Portfolio's
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<PAGE>
total assets will, except for temporary defensive positions, be
invested) and this limitation shall not apply to the International
Bond Portfolio.
3. Borrow money, except from banks for temporary or emergency purposes,
including the meeting of redemption requests which might otherwise
require the untimely disposition of securities. Borrowing in the
aggregate by any particular Portfolio may not exceed 10% of the value of
the Portfolio's total assets at the time the borrowing is made and a
Portfolio may not make additional investments during any period that its
borrowings exceed 5% of the value of the Portfolio's total assets. For
purposes of this restriction, "borrowing" shall not include reverse
repurchase agreements.
4. Lend securities in excess of 20% of the value of its total assets. For
the purposes of this restriction, collateral arrangements with respect
to options, forward currency and futures transactions will not be deemed
to involve loans of securities.
5. Purchase securities on margin (but it may obtain such short-term credits
as may be necessary for the clearance of purchases and sales of
securities); or make short sales except where, by virtue of ownership of
other securities, it has the right to obtain, without payment of further
consideration, securities equal in kind and amount to those sold, and
only to the extent that the Portfolio's short positions will not at the
time of any short sales aggregate in total sale prices more than 10% of
its total assets. For purposes of this restriction, collateral
arrangements with respect to options, forward currency and futures
transactions will not be deemed to involve the use of margin.
6. Enter into reverse repurchase agreements if such investments, taken
together with borrowings represented by senior securities of the
Portfolio, exceed 33 1/3% of the total assets of the Portfolio less
liabilities other than obligations under such borrowings and reverse
repurchase agreements.
7. Act as an underwriter of securities, except to the extent the Fund may
be deemed to be an underwriter in connection with the disposition of
Portfolio securities.
8. Purchase or sell real estate, except that each Portfolio may invest in
securities secured by real estate or interests therein or securities
issued by companies which invest in real estate or interests therein.
9. Buy or sell oil, gas or other mineral leases, rights or royalty
contracts or commodities or commodity contracts, including futures
contracts except that the International Stock Portfolio may purchase and
sell futures contracts on financial instruments and indices and options
on such futures contracts and it may purchase and sell futures contracts
on foreign securities and options on such futures contracts. This
restriction does not prevent the Portfolios from purchasing securities
of companies investing in any of the foregoing.
10. Lend money to other persons except by the purchase of obligations in
which the Portfolio is authorized to invest and by entering into
repurchase agreements. For the purposes of this restriction, collateral
arrangements with respect to options, forward currency and future
transactions will not be deemed to involve loans of securities.
Securities lending may be specifically authorized for a Portfolio as
described in the Prospectus.
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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, Small Company, Value Stock, Small
Company Value, Macro-Cap Value and Micro-Cap Growth Portfolios each
may invest up to 10% of the value of its total assets in securities of
foreign issuers, (ii) the Money Market Portfolio may invest in
obligations of Canadian chartered banks, London branches of United
States banks and United States branches or agencies of foreign banks,
and (iii) the Asset Allocation Portfolio may invest in such securities
subject to the restrictions applicable to those four Portfolios. The
provisions of this restriction apply to all Portfolios other than the
International Stock Portfolio and the Global Bond Portfolio.
14. Purchase securities of other investment companies with an aggregate
value in excess of 5% of the Portfolio's total assets, except in
connection with a merger, consolidation, acquisition or reorganization,
or by purchase in the open market of securities of closed-end companies
where no underwriter or dealer's commission or profit, other than
customary broker's commission, is involved, and if immediately
thereafter not more than 10% of the value of the Portfolio's total
assets would be invested in such securities.
15. Issue or acquire puts, calls, or combinations thereof, except to the
extent a Portfolio is specifically authorized to engage in such
activities as reflected in the Prospectus.
16. Purchase securities for the purpose of exercising control or management.
17. Participate on a joint (or a joint and several) basis in any trading
account in securities (but this does not prohibit the "bunching" of
orders for the sale or purchase of Portfolio securities with the other
Portfolios or with other accounts advised by Advantus Capital or its
Sub-Advisers, to reduce brokerage commissions or otherwise to achieve
best overall execution).
If a percentage restriction is adhered to at the time of an investment, a
later increase or decrease in the investment's percentage of the value of a
Portfolio's total assets resulting from a change in such values or assets will
not constitute a violation of the percentage restriction.
Several other limitations apply with respect to the investment activities
of the Portfolios. These limitations, which arise from the requirements of
various states in which the underlying contracts are offered, have been adopted
by the Fund in order to secure compliance. As a result of these further
limitations, some investment practices otherwise permitted under those
-8-
<PAGE>
restrictions described above in paragraphs 1, 3 and 6 are no longer allowed. In
particular, the Fund has agreed that as long as the underlying contracts are
offered in such states the Fund (i) will not purchase or otherwise acquire the
voting security of any issuer if as a result of such acquisition all of the
Fund's Portfolios in the aggregate will own more than 10% of the total issued
and outstanding voting securities of such issuer, and (ii) will limit its
borrowing for any particular Portfolio to (a) 10% of the Portfolio's total
assets when borrowing for any general purpose and (b) 25% of the Portfolio's
total assets when borrowing as a temporary measure to facilitate redemptions.
For the purpose of these aggregate limitations on borrowing, reverse repurchase
agreements will be considered to be borrowings.
PORTFOLIO TURNOVER
Each Portfolio has a different expected annual rate of portfolio turnover,
which is calculated by dividing the lesser of purchases or sales of Portfolio
securities during the fiscal year by the monthly average of the value of the
Portfolio's securities (excluding from the computation all securities with
maturities at the time of acquisition of one year or less). A high rate of
turnover in a Portfolio generally involves correspondingly greater brokerage
commission expenses, which must be borne directly by the Portfolio. Turnover
rates may vary greatly from year to year and within a particular year and may
also be affected by cash requirements for redemptions of each Portfolio's shares
and by requirements which enable the Fund to receive favorable tax treatment.
The portfolio turnover rates associated with each Portfolio will, of course, be
affected by the level of purchases and redemptions of shares of each Portfolio.
However, because rate of portfolio turnover is not a limiting factor, particular
holdings may be sold at any time, if in the opinion of Advantus Capital such a
sale is advisable.
The Money Market Portfolio, consistent with its investment objective, will
attempt to maximize yield through trading. This may involve selling instruments
and purchasing different instruments to take advantage of disparities of yields
in different segments of the high grade money market or among particular
instruments within the same segment of the market. Since the Portfolio's assets
will be invested in securities with short maturities and the Portfolio will
manage its assets as described above, the Portfolio's holdings of money market
instruments will turn over several times a year. However, this does not
generally increase the Portfolio's brokerage costs, since brokerage commissions
as such are not usually paid in connection with the purchase or sale of the
instruments in which the Portfolio invests since such securities will be
purchased on a net basis.
For each of the last three calendar years, the portfolio turnover rates
for the various Portfolios were as follows:
-9-
<PAGE>
<TABLE>
<CAPTION>
Portfolio Turnover Rate
-----------------------
Portfolio 1997 1996 1995
--------- ---- ---- ----
<S> <C> <C> <C>
Growth 120.1% 154.7% 91.9%
Bond 200.0 154.0 205.4
Money Market N/A N/A N/A
Asset Allocation 140.2 120.1 157.0
Mortgage Securities 106.4 70.0 133.7
Index 500 8.3 15.2 4.8
Capital Appreciation 74.0 62.9 51.1
International Stock 12.5 11.5 20.5
Small Company 63.8 74.4 61.3
Maturing Government Bond -
1998 Portfolio 15.5 18.1 9.0
2002 Portfolio 36.9 21.9 -0-
2006 Portfolio 3.1 25.7 10.0
2010 Portfolio 39.3 71.0 -0-
Value Stock 115.4 88.6 164.2
Small Company Value 13.0 N/A N/A
Global Bond 120.5 N/A N/A
Index 400 Mid-Cap 4.9 N/A N/A
Macro-Cap Value 36.7 N/A N/A
Micro-Cap Growth 28.9 N/A N/A
</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, 75 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., 61 Director Regents' Professor of
Department of Psychology Psychology, University of
University of Minnesota Minnesota
N309 Elliott Hall
Minneapolis, Minnesota 55455
Frederick P. Feuerherm*, 51 Treasurer and Second Vice President of The
The Minnesota Mutual Life Director Minnesota Mutual Life
Insurance Company Insurance Company; Vice
400 Robert Street North President and Assistant
St. Paul, Minnesota 55101 Secretary of MIMLIC
Asset Management Company
Ralph D. Ebbott, 70 Director Retired; Vice President and
409 Birchwood Avenue Treasurer, Minnesota Mining
White Bear Lake, and Manufacturing Company
Minnesota 55110 through June 1989
-10-
<PAGE>
Robert E. Hunstad*, 58 President and Executive Vice President
The Minnesota Mutual Life Director of The Minnesota Mutual Life
Insurance Company Insurance Company; President,
400 Robert Street North Northstar Life Insurance
St. Paul, Minnesota 55101 Company; Director of Ascend
Financial Services, Inc. CRI
Securities, Inc., HomePlus
Insurance Company, Ministers
Life Insurance Company,
Ministers Life Resources,
Northstar Life Insurance
Company, Minnesota Fire and
Casualty Company and Viking
Fire Company (all affiliates
of Minnesota Mutual)
Michael J. Radmer Secretary Partner with the law firm of
Dorsey & Whitney LLP Dorsey & Whitney LLP
220 South Sixth Street
Minneapolis, Minnesota 55402
*Denotes directors of the Fund who are "interested persons" (as defined in the
Investment Company Act of 1940) of the Fund or Advantus Capital.
The Fund has both an Audit Committee and a Nominations Committee, elected by
the Board of Directors, the members of which are all Directors who are not
"interested persons" of the Fund. Ms. Berscheid and Messrs. Arner and Ebbott
comprise the members of both committees.
Legal fees and expenses are paid to the law firm of which Michael J.
Radmer is a partner. No compensation is paid by the Fund to any of its
officers or directors who is affiliated with Advantus Capital. Each director
of the Fund who is not affiliated with Advantus Capital or the prior adviser,
MIMLIC Asset Management Company, was compensated by the Fund during the
fiscal year ended December 31, 1997 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 9,286 N/A N/A 14,000
Ellen S. Berscheid 9,286 N/A N/A 14,000
Ralph D. Ebbott 9,286 N/A N/A 14,000
</TABLE>
(1) Each Director of the Fund who is not affiliated with MIMLIC Management
or Advantus Capital is also a director of the other eleven investment
companies of which MIMLIC Management's wholly-owned subsidiary, Advantus
Capital, is the investment adviser (twelve investment companies in
total-the "Fund Complex"). Such directors receive compensation in
connection with all such investment companies which, in the aggregate,
is equal to $8,000 per year and $2,000 per
-11-
<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.
The Fund and Advantus Capital have obtained an exemptive order from the
Securities and Exchange Commission which permits Advantus Capital to employ a
"manager of managers" strategy in connection with its management of the Fund.
The exemptive order permits Advantus Capital, subject to certain conditions,
to select new sub-advisers with the approval of the Fund's Board of
Directors, but without obtaining shareholder approval. The order also
permits Advantus Capital to change the terms of agreements with the
sub-advisers or continue the employment of a sub-adviser after an event which
would otherwise cause the automatic termination of services. Shareholders
would be notified of any sub-adviser changes. Shareholders have the right to
terminate arrangements with a sub-adviser by vote of a majority of the
outstanding shares of a Portfolio. In the case of a Portfolio which employs
more than one sub-adviser, the order also permits the Fund to disclose such
sub-advisers' fees only in the aggregate in its registration statement.
Advantus Capital has the ultimate responsibility for the investment
performance of each Portfolio employing sub-advisers due to its
responsibility to oversee the sub-advisers and recommend their hiring,
termination, and replacement.
Winslow Management serves as investment sub-adviser to the Fund's
Capital Appreciation Portfolio pursuant to an investment sub-advisory
agreement with Advantus Capital. Templeton Counsel serves as investment
sub-adviser to the Fund's International Stock Portfolio pursuant to an
investment sub-advisory agreement with Advantus Capital. Julius Baer
Investment Management Inc. serves as investment sub-adviser to the Fund's
Global Bond Portfolio, formerly the International Bond Portfolio, pursuant to
an investment sub-advisory agreement with Advantus Capital. J.P. Morgan
Investment Management Inc. serves as sinvestment sub-adviser to the Fund's
Macro-Cap Value Portfolio pursuant to an investment sub-advisory agreement
with Advantus Capital. Wall Street Associates serves as investment
sub-adviser to the Fund's Micro-Cap Growth Portfolio pursuant to an
investment sub-advisory agreement with Advantus Capital.
CONTROL AND MANAGEMENT OF ADVISER
Advantus Capital is a wholly-owned subsidiary of MIMLIC Management.
MIMLIC Management is a subsidiary of Minnesota Mutual. Minnesota Mutual was
organized in 1880, and has assets of approximately $13.4 billion. Frederick
P. Feuerherm, Vice President, Assistant Secretary and a director of MIMLIC
Management, is a Second Vice President of Minnesota Mutual. Mr. Feuerherm is
also a Director of the Fund. Robert E. Hunstad is Executive Vice President
of Minnesota Mutual and a Director of a number of its affiliated companies
and is also a Director of the Fund and serves as its President.
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, 1998. 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.
-12-
<PAGE>
The Investment Advisory Agreement will terminate automatically in the
event of assignment. In addition, the Agreement is terminable at any time,
without penalty, by the Board of Directors of the Fund or by vote of a
majority of the Fund's outstanding voting securities on 60 days' written
notice to Advantus Capital, and by Advantus Capital on 60 days' written
notice to the Fund. Unless sooner terminated, the Agreement shall continue
in effect for more than two years after its execution only so long as such
continuance is specifically approved at least annually either by the Board of
Directors of the Fund or by a vote of a majority of the outstanding voting
securities, provided that in either event such continuance is also approved
by the vote of a majority of the directors who are not interested persons of
any party to the Agreement, cast in person at a meeting called for the
purpose of voting on such approval. The required shareholder approval of any
continuance of the Agreement shall be effective with respect to any
Portfolio if a majority of the outstanding voting securities of the class of
capital stock of that Portfolio votes to approve such continuance,
notwithstanding that such continuance may not have been approved by a
majority of the outstanding voting securities of the Fund.
If the shareholders of a class of capital stock of any Portfolio fail to
approve any continuance of the Agreements, Advantus Capital will continue to
act as investment adviser with respect to such Portfolio pending the required
approval of its continuance, or a new contract with Advantus Capital or a
different adviser or other definitive action; provided, that the compensation
received by Advantus Capital in respect of such Portfolio during such period
will be no more than its actual costs incurred in furnishing investment advisory
and management services to such Portfolio or the amount it would have received
under the Agreement in respect of such Portfolio, whichever is less.
The Agreements may be amended by the parties only if such amendment is
specifically approved by the vote of a majority of the outstanding voting
securities of the Fund and by the vote of a majority of the directors of the
Fund who are not interested persons of any party to the Agreement cast in person
at a meeting called for the purpose of voting on such approval. The required
shareholder approval shall be effective with respect to any Portfolio if a
majority of the outstanding voting securities of the class of capital stock of
that Portfolio vote to approve the amendment, notwithstanding that the amendment
may not have been approved by a majority of the outstanding voting securities of
the Fund.
SUB-ADVISER - WINSLOW MANAGEMENT
Winslow Capital Management, Inc. ("Winslow Management"), a Minnesota
corporation with principal offices at 4720 IDS Tower, 80 South Eighth Street,
Minneapolis, Minnesota 55402 has been retained under an investment
sub-advisory agreement to provide investment advice and, in general, to
conduct the management and investment program of the Capital Appreciation
Portfolio, subject to the general control of the Board of Directors of the
Fund. Winslow Management is a registered investment adviser under the
Investment Advisers Act of 1940. The firm was established by its investment
principals with a focus on providing management services to growth equity
investment accounts. Winslow Management has one other investment company
client for which it acts as the investment adviser. Other assets currently
under management are managed for corporate, endowment, foundation, retirement
system and individual clients.
-13-
<PAGE>
Certain clients of Winslow Management may have investment objectives and
policies similar to that of the Capital Appreciation Portfolio. Winslow
Management may, from time to time, make recommendations which result in the
purchase or sale of a particular security by its other clients simultaneously
with the Capital Appreciation Portfolio. If transactions on behalf of more than
one client during the same period increase the demand for securities being
purchased or the supply of securities being sold, there may be an adverse effect
on price. It is the policy of Winslow Management to allocate advisory
recommendations and the placing of orders in a manner which is deemed equitable
by Winslow Management to the accounts involved, including the Capital
Appreciation Portfolio. When two or more of the clients of Winslow Management
(including the Capital Appreciation Portfolio) are purchasing the same security
on a given day from the same broker-dealer, such transactions may be averaged as
to price.
INVESTMENT SUB-ADVISORY AGREEMENT - WINSLOW MANAGEMENT
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, 1998. 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
-14-
<PAGE>
Worldwide, Inc., Ft. Lauderdale, Florida, which in turn is a wholly-owned
subsidiary of Franklin Resources, Inc. ("Franklin").
Franklin is a large, diversified financial services organization. Through
its operating subsidiaries, Franklin provides a variety of investment products
and services to institutions and individuals throughout the United States and
abroad. One of the country's largest mutual fund organizations, Franklin's
business includes the provision of management, administrative and distribution
services to the Franklin/Templeton Group of Funds, which is distributed through
a nationwide network of banks, broker-dealers, financial planners and investment
advisers. Franklin is headquartered in San Mateo, California, and its common
stock is listed on the New York Stock Exchange under the ticker symbol BEN.
Certain clients of Templeton Counsel may have investment objectives and
policies similar to that of the International Stock Portfolio. Templeton
Counsel may, from time to time make recommendations which result in the purchase
or sale of a particular security by its other clients simultaneously with the
International Stock Portfolio. If transactions on behalf of more than one
client during the same period increase the demand for securities being purchased
or the supply of securities being sold, there may be an adverse effect on price.
It is the policy of Templeton Counsel to allocate advisory recommendations and
the placing of orders in a manner which is deemed equitable by Templeton Counsel
to the accounts involved, including the International Stock Portfolio. When two
or more of the clients of Templeton Counsel (including the International Stock
Portfolio) are purchasing the same security on a given day from the same broker-
dealer, such transactions may be averaged as to price.
INVESTMENT SUB-ADVISORY AGREEMENT - TEMPLETON COUNSEL
Templeton Counsel acts as an investment sub-adviser to the Fund's
International Stock Portfolio under an Investment Sub-Advisory Agreement (the
"Templeton Agreement") with Advantus Capital dated May 1, 1997, which became
effective the same date it was approved by shareholders of the International
Stock Portfolio on April 24, 1997. The Templeton Agreement was last approved
for continuance by the Board of Directors of the Fund, including a majority
of the Directors who are not a party to the Templeton Agreement or interested
persons of any such party, on January 14, 1997. The Templeton Agreement will
terminate automatically upon the termination of the Investment Advisory and
Supplemental Investment Advisory Agreements and in the event of its
assignment. In addition, the Templeton Agreement is terminable at any time,
without penalty, by the Board of Directors of the Fund, by Advantus Capital
or by a vote of the majority of the International Stock Portfolio's
outstanding voting securities on 60 days' written notice to Templeton Counsel
and by Templeton Counsel on 60 days' written notice to Advantus Capital.
Unless sooner terminated, the Templeton Agreement shall continue in effect
from year to year if approved at least annually by the Board of Directors of
the Fund or by a vote of a majority of the outstanding voting securities of
the International Stock Portfolio, provided that in either event such
continuance is also approved by the vote of a majority of the directors who
are not interested persons of any party to the Templeton Agreement, cast in
person at a meeting called for the purpose of voting on such approval.
Information concerning the services performed by Advantus Capital under
the agreement, by Templeton Counsel under the Templeton Agreement and the
fees payable and expenses borne by the Fund are set forth in the prospectus,
which information is incorporated herein by reference.
SUB-ADVISER - JULIUS BAER INVESTMENT MANAGEMENT INC.
Julius Baer Investment Management Inc. ("JBIM"), with principal offices
at 330 Madison Avenue, New York, New York 10017, has been retained under an
investment sub-advisory agreement to provide investment advice and, in
general, to conduct the management investment program of the Global Bond
Portfolio, formerly the International Bond Portfolio (prior to May 1, 1998),
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.
-15-
<PAGE>
INVESTMENT SUB-ADVISORY AGREEMENT - JBIM
JBIM acts as investment sub-adviser to the Fund's Global Bond Portfolio
under an Investment Sub-Advisory Agreement (the "JBIM Agreement") with
Advantus Capital dated May 1, 1998. The JBIM 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
January 14, 1998. The JBIM Agreement replaces a previously existing
sub-advisory agreement between Advantus Capital and JBIM for the management
in the International Bond Portfolio. This previously existing agreement
terminated on May 1, 1998.
The JBIM Agreement will terminate automatically upon the termination of
the Investment Advisory Agreement and in the event of its assignment. In
addition, the JBIM Agreement is terminable at any time, without penalty, by
the Board of Directors of the Fund, by Advantus Capital or by vote of a
majority of the International Bond Portfolio's outstanding voting securities
on 60 days' written notice to JBIM and by JBIM on 60 days' written notice to
Advantus Capital. Unless sooner terminated, the JBIM Agreement shall
continue in effect from year to year if approved at least annually either by
the Board of Directors of the Fund or by a vote of a majority of the
outstanding voting securities of the International Bond Portfolio, provided
that in either event such continuance is also approved by the vote of a
majority of the Directors who are not interested persons of any party to the
JBIM Agreement, cast in person at a meeting called for the purpose of voting
on such approval.
Information concerning the services performed by Advantus Capital under
the Investment Advisory Agreement, by JBIM under the JBIM Agreement and the
fees payable and expenses borne by the Fund are set forth in the Prospectus,
which information is incorporated herein by reference.
SUB-ADVISER - 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
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") last Advantus Capital dated May 1, 1997, and became
effective after it was approved by shareholders on October 15, 1997. The
Morgan Management Agreement was last 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
January 14, 1998.
-16-
<PAGE>
The Morgan Management Agreement will terminate automatically upon the
termination of the Investment Advisory Agreement and in the event of its
assignment. In addition, the Morgan Management Agreement is terminable at
any time, without penalty, by the Board of Directors of the Fund, by Advantus
Capital or by vote of a majority of the Macro-Cap Value Portfolio's
outstanding voting securities on 60 days' written notice to Morgan Management
and by Morgan Management on 60 days' written notice to Advantus Capital.
Unless sooner terminated, the Morgan Management Agreement shall continue in
effect from year to year if approved at least annually either by the Board of
Directors of the Fund or by a vote of a majority of the outstanding voting
securities of the Macro-Cap Value Portfolio, provided that in either event
such continuance is also approved by the vote of a majority of the Directors
who are not interested persons of any party to the Morgan Management
Agreement, cast in person at a meeting called for the purpose of voting on
such approval.
Information concerning the services performed by Advantus Capital under
the Investment Advisory Agreement, by Morgan Management under the Morgan
Management Agreement and the fees payable and expenses borne by the Fund are
set forth in the Prospectus, which information is incorporated herein by
reference.
SUB-ADVISER - WALL STREET ASSOCIATES
Wall Street Associates ("WSA"), a California corporation with principal
offices at La Jolla Financial Building, Suite 100, 1200 Prospect Street, La
Jolla, California 92037, has been retained under an investment sub-advisory
agreement to provide investment advice and, in general, to conduct the
management investment program of the Micro-Cap Growth Portfolio, subject to
the general control of the Board of Directors of the Fund. WSA, founded in
1987, provides investment advisory services for institutional clients and
high net worth individuals. WSA is jointly and equally owned by its
founders, William Jeffery, III, Kenneth F. McCain and Richard S. Coons, who
also serve as fund managers.
INVESTMENT SUB-ADVISORY AGREEMENT - WSA
WSA acts as investment sub-adviser to the Fund's Micro-Cap Growth
Portfolio under an Investment Sub-Advisory Agreement (the "WSA last
Agreement") with Advantus Capital dated May 1, 1997 and became effective
after it was approved by shareholders on September 15, 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 January 14, 1998.
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.
-17-
<PAGE>
ADMINISTRATIVE SERVICES
In addition, effective May 1, 1992, the Fund entered into an
agreement with Minnesota Mutual under which Minnesota Mutual provides
accounting, legal and other administrative services to the Fund. Effective
May 1, 1997, Minnesota Mutual provides such services at a monthly cost of
$2,500 per Portfolio.
PORTFOLIO TRANSACTIONS AND ALLOCATION OF BROKERAGE
ADVISER
Advantus Capital selects and (where applicable) negotiates commissions with
the brokers who execute the transactions for all Portfolios of the Fund,
except for those Portfolios which have entered into Sub-Advisory Agreements. The
primary criteria for the selection of a broker is the ability of the broker,
in the opinion of Advantus Capital, to secure prompt execution of the
transactions on favorable terms, including the reasonableness of the commission
and considering the state of the market at the time. In selecting a broker,
Advantus Capital considers the quality and expertise of that brokerage and any
research services (as defined in the Securities Exchange Act of 1934), and
generally the Fund pays higher than the lowest commission rates available.
Such research services include advice, both directly and in writing, as to the
value of securities, the advisability of investing in, purchasing or selling
securities, and the availability of securities or purchasers or sellers of
securities, as well as analyses and reports concerning issues, industries,
securities, economic factors and trends, portfolio strategy, and the
performance of accounts. By allocating brokerage business in order to obtain
research services for Advantus Capital, the Fund enables Advantus Capital to
supplement its own investment research activities and allows Advantus Capital
to obtain the views and information of individuals and research staffs of many
different securities research firms prior to making investment decisions for
the Fund. To the extent such commissions are directed to these other brokers
who furnish research services to Advantus Capital, Advantus Capital receives a
benefit, not capable of evaluation in dollar amounts, without providing any
direct monetary benefit to the Fund from these commissions.
There is no formula for the allocation by Advantus Capital of the Fund's
brokerage business to any broker-dealers for brokerage and research services.
However, Advantus Capital will authorize the Fund to pay an amount of commission
for effecting a securities transaction in excess of the amount of commission
another broker would have charged only if Advantus Capital determines in good
faith that such amount of commission is reasonable in relation to the value of
the brokerage and research services provided by such broker viewed in terms of
either that particular transaction or Advantus Capital's overall
responsibilities with respect to the accounts as to which it exercises
investment discretion.
To the extent research services are used by Advantus Capital in
rendering investment advice to the Fund, such services would tend to reduce
Advantus Capital's expenses. However, Advantus Capital does not believe that
an exact dollar amount can be assigned to these services. Research services
received by Advantus Capital from brokers or dealers executing transactions
for the Fund will be available also for the benefit of other portfolios
managed by Advantus Capital, and conversely, research services received by
Advantus Capital in respect of transactions for such other portfolios will be
available for the benefit of the Fund. Brokerage Commissions paid during
1997 were as follows: Growth Portfolio, $707,244; Asset Allocation Portfolio,
$412,404; Index 500 Portfolio, $92,649; Capital Appreciation Portfolio,
$342,165; International Stock Portfolio, $163,231; Small Company Portfolio,
$168,318; Value Stock Portfolio, $494,532; Small Company Value, $5,739;
Index 400 Mid-Cap Portfolio, $3,192; Macro-Cap Value, $5,661 and Micro-Cap
Growth Portfolio, $7,115. Brokerage Commissions paid during 1996 were as
follows: Growth Portfolio, $974,688; Asset Allocation Portfolio, $569,804;
Index 500 Portfolio, $106,973; Capital Appreciation Portfolio, $431,845;
International Stock Portfolio, $207,263; Small Company Portfolio, $777,160;
and Value Stock Portfolio, $275,395. Brokerage Commissions paid during 1995
were as follows: Growth Portfolio, $474,096; Asset Allocation Portfolio,
$412,885; Index 500 Portfolio, $32,651; Capital Appreciation Portfolio,
$201,306; International Stock Portfolio, $154,775; Small Company Portfolio,
$85,238; and Value Stock Portfolio, $136,701. One hundred percent of the
brokerage commissions paid by the Portfolios during 1997, 1996 and 1995 was
paid to brokers to whom such transactions were directed in exchange for
research services.
-18-
<PAGE>
Most transactions in money market instruments will be purchases from
issuers of or dealers in money market instruments acting as principal. There
usually will be no brokerage commissions paid by the Fund for such purchases
since securities will be purchased on a net price basis. Trading does, however,
involve transaction costs. Transactions with dealers serving as primary market
makers reflect the spread between the bid and asked prices of securities.
Purchases of underwritten issues may be made which will reflect a fee paid to
the underwriter.
The Fund will not execute portfolio transactions through any affiliate,
except as described below. Advantus Capital believes that most research
services obtained by it generally benefit one or more of the investment
companies which it manages and also benefits accounts which it manages.
Normally research services obtained through managed funds and managed accounts
investing in common stocks would primarily benefit such funds and accounts;
similarly, services obtained from transactions in fixed income securities would
be of greater benefit to the managed funds and managed accounts investing in
debt securities.
In addition to providing investment management services to the Fund,
Advantus Capital provides investment advisory services for three insurance
companies, namely Minnesota Mutual and its subsidiary life insurance
companies and certain associated separate accounts. It also provides
investment advisory services to qualified pension and profit sharing plans,
corporations, partnerships, investment companies and various private
accounts. Frequently, investments deemed advisable for the Fund are also
deemed advisable for one or more of such accounts, so that Advantus Capital
may decide to purchase or sell the same security at or about the same time
for both the Fund and one of those accounts. In such circumstances, orders
for a purchase or sale of the same security for one or more of those accounts
may be combined with an order for the Fund, in which event the transactions
will be averaged as to price and normally allocated as nearly as practicable
in proportion to the amounts desired to be purchased or sold for each
account. While in some instances combined orders could adversely affect the
price or volume of a security, it is believed that the Fund's participation
in such transactions on balance will produce better net results for the Fund.
The Fund's acquisition during the fiscal year ended December 31, 1997, 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:
<TABLE>
<CAPTION>
Value of Securities Owned
in the Portfolios at
Name of Issuer End of Fiscal Year
-------------- -------------------------
<S> <C>
American General Finance $ 2,687,000
Bear Stearns Mortgage, Inc. 1,422,000
Chase Manhattan Corporation 2,380,000
Ford Motor Credit Company 5,041,000
GE Capital Corporation 15,282,000
JP Morgan & Company 1,072,000
Lehman Brothers, Inc. 11,956,000
Merrill Lynch & Company, Inc. 1,072,000
Morgan Stanley Dean Witter 16,779,000
Norwest Corporation 24,959,000
Paine Webber 1,177,000
Provident Distributors, Inc. 56,612,000
Prudential Home Mortagage 11,596,000
</TABLE>
-19-
<PAGE>
SUB-ADVISERS
Except as indicated below, each of the advisory firms having a
sub-advisory relationship with Advantus Capital, in managing the affected
Portfolios, intends to follow the same brokerage practices as those described
above for Advantus Capital. Templeton Counsel, in managing the International
Stock Portfolio, follows the same basic brokerage practices as those
described above for Advantus Capital. In addition, in selecting brokers for
portfolio transactions, Templeton Counsel takes into account its past
experience as to brokers qualified to achieve "best execution," including the
ability to effect transactions at all where a large block is involved,
availability of the broker to stand ready to execute possibly difficult
transactions in the future, the financial strength and stability of the
broker, and whether the broker specializes in foreign securities held by the
International Stock Portfolio. Purchases and sales of portfolio securities
within the United States other than on a securities exchange are executed
with primary market makers acting as principal, except where, in the judgment
of Templeton Counsel, better prices and execution may be obtained on a
commission basis or from other sources.
PURCHASE AND REDEMPTION OF SHARES
Shares of the Fund are currently offered continuously at prices equal to
the respective net asset values of the Portfolios, only to Minnesota Mutual and
its separate accounts. The Fund sells its shares to that company without the
use of any underwriter. It is possible that at some later date the Fund may
offer its shares to other investors and it reserves the right to do so.
Shares of the Fund are sold and redeemed at their net asset value next
computed after a purchase or redemption order is received by the Fund.
Depending upon the net asset values at that time, the amount paid upon
redemption may be more or less than the cost of the shares redeemed. Payment
for shares redeemed will generally be made within seven days after receipt of a
proper notice of redemption. The right to redeem shares or to receive payment
with respect to any redemption may only be suspended for any period during
which: (a) trading on the New York Stock Exchange is restricted as determined
by the Securities and Exchange Commission or such exchange is closed for other
than weekends and holidays; (b) an emergency exists, as determined by the
Securities and Exchange Commission, as a result of which disposal of Portfolio
securities or determination of the net asset value of a Portfolio is not
reasonably practicable; and (c) the Securities and Exchange Commission by order
permits postponement for the protection of shareholders.
FUND SHARES AND VOTING RIGHTS
The authorized capital of the Fund consists of one trillion shares of
capital stock (increased from ten billion shares on April 24, 1997) with a
par value of $.01 per share; with authorized shares of 100,000,000,000
allocated to each Portfolio. The remaining shares may be allocated by the
Board of Directors to any new or existing Portfolios.
-20-
<PAGE>
All shares of all Portfolios have equal voting rights, except that only
shares of a particular Portfolio are entitled to vote certain matters pertaining
only to that Portfolio. Pursuant to the Investment Company Act and the rules
and regulations thereunder, certain matters approved by a vote of all Fund
shareholders may not be binding on a Portfolio whose shareholders have not
approved such matter.
Each issued and outstanding share is entitled to one vote and to
participate equally in dividends and distributions declared by the respective
Portfolio and in net assets of such Portfolio upon liquidation or dissolution
remaining after satisfaction of outstanding liabilities. The shares of each
Portfolio, when issued, are fully paid and non-assessable, have no preemptive,
conversion, or similar rights, and are freely transferable. Fund shares do not
have cumulative voting rights, which means that the holders of more than half of
the Fund shares voting for election of directors can elect all of the directors
if they so choose. In such event, the holders of the remaining shares would not
be able to elect any directors.
The Fund will not hold periodically scheduled shareholder meetings.
Minnesota corporate law does not require an annual meeting. Instead, it
provides for the Board of Directors to convene shareholder meetings when it
deems appropriate. In addition, if a regular meeting of shareholders has not
been held during the immediately preceding fifteen months, a shareholder or
shareholders holding three percent or more of the voting shares of a Fund may
demand a regular meeting of shareholders of the Fund by written notice of demand
given to the chief executive officer or the chief financial officer of the Fund.
Within thirty days after receipt of the demand by one of those officers, the
Board of Directors shall cause a regular meeting of shareholders to be called
and held no later than ninety days after receipt of the demand, all at the
expense of the Fund. A special meeting may also be called at any time by the
chief executive officer, two or more directors, or a shareholder or shareholders
holding ten percent of the voting shares of the Fund. At a meeting called for
the purpose, shareholders may remove any director by a vote of two-thirds of the
outstanding shares. The Fund will assist shareholders seeking to call such a
meeting in communicating with other shareholders, provided they are at least ten
in number, have been shareholders for at least six months and hold in the
aggregate at least one percent of the outstanding shares or shares having a
value of at least $25,000, whichever is less. Additionally, the Investment
Company Act of 1940 requires shareholder votes for all amendments to fundamental
investment policies and restrictions, and for all investment advisory contracts
and amendments thereto.
NET ASSET VALUE
The net asset value of the shares of the Portfolios is computed once daily,
and, in the case of Money Market Portfolio, after the declaration of the daily
dividend, as of the primary closing time for business on the New York Stock
Exchange (as of the date hereof the primary close of trading is 3:00 p.m.
(Central Time), but this time may be changed) on each day, Monday through
Friday, except (i) days on which changes in the value of such Fund's portfolio
securities will not materially affect the current net asset value of such Fund's
shares, (ii) days during which no such Fund's shares are tendered for redemption
and no order to purchase or sell such Fund's shares is received by such Fund and
(iii) customary national business holidays on which the New York Stock Exchange
is closed for trading (as of the date hereof, New Year's Day, Presidents' Day,
Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day). The net asset value per share of each Portfolio is computed by
adding the sum of the value of the securities held by
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<PAGE>
that Portfolio plus any cash or other assets that it holds, subtracting all of
its liabilities, and dividing the result by the total number of shares
outstanding in that Portfolio at that time. Expenses, including the investment
advisory fee payable to Advantus Capital, are accrued daily.
Securities held by the Fund are valued at their market value. Otherwise,
such securities are valued at fair value as determined in good faith by the
Board of Directors, with calculations made by persons acting pursuant to the
direction of the Board. However, debt securities of the International Stock
Portfolio with maturities of 60 days or less when acquired, or which
subsequently are within 60 days of maturity, and all securities in the Money
Market Portfolio, are valued at amortized cost.
All instruments held by the Money Market Portfolio are valued on an
amortized cost basis. This involves valuing an instrument at its cost and
thereafter assuming a constant amortization to maturity of any discount or
premium, regardless of the impact of fluctuating interest rates on the market
value of the instrument. While this method provides certainty in valuation, it
may result in periods during which the value of an instrument in the Portfolio,
as determined by amortized cost, is higher or lower than the price the Portfolio
would receive if it sold the instrument. During periods of declining interest
rates, the daily yield on shares of the Portfolio computed by dividing the
annualized daily income of the Portfolio by the net asset value computed as
described above may tend to be higher than a like computation made by a
portfolio with identical investments utilizing a method of valuation based upon
market prices and estimates of market prices for all of its securities.
The Money Market Portfolio values its portfolio securities at amortized
cost in accordance with Rule 2a-7 under the Investment Company Act of 1940, as
amended. Pursuant to Rule 2a-7, the Board of Directors of the Fund has
determined, in good faith based upon a full consideration of all material
factors, that it is in the best interests of the Money Market Portfolio and its
shareholders to maintain a stable net asset value per share for such Portfolio
of a constant $1.00 per share by virtue of the amortized cost method of
valuation. The Money Market Portfolio will continue to use this method only so
long as the Board of Directors believes that it fairly reflects the market-based
net asset value per share. In accordance with Rule 2a-7, the Board of Directors
has undertaken, as a particular responsibility within the overall duty of care
owed to the Portfolio's shareholders, to establish procedures reasonably
designed, taking into account current market conditions and the Portfolio's
investment objective, to stabilize the Portfolio's net asset value per share at
a single value. These procedures include the periodic determination of any
deviation of current net asset value per share calculated using available market
quotations from the Portfolio's amortized cost price per share, the periodic
review by the Board of the amount of any such deviation and the method used to
calculate any such deviation, the maintenance of records of such determinations
and the Board's review thereof, the prompt consideration by the Board if any
such deviation exceeds 1/2 of 1%, and the taking of such remedial action by the
Board as it deems appropriate where it believes the extent of any such deviation
may result in material dilution or other unfair results to investors or existing
shareholders. Such remedial action may include reverse share splits,
redemptions in kind, selling portfolio instruments prior to maturity to realize
capital gains or losses, shortening the average portfolio maturity, withholding
dividends or utilizing a net asset value per share as determined by using
available market quotations.
-22-
<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,
1997 were 5.03% and 5.16%, respectively.
CURRENT YIELD FIGURES FOR OTHER PORTFOLIOS
Yield quotations for Portfolios other than the Money Market Portfolio
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
-23-
<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, 1997, the yields of the Growth Portfolio,
Bond Portfolio, Asset Allocation Portfolio, Mortgage Securities Portfolio,
Index 500 Portfolio, Capital Appreciation Portfolio, Small Company Portfolio,
the 1998, 2002, 2006 and 2010 Maturing Government Bond Portfolios and Value
Stock Portfolio were .59%, 4.59%, 2.08%, -.01%, 1.17%, -.28%, -.56%, 5.90%,
6.18%, 5.87%, 6.12% and 1.18%, respectively. For the four Maturing Government
Bond Portfolios, such figures reflect the voluntary absorption of certain
Fund expenses by Minnesota Mutual described under "Investment Adviser" in the
Prospectus. In the absence of such absorption of expenses, the yield figures
for such Portfolios would have been 5.42%, 5.33%, 4.96% and 5.01%,
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, 1997 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 12/31/97 Inception
----------- ---------
<S> <C> <C>
Growth Portfolio 347.6% (342.8%) 12/3/85
Bond Portfolio 174.1% (171.0%) 12/3/85
Money Market Portfolio 88.8% (82.4%) 12/3/85
Asset Allocation Portfolio 268.8% (268.8%) 12/3/85
Mortgage Securities Portfolio 146.1% (146.1%) 5/1/87
Index 500 Portfolio 331.8% (327.8%) 5/1/87
Capital Appreciation Portfolio 320.7% (316.7%) 5/1/87
International Stock Portfolio 105.1% (105.1%) 5/1/92
Small Company Portfolio 88.9% (88.9%) 5/3/93
Maturing Government Bond -
-24-
<PAGE>
1998 Portfolio 28.2% (26.0%) 5/2/94
2002 Portfolio 38.6% (34.0%) 5/2/94
2006 Portfolio 50.1% (43.8%) 5/2/94
2010 Portfolio 60.2% (51.1%) 5/2/94
Value Stock Portfolio 120.9% (120.3%) 5/2/94
Small Company Value Portfolio 2.3% (1.4%) 10/1/97
International Bond Portfolio .1% (.1%) 10/1/97
(now Global Bond Portfolio)
Index 400 Mid-Cap Portfolio .1% (-1.1%) 10/1/97
Macro-Cap Value Portfolio -2.1% (-2.6%) 10/1/97
Micro-Cap Growth Portfolio -13.2% (-14.0%) 10/1/97
</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, 1997 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
12/31/97 Ended 12/31/97 Ended 12/31/97 to 12/31/97 Inception
-------- -------------- -------------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Growth Portfolio 33.4% (33.4%) 15.4% (15.4%) 15.5% (15.4%) 13.2% (13.1%) 12/3/85
Bond Portfolio 9.4% (9.4%) 7.3% (7.3%) 8.7% (8.6%) 8.7% (8.6%) 12/3/85
Money Market Portfolio 5.1% (5.1%) 4.4% (4.3%) 5.3% (5.2%) 5.4% (5.1%) 12/3/85
Asset Allocation Portfolio 19.0% (19.0%) 11.9% (11.9%) 12.9% (12.9%) 11.4% (11.4%) 12/3/85
Mortgage Securities Portfolio 9.1% (9.1%) 7.4% (7.4%) 9.1% (9.1%) 8.8% (8.8%) 5/1/87
Index 500 Portfolio 32.4% (32.4%) 19.6% (19.6%) 17.4% (17.4%) 14.8% (14.7%) 5/1/87
Capital Appreciation Portfolio 28.3% (28.3%) 15.9% (15.9%) 16.4% (16.3%) 14.4% (14.3%) 5/1/87
-25-
<PAGE>
International Stock Portfolio 11.9% (11.9%) 17.1% (17.1%) N/A 13.5% (13.5%) 5/1/92
Small Company Portfolio 7.8% (7.8%) N/A N/A 14.6% (14.6%) 5/3/93
Maturing Government Bond-
1998 Portfolio 6.1% (5.5%) N/A N/A 7.0% (6.5%) 5/2/94
2002 Portfolio 8.5% (7.6%) N/A N/A 9.3% (8.3%) 5/2/94
2006 Portfolio 12.6% (11.6%) N/A N/A 11.7% (10.4%) 5/2/94
2010 Portfolio 17.9% (16.0%) N/A N/A 13.7% (11.9%) 5/2/94
Value Stock Portfolio 21.2% (21.2%) N/A N/A 24.1% (24.0%) 5/2/94
Small Company Value Portfolio N/A N/A N/A 2.3% (1.4%) 10/1/97
International Bond Portfolio
(now Global Bond Portfolio) N/A N/A N/A .1% (.1%) 10/1/97
Index 400 Mid-Cap Portfolio N/A N/A N/A .1% (-1.1%) 10/1/97
Macro-Cap Value Portfolio N/A N/A N/A -2.1% (-2.6%) 10/1/97
Micro-Cap Growth Portfolio N/A N/A N/A -13.2% (-14.0%) 10/1/97
</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
-26-
<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.
-27-
<PAGE>
TAXES
The Fund and each Portfolio qualified for the year ended December 31, 1997,
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, 1997,
of the Fund are incorporated by reference in this Statement of Additional
Information from the Fund's Annual Report to Shareholders for the year ended
December 31, 1997. The financial statements as of and for the year ended
December 31, 1997, and the Financial Highlights included in the Prospectus
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 with respect thereto and are included herein in
reliance upon such report and upon the authority of such firm as experts in
accounting and auditing.
-28-
<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.
-29-
<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;
-30-
<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.
-31-
<PAGE>
PART C. OTHER INFORMATION
-----------------
<PAGE>
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial statements: The Registrant's financial statements for the
year ended December 31, 1997, including the financial highlights for
each of the respective periods presented, appearing in the
Registrant's Annual Report, and the report thereon of the
Registrant's independent auditors, KPMG Peat Marwick LLP, also
appearing therein, are incorporated by reference in the Statement of
Additional Information included in Part B of this Registration
Statement. The following financial statements are included in such
Annual Report:
(1) Independent Auditors' Report - Advantus Series Fund, Inc.
(2) Investments in Securities - Advantus Series Fund, Inc.; Growth
Portfolio
(3) Investments in Securities - Advantus Series Fund, Inc.; Bond
Portfolio
(4) Investments in Securities - Advantus Series Fund, Inc.; Money
Market Portfolio
(5) Investments in Securities - Advantus Series Fund, Inc.; Asset
Allocation Portfolio
(6) Investments in Securities - Advantus Series Fund, Inc.;
Mortgage Securities Portfolio
(7) Investments in Securities - Advantus Series Fund, Inc.; Index
500 Portfolio
(8) Investments in Securities - Advantus Series Fund, Inc.;
Capital Appreciation Portfolio
(9) Investments in Securities - Advantus Series Fund, Inc.;
International Stock Portfolio
(10) Investments in Securities - Advantus Series Fund, Inc.; Small
Company Portfolio
(11) Investments in Securities - Advantus Series Fund, Inc.;
Maturing Government Bond 1998 Portfolio
(12) Investments in Securities - Advantus Series Fund, Inc.;
Maturing Government Bond 2002 Portfolio
(13) Investments in Securities - Advantus Series Fund, Inc.;
Maturing Government Bond 2006 Portfolio
(14) Investments in Securities - Advantus Series Fund, Inc.;
Maturing Government Bond 2010 Portfolio
(15) Investments in Securities - Advantus Series Fund, Inc.; Value
Stock Portfolio
(16) Investments in Securities - Advantus Series Fund, Inc.;
Small Company Value Portfolio
(17) Investments in Securities - Advantus Series Fund, Inc.;
International Bond Portfolio (Global Bond Portfolio after
May 1, 1998)
(18) Investments in Securities - Advantus Series Fund, Inc.;
Index 400 Mid-Cap Portfolio
(19) Investments in Securities - Advantus Series Fund, Inc.;
Macro-Cap Growth Portfolio
(20) Investments in Securities - Advantus Series Fund, Inc.;
Micro-Cap Growth Portfolio
(21) Statements of Assets and Liabilities - Advantus Series Fund,
Inc.
(22) Statements of Operations - Advantus Series Fund, Inc.
(23) Statements of Changes in Net Assets - Advantus Series Fund,
Inc.
(24) Notes to Financial Statements - Advantus Series Fund, Inc.
(b) Exhibits:
(1) Articles of Incorporation - as amended May 1, 1997 -
Previously filed as Exhibit 24(b)(1) to Registrant's Form
N-1A, File Number 2-96990, Post-Effective Amendment Number
16, is hereby incorporated by reference.
<PAGE>
(2)(i) Bylaws - Previously filed as Exhibit 24(b)(2)(i) to
Registrant's Form N-1A, File Number 2-96990,
Post-Effective Amendment Number 17, is hereby
incorporated by reference.
(2)(ii) Amendment to the Bylaws - Previously filed as Exhibit
24(b)(2)(ii) to Registrant's Form N-1A, File Number
2-96990, Post-Effective Amendment Number 17, is hereby
incorporated by reference.
(5)(A) Investment Advisory Agreement between the Registrant and
Advantus Capital Management, Inc. - Previously filed as
Exhibit 24(b)(5)(K) to Registrant's Form N-1A, File
Number 2-96990, Post-Effective Amendment Number 15, is
hereby incorporated by reference.
(5)(B) Investment Sub-Advisory Agreement between Advantus
Capital Management, Inc. and Winslow Capital Management,
Inc. - Previously filed as Exhibit 24(b)(5)(B) to
Registrant's Form N-1A, File Number 2-96990,
Post-Effective Amendment Number 17, is hereby
incorporated by reference.
(5)(C) Investment Sub-Advisory Agreement between Advantus
Capital Management, Inc. and Templeton Investment
Counsel, Inc. - Previously filed as Exhibit 24(b)(5)(C)
to Registrant's Form N-1A, File Number 2-96990,
Post-Effective Amendment Number 17, is hereby
incorporated by reference.
(5)(D) Investment Sub-Advisory Agreement between Advantus
Capital Management, Inc. and J.P. Morgan Investment
Management Inc. - Previously filed as Exhibit 24(b)(5)(L)
to Registrant's Form N-1A, File Number 2-96990,
Post-Effective Amendment Number 15, is hereby
incorporated by reference.
(5)(E) Investment Sub-Advisory Agreement between Advantus
Capital Management, Inc. and Wall Street Associates -
Previously filed as Exhibit 24(b)(5)(N), File Number
2-96990, Post-Effective Amendment Number 15, is hereby
incorporated by reference.
(5)(F) 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)(i) to Registrant's Form N-1A, File
Number 2-96990, Post-Effective Amendment Number 17, is
hereby incorporated by reference.
(8)(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.
<PAGE>
(8)(A)(iii) Amendment Number Two to Custodian Agreement between the
Registrant and First Trust National Association -
Previously filed as Exhibit 24(b)(8)(A)(iii) to
Registrant's N-1A, File Number 2-96990, Post-Effective
Amendment Number 16, is hereby incorporated by reference.
(8)(B)(i) Form of Custodian Agreement between the Registrant and
Norwest Bank Minnesota, N.A. - Previously filed as
Exhibit 24(b)(8)(B)(i) to Registrant's Form N-1A, File
Number 2-96990, Post-Effective Amendment Number 17, is
hereby incorporated by reference.
(8)(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 Form
N-1A, File Number 2-96990, Post-Effective Amendment
Number 17, is hereby incorporated by reference.
(8)(B)(iii) Second Amendment to the Custodian Agreement between the
Registrant and Norwest Bank Minnesota, N.A. - Previously
filed as Exhibit 24(b)(8)(B)(iii) to Registrant's Form
N-1A, File Number 2-96990, Post-Effective Amendment
Number 17, is hereby incorporated by reference.
(8)(C)(i) Form of Custodian Agreement between the Registrant and
Bankers Trust Company - Previously filed as Exhibit
24(b)(8)(C)(i) to Registrant's Form N-1A, File Number
2-96990, Post-Effective Amendment Number 17, is hereby
incorporated by reference.
(8)(C)(ii) Amendment to the Custodian Agreement between the
Registrant and Bankers Trust Company - Previously filed
as Exhibit 24(b)(8)(C)(ii) to Registrant's Form N-1A,
File Number 2-96990, Post-Effective Amendment Number 17,
is hereby incorporated by reference.
(8)(D) Form of Custodian Agreement between the Registrant and
Bankers Trust Company - Previously filed as Exhibit
24(b)(8)(D) to Registrant's N-1A, File Number 2-96990,
Post-Effective Amendment Number 15, is hereby
incorporated by reference.
(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 17, is hereby
incorporated by reference.
(10) Opinion and Consent of Donald F. Gruber, Esq.
(11)(A) Consent of KPMG Peat Marwick LLP.
(11)(B) Consent of Dorsey & Whitney 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, Post-Effective Amendment Number 17, is hereby
incorporated by reference.
<PAGE>
(16) Schedules for Computation of Performance Quotation
(16)(A) Growth Portfolio (formerly the "Stock" Portfolio)
Performance Calculations - Previously filed as Exhibit
24(b)(16)(A) to Registrant's Form N-1A, File Number
2-96990, Post-Effective Amendment Number 17, is hereby
incorporated by reference.
(16)(B) Bond Portfolio Performance Calculations - Previously
filed as Exhibit 24(b)(16)(B) to Registrant's Form N-1A,
File Number 2-96990, Post-Effective Amendment Number 17,
is hereby incorporated by reference.
(16)(C) Money Market Portfolio Performance Calculations -
Previously filed as Exhibit 24(b)(16)(C) to Registrant's
Form N-1A, File Number 2-96990, Post-Effective Amendment
Number 17, is hereby incorporated by reference.
(16)(D) Asset Allocation Portfolio (formerly the "Managed"
Portfolio) Performance Calculations - Previously filed as
Exhibit 24(b)(16)(D) to Registrant's Form N-1A, File
Number 2-96990, Post-Effective Amendment Number 17, is
hereby incorporated by reference.
(16)(E) Mortgage Securities Portfolio Performance Calculations -
Previously filed as Exhibit 24(b)(16)(E) to Registrant's
Form N-1A, File Number 2-96990, Post-Effective Amendment
Number 17, is hereby incorporated by reference.
(16)(F) Index 500 Portfolio (formerly the "Index" Portfolio)
Performance Calculations - Previously filed as Exhibit
24(b)(16)(F) to Registrant's Form N-1A, File Number
2-96990, Post-Effective Amendment Number 17, is hereby
incorporated by reference.
(16)(G) Capital Appreciation Portfolio (formerly the "Aggressive
Growth" Portfolio) Performance Calculations - Previously
filed as Exhibit 24(b)(16)(G) to Registrant's Form N-1A,
File Number 2-96990, Post-Effective Amendment Number 17,
is hereby incorporated by reference.
(16)(H) International Stock Portfolio Performance Calculations -
Previously filed as Exhibit 24(b)(16)(H) to Registrant's
Form N-1A, File Number 2-96990, Post-Effective Amendment
Number 17, is hereby incorporated by reference.
(16)(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 17, is hereby incorporated by reference.
(16)(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 17, is hereby incorporated by reference.
<PAGE>
(16)(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 17, is hereby
incorporated by reference.
(16)(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 17, is hereby
incorporated by reference.
(16)(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 17, is hereby
incorporated by reference.
(16)(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 17, is hereby
incorporated by reference.
(17)(A) Financial Data Schedule - Growth Portfolio.
(17)(B) Financial Data Schedule - Bond Portfolio.
(17)(C) Financial Data Schedule - Money Market Portfolio.
(17)(D) Financial Data Schedule - Asset Allocation Portfolio.
(17)(E) Financial Data Schedule - Mortgage Securities Portfolio.
(17)(F) Financial Data Schedule - Index 500 Portfolio.
(17)(G) Financial Data Schedule - Capital Appreciation Portfolio.
(17)(H) Financial Data Schedule - International Stock Portfolio.
(17)(I) Financial Data Schedule - Small Company Portfolio.
(17)(J) Financial Data Schedule - Maturing Government Bond - 1998
Portfolio.
(17)(K) Financial Data Schedule - Maturing Government Bond - 2002
Portfolio.
(17)(L) Financial Data Schedule - Maturing Government Bond - 2006
Portfolio.
(17)(M) Financial Data Schedule - Maturing Government Bond - 2010
Portfolio.
(17)(N) Financial Data Schedule - Value Stock Portfolio.
(17)(O) Financial Data Schedule - Small Company Value Portfolio.
(17)(P) Financial Data Schedule - International Bond Portfolio.
(17)(Q) Financial Data Schedule - Index 400 Mid-Cap Portfolio.
(17)(R) Financial Data Schedule - Macro-Cap Value Portfolio.
(17)(S) Financial Data Schedule - Micro-Cap Growth Portfolio.
<PAGE>
(19) Power of Attorney to sign Registration Statement executed
by Directors of Registrant - Previously filed as Exhibit
24(b)(19) to Registrant's Form N-1A, File Number 2-96990,
Post-Effective Amendment Number 17, is hereby
incorporated by reference.
<PAGE>
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
Northstar Life Insurance Company (New York)
Robert Street Energy, Inc.
HomePlus Insurance Company
Open-end registered investment company offering shares solely to separate
accounts of The Minnesota Mutual Life Insurance Company and Northstar Life
Insurance Company:
Advantus Series Fund, Inc.
Wholly-owned subsidiaries of MIMLIC Asset Management Company:
Ascend Financial Services, Inc.
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 Insurance Agency, Inc.
MCM Funding 1997-1, 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 Ascend Financial Services, Inc.:
MIMLIC Insurance Agency of Massachusetts, Inc. (Massachusetts)
<PAGE>
Majority-owned subsidiaries of MIMLIC Imperial Corporation:
J. H. Shoemaker Advisory Corporation (Tennessee)
Consolidated Capital Advisors, Inc. (Tennessee)
Majority-owned subsidiary of Ascend Financial Services, Inc.:
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:
<TABLE>
<CAPTION>
Number of
Title of Class Record Holders
-------------- --------------
<S> <C>
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 5
Maturing Government Bond - 2002 Portfolio 5
</TABLE>
<PAGE>
Maturing Government Bond - 2006 Portfolio 5
Maturing Government Bond - 2010 Portfolio 5
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) Advantus Capital Management, Inc.
Directors and Officers Office with
of Investment Adviser Investment Adviser Other Business Connections
- ---------------------- ------------------ --------------------------
<PAGE>
James P. Tatera Senior Vice President, Vice President, MIMLIC
Treasurer and Director Funding, Inc.; Second Vice
President, The Minnesota
Mutual Life Insurance
Company; Vice President
and Equity Portfolio
Manager, MIMLIC Asset
Management Company; Vice
President and Assistant
Secretary, MCM Funding
1997-1, Inc.
Jeffrey R. Erickson Vice President Investment Officer, The
Minnesota Mutual Life
Insurance Company;
Investment Officer, MIMLIC
Asset Management Company
Gary A. Aster Vice President Investment Officer, The
Minnesota Mutual Life
Insurance Company;
Investment Officer and
Equity Portfolio Manager,
MIMLIC Asset Management
Company
Thomas A. Gunderson Vice President Investment Officer, The
Minnesota Mutual Life
Insurance Company;
Investment Officer, MIMLIC
Asset Management Company
Wayne Schmidt Vice President Investment Officer, The
Minnesota Mutual Life
Insurance Company;
Investment Officer, MIMLIC
Asset Management Company;
Treasurer and Assistant
Secretary, Robert Street
Energy, Inc.;
Secretary/Treasurer,
MIMLIC Funding, Inc.;
Vice President and
Secretary, MIMLIC Imperial
Corporation; Assistant
Secretary, MCM Funding
1997-1, Inc.
Kent R. Weber Vice President Investment Officer, The
Minnesota Mutual Life
Insurance Company;
Investment Officer, MIMLIC
Asset Management Company
Richard W. Worthing Vice President Vice President and Head of
Equities, MIMLIC Asset
Management Company; Vice
President, MCM Funding
1997-1, Inc.
Kevin J. Hiniker Secretary Investment Officer, The
Minnesota Mutual Life
Insurance Company;
Associate General Counsel,
MIMLIC Asset Management
Company; Assistant
Secretary, Robert Street
Energy, Inc.
The Fund's investment adviser is Advantus Capital. In addition to the
Fund, it manages investment advisory accounts for a number of insurance
companies, namely Minnesota Mutual and its subsidiary life insurance
companies with respect to its equity securities, and certain associated
separate accounts. It also provides investment advisory services to the
Advantus Family of Mutual Funds, eleven registered investment companies,
and various private accounts.
<PAGE>
(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 Portfolio Manager and
Director, Winslow Capital
Management, Inc.
Richard E. Pyle Executive Vice Executive Vice President,
President and Portfolio Manager and
Director Director, Winslow Capital
Management, Inc.
Joseph J. Docter Senior Vice President Senior Vice President and
Portfolio Manager, Winslow
Capital Management, Inc.;
Partner and Equity
Portfolio Manager/Analyst,
Baird Capital Management;
Senior Vice President and
Senior Portfolio
Manager/Analyst, Firstar
Investment Research &
Management Co.
R. Bart Wear Senior Vice President Senior Vice President and
Portfolio Manager, Winslow
Capital Management, Inc.;
Partner and Equity
Portfolio Manager/Analyst,
Baird Capital Management;
Senior Vice President and
Senior Portfolio
Manager/Analyst, Firstar
Investment Research &
Management Co.
Jon R. Foust Managing Director Managing Director, Winslow
Capital Management, 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.; President and
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, Executive Financial Officer and
Vice President and Chief Treasurer of Franklin
Operating Officer Resources, Inc.
777 Mariners Island Blvd.
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
Keith Morgan Schappert President, Director & Morgan Guaranty Trust
Managing Director Company, Managing Director
William Lyman Cobb, Jr. Director, Managing Morgan Guaranty Trust
Director and Vice Company; Managing Director
Chairman
Thomas Michael Luddy Director & Morgan Guaranty Trust
Managing Director Company, Managing Director
Jean Louis Pierre Director & Morgan Guaranty Trust
Brunel Managing Director Company; Managing Director
Robert Anthony Anselmi Director/ Managing Morgan Guaranty Trust
Director & Secretary Company; Managing Director
and Assistant Secretary
John Robert Thomas Director & Managing Morgan Guaranty Trust
Director Company; Managing Director
Kenneth Warren Anderson Director/Managing Morgan Guaranty Trust
Director Company; 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
(e) 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
(f) 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 Chairman Baer Holding, Ltd.;
Management
Committee Member
Bahnhofstrasse 36
Zurich, Switzerland
CH8010
Jay A. Dirnberger Managing Director Julius Baer Securities,
and Vice Chairman Inc.; Vice President
330 Madison Avenue
New York, NY 10017
Hans C. Mautner Director Corporate Property
Investors, President
and Trustee
305 E. 47th Street
New York, NY 10017
Jonathan C. Minter Managing Director &
JBIM, London Office Vice Chairman
Alessandro E. Fusina Director Ilander, Ltd.
President
330 Madison Avenue
New York, NY 10017
Cynthia Young-Jones 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 and Micro-Cap Growth Portfolios; (b)
Norwest Bank Minnesota, N.A., 733 Marquette Avenue, Minneapolis, Minnesota
55479, as to the Money Market and International Stock Portfolios; and (c)
Bankers Trust Company, 280 Park Avenue, New York, New York 10017, as to the
Bond, Mortgage Securities, the four Maturing Government Bond Portfolios and
the Global Bond Portfolios.
ITEM 31. MANAGEMENT SERVICES
Not applicable.
ITEM 32. UNDERTAKINGS
(a) Not applicable.
(b) Not applicable.
(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 Investment Company Act of 1940, the
Registrant certifies that it meets all of the requirements for effectiveness
of this Post-Effective Amendment to its Registration Statement pursuant to
Rule 485(b) under the Securities Act of 1933 and 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 1st day of April, 1998.
ADVANTUS SERIES FUND, INC.
By /s/ Robert E. Hunstad
--------------------------
Robert E. Hunstad, 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
--------- ----- ----
* Director
- --------------------------------
Robert E. Hunstad
* Director
- --------------------------------
Frederick P. Feuerherm
* Director
- --------------------------------
Charles E. Arner
* Director
- --------------------------------
Ellen S. Berscheid
* Director
- --------------------------------
Ralph D. Ebbott
/s/Frederick P. Feuerherm Treasurer April 1, 1998
- -------------------------------- (chief financial
Frederick P. Feuerherm officer)
/s/Robert E. Hunstad President April 1, 1998
- -------------------------------- (chief accounting
Robert E. Hunstad officer)
/s/Robert E. Hunstad Attorney-in-Fact April 1, 1998
- --------------------------------
*By Robert E. Hunstad
* Pursuant to power of attorney dated January 14, 1998, previously filed
as exhibit Item 24(b)(19), to this Registration Statement.
<PAGE>
EXHIBIT INDEX
Exhibit Number Description of Exhibit
- -------------- ---------------------
(5)(F) Investment Sub-Advisory Agreement between Advantus Capital
Management, Inc. and Julius Baer Investment Management Inc.
(10) Opinion and Consent of Donald F. Gruber, Esq.
(11)(A) Consent of KPMG Peat Marwick LLP.
(11)(B) Consent of Dorsey & Whitney LLP.
(17)(A) Financial Data Schedule - Growth Portfolio.
(17)(B) Financial Data Schedule - Bond Portfolio.
(17)(C) Financial Data Schedule - Money Market Portfolio.
(17)(D) Financial Data Schedule - Asset Allocation Portfolio.
(17)(E) Financial Data Schedule - Mortgage Securities Portfolio.
(17)(F) Financial Data Schedule - Index 500 Portfolio.
(17)(G) Financial Data Schedule - Capital Appreciation Portfolio.
(17)(H) Financial Data Schedule - International Stock Portfolio.
(17)(I) Financial Data Schedule - Small Company Portfolio.
(17)(J) Financial Data Schedule - Maturing Government Bond - 1998
Portfolio.
(17)(K) Financial Data Schedule - Maturing Government Bond - 2002
Portfolio.
(17)(L) Financial Data Schedule - Maturing Government Bond - 2006
Portfolio.
(17)(M) Financial Data Schedule - Maturing Government Bond - 2010
Portfolio.
(17)(N) Financial Data Schedule - Value Stock Portfolio.
(17)(O) Financial Data Schedule - Small Company Value Portfolio.
(17)(P) Financial Data Schedule - International Bond Portfolio.
(17)(Q) Financial Data Schedule - Index 400 Mid-Cap Portfolio.
(17)(R) Financial Data Schedule - Macro-Cap Value Portfolio.
(17)(S) Financial Data Schedule - Micro-Cap Growth Portfolio.
<PAGE>
INVESTMENT SUB-ADVISORY AGREEMENT
(GLOBAL BOND PORTFOLIO)
THIS AGREEMENT, made as of the 1st day of May, 1998, 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., (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 Global
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, 1998, 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 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
<PAGE>
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 formulate and implement an
overall continuing program for managing the investment of the
assets of the Global Bond Portfolio, and shall amend and update
such program from time to time as financial and other economic
conditions warrant. 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; (3) make all determinations with respect to managing the
investment of the international component (as described in the
Prospectus) of the assets of the Global Bond Portfolio; (4)
determine allocation of assets of the Global Bond Portfolio among
domestic and international components; (5) manage currency and
foreign exchange position with respect to all components of the
assets and (6) 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.
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
-3-
<PAGE>
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 Global Bond Portfolio Assets .30%
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 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.
-4-
<PAGE>
(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.
(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.
-5-
<PAGE>
(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.
ADVANTUS CAPITAL MANAGEMENT, INC.
By:
------------------------------
Its:
------------------------------
Date:
------------------------------
JULIUS BAER INVESTMENT MANAGEMENT INC.
By:
------------------------------
Its:
------------------------------
Date:
------------------------------
-6-
<PAGE>
A-1
SCHEDULE A
TO THE
INVESTMENT ADVISORY AGREEMENT
AMENDED JANUARY 14, 1998
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:
<TABLE>
<CAPTION>
PORTFOLIO FEE RATE
- -------------------------------------------------------------------------------------
<S> <C>
Growth Portfolio 0.50%
Bond Portfolio 0.50%
Money Market Portfolio 0.50%
Asset Allocation Portfolio 0.50%
Mortgage Securities Portfolio 0.50%
Index 500 Portfolio 0.40%
Capital Appreciation 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%
Small Company Value Portfolio 0.75%
International Bond Portfolio 0.60%
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%
Global Bond Portfolio 0.60%
Real Estate Securities Portfolio 0.75%
</TABLE>
A-1
<PAGE>
THE MINNESOTA MUTUAL LIFE INSURANCE COMPANY
400 ROBERT STREET NORTH
ST. PAUL, MN 55101-2098
PH 612/665-3500
April 1, 1998 MINNESOTA MUTUAL
Advantus Series Fund, Inc.
Minnesota Mutual Life Center
400 Robert Street North
St. Paul, Minnesota 55101
RE: OPINION OF COUNSEL
Gentlepersons:
In my capacity as counsel for The Minnesota Mutual Life Insurance Company (the
"Company"), I have reviewed certain legal matters relating to the Advantus
Series Fund, Inc. in connection with its Post-Effective Amendment No. 18 to the
Registration Statement on Form N-1A. This Post-Effective Amendment is to be
filed by the Fund with the Securities and Exchange Commission under the
Securities Act of 1933, as amended, with respect to interest under the Fund
(Securities and Exchange Commission File Nos. 2-96990 and 811-4279).
Based upon that review, I am of the following opinion:
1. The Fund is a company duly created and validly existing pursuant to
the laws of the State of Minnesota; and
2. The issuance and sale of the Fund shares being registered, have been
duly authorized by the Fund and such shares, when issued in accordance
with and described in the current Prospectus contained in the
Registration Statement, and upon compliance with applicable local and
federal laws, will be legal and binding obligations of the Fund, fully
paid and nonassessible, in accordance with their terms.
I hereby consent to the filing of this opinion as an exhibit to the Registration
Statement.
Sincerely,
Donald F. Gruber
Assistant General Counsel
DFG:pjh
<PAGE>
KPMG Peat Marwick LLP Letterhead
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Advantus Series Fund, Inc.:
We consent to the references to our Firm under the headings "FINANCIAL
HIGHLIGHTS" and "COUNSEL AND INDEPENDENT AUDITORS" in Part A and "INDEPENDENT
AUDITORS" for Part B of the Registration Statement.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
April 1, 1998
<PAGE>
[Dorsey & Whitney LLP Letterhead]
The Minnesota Mutual Life
Insurance Company
400 Robert Street North
St. Paul, Minnesota 55101
Dear Sir/Madam:
We hereby consent to the reference to this firm under the caption "Counsel
and Independent Auditors" in Part A contained in the Post-Effective Amendment
Number 18 to the registration statement on Form N-1A of Advantus Series Fund,
Inc., File Number 2-96990, to be filed with the Securities and Exchange
Commission and to the use of this opinion as an exhibit to the Registration
Statement.
Dated: April 1, 1998
Very truly yours,
/s/ Dorsey & Whitney LLP
DORSEY & WHITNEY LLP
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<RESTATED>
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<RESTATED>
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<NAME> ADVANTUS SERIES FUND, INC.
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<RESTATED>
<CIK> 0000766351
<NAME> ADVANTUS SERIES FUND, INC.
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<RESTATED>
<CIK> 0000766351
<NAME> ADVANTUS SERIES FUND, INC.
<SERIES>
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<LEGEND>
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</LEGEND>
<RESTATED>
<CIK> 0000766351
<NAME> ADVANTUS SERIES FUND, INC.
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<RESTATED>
<CIK> 0000766351
<NAME> ADVANTUS SERIES FUND, INC.
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<RESTATED>
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<RESTATED>
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<SERIES>
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