<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 22
----
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment Number 20
---
---------------------
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)
(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
-----------------------
IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE (check appropriate box)
immediately upon filing pursuant to paragraph (b)
---
X on May 1, 2000 pursuant to paragraph (b)
---
60 days after filing pursuant to paragraph (a)(1)
---
on (date) pursuant to paragraph (a)(1)
---
75 days after filing pursuant to paragraph (a)(2)
---
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.
<PAGE>
[LOGO]
ADVANTUS SERIES FUND, INC.
PROSPECTUS DATED MAY 1, 2000
As with all mutual funds, the
Securities and Exchange Commission has
not determined that the information in
this prospectus is accurate or
complete, nor has it approved the
Fund's securities. It is a criminal
offense to state otherwise.
<PAGE>
ADVANTUS SERIES FUND, INC.
Advantus Series Fund, Inc. (Fund) is a Minnesota corporation with various
investment portfolios that are each operated as mutual funds (the Portfolios).
The Portfolios are as follows:
- Growth Portfolio
- Bond Portfolio
- Money Market Portfolio
- Asset Allocation Portfolio
- Mortgage Securities Portfolio
- Index 500 Portfolio
- Capital Appreciation Portfolio
- International Stock Portfolio
- Small Company Growth Portfolio
- Maturing Government Bond Portfolios (three separate portfolios with
maturity dates of 2002, 2006 and 2010)
- Value Stock Portfolio
- Small Company Value Portfolio
- Global Bond Portfolio
- Index 400 Mid-Cap Portfolio
- Macro-Cap Value Portfolio
- Micro-Cap Growth Portfolio
- Real Estate Securities Portfolio
The Fund has issued a separate series of its common stock for each Portfolio.
This prospectus provides investors information about the Fund and each Portfolio
investors should know before investing.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page No.
<S> <C>
SUMMARY .................................................... 1
Growth Portfolio .................................... 2
Portfolio Performance ............................ 3
Financial Highlights ............................. 4
Bond Portfolio ...................................... 5
Portfolio Performance ............................ 6
Financial Highlights ............................. 7
Money Market Portfolio .............................. 8
Portfolio Performance ............................ 9
Financial Highlights ............................. 10
Asset Allocation Portfolio .......................... 11
Portfolio Performance ............................ 12
Financial Highlights ............................. 13
Mortgage Securities Portfolio ....................... 14
Portfolio Performance ............................ 15
Financial Highlights ............................. 16
Index 500 Portfolio ................................. 17
Portfolio Performance ............................ 18
Financial Highlights ............................. 19
Capital Appreciation Portfolio ...................... 20
Portfolio Performance ............................ 21
Financial Highlights ............................. 22
International Stock Portfolio ....................... 23
Portfolio Performance ............................ 24
Financial Highlights ............................. 25
Small Company Growth Portfolio ...................... 26
Portfolio Performance ............................ 27
Financial Highlights ............................. 28
Maturing Government Bond Portfolios ................. 29
Portfolio Performance ............................ 30
Financial Highlights ............................. 32
Value Stock Portfolio ............................... 35
Portfolio Performance ............................ 36
Financial Highlights ............................. 37
Small Company Value Portfolio ....................... 38
Portfolio Performance ............................ 39
Financial Highlights ............................. 40
Global Bond Portfolio ............................... 41
Portfolio Performance ............................ 42
Financial Highlights ............................. 43
Index 400 Mid-Cap Portfolio ......................... 44
Portfolio Performance ............................ 45
Financial Highlights ............................. 46
Macro-Cap Value Portfolio ........................... 47
Portfolio Performance ............................ 48
Financial Highlights ............................. 49
</TABLE>
TABLE OF CONTENTS i
<PAGE>
<TABLE>
<CAPTION>
Page No.
<S> <C>
Micro-Cap Growth Portfolio .......................... 50
Portfolio Performance ............................ 51
Financial Highlights ............................. 52
Real Estate Securities Portfolio .................... 53
Portfolio Performance ............................ 54
Financial Highlights ............................. 55
INVESTING IN THE FUND ...................................... 56
Managing the Portfolios ............................. 56
Advisory Fees ....................................... 59
Distribution Fees ................................... 60
Voluntary Fee Absorption ............................ 60
Investment Objective, Policies and Practices ........ 61
Growth Portfolio ................................. 61
Bond Portfolio ................................... 61
Money Market Portfolio ........................... 63
Asset Allocation Portfolio ....................... 64
Mortgage Securities Portfolio .................... 65
Index 500 Portfolio .............................. 67
Capital Appreciation Portfolio ................... 68
International Stock Portfolio .................... 69
Small Company Growth Portfolio ................... 70
Maturing Government Bond Portfolios .............. 71
Value Stock Portfolio ............................ 73
Small Company Value Portfolio .................... 74
Global Bond Portfolio ............................ 75
Index 400 Mid-Cap Portfolio ...................... 77
Macro-Cap Value Portfolio ........................ 77
Micro-Cap Growth Portfolio ....................... 78
Real Estate Securities Portfolio ................. 79
Investment Practices Common To The Portfolios .... 80
Portfolio Turnover ............................... 81
Defining Risks ...................................... 81
BUYING AND SELLING SHARES .................................. 86
Buying Shares ....................................... 86
Selling Shares ...................................... 86
Exchanging Shares ................................... 87
GENERAL INFORMATION ........................................ 88
Dividends and Capital Gains Distributions ........... 88
Taxes ............................................... 88
Mixed Funding ....................................... 88
Service Providers ................................... 89
Additional Information About the Fund ............... 90
How to Obtain Additional Information ................ 90
</TABLE>
ii TABLE OF CONTENTS
<PAGE>
SUMMARY
Advantus Series Fund, Inc. consists of various investment portfolios (except
Global Bond Portfolio) that are each open-end, diversified investment companies
(I.E. mutual funds). Global Bond Portfolio is an open-end, non-diversified
investment company. The Portfolios offer investors a variety of investment
objectives. Portfolio shares are not offered directly to the public. Portfolio
shares are sold to Minnesota Life Insurance Company (Minnesota Life) in
connection with its variable life insurance policies and variable annuity
contracts. Portfolio shares are also offered to certain life insurance
affiliates of Minnesota Life.
This section gives investors a brief summary of each Portfolio's investment
objective, policies and main risks, as well as performance and financial
information. More detailed information about each Portfolio follows this
summary. Keep in mind that an investment in each Portfolio is not a deposit of a
bank and is not insured or guaranteed by the Federal Deposit Insurance
Corporation or any other governmental agency and that it is possible to lose
money by investing in a Portfolio. An investor should also note that if a
Portfolio makes frequent changes in its investment portfolio securities, such
changes may result in higher Portfolio costs and may adversely affect an
investor's return.
SUMMARY 1
<PAGE>
GROWTH PORTFOLIO
Growth Portfolio seeks long-term accumulation of capital. Current income is a
factor in the selection of securities, but is a secondary objective.
The Portfolio primarily invests in various equity securities of large and mid
capitalization companies (I.E., companies with a market capitalization of at
least $1 billion). The Portfolio invests primarily in common and preferred
stocks but may also invest in securities convertible into equity securities. In
selecting equity securities, the Portfolio invests in securities that the
Portfolio's investment adviser believes show sustainable earnings growth
potential and improving profitability.
An investment in the Portfolio may result in the loss of money, and may also be
subject to various risks including the following types of main risk:
- PORTFOLIO RISK - the risk that Portfolio performance may not meet or
exceed that of the market as a whole.
- MARKET RISK - the risk that equity securities are subject to adverse
trends in equity markets.
- GROWTH STOCK RISK - the risk that if the assessment by the Portfolio's
investment adviser of a company's prospective earnings growth or judgment
of how other investors assess the company's earnings growth is wrong, then
the value of the company's securities may decrease or not approach the
value that the Portfolio's investment adviser has placed on it.
Please see "Investing in the Fund - Investment Objective, Policies and
Practices" and "- Defining Risks" for a more detailed description of these main
risks and additional risks in connection with investing in the Portfolio.
2 SUMMARY
<PAGE>
PORTFOLIO PERFORMANCE
The following bar chart and table show Growth Portfolio's annual returns and
long-term performance. The chart shows how the Portfolio's performance has
varied from year to year, and provides some indication of the risks in investing
in the Portfolio. The table shows how the Portfolio's average annual return over
a one, five and ten year period compares to the return of a broad based index.
The chart and table assume reinvestment of dividends and distributions. The
chart and table do not, however, reflect the charges and other expenses
associated with the variable life insurance policies and variable annuity
contracts which invest in the Portfolio. If such charges and expenses were
included, the returns shown below would be lower. Like other mutual funds, the
past performance of the Portfolio does not necessarily indicate how the
Portfolio will perform in the future.
YEAR TO YEAR TOTAL RETURN (AS OF DECEMBER 31)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
'90 0.21%
'91 34.06%
'92 4.82%
'93 4.68%
'94 0.81%
'95 24.28%
'96 17.15%
'97 33.41%
'98 34.70%
'99 25.67%
</TABLE>
<TABLE>
<S> <C> <C>
Best Quarter: (Q4'98) 21.62%
Worst Quarter: (Q3'90) -13.51%
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
(FOR PERIODS ENDING DECEMBER 31, 1999)
1 Year 5 Years 10 Years
<S> <C> <C> <C> <C>
Growth Portfolio % 25.67 26.88 17.19
Russell 1000 Growth Index 33.14 32.42 20.32
</TABLE>
SUMMARY 3
<PAGE>
FINANCIAL HIGHLIGHTS
The following table describes the Portfolio's performance for the fiscal periods
indicated. "Total return" shows how much an investment in the Portfolio would
have increased (or decreased) during each period, assuming an investor had
reinvested all dividends and distributions. These figures have been audited by
KPMG LLP, the Fund's independent auditors, whose report, along with the Fund's
financial statements, are included in the Fund's annual report, which is
available upon request.
<TABLE>
FINANCIAL HIGHLIGHTS GROWTH PORTFOLIO
Year ended December 31,
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of year $ 2.74 2.40 2.34 2.21 1.87
INCOME FROM INVESTMENT OPERATIONS:
Net investment income -- .01 .02 .02 .02
Net gains on securities (both realized and unrealized) .67 .74 .62 .32 .41
Total from investment operations .67 .75 .64 .34 .43
LESS DISTRIBUTIONS:
Dividends from net investment income (.01) (.02) (.02) (.02) (.02)
Distributions from net realized gains (.07) (.39) (.56) (.19) (.07)
Total distributions (.08) (.41) (.58) (.21) (.09)
Net asset value, end of year $ 3.33 2.74 2.40 2.34 2.21
Total return (a) % 25.67 34.70 33.41 17.15 24.28
Net assets, end of year (in thousands) $ 594,676 468,382 330,816 248,465 201,678
Ratio of expenses to average daily net assets % .53 .53 .55 .59 .55
Ratio of net investment income to average daily net assets % .12 .40 1.16 1.04 1.04
Portfolio turnover rate (excluding short-term securities) % 65.3 66.4 120.1 154.7 91.9
</TABLE>
<TABLE>
<C> <S>
(a) Total return figures are based on a share outstanding
throughout the period and assume reinvestment of
distributions at net asset value. Total return figures do
not reflect 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.
</TABLE>
4 SUMMARY
<PAGE>
BOND PORTFOLIO
Bond Portfolio seeks as high a level of a long-term total rate of return as is
consistent with prudent investment risk. The Portfolio also seeks preservation
of capital as a secondary objective.
The Portfolio invests in a variety of investment-grade debt securities. These
debt securities include, among other things, corporate and mortgage-backed
securities, debt securities issued or guaranteed by the U.S. government or any
of its agencies or instrumentalities, asset-backed securities and other debt
obligations of U.S. banks or savings and loan associations. In selecting
securities, the Portfolio's investment adviser considers factors such as
industry outlook, current and anticipated market and economic conditions,
general levels of debt prices and issuer operations.
An investment in the Portfolio may result in the loss of money, and may also be
subject to various risks including the following types of main risk:
- INTEREST RATE RISK - the risk that the value of a debt security or fixed
income obligation will decline due to changes in market interest rates
(note: one measure of interest rate risk is effective duration, explained
under "Investing in the Fund - Investment Objective, Policies and
Practices - Bond Portfolio").
- INCOME RISK - the risk that the Portfolio may experience a decline in its
income due to falling interest rates.
- CREDIT RISK - the risk that an issuer of a debt security or fixed income
obligation will not make payments on the security or obligation when due.
- CALL RISK - the risk that securities with interest rates will be prepaid
by the issuer prior to maturity, particularly during periods of falling
interest rates, causing the Portfolio to reinvest the proceeds in other
securities with generally lower interest rates.
- PREPAYMENT RISK - the risk that falling interest rates could cause
prepayments of securities to occur more quickly than expected, causing the
Portfolio to reinvest the proceeds in other securities with generally
lower interest rates.
- EXTENSION RISK - the risk that rising interest rates could cause property
owners to prepay their mortgages more slowly than expected, resulting in
slower prepayments of mortgage-backed securities.
Please see "Investing in the Fund - Investment Objective, Policies and
Practices" and "- Defining Risks" for a more detailed description of these main
risks and additional risks in connection with investing in the Portfolio.
SUMMARY 5
<PAGE>
PORTFOLIO PERFORMANCE
The following bar chart and table show Bond Portfolio's annual returns and
long-term performance. The chart shows how the Portfolio's performance has
varied from year to year, and provides some indication of the risks in investing
in the Portfolio. The table shows how the Portfolio's average annual return over
a one, five and ten year period compares to the return of a broad based index.
The chart and table assume reinvestment of dividends and distributions. The
chart and table do not, however, reflect the charges and other expenses
associated with the variable life insurance policies and variable annuity
contracts which invest in the Portfolio. If such charges and expenses were
included, the returns shown below would be lower. Like other mutual funds, the
past performance of the Portfolio does not necessarily indicate how the
Portfolio will perform in the future.
YEAR TO YEAR TOTAL RETURN (AS OF DECEMBER 31)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
'90 7.23%
'91 17.60%
'92 6.67%
'93 10.25%
'94 -4.55%
'95 19.75%
'96 2.96%
'97 9.42%
'98 6.08%
'99 -2.73%
</TABLE>
<TABLE>
<S> <C> <C>
Best Quarter: (Q2'95) 6.81%
Worst Quarter: (Q1'94) -3.92%
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
(FOR PERIODS ENDING DECEMBER 31, 1999)
1 Year 5 Years 10 Years
<S> <C> <C> <C> <C>
Bond Portfolio % -2.73 6.84 7.02
Lehman Brothers Government/Corporate Bond Index -2.15 7.60 7.65
</TABLE>
6 SUMMARY
<PAGE>
FINANCIAL HIGHLIGHTS
The following table describes the Portfolio's performance for the fiscal periods
indicated. "Total return" shows how much an investment in the Portfolio would
have increased (or decreased) during each period, assuming an investor had
reinvested all dividends and distributions. These figures have been audited by
KPMG LLP, the Fund's independent auditors, whose report, along with the Fund's
financial statements, are included in the Fund's annual report, which is
available upon request.
<TABLE>
FINANCIAL HIGHLIGHTS BOND PORTFOLIO
Year ended December 31,
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of year $ 1.31 1.33 1.28 1.33 1.16
INCOME FROM INVESTMENT OPERATIONS:
Net investment income .07 .06 .08 .06 .07
Net gains (losses) on securities (both realized and
unrealized) (.10) .01 .04 (.03) .15
Total from investment operations (.03) .07 .12 .03 .22
LESS DISTRIBUTIONS:
Dividends from net investment income (.07) (.07) (.07) (.07) (.05)
Distributions from net realized gains (.03) (.02) -- (.01) --
Total distributions (.10) (.09) (.07) (.08) (.05)
Net asset value, end of year $ 1.18 1.31 1.33 1.28 1.33
Total return (a) % (2.73) 6.08 9.42 2.96 19.75
Net assets, end of year (in thousands) $ 181,881 178,793 139,824 125,886 101,045
Ratio of expenses to average daily net assets % .56 .55 .57 .56 .58
Ratio of net investment income to average daily net assets % 5.92 5.84 6.39 6.36 6.57
Portfolio turnover rate (excluding short-term securities) % 140.8 252.1 200.0 154.0 205.4
</TABLE>
<TABLE>
<C> <S>
(a) Total return figures are based on a share outstanding
throughout the period and assume reinvestment of
distributions at net asset value. Total return figures do
not reflect 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.
</TABLE>
SUMMARY 7
<PAGE>
MONEY MARKET PORTFOLIO
Money Market Portfolio seeks maximum current income to the extent consistent
with liquidity and the preservation of capital.
The Portfolio invests in a variety of U.S. dollar denominated money market
securities.
Although the Portfolio seeks to preserve the value of your investment at $1.00
per share, it is possible to lose money by investing in the Portfolio. An
investment in the Portfolio may result in the loss of money, and may also be
subject to various risks including the following types of main risk:
- INTEREST RATE RISK - the risk that the value of a fixed income obligation
will decline due to changes in market interest rates.
- INCOME RISK - the risk that the Portfolio may experience a decline in its
income due to falling interest rates.
- CREDIT RISK - the risk that an issuer of a debt security or other fixed
income obligation will not make payments on the security or obligation
when due.
- INFLATION RISK - the risk that inflation will erode the purchasing power
of the value of securities held by the Portfolio or the Portfolio's
dividends.
Please see "Investing in the Fund - Investment Objective, Policies and
Practices" and "- Defining Risks" for a more detailed description of these main
risks and additional risks in connection with investing in the Portfolio.
8 SUMMARY
<PAGE>
PORTFOLIO PERFORMANCE
The following bar chart and table show Money Market Portfolio's annual returns
and long-term performance. The chart shows how the Portfolio's performance has
varied from year to year, and provides some indication of the risks in investing
in the Portfolio. The table shows the Portfolio's average annual return over a
one, five and ten year period. The chart and table assume reinvestment of
dividends. The chart and table do not, however, reflect the charges and other
expenses associated with the variable life insurance policies and variable
annuity contracts which invest in the Portfolio. If such charges and expenses
were included, the returns shown below would be lower. Like other mutual funds,
the past performance of the Portfolio does not necessarily indicate how the
Portfolio will perform in the future.
YEAR TO YEAR TOTAL RETURN (AS OF DECEMBER 31)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
'90 7.73%
'91 5.44%
'92 3.23%
'93 2.68%
'94 3.71%
'95 5.43%
'96 4.92%
'97 5.11%
'98 4.97%
'99 4.71%
</TABLE>
<TABLE>
<S> <C> <C>
Best Quarter: (Q2'90) 1.90%
Worst Quarter: (Q2'93) .66%
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
(FOR PERIODS ENDING DECEMBER 31, 1999)
1 Year 5 Years 10 Years
<S> <C> <C> <C> <C>
Money Market Portfolio % 4.71 5.03 4.78
</TABLE>
An investor may obtain up-to-date information about the Portfolio's seven-day
current yield and seven-day effective yield by calling Minnesota Life at
(800) 995-3850.
SUMMARY 9
<PAGE>
FINANCIAL HIGHLIGHTS
The following table describes the Portfolio's performance for the fiscal periods
indicated. "Total return" shows how much an investment in the Portfolio would
have increased (or decreased) during each period, assuming an investor had
reinvested all dividends and distributions. These figures have been audited by
KPMG LLP, the Fund's independent auditors, whose report, along with the Fund's
financial statements, are included in the Fund's annual report, which is
available upon request.
<TABLE>
FINANCIAL HIGHLIGHTS MONEY MARKET PORTFOLIO
Year ended December 31,
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of year $ 1.00 1.00 1.00 1.00 1.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment income .05 .05 .05 .05 .05
Total from investment operations .05 .05 .05 .05 .05
LESS DISTRIBUTIONS:
Dividends from net investment income (.05) (.05) (.05) (.05) (.05)
Total distributions (.05) (.05) (.05) (.05) (.05)
Net asset value, end of year $ 1.00 1.00 1.00 1.00 1.00
Total return (a) % 4.71 4.97 5.11 4.92 5.43
Net assets, end of year (in thousands) $ 156,580 126,177 53,583 51,461 30,166
Ratio of expenses to average daily net assets % .56 .58 .59 .60 .64
Ratio of net investment income to average daily net assets % 4.61 4.84 5.13 4.81 5.29
</TABLE>
<TABLE>
<C> <S>
(a) Total return figures are based on a share outstanding
throughout the period and assume reinvestment of
distributions at net asset value. Total return figures do
not reflect 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.
</TABLE>
10 SUMMARY
<PAGE>
ASSET ALLOCATION PORTFOLIO
Asset Allocation Portfolio seeks as high a level of long-term total rate of
return as is consistent with prudent investment risk.
The composition of the Portfolio's investment portfolio will vary with
prevailing economic conditions. As a result, the Portfolio may invest in various
types and classes of securities including equity securities, investment-grade
debt securities, money market securities and mortgage-related securities. The
Portfolio's investments are allocated among these asset classes based on a
risk/return analysis by the Portfolio's investment adviser as to current
economic and market conditions, trends in investment yields and interest rates,
changes in fiscal or monetary policies and other relevant factors.
An investment in the Portfolio may result in the loss of money, and may also be
subject to various risks including the following types of main risk:
- PORTFOLIO RISK - the risk that Portfolio performance may not meet or
exceed that of the market as a whole.
- MARKET RISK - the risk that equity and debt securities are subject to
adverse trends in equity and debt markets.
- INTEREST RATE RISK - the risk that the value of a debt security or other
fixed income obligation will increase or decrease due to changes in market
interest rates (note: one measure of interest rate risk is effective
duration, explained under "Investing in the Fund - Investment Objective,
Policies and Practices - Asset Allocation Portfolio").
- INCOME RISK - the risk that the Portfolio may experience a decline in its
income due to falling interest rates.
- CREDIT RISK - the risk that an issuer of a debt security or other fixed
income obligation will not make payments on the security when due.
Please see "Investing in the Fund - Investment Objective, Policies and
Practices" and "- Defining Risks" for a more detailed description of these main
risks and additional risks in connection with investing in the Portfolio.
SUMMARY 11
<PAGE>
PORTFOLIO PERFORMANCE
The following bar chart and table show Asset Allocation Portfolio's annual
returns and long-term performance. The chart shows how the Portfolio's
performance has varied from year to year, and provides some indication of the
risks in investing in the Portfolio. The table shows how the Portfolio's average
annual return over a one, five and ten year period compares to the return of
certain selected broad based indices. The chart and table assume reinvestment of
dividends and distributions. The chart and table do not, however, reflect the
charges and other expenses associated with the variable life insurance policies
and variable annuity contracts which invest in the Portfolio. If such charges
and expenses were included, the returns shown below would be lower. Like other
mutual funds, the past performance of the Portfolio does not necessarily
indicate how the Portfolio will perform in the future.
YEAR TO YEAR TOTAL RETURN (AS OF DECEMBER 31)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
'90 3.61%
'91 28.88%
'92 7.27%
'93 6.46%
'94 -1.40%
'95 25.01%
'96 12.50%
'97 18.99%
'98 23.65%
'99 15.17%
</TABLE>
<TABLE>
<S> <C> <C>
Best Quarter: (Q4'98) 15.03%
Worst Quarter: (Q3'90) -5.96%
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
(FOR PERIODS ENDING DECEMBER 31, 1999)
1 Year 5 Years 10 Years
<S> <C> <C> <C> <C>
Asset Allocation Portfolio % 15.17 18.97 13.61
Russell 1000 Growth Index 33.14 32.42 20.32
Lehman Brothers Aggregate Bond Index -.83 7.73 7.70
Blended Index(1) 18.80 22.34 15.40
</TABLE>
<TABLE>
<C> <S>
(1) The blended index is comprised of 60 percent Russell 1000
Growth Index and 40 percent Lehman Brothers Aggregate Bond
Index.
</TABLE>
12 SUMMARY
<PAGE>
FINANCIAL HIGHLIGHTS
The following table describes the Portfolio's performance for the fiscal periods
indicated. "Total return" shows how much an investment in the Portfolio would
have increased (or decreased) during each period, assuming an investor had
reinvested all dividends and distributions. These figures have been audited by
KPMG LLP, the Fund's independent auditors, whose report, along with the Fund's
financial statements, are included in the Fund's annual report, which is
available upon request.
<TABLE>
FINANCIAL HIGHLIGHTS ASSET ALLOCATION PORTFOLIO
Year ended December 31,
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of year $ 2.28 2.03 1.87 1.83 1.52
INCOME FROM INVESTMENT OPERATIONS:
Net investment income .05 .05 .05 .05 .06
Net gains on securities (both realized and unrealized) .27 .40 .27 .16 .31
Total from investment operations .32 .45 .32 .21 .37
LESS DISTRIBUTIONS:
Dividends from net investment income (.10) (.06) (.05) (.06) (.05)
Distributions from net realized gains (.11) (.14) (.11) (.11) (.01)
Total distributions (.21) (.20) (.16) (.17) (.06)
Net asset value, end of year $ 2.39 2.28 2.03 1.87 1.83
Total return (a) % 15.17 23.65 18.99 12.50 25.01
Net assets, end of year (in thousands) $ 750,129 637,997 507,220 414,709 349,010
Ratio of expenses to average daily net assets % .53 .53 .55 .54 .55
Ratio of net investment income to average daily net assets % 2.28 2.51 3.10 3.09 3.75
Portfolio turnover rate (excluding short-term securities) % 97.0 129.6 140.2 120.1 157.0
</TABLE>
<TABLE>
<C> <S>
(a) Total return figures are based on a share outstanding
throughout the period and assume reinvestment of
distributions at net asset value. Total return figures do
not reflect 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.
</TABLE>
SUMMARY 13
<PAGE>
MORTGAGE SECURITIES PORTFOLIO
Mortgage Securities Portfolio seeks a high level of current income consistent
with prudent investment risk.
The Portfolio invests at least 65% of its total assets in mortgage-related
securities. The Portfolio invests a major portion of its assets in
investment-grade securities representing interests in pools of mortgage loans.
In addition, the Portfolio may invest in a variety of other mortgage-related
securities including collateralized mortgage obligations (CMOs) and stripped
mortgage-backed securities. In selecting securities, the Portfolio's investment
adviser considers factors such as prepayment risk, liquidity, credit quality and
the type of loan and collateral underlying the security, as well as trends in
economic conditions and interest rates.
An investment in the Portfolio may result in the loss of money, and may also be
subject to various risks including the following types of main risk:
- INTEREST RATE RISK - the risk that the value of a mortgage-backed security
or fixed income obligation will decline due to changes in market interest
rates (note: one measure of interest rate risk is effective duration,
explained under "Investing in the Fund - Investment Objective, Policies
and Practices - Mortgage Securities Portfolio").
- CREDIT RISK - the risk that an issuer of a mortgage-backed security or
fixed income obligation will not make payments on the security or
obligation when due.
- INCOME RISK - the risk that the Portfolio may experience a decline in its
income due to falling interest rates.
- CALL RISK - the risk that callable securities with high interest rates
will be prepaid by the issuer prior to maturity, particularly during
periods of falling interest rates, causing the Portfolio to reinvest the
proceeds in other securities with generally lower interest rates.
- PREPAYMENT RISK - the risk that falling interest rates could cause
prepayments of securities to occur more quickly than expected, causing the
Portfolio to reinvest the proceeds in other securities with generally
lower interest rates.
- EXTENSION RISK - the risk that rising interest rates could cause property
owners to prepay their mortgages more slowly than expected, resulting in
slower prepayments of mortgage-backed securities.
Please see "Investing in the Fund - Investment Objective, Policies and
Practices" and "- Defining Risks" for a more detailed description of these main
risks and additional risks in connection with investing in the Portfolio.
14 SUMMARY
<PAGE>
PORTFOLIO PERFORMANCE
The following bar chart and table show Mortgage Securities Portfolio's annual
returns and long-term performance. The chart shows how the Portfolio's
performance has varied from year to year, and provides some indication of the
risks in investing in the Portfolio. The table shows how the Portfolio's average
annual return over a one, five and ten year period compares to the return of a
broad based index. The chart and table assume reinvestment of dividends and
distributions. The chart and table do not, however, reflect the charges and
other expenses associated with the variable life insurance policies and variable
annuity contracts which invest in the Portfolio. If such charges and expenses
were included, the returns shown below would be lower. Like other mutual funds,
the past performance of the Portfolio does not necessarily indicate how the
Portfolio will perform in the future.
YEAR TO YEAR TOTAL RETURN (AS OF DECEMBER 31)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
'90 9.43%
'91 16.27%
'92 6.37%
'93 9.25%
'94 -3.37%
'95 18.01%
'96 5.26%
'97 9.14%
'98 6.57%
'99 1.99%
</TABLE>
<TABLE>
<S> <C> <C>
Best Quarter: (Q2'95) 5.90%
Worst Quarter: (Q1'94) -3.78%
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
(FOR PERIODS ENDING DECEMBER 31, 1999)
1 Year 5 Years 10 Years
<S> <C> <C> <C> <C>
Mortgage Securities Portfolio % 1.99 8.06 7.73
Lehman Brothers Mortgage-Backed Securities Index 1.85 7.98 7.78
</TABLE>
SUMMARY 15
<PAGE>
FINANCIAL HIGHLIGHTS
The following table describes the Portfolio's performance for the fiscal periods
indicated. "Total return" shows how much an investment in the Portfolio would
have increased (or decreased) during each period, assuming an investor had
reinvested all dividends and distributions. These figures have been audited by
KPMG LLP, the Fund's independent auditors, whose report, along with the Fund's
financial statements, are included in the Fund's annual report, which is
available upon request.
<TABLE>
FINANCIAL HIGHLIGHTS MORTGAGE SECURITIES PORTFOLIO
Year ended December 31,
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of year $ 1.22 1.21 1.19 1.21 1.10
INCOME FROM INVESTMENT OPERATIONS:
Net investment income .07 .08 .07 .08 .08
Net gains (losses) on securities (both realized and
unrealized) (.05) -- .03 (.02) .11
Total from investment operations .02 .08 .10 .06 .19
LESS DISTRIBUTIONS:
Dividends from net investment income (.07) (.07) (.08) (.08) (.08)
Total distributions (.07) (.07) (.08) (.08) (.08)
Net asset value, end of year $ 1.17 1.22 1.21 1.19 1.21
Total return (a) % 1.99 6.57 9.14 5.26 18.01
Net assets, end of year (in thousands) $ 138,815 124,358 99,233 75,992 69,746
Ratio of expenses to average daily net assets % .57 .57 .59 .58 .58
Ratio of net investment income to average daily net assets % 6.88 6.76 7.08 6.94 7.09
Portfolio turnover rate (excluding short-term securities) % 79.4 116.7 106.4 70.0 133.7
</TABLE>
<TABLE>
<C> <S>
(a) Total return figures are based on a share outstanding
throughout the period and assume reinvestment of
distributions at net asset value. Total return figures do
not reflect 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.
</TABLE>
16 SUMMARY
<PAGE>
INDEX 500 PORTFOLIO
Index 500 Portfolio seeks investment results that correspond generally to the
price and yield performance of the common stocks included in the Standard &
Poor's 500 Composite Stock Price Index (the S&P 500).
The Portfolio invests its assets in all of the common stocks included in the
S&P 500.
An investment in the Portfolio may result in the loss of money, and may also be
subject to various risks including the following types of main risk:
- MARKET RISK - the risk that equity securities are subject to adverse
trends in equity markets.
- INDEX PERFORMANCE RISK - the risk that the Portfolio's ability to
replicate the performance of the S&P 500 may be affected by, among other
things, changes in securities markets, the manner in which Standard &
Poor's Rating Services calculates the S&P 500, the amount and timing of
cash flows into and out of the Portfolio, commissions, and other expenses.
- PORTFOLIO RISK - the risk that Portfolio performance may not meet or
exceed that of the market as a whole.
Please see "Investing in the Fund - Investment Objective, Policies and
Practices" and "- Defining Risks" for a more detailed description of these main
risks and additional risks in connection with investing in the Portfolio.
SUMMARY 17
<PAGE>
PORTFOLIO PERFORMANCE
The following bar chart and table show Index 500 Portfolio's annual returns and
long-term performance. The chart shows how the Portfolio's performance has
varied from year to year, and provides some indication of the risks in investing
in the Portfolio. The table shows how the Portfolio's average annual return over
a one, five and ten year period compares to the return of a broad based index.
The chart and table assume reinvestment of dividends and distributions. The
chart and table do not, however, reflect the charges and other expenses
associated with the variable life insurance policies and variable annuity
contracts which invest in the Portfolio. If such charges and expenses were
included, the returns shown below would be lower. Like other mutual funds, the
past performance of the Portfolio does not necessarily indicate how the
Portfolio will perform in the future.
YEAR TO YEAR TOTAL RETURN (AS OF DECEMBER 31)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
'90 -3.92%
'91 29.75%
'92 7.38%
'93 9.76%
'94 1.18%
'95 36.83%
'96 21.64%
'97 32.36%
'98 27.99%
'99 20.28%
</TABLE>
<TABLE>
<S> <C> <C>
Best Quarter: (Q4'98) 21.29%
Worst Quarter: (Q3'90) -13.75%
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
(FOR PERIODS ENDING DECEMBER 31, 1999)
1 Year 5 Years 10 Years
<S> <C> <C> <C> <C>
Index 500 Portfolio % 20.28 27.67 17.56
S&P 500 (as adjusted for dividend reinvestment) 21.01 28.54 18.19
</TABLE>
18 SUMMARY
<PAGE>
FINANCIAL HIGHLIGHTS
The following table describes the Portfolio's performance for the fiscal periods
indicated. "Total return" shows how much an investment in the Portfolio would
have increased (or decreased) during each period, assuming an investor had
reinvested all dividends and distributions. These figures have been audited by
KPMG LLP, the Fund's independent auditors, whose report, along with the Fund's
financial statements, are included in the Fund's annual report, which is
available upon request.
<TABLE>
FINANCIAL HIGHLIGHTS INDEX 500 PORTFOLIO
Year ended December 31,
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of year $ 3.91 3.10 2.41 2.02 1.52
INCOME FROM INVESTMENT OPERATIONS:
Net investment income .04 .04 .03 .03 .03
Net gains on securities (both realized and unrealized) .74 .82 .73 .40 .51
Total from investment operations .78 .86 .76 .43 .54
LESS DISTRIBUTIONS:
Dividends from net investment income (.07) (.03) (.03) (.03) (.03)
Distributions from net realized gains (.06) (.02) (.04) (.01) (.01)
Total distributions (.13) (.05) (.07) (.04) (.04)
Net asset value, end of year $ 4.56 3.91 3.10 2.41 2.02
Total return (a) % 20.28 27.99 32.36 21.64 36.83
Net assets, end of year (in thousands) $ 657,824 536,859 380,751 204,395 123,999
Ratio of expenses to average daily net assets % .45 .44 .45 .45 .47
Ratio of net investment income to average daily net assets % .85 1.08 1.33 1.77 2.08
Portfolio turnover rate (excluding short-term securities) % 25.6 30.2 8.3 15.2 4.8
</TABLE>
<TABLE>
<C> <S>
(a) Total return figures are based on a share outstanding
throughout the period and assume reinvestment of
distributions at net asset value. Total return figures do
not reflect 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.
</TABLE>
SUMMARY 19
<PAGE>
CAPITAL APPRECIATION PORTFOLIO
Capital Appreciation Portfolio seeks growth of capital.
The Portfolio primarily invests in various types of equity securities of small,
mid and large capitalization companies. In selecting equity securities, the
Portfolio invests in securities that the Portfolio's investment sub-adviser
believes show possibilities for capital appreciation. The Portfolio's investment
sub-adviser seeks sectors and companies that will outperform the overall market,
and looks for themes or patterns associated with growth companies, such as
significant fundamental changes, generation of a large free cash flow or company
share-buyback programs.
An investment in the Portfolio may result in the loss of money, and may also be
subject to various risks including the following types of main risk:
- MARKET RISK - the risk that equity securities are subject to adverse
trends in equity markets.
- PORTFOLIO RISK - the risk that Portfolio performance may not meet or
exceed that of the market as a whole.
- GROWTH STOCK RISK - the risk that if the assessment by the Portfolio's
investment adviser of a company's prospective earnings growth or judgement
of how other investors assess the company's earnings growth is wrong, then
the value of the company's securities may decrease or not approach the
value that the Portfolio's investment adviser has placed on it.
- SMALL COMPANY RISK - the risk that equity securities of small
capitalization companies are subject to greater price volatility due to,
among other things, such companies' small size, limited product lines,
limited access to financing sources and limited management depth.
Please see "Investing in the Fund - Investment Objective, Policies and
Practices" and "- Defining Risks" for a more detailed description of these main
risks and additional risks in connection with investing in the Portfolio.
20 SUMMARY
<PAGE>
PORTFOLIO PERFORMANCE
The following bar chart and table show Capital Appreciation Portfolio's annual
returns and long-term performance. The chart shows how the Portfolio's
performance has varied from year to year, and provides some indication of the
risks in investing in the Portfolio. The table shows how the Portfolio's average
annual return over a one, five and ten year period compares to the return of a
broad based index. The chart and table assume reinvestment of dividends and
distributions. The chart and table do not, however, reflect the charges and
other expenses associated with the variable life insurance policies and variable
annuity contracts which invest in the Portfolio. If such charges and expenses
were included, the returns shown below would be lower. Like other mutual funds,
the past performance of the Portfolio does not necessarily indicate how the
Portfolio will perform in the future.
YEAR TO YEAR TOTAL RETURN (AS OF DECEMBER 31)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
'90 -2.05%
'91 41.79%
'92 5.04%
'93 10.44%
'94 2.25%
'95 22.78%
'96 17.61%
'97 28.26%
'98 30.83%
'99 21.51%
</TABLE>
<TABLE>
<S> <C> <C>
Best Quarter: (Q4'99) 29.80%
Worst Quarter: (Q3'90) -19.20%
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
(FOR PERIODS ENDING DECEMBER 31, 1999)
1 Year 5 Years 10 Years
<S> <C> <C> <C> <C>
Capital Appreciation Portfolio % 21.51 24.11 17.11
Russell 1000 Growth Index 33.14 32.42 20.32
</TABLE>
SUMMARY 21
<PAGE>
FINANCIAL HIGHLIGHTS
The following table describes the Portfolio's performance for the fiscal periods
indicated. "Total return" shows how much an investment in the Portfolio would
have increased (or decreased) during each period, assuming an investor had
reinvested all dividends and distributions. These figures have been audited by
KPMG LLP, the Fund's independent auditors, whose report, along with the Fund's
financial statements, are included in the Fund's annual report, which is
available upon request.
<TABLE>
FINANCIAL HIGHLIGHTS CAPITAL APPRECIATION PORTFOLIO
Year ended December 31,
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of year $ 3.54 2.85 2.47 2.16 1.81
INCOME FROM INVESTMENT OPERATIONS:
Net investment loss (.01) -- -- -- --
Net gains on securities (both realized and unrealized) .64 .86 .62 .37 .40
Total from investment operations .63 .86 .62 .37 .40
LESS DISTRIBUTIONS:
Distributions from net realized gains (.47) (.17) (.24) (.06) (.05)
Total distributions (.47) (.17) (.24) (.06) (.05)
Net asset value, end of year $ 3.70 3.54 2.85 2.47 2.16
Total return (a) % 21.51 30.83 28.26 17.61 22.78
Net assets, end of year (in thousands) $ 457,449 392,800 294,665 214,468 163,520
Ratio of expenses to average daily net assets % .79 .78 .80 .85 .80
Ratio of net investment (loss) to average daily net assets % (.24) (.21) (.12) (.09) (.15)
Portfolio turnover rate (excluding short-term securities) % 114.1 82.7 74.0 62.9 51.1
</TABLE>
<TABLE>
<C> <S>
(a) Total return figures are based on a share outstanding
throughout the period and assume reinvestment of
distributions at net asset value. Total return figures do
not reflect 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.
</TABLE>
22 SUMMARY
<PAGE>
INTERNATIONAL STOCK PORTFOLIO
International Stock Portfolio seeks long-term capital growth.
The Portfolio primarily invests in equity securities issued by small, mid and
large capitalization foreign companies and governmental agencies. In addition,
the Portfolio may invest lesser portions of its assets in foreign
investment-grade debt securities. In selecting equity securities, the
Portfolio's investment sub-adviser performs a company-by-company analysis,
rather than focusing on a specific industry or economic sector. The Portfolio's
investment sub-adviser concentrates on the market price of a company relative to
its view regarding the company's long-term earnings potential.
An investment in the Portfolio may result in the loss of money, and may also be
subject to various risks including the following types of main risk:
- MARKET RISK - the risk that equity securities are subject to adverse
trends in equity markets.
- PORTFOLIO RISK - the risk that Portfolio performance may not meet or
exceed that of the market as a whole.
- FOREIGN SECURITIES RISK - the risk that the value of foreign companies or
foreign government securities may be subject to greater volatility than
domestic securities due to additional factors related to investing in
foreign securities.
- CURRENCY RISK - the risk that changes in foreign currency exchange rates
will increase or decrease the value of foreign securities or the amount of
income or gain received on such securities.
Please see "Investing in the Fund - Investment Objective, Policies and
Practices" and "- Defining Risks" for a more detailed description of these main
risks and additional risks in connection with investing in the Portfolio.
SUMMARY 23
<PAGE>
PORTFOLIO PERFORMANCE
The following bar chart and table show International Stock Portfolio's annual
returns and long-term performance. The chart shows how the Portfolio's
performance has varied from year to year, and provides some indication of the
risks in investing in the Portfolio. The table shows how the Portfolio's average
annual return over a one and five year period and since the inception of the
Portfolio compares to the return of a broad based index. The chart and table
assume reinvestment of dividends and distributions. The chart and table do not,
however, reflect the charges and other expenses associated with the variable
life insurance policies and variable annuity contracts which invest in the
Portfolio. If such charges and expenses were included, the returns shown below
would be lower. Like other mutual funds, the past performance of the Portfolio
does not necessarily indicate how the Portfolio will perform in the future.
YEAR TO YEAR TOTAL RETURN (AS OF DECEMBER 31)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
'93 44.15%
'94 -0.32%
'95 14.23%
'96 19.79%
'97 11.94%
'98 6.61%
'99 21.43%
</TABLE>
<TABLE>
<S> <C> <C>
Best Quarter: (Q4'98) 14.54%
Worst Quarter: (Q3'98) -16.76%
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
(FOR PERIODS ENDING DECEMBER 31, 1999) From
1 Year 5 Years 10 Years Inception
<S> <C> <C> <C> <C> <C>
International Stock Portfolio
(inception 5/1/92) % 21.43 14.67 -- 13.58
Morgan Stanley Capital EAFE Index 27.30 13.15 7.34 13.55
</TABLE>
24 SUMMARY
<PAGE>
FINANCIAL HIGHLIGHTS
The following table describes the Portfolio's performance for the fiscal periods
indicated. "Total return" shows how much an investment in the Portfolio would
have increased (or decreased) during each period, assuming an investor had
reinvested all dividends and distributions. These figures have been audited by
KPMG LLP, the Fund's independent auditors, whose report, along with the Fund's
financial statements, are included in the Fund's annual report, which is
available upon request.
<TABLE>
FINANCIAL HIGHLIGHTS INTERNATIONAL STOCK PORTFOLIO
Year ended December 31,
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of year $ 1.73 1.71 1.60 1.41 1.24
INCOME FROM INVESTMENT OPERATIONS:
Net investment income .04 .04 .03 .03 .03
Net gains on securities (both realized and unrealized) .31 .08 .15 .24 .14
Total from investment operations .35 .12 .18 .27 .17
LESS DISTRIBUTIONS:
Dividends from net investment income (.05) (.05) (.05) (.04) --
Distributions from net realized gains (.09) (.05) (.02) (.04) --
Total distributions (.14) (.10) (.07) (.08) --
Net asset value, end of year $ 1.94 1.73 1.71 1.60 1.41
Total return (a) % 21.43 6.61 11.94 19.79 14.23
Net assets, end of year (in thousands) $ 363,849 310,873 287,170 213,608 140,770
Ratio of expenses to average daily net assets % .90 .94 .97 1.06 1.04
Ratio of net investment income to average daily net assets % 2.03 2.55 2.29 2.53 2.69
Portfolio turnover rate (excluding short-term securities) % 34.7 22.4 12.5 11.5 20.3
</TABLE>
<TABLE>
<C> <S>
(a) Total return figures are based on a share outstanding
throughout the period and assume reinvestment of
distributions at net asset value. Total return figures do
not reflect 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.
</TABLE>
SUMMARY 25
<PAGE>
SMALL COMPANY GROWTH PORTFOLIO
Small Company Growth Portfolio seeks long-term accumulation of capital.
The Portfolio primarily invests in various types of equity securities of small
capitalization companies at the time of purchase. The Portfolio invests
primarily in common and preferred stocks but may also invest in securities
convertible into equity securities. In selecting equity securities, the
Portfolio's investment sub-adviser employs a growth investment style and looks
for either developing or older companies in a growth stage or companies
providing products or services with a high unit-volume growth rate.
Under normal market conditions, the Portfolio will invest at least 65% of assets
in equity securities of small companies. The Portfolio considers a "small"
company to be one whose market capitalization is within the range of
capitalizations of companies in the Russell 2000 Growth Index. As of
December 31, 1999, market capitalizations of Russell 2000 Growth companies
ranged from $40 million to $13 billion.
Some companies may outgrow the definition of a small company after the Portfolio
has purchased their securities. These companies continue to be considered small
for purposes of the Portfolio's minimum 65% allocation to small company
equities. In addition, the Portfolio may invest in companies of any size once
the 65% policy is met. As a result, the Portfolio's average market
capitalization may sometimes exceed that of the largest company in the Russell
2000 Growth Index.
An investment in the Portfolio may result in the loss of money, and may also be
subject to various risks including the following types of main risk:
- MARKET RISK - the risk that equity securities are subject to adverse
trends in equity markets.
- PORTFOLIO RISK - the risk that Portfolio performance may not meet or
exceed that of the market as a whole.
- GROWTH STOCK RISK - the risk that if the assessment by the Portfolio's
investment adviser of a company's prospective earnings growth or judgment
of how other investors assess the company's earnings growth is wrong, then
the value of the company's securities may decrease or not approach the
value that the Portfolio's investment adviser has placed on it.
- SMALL COMPANY RISK - the risk that equity securities of small companies
are subject to greater price volatility due to, among other things, such
companies' small size, limited product lines, limited access to financing
sources and limited management depth.
Please see "Investing in the Fund - Investment Objective, Policies and
Practices" and "- Defining Risks" for a more detailed description of these main
risks and additional risks in connection with investing in the Portfolio.
26 SUMMARY
<PAGE>
PORTFOLIO PERFORMANCE
The following bar chart and table show Small Company Growth Portfolio's annual
returns and long-term performance. The chart shows how the Portfolio's
performance has varied from year to year, and provides some indication of the
risks in investing in the Portfolio. The table shows how the Portfolio's average
annual return over a one and five year period and since the inception of the
Portfolio compares to the return of a broad based index. The chart and table
assume reinvestment of dividends and distributions. The chart and table do not,
however, reflect the charges and other expenses associated with the variable
life insurance policies and variable annuity contracts which invest in the
Portfolio. If such charges and expenses were included, the returns shown below
would be lower. Like other mutual funds, the past performance of the Portfolio
does not necessarily indicate how the Portfolio will perform in the future.
YEAR TO YEAR TOTAL RETURN (AS OF DECEMBER 31)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
'94 6.16%
'95 32.06%
'96 6.45%
'97 7.75%
'98 1.27%
'99 45.63%
</TABLE>
<TABLE>
<S> <C> <C>
Best Quarter: (Q4'99) 45.45%
Worst Quarter: (Q3'98) -27.87%
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
(FOR PERIODS ENDING DECEMBER 31, 1999) From
1 Year 5 Years 10 Years Inception
<S> <C> <C> <C> <C> <C>
Small Company Growth Portfolio
(inception 5/3/93) % 45.63 17.44 -- 16.59
Russell 2000 Growth Index 43.10 18.99 13.51 16.99
</TABLE>
SUMMARY 27
<PAGE>
FINANCIAL HIGHLIGHTS
The following table describes the Portfolio's performance for the fiscal periods
indicated. "Total return" shows how much an investment in the Portfolio would
have increased (or decreased) during each period, assuming an investor had
reinvested all dividends and distributions. These figures have been audited by
KPMG LLP, the Fund's independent auditors, whose report, along with the Fund's
financial statements, are included in the Fund's annual report, which is
available upon request.
<TABLE>
FINANCIAL HIGHLIGHTS SMALL COMPANY GROWTH PORTFOLIO
Year ended December 31,
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of year $ 1.68 1.65 1.54 1.60 1.23
INCOME FROM INVESTMENT OPERATIONS:
Net investment loss (.01) -- -- -- --
Net gains on securities (both realized and unrealized) .77 .03 .11 .10 .39
Total from investment operations .76 .03 .11 .10 .39
LESS DISTRIBUTIONS:
Distributions from net realized gains -- -- -- (.16) (.02)
Total distributions -- -- -- (.16) (.02)
Net asset value, end of year $ 2.44 1.68 1.65 1.54 1.60
Total return (a) % 45.63 1.27 7.75 6.45 32.06
Net assets, end of year (in thousands) $ 269,881 195,347 182,917 144,544 98,895
Ratio of expenses to average daily net assets % .80 .79 .82 .81 .84
Ratio of net investment income (loss) to average daily net
assets % (.45) (.28) (.05) .24 .15
Portfolio turnover rate (excluding short-term securities) % 105.1 75.5 63.8 74.4 61.3
</TABLE>
<TABLE>
<C> <S>
(a) Total return figures are based on a share outstanding
throughout the period and assume reinvestment of
distributions at net asset value. Total return figures do
not reflect 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.
</TABLE>
28 SUMMARY
<PAGE>
MATURING GOVERNMENT BOND PORTFOLIOS
Each of the Maturing Government Bond Portfolios seeks as high an investment
return as is consistent with prudent investment risk for a specified period of
time ending on a specified liquidation date.
Each of the Portfolios primarily invests in debt securities issued by the United
States Treasury that are stripped of their unmatured interest coupons, and in
receipts and certificates for stripped debt obligations and stripped interest
coupons. In addition, each of the Portfolios may purchase other zero coupon
securities issued by the U.S. government and its agencies and instrumentalities,
by trusts where payment of principal and interest is guaranteed by the U.S. and
by other government corporations. Each Portfolio will mature on a specific
target date. The current target maturity dates are September 2002, 2006 and
2010. On each target date, the Portfolio will be converted to cash and
reinvested in another Fund Portfolio at the direction of the investor. If the
investor does not provide reinvestment instructions, then the proceeds will
automatically be invested in the Money Market Portfolio.
An investment in the Portfolio may result in the loss of money, and may also be
subject to various risks including the following types of main risk:
- INTEREST RATE RISK - the risk that the value of a debt security will
decline due to changes in market interest rates (note: interest rate risk
will affect the value of any of the Portfolio's zero coupon securities if
the Portfolio desires to redeem a security prior to the security's
maturity date. Otherwise, the Portfolio will receive the stated return
from a zero coupon security upon maturity that will not be affected by
changes in prevailing market interest rates). If an investor redeems
Portfolio shares prior to the Portfolio's maturity target date, then the
value of such Portfolio shares may be affected by interest rate risk.
- CREDIT RISK - the risk that an issuer of a fixed income obligation will
not make payments on the obligation when due (note: since the payment of
principal on Portfolio securities is backed by the full faith and credit
of the United States, this risk is less pervasive than other fixed
income-oriented mutual funds).
Please see "Investing in the Fund - Investment Objective, Policies and
Practices" and "- Defining Risks" for a more detailed description of these main
risks and additional risks in connection with investing in the Portfolio.
SUMMARY 29
<PAGE>
PORTFOLIO PERFORMANCE
The following bar chart and table show each of the Maturing Government Bond
Portfolio's annual returns and long-term performance. The chart shows how each
Portfolio's performance has varied from year to year, and provides some
indication of the risks in investing in each of the Portfolios. The table shows
how each Portfolio's average annual return over a one and five year period and
since the inception of the Portfolio compares to the return of a broad based
index. The chart and table assume reinvestment of dividends and distributions.
The chart and table do not, however, reflect the charges and other expenses
associated with the variable life insurance policies and variable annuity
contracts which invest in the Portfolio. If such charges and expenses were
included, the returns shown below would be lower. Like other mutual funds, the
past performance of each Portfolio does not necessarily indicate how such
Portfolio will perform in the future.
2002 PORTFOLIO
YEAR TO YEAR TOTAL RETURN (AS OF DECEMBER 31)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
'95 25.02%
'96 1.73%
'97 8.50%
'98 9.61%
'99 -.48%
</TABLE>
<TABLE>
<S> <C> <C>
Best Quarter: (Q2'95) 9.14%
Worst Quarter: (Q1'96) -3.36%
</TABLE>
2006 PORTFOLIO
YEAR TO YEAR TOTAL RETURN (AS OF DECEMBER 31)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
'95 34.72%
'96 -1.21%
'97 12.62%
'98 14.37%
'99 -7.81%
</TABLE>
<TABLE>
<S> <C> <C>
Best Quarter: (Q2'95) 12.66%
Worst Quarter: (Q1'96) -6.91%
</TABLE>
30 SUMMARY
<PAGE>
2010 PORTFOLIO
YEAR TO YEAR TOTAL RETURN (AS OF DECEMBER 31)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
'95 41.22%
'96 -3.42%
'97 17.87%
'98 14.28%
'99 -11.54%
</TABLE>
<TABLE>
<S> <C> <C>
Best Quarter: (Q2'95) 15.42%
Worst Quarter: (Q1'96) -10.09%
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
(FOR PERIODS ENDING DECEMBER 31, 1999) From
1 Year 5 Years Inception
<S> <C> <C> <C> <C>
2002 Portfolio
(inception 5/2/94) % -.48 8.52 7.53
Ryan Labs, Inc. September 2002
Index of U.S. Treasury Strips -.28 9.02 7.82
2006 Portfolio
(inception 5/2/94) -7.81 9.58 8.43
Ryan Labs, Inc. September 2006
Index of U.S. Treasury Strips -7.45 10.00 8.74
2010 Portfolio
(inception 5/2/94) -11.54 10.20 8.89
Ryan Labs, Inc. September 2010
Index of U.S. Treasury Strips -11.35 10.94 9.45
</TABLE>
SUMMARY 31
<PAGE>
FINANCIAL HIGHLIGHTS
The following tables describe each Portfolio's performance for the fiscal
periods indicated. "Total return" shows how much an investment in each of the
Portfolios would have increased (or decreased) during each period, assuming an
investor had reinvested all dividends and distributions. These figures have been
audited by KPMG LLP, the Fund's independent auditors, whose report, along with
the Fund's financial statements, are included in the Fund's annual report, which
is available upon request.
<TABLE>
FINANCIAL HIGHLIGHTS MATURING GOVERNMENT BOND 2002 PORTFOLIO
Year ended December 31,
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period $ 1.11 1.07 1.05 1.09 .93
INCOME FROM INVESTMENT OPERATIONS:
Net investment income .05 .05 .06 .06 .07
Net gains (losses) on securities
(both realized and unrealized) (.06) .06 .02 (.04) .16
Total from investment operations (.01) .11 .08 .02 .23
LESS DISTRIBUTIONS:
Dividends from net investment
income (.05) (.06) (.05) (.06) (.07)
Distributions from net realized
gains -- (.01) (.01) -- --
Total distributions (.05) (.07) (.06) (.06) (.07)
Net asset value, end of period $ 1.05 1.11 1.07 1.05 1.09
Total return (a) % (.48) 9.61 8.50 1.73 25.02
Net assets, end of period
(in thousands) $ 10,161 6,854 4,208 3,900 3,049
Ratio of expenses to average daily
net assets (b) % .40 .34 .20 .20 .20
Ratio of net investment income to
average daily net assets (b) % 5.37 5.74 5.99 6.52 6.52
Portfolio turnover rate (excluding
short-term securities) % 21.1 35.2 36.9 21.9 --
</TABLE>
(a) Total return figures are based on a share outstanding throughout the period
and assume reinvestment of distributions at net asset value. Total return
figures do not reflect 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 Life voluntarily absorbed $53,336, $37,949, $36,833, $31,158 and
$24,709 in expenses for the years ended December 31, 1999, 1998, 1997, 1996
and 1995, respectively. Had the Portfolio paid all fees and expenses, the
ratio of expenses to average daily net assets would have been 1.08%, 1.07%,
1.14%, 1.14% and 1.06%, respectively, and the ratio of net investment
income to average daily net assets would have been 4.69%, 5.01%, 5.05%,
5.58% and 5.66%, respectively.
32 SUMMARY
<PAGE>
<TABLE>
FINANCIAL HIGHLIGHTS MATURING GOVERNMENT BOND 2006 PORTFOLIO
Year ended December 31,
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period $ 1.25 1.16 1.09 1.17 .92
INCOME FROM INVESTMENT OPERATIONS:
Net investment income .07 .05 .07 .06 .07
Net gains (losses) on securities
(both realized and unrealized) (.16) .11 .07 (.07) .25
Total from investment operations (.09) .16 .14 (.01) .32
LESS DISTRIBUTIONS:
Dividends from net investment
income (.07) (.06) (.06) (.06) (.07)
Distributions from net realized
gains -- (.01) (.01) (.01) --
Total distributions (.07) (.07) (.07) (.07) (.07)
Net asset value, end of period $ 1.09 1.25 1.16 1.09 1.17
Total return (a) % (7.81) 14.37 12.62 (1.21) 34.72
Net assets, end of period
(in thousands) $ 6,261 6,870 3,900 3,095 2,570
Ratio of expenses to average daily
net assets (b) % .40 .40 .40 .40 .40
Ratio of net investment income to
average daily net assets (b) % 5.76 5.57 6.23 6.43 6.56
Portfolio turnover rate (excluding
short-term securities) % 19.8 21.6 3.1 25.7 10.0
</TABLE>
(a) Total return figures are based on a share outstanding throughout the period
and assume reinvestment of distributions at net asset value. Total return
figures do not reflect 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 Life voluntarily absorbed $56,178, $37,165, $37,425, $31,536 and
$25,199 in expenses for the years ended December 31, 1999, 1998, 1997, 1996
and 1995, respectively. Had the Portfolio paid all fees and expenses, the
ratio of expenses to average daily net assets would have been 1.26%, 1.12%,
1.50%, 1.58% and 1.56%, respectively, and the ratio of net investment
income to average daily net assets would have been 4.90%, 4.85%, 5.13%,
5.25% and 5.40% respectively.
SUMMARY 33
<PAGE>
<TABLE>
FINANCIAL HIGHLIGHTS MATURING GOVERNMENT BOND 2010 PORTFOLIO
Year ended December 31,
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period $ 1.41 1.29 1.17 1.21 .91
INCOME FROM INVESTMENT OPERATIONS:
Net investment income .08 .06 .07 .05 .07
Net gains (losses) on securities
(both realized and unrealized) (.24) .12 .11 (.09) .30
Total from investment operations (.16) .18 .18 (.04) .37
LESS DISTRIBUTIONS:
Dividends from net investment
income (.06) (.06) (.05) -- (.07)
Distributions from net realized
gains -- -- (.01) -- --
Total distributions (.06) (.06) (.06) -- (.07)
Net asset value, end of period $ 1.19 1.41 1.29 1.17 1.21
Total return (a) % (11.54) 14.28 17.87 (3.42) 41.22
Net assets, end of period
(in thousands) $ 4,942 5,648 3,176 2,813 1,384
Ratio of expenses to average daily
net assets (b) % .40 .40 .40 .40 .40
Ratio of net investment income to
average daily net assets (b) % 5.82 5.48 6.18 6.40 6.58
Portfolio turnover rate (excluding
short-term securities) % 28.4 28.2 39.3 71.0 --
</TABLE>
(a) Total return figures are based on a share outstanding throughout the period
and assume reinvestment of distributions at net asset value. Total return
figures do not reflect 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 Life voluntarily absorbed $55,419, $39,052, $38,967, $33,042 and
$26,308 in expenses for the years ended December 31, 1999, 1998, 1997, 1996
and 1995, respectively. Had the Portfolio paid all fees and expenses, the
ratio of expenses to average daily net assets would have been 1.43%, 1.33%,
1.85%, 2.18% and 2.68%, respectively, and the ratio of net investment
income to average daily net assets would have been 4.79%, 4.55%, 4.73%,
4.62% and 4.30%, respectively.
34 SUMMARY
<PAGE>
VALUE STOCK PORTFOLIO
Value Stock Portfolio seeks long-term accumulation of capital. The production of
income is a secondary objective of the Portfolio.
The Portfolio primarily invests in various types of equity securities of mid and
large capitalization companies (I.E., companies with a market capitalization of
at least $1.5 billion). These equity securities will consist primarily of common
stock, but may also include preferred stock and other securities convertible
into equity securities. In selecting equity securities, the Portfolio invests in
securities that the Portfolio's investment adviser believes are undervalued
relative to other securities, earn low returns with a potential for higher
returns, are undervalued relative to their potential for improved operating
performance and financial strength or are issued by companies that have recently
undergone a change in management or control and are undervalued relative to
their potential for improved operating performance.
An investment in the Portfolio may result in the loss of money, and may also be
subject to various risks including the following types of main risk:
- MARKET RISK - the risk that equity securities are subject to adverse
trends in equity markets.
- PORTFOLIO RISK - the risk that Portfolio performance may not meet or
exceed that of the market as a whole.
- VALUE STOCK RISK - the risk that the value of a security believed by the
Portfolio's investment adviser to be undervalued may never reach what such
investment adviser believes is its full value, or that such security's
value may decrease.
Please see "Investing in the Fund - Investment Objective, Policies and
Practices" and "- Defining Risks" for a more detailed description of these main
risks and additional risks in connection with investing in the Portfolio.
SUMMARY 35
<PAGE>
PORTFOLIO PERFORMANCE
The following bar chart and table show Value Stock Portfolio's annual returns
and long-term performance. The chart shows how the Portfolio's performance has
varied from year to year, and provides some indication of the risks in investing
in the Portfolio. The table shows how the Portfolio's average annual return over
a one and five year period and since the inception of the Portfolio compares to
the return of a broad based index. The chart and table assume reinvestment of
dividends and distributions. The chart and table do not, however, reflect the
charges and other expenses associated with the variable life insurance policies
and variable annuity contracts which invest in the Portfolio. If such charges
and expenses were included, the returns shown below would be lower. Like other
mutual funds, the past performance of the Portfolio does not necessarily
indicate how the Portfolio will perform in the future.
YEAR TO YEAR TOTAL RETURN (AS OF DECEMBER 31)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
'95 32.96%
'96 30.95%
'97 21.19%
'98 1.75%
'99 0.27%
</TABLE>
<TABLE>
<S> <C> <C>
Best Quarter: (Q4'98) 15.18%
Worst Quarter: (Q3'98) -13.65%
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
(FOR PERIODS ENDING DECEMBER 31, 1999) From
1 Year 5 Years 10 Years Inception
<S> <C> <C> <C> <C> <C>
Value Stock Portfolio
(inception 5/2/94) % .27 16.57 -- 15.39
Russell 1000 Value Index 7.34 23.07 15.60 20.52
</TABLE>
36 SUMMARY
<PAGE>
FINANCIAL HIGHLIGHTS
The following table describes the Portfolio's performance for the fiscal periods
indicated. "Total return" shows how much an investment in the Portfolio would
have increased (or decreased) during each period, assuming an investor had
reinvested all dividends and distributions. These figures have been audited by
KPMG LLP, the Fund's independent auditors, whose report, along with the Fund's
financial statements, are included in the Fund's annual report, which is
available upon request.
<TABLE>
FINANCIAL HIGHLIGHTS VALUE STOCK PORTFOLIO
Year ended December 31,
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 1.76 1.73 1.59 1.31 1.04
INCOME FROM INVESTMENT OPERATIONS:
Net investment income .02 .03 .01 .01 .01
Net gains (losses) on securities (both realized and
unrealized) (.02) -- .32 .39 .33
Total from investment operations -- .03 .33 .40 .34
LESS DISTRIBUTIONS:
Dividends from net investment income (.05) -- (.02) (.01) (.01)
Distributions from net realized gains -- -- (.17) (.11) (.06)
Total distributions (.05) -- (.19) (.12) (.07)
Net asset value, end of period $ 1.71 1.76 1.73 1.59 1.31
Total return (a) % .27 1.75 21.19 30.95 32.96
Net assets, end of period (in thousands) $ 191,380 214,046 208,093 97,187 31,825
Ratio of expenses to average daily net assets (b) % .80 .79 .80 .83 .89
Ratio of net investment income to average daily net
assets (b) % 1.26 1.54 1.13 1.28 1.25
Portfolio turnover rate (excluding short-term securities) % 131.2 88.9 115.4 88.6 164.2
</TABLE>
<TABLE>
<C> <S>
(a) Total return figures are based on a share outstanding
throughout the period and assume reinvestment of
distributions at net asset value. Total return figures do
not reflect 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 Life voluntarily absorbed $11,610 in expenses for
the year ended December 31, 1995. Had the Portfolio paid all
fees and expenses, the ratio of expenses to average daily
net assets would have been .95% and the ratio of net
investment income to average daily net assets would have
been 1.19%.
</TABLE>
SUMMARY 37
<PAGE>
SMALL COMPANY VALUE PORTFOLIO
Small Company Value Portfolio seeks long-term accumulation of capital.
The Portfolio primarily invests in various types of equity securities of small
capitalization companies (I.E. companies with a market capitalization of less
than $1.5 billion) at the time of purchase. These equity securities will consist
primarily of value common stocks, but may also include preferred stock and other
securities convertible into equity securities. In selecting equity securities,
the Portfolio's investment sub-adviser searches for those companies that appear
to be undervalued or trading below their true worth, and examines such features
as a firm's financial condition, business prospects, competitive position and
business strategy. The Fund looks for companies that appear likely to come back
into favor with investors, for reasons that may range from good prospective
earnings or strong management teams to new products or services.
An investment in the Portfolio may result in the loss of money, and may also be
subject to various risks including the following types of main risk:
- MARKET RISK - the risk that equity securities are subject to adverse
trends in equity markets.
- PORTFOLIO RISK - the risk that Portfolio performance may not meet or
exceed that of the market as a whole.
- VALUE STOCK RISK - the risk that the value of a security believed by the
Portfolio's investment adviser to be undervalued may never reach what such
investment adviser believes is its full value, or that such security's
value may decrease.
- SMALL COMPANY RISK - the risk that equity securities of small companies
are subject to greater price volatility due to, among other things, such
companies' small size, limited product lines, limited access to financing
sources and limited management depth.
- INITIAL PUBLIC OFFERING RISK - the risk that the Portfolio will not be
able to sustain the positive effect on performance that may result from
investments in initial public offerings (IPOs). The Portfolio's total
return in 1999 was enhanced by its investments in IPOs. The effect of IPOs
on the Portfolio's total returns going forward may not be positive, either
as a result of changes in the IPO market or growth of the Portfolio's
assets which may reduce its total return.
Please see "Investing in the Fund - Investment Objective, Policies and
Practices" and "- Defining Risks" for a more detailed description of these main
risks and additional risks in connection with investing in the Portfolio.
38 SUMMARY
<PAGE>
PORTFOLIO PERFORMANCE
The following bar chart and table show Small Company Value Portfolio's annual
returns and long-term performance. The chart shows how the Portfolio's
performance has varied from year to year, and provides some indication of the
risks in investing in the Portfolio. The table shows how the Portfolio's average
annual return over a one year period and since the inception of the Portfolio
compares to the return of a broad based index. The chart and table assume
reinvestment of dividends and distributions. The chart and table do not,
however, reflect the charges and other expenses associated with the variable
life insurance policies and variable annuity contracts which invest in the
Portfolio. If such charges and expenses were included, the returns shown below
would be lower. Like other mutual funds, the past performance of the Portfolio
does not necessarily indicate how the Portfolio will perform in the future.
YEAR TO YEAR TOTAL RETURN (AS OF DECEMBER 31)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
'98 -6.75%
'99 -3.07%
</TABLE>
<TABLE>
<S> <C> <C>
Best Quarter: (Q2'99) 15.97%
Worst Quarter: (Q3'98) -19.72%
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
(FOR PERIODS ENDING DECEMBER 31, 1999) From
1 Year 5 Years 10 Years Inception
<S> <C> <C> <C> <C> <C>
Small Company Value Portfolio
(inception 10/1/97) % -3.07 -- -- -3.42
Russell 2000 Value Index -1.50 13.14 12.46 -2.84
</TABLE>
SUMMARY 39
<PAGE>
FINANCIAL HIGHLIGHTS
The following table describes the Portfolio's performance for the fiscal periods
indicated. "Total return" shows how much an investment in the Portfolio would
have increased (or decreased) during each period, assuming an investor had
reinvested all dividends and distributions. These figures have been audited by
KPMG LLP, the Fund's independent auditors, whose report, along with the Fund's
financial statements, are included in the Fund's annual report, which is
available upon request.
<TABLE>
FINANCIAL HIGHLIGHTS SMALL COMPANY VALUE PORTFOLIO
Period from
Year ended October 1,
1997(a) to
December 31, December 31,
1999 1998 1997
<S> <C> <C> <C> <C>
Net asset value, beginning of period $ .95 1.03 1.01
INCOME FROM INVESTMENT OPERATIONS:
Net investment income .01 .01 --
Net gains (losses) on securities (both realized and
unrealized) (.04) (.08) .02
Total from investment operations (.03) (.07) .02
LESS DISTRIBUTIONS:
Dividends from net investment income (.01) (.01) --
Total distributions (.01) (.01) --
Net asset value, end of period $ .91 .95 1.03
Total return (b) % (3.07) (6.75) 2.30
Net assets, end of period (in thousands) $ 12,518 8,646 5,177
Ratio of expenses to average daily net assets (c) % .90 .90 .90(d)
Ratio of net investment income to average daily net
assets (c) % 1.42 1.52 1.13(d)
Portfolio turnover rate (excluding short-term securities) % 101.5 70.2 13.0
</TABLE>
<TABLE>
<C> <S>
(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) Total return figures are based on a share outstanding
throughout the period and assume reinvestment of
distributions at net asset value. Total return figures do
not reflect 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 Life voluntarily absorbed $67,886, $58,848 and
$11,517 in expenses for the years ended December 31, 1999
and 1998, and the period ended December 31, 1997,
respectively. Had the Portfolio paid all fees and expenses,
the ratio of expenses to average daily net assets would have
been 1.56%, 1.83% and 1.78%, respectively, and the ratio of
net investment income to average daily net assets would have
been .76%, .59% and .25%, respectively.
(d) Adjusted to an annual basis.
</TABLE>
40 SUMMARY
<PAGE>
GLOBAL BOND PORTFOLIO
Global Bond Portfolio seeks to maximize current income, consistent with the
protection of principal.
The Portfolio invests mainly in a variety of investment-grade debt securities
issued by domestic and foreign issuers. These debt securities include, among
other things, debt obligations issued or guaranteed by foreign governments or
any of their agencies or instrumentalities, debt obligations issued or
guaranteed by supranational organizations established or supported by foreign
governments and debt obligations issued by foreign companies. In addition, the
Portfolio may invest in U.S. debt obligations including, among other things,
corporate and mortgage-backed securities, debt securities issued or guaranteed
by the U.S. government or any of its agencies or instrumentalities, asset-backed
securities and other debt obligations of U.S. banks or savings and loan
associations.
An investment in the Portfolio may result in the loss of money, and may also be
subject to various risks including the following types of main risk:
- INTEREST RATE RISK - the risk that the value of a debt security or fixed
income obligation will decline due to changes in market interest rates
(note: one measure of interest rate risk is effective duration, explained
under "Investing in the Fund - Investment Objective, Policies and
Practices - Global Bond Portfolio").
- INCOME RISK - the risk that the Portfolio may experience a decline in its
income due to falling interest rates.
- CREDIT RISK - the risk that an issuer of a debt security or fixed income
obligation will not make payments on the security or obligation when due.
- CALL RISK - the risk that securities with interest rates will be prepaid
by the issuer prior to maturity, particularly during periods of falling
interest rates, causing the Portfolio to reinvest the proceeds in other
securities with generally lower interest rates.
- PREPAYMENT RISK - the risk that falling interest rates could cause
prepayments of securities to occur more quickly than expected, causing the
Portfolio to reinvest the proceeds in other securities with generally
lower interest rates.
- EXTENSION RISK - the risk that rising interest rates could cause property
owners to prepay their mortgages more slowly than expected, resulting in
slower prepayments of mortgage-backed securities.
- FOREIGN SECURITIES RISK - the risk that the value of foreign companies or
foreign government securities may be subject to greater volatility than
domestic securities due to additional factors related to investing in
foreign securities.
- CURRENCY RISK - the risk that changes in foreign currency exchange rates
will increase or decrease the value of foreign securities or the amount of
income or gain received on such securities.
Please see "Investing in the Fund - Investment Objective, Policies and
Practices" and "- Defining Risks" for a more detailed description of these main
risks and additional risks in connection with investing in the Portfolio.
SUMMARY 41
<PAGE>
PORTFOLIO PERFORMANCE
The following bar chart and table show Global Bond Portfolio's annual returns
and long-term performance. The chart shows how the Portfolio's performance has
varied from year to year, and provides some indication of the risks in investing
in the Portfolio. The table shows how the Portfolio's average annual return over
a one year period and from the inception of the Portfolio compares to the return
of a broad based index. The chart and table assume reinvestment of dividends and
distributions. The chart and table do not, however, reflect the charges and
other expenses associated with the variable life insurance policies and variable
annuity contracts which invest in the Portfolio. If such charges and expenses
were included, the returns shown below would be lower. Like other mutual funds,
the past performance of the Portfolio does not necessarily indicate how the
Portfolio will perform in the future.
YEAR TO YEAR TOTAL RETURN (AS OF DECEMBER 31)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
'98 16.18%
'99 -7.81%
</TABLE>
<TABLE>
<S> <C> <C>
Best Quarter: (Q3'98) 8.07%
Worst Quarter: (Q1'98) 2.21%
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
(FOR PERIODS ENDING DECEMBER 31, 1999) From
1 Year 5 Years 10 Years Inception
<S> <C> <C> <C> <C> <C>
Global Bond Portfolio
(inception 10/1/97) % -7.81 -- -- 3.13
Salomon Brothers World Government Bond
Index -4.27 6.42 8.04 4.58
</TABLE>
42 SUMMARY
<PAGE>
FINANCIAL HIGHLIGHTS
The following table describes the Portfolio's performance for the fiscal periods
indicated. "Total return" shows how much an investment in the Portfolio would
have increased (or decreased) during each period, assuming an investor had
reinvested all dividends and distributions. These figures have been audited by
KPMG LLP, the Fund's independent auditors, whose report, along with the Fund's
financial statements, are included in the Fund's annual report, which is
available upon request.
<TABLE>
FINANCIAL HIGHLIGHTS GLOBAL BOND PORTFOLIO
Period from
Year ended October 1,
1997(a) to
December 31, December 31,
1999 1998 1997
<S> <C> <C> <C> <C>
Net asset value, beginning of period $ 1.05 .98 1.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) .05 .05 (.02)
Net gains (losses) on securities (both realized and
unrealized) (.13) .11 .02
Total from investment operations (.08) .16 --
LESS DISTRIBUTIONS:
Dividends from net investment income (.03) (.03) (.01)
Distributions from net realized gains -- (.06) --
Excess distributions of net investment income -- -- (.01)
Total distributions (.03) (.09) (.02)
Net asset value, end of period $ .94 1.05 .98
Total return (b) % (7.81) 16.18 .10
Net assets, end of period (in thousands) $ 32,093 31,152 25,019
Ratio of expenses to average daily net assets % .94 1.13 1.60(c)
Ratio of net investment income to average daily % 5.90 4.86 3.66(c)
Portfolio turnover rate (excluding short-term securities) % 287.4 285.3 120.5
</TABLE>
<TABLE>
<C> <S>
(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) Total return figures are based on a share outstanding
throughout the period and assume reinvestment of
distributions at net asset value. Total return figures do
not reflect 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) Adjusted to an annual basis.
</TABLE>
SUMMARY 43
<PAGE>
INDEX 400 MID-CAP PORTFOLIO
Index 400 Mid-Cap Portfolio seeks investment results generally corresponding to
the aggregate price and dividend performance of the publicly traded common
stocks that comprise the Standard & Poor's 400 MidCap Index (the S&P 400).
The Portfolio invests at least 80% of its total assets in common stocks included
in the S&P 400.
An investment in the Portfolio may result in the loss of money, and may also be
subject to various risks including the following types of main risk:
- MARKET RISK - the risk that equity securities are subject to adverse
trends in equity markets.
- INDEX PERFORMANCE RISK - the risk that the Portfolio's ability to
replicate the performance of the S&P 400 may be affected by, among other
things, changes in securities markets, the manner in which Standard &
Poor's Rating Services calculates the S&P 400, the amount and timing of
cash flows into and out of the Portfolio, commissions, and other expenses.
- PORTFOLIO RISK - the risk that Portfolio performance may not meet or
exceed that of the market as a whole.
Please see "Investing in the Fund - Investment Objective, Policies and
Practices" and "- Defining Risks" for a more detailed description of these main
risks and additional risks in connection with investing in the Portfolio.
44 SUMMARY
<PAGE>
PORTFOLIO PERFORMANCE
The following bar chart and table show Index 400 Mid-Cap Portfolio's annual
returns and long-term performance. The chart shows how the Portfolio's
performance has varied from year to year, and provides some indication of the
risks in investing in the Portfolio. The table shows how the Portfolio's average
annual return over a one year period and from the inception of the Portfolio
compares to the return of a broad based index. The chart and table assume
reinvestment of dividends and distributions. The chart and table do not,
however, reflect the charges and other expenses associated with the variable
life insurance policies and variable annuity contracts which invest in the
Portfolio. If such charges and expenses were included, the returns shown below
would be lower. Like other mutual funds, the past performance of the Portfolio
does not necessarily indicate how the Portfolio will perform in the future.
YEAR TO YEAR TOTAL RETURN (AS OF DECEMBER 31)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
'98 16.68%
'99 15.96%
</TABLE>
<TABLE>
<S> <C> <C>
Best Quarter: (Q4'98) 26.59%
Worst Quarter: (Q3'98) -14.74%
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
(FOR PERIODS ENDING DECEMBER 31, 1999) From
1 Year 5 Years 10 Years Inception
<S> <C> <C> <C> <C> <C>
Index 400 Mid-Cap Portfolio
(inception 10/1/97) % 15.96 -- -- 14.40
S&P 400 MidCap Index 14.71 23.00 17.30 15.28
</TABLE>
SUMMARY 45
<PAGE>
FINANCIAL HIGHLIGHTS
The following table describes the Portfolio's performance for the fiscal periods
indicated. "Total return" shows how much an investment in the Portfolio would
have increased (or decreased) during each period, assuming an investor had
reinvested all dividends and distributions. These figures have been audited by
KPMG LLP, the Fund's independent auditors, whose report, along with the Fund's
financial statements, are included in the Fund's annual report, which is
available upon request.
<TABLE>
FINANCIAL HIGHLIGHTS INDEX 400 MID-CAP PORTFOLIO
Period from
Year ended October 1,
1997(a) to
December 31, December 31,
1999 1998 1997
<S> <C> <C> <C> <C>
Net asset value, beginning of period $ 1.15 1.01 1.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment income -- .01 --
Net gains on securities (both realized and unrealized) .15 .16 .01
Total from investment operations .15 .17 .01
LESS DISTRIBUTIONS:
Dividends from net investment income -- (.01) --
Distributions from net realized gains (.12) (.02) --
Total distributions (.12) (.03) --
Net asset value, end of period $ 1.18 1.15 1.01
Total return (b) % 15.96 16.68 .06
Net assets, end of period (in thousands) $ 24,357 10,511 5,052
Ratio of expenses to average daily net assets (c) % .55 .55 .55(d)
Ratio of net investment income to average daily net
assets (c) % .72 .78 .89(d)
Portfolio turnover rate (excluding short-term securities) % 76.6 85.4 4.9
</TABLE>
<TABLE>
<C> <S>
(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) Total return figures are based on a share outstanding
throughout the period and assume reinvestment of
distributions at net asset value. Total return figures do
not reflect 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 Life voluntarily absorbed $70,044, $52,946 and
$14,670 in expenses for the years ended December 31, 1999
and 1998, and the period ended December 31, 1997,
respectively. Had the Portfolio paid all fees and expenses,
the ratio of expenses to average daily net assets would have
been 1.00%, 1.36% and 1.70%, respectively, and the ratio of
net investment income (loss) to average daily net assets
would have been .27%, (.03)% and (.26)%, respectively.
(d) Adjusted to an annual basis.
</TABLE>
46 SUMMARY
<PAGE>
MACRO-CAP VALUE PORTFOLIO
Macro-Cap Value Portfolio seeks high total return.
The Portfolio primarily invests in common stocks of very large capitalization
domestic companies (I.E. typically companies with a market capitalization of at
least $8 billion) at the time of purchase. These equity securities will consist
primarily of common stock, but may also include preferred stock and other
securities convertible into equity securities. In selecting equity securities,
the Portfolio invests in securities that the Portfolio's investment sub-adviser
believes are undervalued relative to their potential for improved operating
performance and financial strength.
An investment in the Portfolio may result in the loss of money, and may also be
subject to various risks including the following types of main risk:
- MARKET RISK - the risk that equity securities are subject to adverse
trends in equity markets.
- PORTFOLIO RISK - the risk that Portfolio performance may not meet or
exceed that of the market as a whole.
- VALUE STOCK RISK - the risk that the value of a security believed by the
Portfolio's investment sub-adviser to be undervalued may never reach what
such investment sub-adviser believes is its full value, or that such
security's value may decrease.
- LARGE COMPANY RISK - the risk that a portfolio of very large
capitalization company securities may underperform the market as a whole.
Please see "Investing in the Fund - Investment Objective, Policies and
Practices" and "- Defining Risks" for a more detailed description of these main
risks and additional risks in connection with investing in the Portfolio.
SUMMARY 47
<PAGE>
PORTFOLIO PERFORMANCE
The following bar chart and table show Macro-Cap Value Portfolio's annual
returns and long-term performance. The chart shows how the Portfolio's
performance has varied from year to year, and provides some indication of the
risks in investing in the Portfolio. The table shows how the Portfolio's average
annual return over a one year period and from the inception of the Portfolio
compares to the return of a broad based index. The chart and tables assume
reinvestment of dividends and distributions. The chart and table do not,
however, reflect the charges and other expenses associated with the variable
life insurance policies and variable annuity contracts which invest in the
Portfolio. If such charges and expenses were included, the returns shown below
would be lower. Like other mutual funds, the past performance of the Portfolio
does not necessarily indicate how the Portfolio will perform in the future.
YEAR TO YEAR TOTAL RETURN (AS OF DECEMBER 31)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
'98 22.33%
'99 7.17%
</TABLE>
<TABLE>
<S> <C> <C>
Best Quarter: (Q4'98) 20.98%
Worst Quarter: (Q3'99) -12.25%
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
(FOR PERIODS ENDING DECEMBER 31, 1999) From
1 Year 5 Years 10 Years Inception
<S> <C> <C> <C> <C> <C>
Macro-Cap Value Portfolio
(inception 10/15/97) % 7.17 -- -- 11.92
S&P 500 Index (as adjusted for dividend
reinvestment) 21.01 28.54 18.19 23.67
</TABLE>
48 SUMMARY
<PAGE>
FINANCIAL HIGHLIGHTS
The following table describes the Portfolio's performance for the fiscal periods
indicated. "Total return" shows how much an investment in the Portfolio would
have increased (or decreased) during each period, assuming an investor had
reinvested all dividends and distributions. These figures have been audited by
KPMG LLP, the Fund's independent auditors, whose report, along with the Fund's
financial statements, are included in the Fund's annual report, which is
available upon request.
<TABLE>
FINANCIAL HIGHLIGHTS MACRO-CAP VALUE PORTFOLIO
Period from
Year ended October 15,
1997(a) to
December 31, December 31,
1999 1998 1997
<S> <C> <C> <C> <C>
Net asset value, beginning of period $ 1.14 .97 1.00
INCOME FROM INVESTMENT OPERATIONS:
Net investment income .01 .01 --
Net gains (losses) on securities (both realized and
unrealized) .07 .21 (.02)
Total from investment operations .08 .22 (.02)
LESS DISTRIBUTIONS:
Dividends from net investment income (.01) -- (.01)
Distributions from net realized gains (.05) (.05) --
Total distributions (.06) (.05) (.01)
Net asset value, end of period $ 1.16 1.14 .97
Total return (b) % 7.17 22.33 (2.13)
Net assets, end of period (in thousands) $ 22,570 11,088 4,923
Ratio of expenses to average daily net assets (c) % .85 .85 .85(d)
Ratio of net investment income to average daily net
assets(c) % .60 .69 2.04(d)
Portfolio turnover rate (excluding short-term securities) % 103.4 164.0 36.7
</TABLE>
<TABLE>
<C> <S>
(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 15, 1997.
(b) Total return figures are based on a share outstanding
throughout the period and assume reinvestment of
distributions at net asset value. Total return figures do
not reflect 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 Life voluntarily absorbed $102,703, $114,468 and
$22,940 in expenses for the years ending December 31, 1999
and 1998 and the period ending December 31, 1997. Had the
Portfolio paid all fees and expenses, the ratio of expenses
to average daily net assets would have been 1.48%, 2.53% and
3.13%, respectively, and the ratio of net investment income
(loss) to average daily net assets would have been (.03)%,
(.99)% and (.24)%, respectively.
(d) Adjusted to an annual basis.
</TABLE>
SUMMARY 49
<PAGE>
MICRO-CAP GROWTH PORTFOLIO
Micro-Cap Growth Portfolio seeks long-term capital appreciation.
The Portfolio primarily invests in equity securities of micro-cap companies
(I.E., companies with a market capitalization of less than $300 million) at the
time of purchase. The Portfolio primarily invests in common stock but may also
invest in preferred stock and securities convertible into equity securities. In
selecting equity securities, the Portfolio invests in securities that the
Portfolio's investment sub-adviser believes show sustainable earnings growth
potential and improving profitability.
An investment in the Portfolio may result in the loss of money, and may also be
subject to various risks including the following types of main risk:
- MARKET RISK - the risk that equity securities are subject to adverse
trends in equity markets.
- PORTFOLIO RISK - the risk that Portfolio performance may not meet or
exceed that of the market as a whole.
- MICRO-CAP COMPANY RISK - the risk that equity securities of micro-cap
companies are subject to greater price volatility due to, among other
things, such companies' small size, limited product lines, limited access
to financing sources and limited management depth.
- GROWTH STOCK RISK - the risk that if the assessment by the Portfolio's
investment sub-adviser of a company's prospective earnings growth or
judgment of how other investors assess the company's earnings growth is
wrong, then the value of the company's securities may decrease or not
approach the value that the Portfolio's investment sub-adviser has placed
on it.
- INITIAL PUBLIC OFFERING RISK - the risk that the Portfolio will not be
able to sustain the positive effect on performance that may result from
investments in initial public offerings (IPOs). The Portfolio's total
return in 1999 was enhanced by its investments in IPOs. The effect of IPOs
on the Portfolio's total returns going forward may not be positive, either
as a result of changes in the IPO market or growth of the Portfolio's
assets which may reduce its total return.
Please see "Investing in the Fund - Investment Objective, Policies and
Practices" and "- Defining Risks" for a more detailed description of these main
risks and additional risks in connection with investing in the Portfolio.
50 SUMMARY
<PAGE>
PORTFOLIO PERFORMANCE
The following bar chart and table show Micro-Cap Growth Portfolio's annual
returns and long-term performance. The chart shows how the Portfolio's
performance has varied from year to year, and provides some indication of the
risks in investing in the Portfolio. The table shows how the Portfolio's average
annual return over a one year period and since the inception of the Portfolio
compares to the return of a broad based index. The chart and table assume
reinvestment of dividends and distributions. The chart and table do not,
however, reflect the charges and other expenses associated with the variable
life insurance policies and variable annuity contracts which invest in the
Portfolio. If such charges and expenses were included, the returns shown below
would be lower. Like other mutual funds, the past performance of the Portfolio
does not necessarily indicate how the Portfolio will perform in the future.
YEAR TO YEAR TOTAL RETURN (AS OF DECEMBER 31)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
'98 13.44%
'99 148.77%
</TABLE>
<TABLE>
<S> <C> <C>
Best Quarter: (Q4'99) 82.84%
Worst Quarter: (Q3'98) -20.12%
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
(FOR PERIODS ENDING DECEMBER 31, 1999) From
1 Year 5 Years 10 Years Inception
<S> <C> <C> <C> <C> <C>
Micro-Cap Growth Portfolio
(inception 10/1/97) % 148.77 -- -- 48.85
Russell 2000 Growth Index 43.10 18.99 13.51 13.50
</TABLE>
SUMMARY 51
<PAGE>
FINANCIAL HIGHLIGHTS
The following table describes the Portfolio's performance for the fiscal periods
indicated. "Total return" shows how much an investment in the Portfolio would
have increased (or decreased) during each period, assuming an investor had
reinvested all dividends and distributions. These figures have been audited by
KPMG LLP, the Fund's independent auditors, whose report, along with the Fund's
financial statements, are included in the Fund's annual report, which is
available upon request.
<TABLE>
FINANCIAL HIGHLIGHTS MICRO-CAP GROWTH PORTFOLIO
Period from
Year ended October 1,
1997(a) to
December 31, December 31,
1999 1998 1997
<S> <C> <C> <C> <C>
Net asset value, beginning of period $ 1.01 .89 1.06
INCOME FROM INVESTMENT OPERATIONS:
Net gains (losses) on securities (both realized and
unrealized) 1.50 .12 (.14)
Total from investment operations 1.50 .12 (.14)
LESS DISTRIBUTIONS:
Distributions from net realized gains -- -- (.03)
Total distributions -- -- (.03)
Net asset value, end of period $ 2.51 1.01 .89
Total return (b) % 148.77 13.44 (13.20)
Net assets, end of period (in thousands) $ 42,554 8,034 4,591
Ratio of expenses to average daily net assets (c) % 1.25 1.25 1.25(d)
Ratio of net investment (loss) to average daily net
assets (c) % (.47) (.40) (.24)(d)
Portfolio turnover rate (excluding short-term securities) % 108.5 67.4 28.9
</TABLE>
<TABLE>
<C> <S>
(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) Total return figures are based on a share outstanding
throughout the period and assume reinvestment of
distributions at net asset value. Total return figures do
not reflect 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 Life voluntarily absorbed $50,020, $46,960 and
$11,102 in expenses for the years ended December 31, 1999
and 1998 and the period ended December 31, 1997,
respectively. Had the Portfolio paid all fees and expenses,
the ratio of expenses to average daily net assets would have
been 1.57%, 2.10% and 2.03%, respectively, and the ratio of
net investment income (loss) to average daily net assets
would have been (.79)%, (1.25)% and (1.02)%, respectively.
(d) Adjusted to an annual basis.
</TABLE>
52 SUMMARY
<PAGE>
REAL ESTATE SECURITIES PORTFOLIO
Real Estate Securities Portfolio seeks above average income and long-term growth
of capital.
Under normal circumstances, at least 65% of the Portfolio's total assets will be
invested in real estate and real estate-related securities. "Real estate
securities" include securities issued by companies that receive at least 50% of
their gross revenue from the construction, ownership, management, financing or
sale of residential, commercial or industrial real estate. "Real estate-related
securities" include securities issued by companies engaged in businesses that
sell or offer products or services that are closely related to the real estate
industry.
Most of the Portfolio's real estate securities portfolio will consist of
securities issued by Real Estate Investment Trusts (REITs) that are listed on a
securities exchange or traded over-the-counter. A REIT is a corporation or trust
that invests in fee or leasehold ownership of real estate mortgages or shares
issued by other REITs. In selecting securities, the Portfolio's investment
adviser considers factors such as a company's financial condition, financial
performance, policies and strategies, real estate properties and competitive
market condition.
An investment in the Portfolio may result in the loss of money, and may also be
subject to various risks including the following types of main risk:
- MARKET RISK - the risk that equity securities are subject to adverse
trends in equity markets.
- PORTFOLIO RISK - the risk that Portfolio performance may not meet or
exceed that of the market as a whole.
- REAL ESTATE RISK - the risk that the value of the Portfolio's investments
may decrease due to a variety of factors related to the construction,
development, ownership, financing, repair or servicing or other events
affecting the value of real estate, buildings or other real estate
fixtures.
- REIT-RELATED RISK - the risk that the value of the Portfolio's equity
securities issued by REITs will be adversely affected by changes in the
value of the underlying property.
Please see "Investing in the Fund - Investment Objective, Policies and
Practices" and "- Defining Risks" for a more detailed description of these main
risks and additional risks in connection with investing in the Portfolio.
SUMMARY 53
<PAGE>
PORTFOLIO PERFORMANCE
The following bar chart and table show Real Estate Securities Portfolio's annual
returns and long-term performance. The chart shows how the Portfolio's
performance has varied from year to year, and provides some indication of the
risks in investing in the Portfolio. The table shows how the Portfolio's average
annual return over a one year period and from the inception of the Portfolio
compares to the return of a broad based index. The chart and table assume
reinvestment of dividends and distributions. The chart and table do not,
however, reflect the charges and other expenses associated with the variable
life insurance policies and variable annuity contracts which invest in the
Portfolio. If such charges and expenses were included, the returns shown below
would be lower. Like other mutual funds, the past performance of the Portfolio
does not necessarily indicate how the Portfolio will perform in the future.
YEAR TO YEAR TOTAL RETURN (AS OF DECEMBER 31)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
'99 -3.89%
</TABLE>
<TABLE>
<S> <C> <C>
Best Quarter: (Q2'99) 13.98%
Worst Quarter: (Q3'99) -10.30%
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
(FOR PERIODS ENDING DECEMBER 31, 1999) From
1 Year Inception
<S> <C> <C> <C>
Real Estate Securities Portfolio
(inception 5/1/98) % -3.89 -11.33
Wilshire Associates Real Estate Securities Index -3.20 -10.59
</TABLE>
54 SUMMARY
<PAGE>
FINANCIAL HIGHLIGHTS
The following table describes the Portfolio's performance for the fiscal periods
indicated. "Total return" shows how much an investment in the Portfolio would
have increased (or decreased) during each period, assuming an investor had
reinvested all dividends and distributions. These figures have been audited by
KPMG LLP, the Fund's independent auditors, whose report, along with the Fund's
financial statements, are included in the Fund's annual report, which is
available upon request.
<TABLE>
FINANCIAL HIGHLIGHTS REAL ESTATE SECURITIES PORTFOLIO
Period from
May 1,
Year ended 1998(a) to
December 31, December 31,
1999 1998
<S> <C> <C> <C>
Net asset value, beginning of period $ .83 1.02
INCOME FROM INVESTMENT OPERATIONS:
Net investment income .04 .03
Net losses on securities (both realized and unrealized) (.07) (.19)
Total from investment operations (.03) (.16)
LESS DISTRIBUTIONS:
Dividends from net investment income (.03) (.03)
Tax return of capital (.01) --
Total distributions (.04) (.03)
Net asset value, end of period $ .76 .83
Total return (b) % (3.89) (14.90)
Net assets, end of period (in thousands) $ 5,826 5,322
Ratio of expenses to average daily net assets (c) % .90 .90(d)
Ratio of net investment income to average daily net
assets (c) % 4.58 5.54(d)
Portfolio turnover rate (excluding short-term securities) % 106.3 54.0
</TABLE>
<TABLE>
<C> <S>
(a) The inception of the Portfolio was May 1, 1998 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 assume 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 Life voluntarily absorbed $63,511 and $31,736 in
expenses for the year ended December 31, 1999 and the period
ended December 31, 1998. Had the Portfolio paid all fees and
expenses, the ratio of expenses to average daily net assets
would have been 2.05% and 1.90%, respectively, and the ratio
of net investment income to average daily net assets would
have been 3.43% and 4.54%, respectively.
(d) Adjusted to an annual basis.
</TABLE>
SUMMARY 55
<PAGE>
INVESTING IN THE FUND
MANAGING THE PORTFOLIOS
The Fund's investment adviser is Advantus Capital Management, Inc. (Advantus
Capital), 400 Robert Street North, St. Paul, Minnesota 55101. Since its
inception in 1994, Advantus Capital has provided investment advisory services
for the Portfolios and other Advantus Funds, and has managed investment
portfolios for various private accounts. With more than $14.2 billion of assets
under management, Advantus Capital manages the Fund's investments and provides
all necessary office space, equipment and personnel for servicing the Fund's
investments. Advantus Capital is a wholly-owned subsidiary of Minnesota Life,
which was organized in 1880 and has assets on a consolidated basis of more than
$16.4 billion. Minnesota Life is a third-tier subsidiary of a mutual insurance
holding company called Minnesota Mutual Companies, Inc. Personnel of Advantus
Capital also manage Minnesota Life's investment portfolio. In addition,
Minnesota Life serves as administrative services agent to the Fund.
The Fund and Advantus Capital have obtained an exemptive order from the SEC
allowing it to use a "manager of managers" strategy related to management of the
Fund. Under this strategy, Advantus Capital may select new Portfolio investment
sub-advisers upon the approval of the Fund's Board of Directors and without
shareholder approval. Advantus Capital may change the terms of any investment
sub-advisory agreement or continue to employ an investment sub-adviser after
termination of an investment sub-advisory agreement. Investors will be notified
of any investment sub-adviser changes. In any event, Fund shareholders may
terminate investment sub-adviser arrangements upon a vote of the majority of the
applicable outstanding Portfolio shares. Advantus Capital is responsible for
overseeing sub-advisers and for recommending their hiring, termination and
replacement and retains ultimate responsibility for the investment performance
of each Portfolio employing a sub-adviser. Investors in the Fund (purchasers of
variable life insurance policies and variable annuity contracts issued by
Minnesota Life) are, in effect, electing to have Advantus Capital either manage
the investment of a Portfolio's assets or select one or more sub-advisers to
achieve that Portfolio's investment objective.
The investment sub-adviser of the Capital Appreciation Portfolio is Credit
Suisse Asset Management, LLC (CSAM), 153 East 53rd Street, One Citicorp Center,
New York, New York 10022. CSAM provides investment advice and generally conducts
the investment management program for the Capital Appreciation Portfolio.
The investment sub-adviser of the International Stock Portfolio is Templeton
Investment Counsel, Inc. (Templeton Counsel), 500 East Broward Boulevard, Fort
Lauderdale, Florida 33394. Templeton Counsel provides investment advice and
generally conducts the investment management program for the International Stock
Portfolio.
The investment sub-adviser of the Small Company Growth Portfolio is Credit
Suisse Asset Management, LLC (CSAM), 153 East 53rd Street, One Citicorp Center,
New York, New York 10022. CSAM provides investment advice and generally conducts
the investment management program for the Small Company Growth Portfolio.
56 INVESTING IN THE FUND
<PAGE>
The investment sub-adviser of the Small Company Value Portfolio is State Street
Research & Management Company (State Street Research), One Financial Center,
Boston, Massachusetts 02111. State Street Research provides investment advice
and generally conducts the investment management program for the Small Company
Value Portfolio.
The investment sub-adviser of the Global Bond Portfolio is Julius Baer
Investment Management Inc. (JBIM), 330 Madison Avenue, New York, New York 10017.
JBIM provides investment advice and generally conducts the investment management
program for the Portfolio's foreign securities and determines the Portfolio's
total allocation of domestic and foreign securities. Advantus Capital provides
investment advice and generally conducts the investment management program for
the Portfolio's domestic securities.
The investment sub-adviser of the Macro-Cap Value Portfolio is J.P. Morgan
Investment Management Inc. (J.P. Morgan), 522 Fifth Avenue, New York, New York
10036. J.P. Morgan provides investment advice and generally conducts the
investment management program for the Macro-Cap Value Portfolio.
The investment sub-adviser of the Micro-Cap Growth Portfolio is Wall Street
Associates (WSA), La Jolla Financial Building, Suite 100, 1200 Prospect Street,
La Jolla, California 92037. WSA provides investment advice and generally
conducts the investment management program for the Micro-Cap Growth Portfolio.
The following persons serve as the primary portfolio managers for the
Portfolios:
<TABLE>
<CAPTION>
PORTFOLIO MANAGER PRIMARY PORTFOLIO
PORTFOLIO AND TITLE MANAGER SINCE
<S> <C> <C>
Growth Thomas A. Gunderson June 30, 1997
Portfolio Manager
Allen D. Steinkopf May 1, 2000
Bond Wayne R. Schmidt May 1, 1991
Portfolio Manager
Money Market Steven S. Nelson May 1, 1999
Portfolio Manager
Asset Allocation Thomas A. Gunderson January 1, 1989
Portfolio Manager
Wayne R. Schmidt May 1, 1999
Portfolio Manager
Mortgage Securities Kent R. Weber January 1, 1990
Portfolio Manager
Capital Appreciation Susan L. Black May 1, 2000
Portfolio Manager
International Stock Gary R. Clemons June 2, 1997
Senior Vice President
Edgerton Tucker Scott III February 1, 2000
Vice President and Research
Analyst
<CAPTION>
PORTFOLIO BUSINESS EXPERIENCE DURING PAST FIVE YEARS
<S> <C>
Growth Vice President of Advantus Capital; Investment Officer of
MIMLIC Asset Management Company, Advantus Capital's
predecessor ("MIMLIC Management")
Portfolio Manager of Advantus Capital since May 2000;
Assistant Portfolio Manager, Advantus Capital from June
1998 to April 2000; Investment Officer, Advantus Capital
from June 1993 to June 1998
Bond Vice President of Advantus Capital; Investment Officer of
MIMLIC Management
Money Market Vice President of Advantus Capital since February 1999,
Portfolio Manager of Advantus Capital since
September 1998; Vice President of Reliastar Investment
Research, Inc. from June 1996 to September 1998;
Investment Officer, MIMLIC Management, from July 1992 to
May 1996
Asset Allocation Vice President of Advantus Capital; Investment Officer of
MIMLIC Management
Vice President of Advantus Capital; Investment Officer of
MIMLIC Management
Mortgage Securities Vice President of Advantus Capital; Investment Officer of
MIMLIC Management
Capital Appreciation Managing Director, Senior Investment Manager, CSAM, from
July, 1999; prior to that time Portfolio Manager, Warburg
Pincus Asset Management, Inc.
International Stock Senior Vice President, Portfolio Management/ Research,
Templeton Investment Counsel, Inc., since 1993
Vice President and Research Analyst, Templeton Investment
Counsel since September 1996; Investment Analyst, Aeltus
Investment Management, from June 1994 to August 1996
</TABLE>
INVESTING IN THE FUND 57
<PAGE>
<TABLE>
<CAPTION>
PORTFOLIO MANAGER PRIMARY PORTFOLIO
PORTFOLIO AND TITLE MANAGER SINCE
<S> <C> <C>
Small Company Growth Stephen J. Lurito March 7, 2000
Co-Portfolio Manager
Sammy Oh March 7, 2000
Co-Portfolio Manager
Maturing Government Kent R. Weber April 25, 1994
Bond - 2002, 2006 and Portfolio Manager
2010
Value Stock Matthew Norris February 1, 2000
Portfolio Manager
Small Company Value Rudolph K. Kluiber March 7, 2000
Portfolio Manager
Global Bond Edward C. Dove October 1, 1997
Director, Chief Investment
Officer
Wayne R. Schmidt May 1, 1998
Portfolio Manager
Macro-Cap Value Peggy Adams September 17, 1999
Vice President, Portfolio
Manager
Harry D. Cavanna
Managing Director
Micro-Cap Growth William Jeffery, III and October 1, 1997
Kenneth F. McCain June 11, 1999
David A. Baratta, Principals
and Portfolio Managers
Real Estate Joseph R. Betlej May 1, 1998
Securities Portfolio Manager
<CAPTION>
PORTFOLIO BUSINESS EXPERIENCE DURING PAST FIVE YEARS
<S> <C>
Small Company Growth Managing Director and Portfolio Manager, CSAM
Portfolio Manager, CSAM, from 1997; previous Vice
President of Bessemar Trust, 1995 to 1996; Vice President
of Forstmann-Leff, 1993 to 1995
Maturing Government Vice President of Advantus Capital; Investment Officer of
Bond - 2002, 2006 and MIMLIC Management
2010
Value Stock Portfolio Manager of Advantus Capital since December 1997;
Institutional Portfolio Manager, Norwest Investment
Management, Minneapolis, Minnesota, from September 1997 to
December 1997; Senior Portfolio Manager, Norwest Bank
Nebraska, Omaha, Nebraska, from June 1994 to September
1997
Small Company Value Senior Vice President, State Street Research, since 1989
Global Bond Director, Fixed Income, Julius Baer Investment Management
Inc., since January 1995
Vice President of Advantus Capital; Investment Officer of
MIMLIC Management
Macro-Cap Value Portfolio Manager, J.P. Morgan Investment Management Inc
Senior U.S. Equity Portfolio Manager, J.P. Morgan
Investment Management Inc.
Micro-Cap Growth Principals and Portfolio Managers, Wall Street Associates
Principal and Portfolio Manager, Wall Street Associates
since June 1999; Portfolio Manager and Executive Vice
President, Morgan Grenfell, Inc., New York, New York, from
October 1994 to June 1999
Real Estate Vice President of Advantus Capital; Vice President of
Securities MIMLIC Management since September 1996; prior to that
time, Investment Officer, MIMLIC Management
</TABLE>
58 INVESTING IN THE FUND
<PAGE>
ADVISORY FEES
The Fund pays Advantus Capital monthly fees calculated on an annual basis for
each Portfolio. Advantus Capital uses a portion of the applicable fees to pay
sub-advisers. The annual advisory fees paid to Advantus Capital for each of the
Portfolios is as follows:
<TABLE>
<CAPTION>
ADVISORY FEE
(AS A PERCENTAGE OF AVERAGE
PORTFOLIO DAILY NET ASSETS)
<S> <C>
Growth Portfolio 0.45% of assets to $1 billion; and
0.40% of assets exceeding $1 billion
Bond Portfolio 0.30% of assets to $500 million;
0.25% of assets exceeding $500 million
to $1 billion; and
0.20% of assets exceeding $1 billion
Money Market Portfolio 0.25% of assets to $1 billion; and
0.20% of assets exceeding $1 billion
Asset Allocation Portfolio 0.35% of assets to $1 billion; and
0.30% of assets exceeding $1 billion
Mortgage Securities Portfolio 0.30% of assets to $1 billion; and
0.25% of assets exceeding $1 billion
Index 500 Portfolio 0.15% of assets to $250 million;
0.10% of assets exceeding $250 million
to $1 billion; and
0.075% of assets exceeding $1 billion
Capital Appreciation Portfolio 0.50% of assets to $1 billion; and
0.45% of assets exceeding $1 billion(1)
International Stock Portfolio 0.60% of assets to $250 million;
0.55% of assets exceeding $250 million
to $500 million;
0.50% of assets exceeding $500 million
to $1 billion; and
0.45% of assets exceeding $1 billion(2)
Small Company Growth Portfolio 0.65% of assets to $1 billion; and
0.60% of assets exceeding $1 billion(3)
Maturing Government Bond Portfolios 0.25%
Value Stock Portfolio 0.50% of assets to $500 million;
0.45% of assets exceeding $500 million
to $1 billion; and
0.40% of assets exceeding $1 billion
Small Company Value Portfolio 0.70% of assets to $1 billion; and
0.65% of assets exceeding $1 billion(4)
Global Bond Portfolio 0.60% of assets to $1 billion; and
0.55% of assets exceeding $1 billion(5)
Index 400 Mid-Cap Portfolio 0.15% of assets to $250 million;
0.10% of assets exceeding $250 million
to $1 billion; and
0.075% of assets exceeding $1 billion
Macro-Cap Value Portfolio 0.50%(6)
Micro-Cap Growth Portfolio 0.95%(7)
Real Estate Securities Portfolio 0.60% of assets to $1 billion; and
0.55% of assets exceeding $1 billion
</TABLE>
INVESTING IN THE FUND 59
<PAGE>
<TABLE>
<C> <S>
(1) Advantus Capital uses a portion of these fees to pay CSAM an
annual sub-advisers fee equal to 0.50% of total assets
between $0 and $500 million; 0.45% of total assets between
$500 million and $1 billion; 0.35% of total assets between
$1 billion and $2 billion; and 0.30% of total assets
exceeding $2 billion.
(2) Advantus Capital uses a portion of these fees to pay
Templeton Counsel an annual sub-advisers fee equal to 0.70%
of total assets between $0 and $10 million; 0.65% of total
assets exceeding $10 million to $25 million; 0.55% of assets
exceeding $25 million to $50 million; 0.50% of assets
exceeding $50 million to $100 million; and 0.40% of assets
exceeding $100 million.
(3) Advantus Capital uses a portion of these fees to pay CSAM an
annual sub-advisers fee equal to 0.65% of total assets
between $0 and $500 million; 0.60% of total assets between
$500 million and $1 billion; 0.50% of total assets between
$1 billion and $2 billion; and 0.45% of total assets
exceeding $2 billion.
(4) Advantus Capital uses a portion of these fees to pay State
Street Research an annual sub-advisers fee equal to 0.65% on
the first $500 million of assets; 0.60% on the next
$500 million of assets; and 0.50% of assets in excess of
$1 billion.
(5) Advantus Capital uses a portion of these fees to pay JBIM an
annual sub-advisers fee equal to .030% of the Portfolio's
average daily net assets.
(6) Advantus Capital uses a portion of these fees to pay J.P.
Morgan an annual sub-advisers fee equal to .45% of the
Portfolio's average daily net assets.
(7) Advantus Capital uses a portion of these fees to pay WSA an
annual sub-advisers fee equal to .85% of the Portfolio's
average daily net assets.
</TABLE>
DISTRIBUTION FEES
The Fund has adopted a Rule 12b-1 Distribution Plan covering all of its
Portfolios except the Maturing Government Bond Portfolios. Each covered
Portfolio pays distribution fees equal to .25% per annum of the average daily
net assets of the Portfolio. These fees are paid out of the Portfolio's assets,
which affects the Portfolio's share price. The fees are paid to Ascend Financial
Services, Inc. (Ascend Financial) the Fund's underwriter, to pay for
distribution-related expenses and activities in connection with the distribution
of the Portfolio's shares. Ascend Financial may also use the fees to pay
insurance companies, dealers or others for certain non-distribution services as
provided for in the Distribution Plan.
VOLUNTARY FEE ABSORPTION
Prior to May 1, 2000, Minnesota Life had voluntarily agreed to absorb all fees
and expenses that exceed .65% of average daily net assets for the Growth
Portfolio, Bond Portfolio, Money Market Portfolio, Asset Allocation Portfolio
and Mortgage Securities Portfolio, .55% of average daily net assets for the
Index 500 Portfolio and Index 400 Mid-Cap Portfolio, .90% of average daily net
assets for the Capital Appreciation Portfolio, Small Company Growth Portfolio,
Value Stock Portfolio, Small Company Value Portfolio and Real Estate Securities
Portfolio, .40% of average daily net assets for each of the three Maturing
Government Bond 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 Life had voluntarily agreed to absorb expenses, excluding investment
advisory fees, that exceed 1.00% for International Stock Portfolio. Effective
May 1, 2000, Advantus Capital has voluntarily agreed to absorb all fees and
expenses that exceed, for each Portfolio, the percentage of average daily net
assets set forth above. Advantus Capital has not agreed to absorb expenses over
a specified period of time and it may cease its absorption of expenses at any
time. If it does so, some Portfolio expenses would increase and thereby reduce
investment return.
60 INVESTING IN THE FUND
<PAGE>
INVESTMENT OBJECTIVE,
POLICIES AND PRACTICES
GROWTH PORTFOLIO
Growth Portfolio seeks long-term accumulation of capital. Current income is a
factor in the selection of securities, but is a secondary objective.
The Portfolio primarily invests in various equity securities of mid and large
capitalization companies (I.E., companies with a market capitalization of at
least $1 billion). The Portfolio primarily invests in common and preferred
stocks but may also invest in securities convertible into equity securities.
From time to time, the Portfolio may also invest a lesser portion of its assets
in equity securities of small capitalization companies. As of December 31, 1999,
the average weighted market capitalization of the Portfolio's investments was
$174.870 billion.
In selecting equity securities for the Portfolio, Advantus Capital primarily
looks to an investment's potential for sustainable earnings growth and improving
profitability. In selecting securities with earnings growth potential, Advantus
Capital considers factors such as a company's competitive market position,
quality of management, growth strategy, internal operating trends (such as
profit margins, cash flows and earnings and revenue growth), overall financial
condition, and ability to sustain current rate of growth. In seeking to achieve
its investment objective, the Portfolio may also invest in equity securities of
companies that Advantus Capital believes are temporarily undervalued or show
promise of improved results due to new management, products, markets or other
factors.
In addition, the Portfolio may invest lesser portions of its assets in
restricted and illiquid securities, convertible and non-convertible
investment-grade corporate debt securities, foreign securities, warrants, stock
index futures contracts, options (the Portfolio may purchase, sell and write put
and call options), securities of other mutual funds, index depositary receipts,
repurchase agreement transactions and money market securities. To generate
additional income, the Portfolio may lend securities representing up to
one-third of the value of its total assets to broker-dealers, banks and other
institutions.
RISKS. An investment in the Portfolio is subject to the following risks:
- Company Risk
- Concentration Risk
- Growth Stock Risk
- Inflation Risk
- Large Company Risk
- Market Risk
- Mid Size Company Risk
- Portfolio Risk
- Sector Risk
- Securities Lending Risk
- Small Company Risk
A detailed description of these risks is set forth in "- Defining Risks" below.
Additional risk information is provided in the Statement of Additional
Information.
BOND PORTFOLIO
Bond Portfolio seeks as high a level of a long-term total rate of return as is
consistent with prudent investment risk. The Portfolio also seeks preservation
of capital as a secondary objective.
INVESTING IN THE FUND 61
<PAGE>
The Portfolio invests in a variety of investment-grade debt securities. These
debt securities include:
- investment-grade corporate debt obligations and mortgage-backed securities
- debt securities issued or guaranteed by the U.S. government or any of its
agencies or instrumentalities (including U.S. Treasury bills, notes and
bonds)
- investment-grade mortgage-backed securities issued by governmental
agencies and financial institutions
- investment-grade asset-backed securities
- U.S. dollar denominated investment-grade debt securities issued by foreign
governments and companies and publicly traded in the United States
- debt obligations of U.S. banks, savings and loan associations and savings
banks
The Portfolio invests primarily in investment-grade debt obligations issued by
domestic companies in a variety of industries. The Portfolio may invest in
long-term debt securities (I.E., maturities of more than 10 years), intermediate
debt securities (I.E., maturities from 3 to 10 years) and short-term debt
securities (I.E., maturities of less than 3 years). In selecting corporate debt
securities and their maturities, Advantus Capital seeks to maximize current
income by engaging in a risk/return analysis that focuses on various factors
such as industry outlook, current and anticipated market and economic
conditions, general levels of debt prices and issuer operations.
The Portfolio may also invest a portion of its assets in CMOs, stripped
mortgage-backed securities and asset-backed securities. CMOs are debt
obligations typically issued by a private special-purpose entity that are
collateralized by residential or commercial mortgage loans or pools of
residential mortgage loans. CMOs allocate the priority of the distribution of
principal and interest from the underlying mortgage loans among various series.
Each series differs from the other in terms of the priority right to receive
cash payments from the underlying mortgage loans.
Stripped mortgage-backed securities also represent ownership interests in a pool
of mortgages. However, the stripped mortgage-backed securities are separated
into interest and principal components. The interest component only allows the
interest holder to receive the interest portion of cash payments, while the
principal component only allows the interest holder to receive the principal
portion of cash payments.
Asset-backed securities represent interest in pools of consumer loans (such as
credit card, trade or automobile loans). Investors in asset-backed securities
are entitled to receive payments of principal and interest received by the pool
entity from the underlying consumer loans net of any costs and expenses incurred
by the entity.
As a rule of thumb, a portfolio of debt, mortgage-related and asset-backed
securities experiences a decrease in principal value with an increase in
interest rates. The extent of the decrease in principal value may be affected by
the Portfolio's duration of its portfolio of debt, mortgage-related and
asset-backed securities. Duration measures the relative price sensitivity of a
security to changes in interest rates. "Effective" duration takes into
consideration the likelihood that a security will be called or prepaid prior to
maturity given current interest rates. Typically, a security with a longer
duration is more price sensitive than a security with a shorter duration. In
general, a portfolio of debt, mortgage-related and asset-backed securities
experiences a percentage decrease in principal value equal to its effective
duration for each 1% increase in interest rates. For example, if the Portfolio
holds securities with an effective duration of five years and interest rates
rise 1%, the principal
62 INVESTING IN THE FUND
<PAGE>
value of such securities could be expected to decrease by approximately 5%. The
Portfolio expects that under normal circumstances the effective duration of its
debt, mortgage-related and asset-backed securities portfolio will range from
four to seven years.
In addition, the Portfolio may invest lesser portions of its assets in interest
rate and other bond futures contracts, convertible and non-convertible
investment-grade and non-investment grade debt securities issued by domestic
governments and companies, restricted and illiquid securities, options (the
Portfolio may purchase, sell and write put and call options), stripped
asset-backed securities, securities purchased on a when-issued or forward
commitment basis, mortgage dollar roll transactions, securities of other mutual
funds, preferred stocks and other equity securities obtained upon conversion of
debt securities or warrants, repurchase agreement transactions and money market
securities. To generate additional income, the Portfolio may lend securities
representing up to one-third of the value of its total assets to broker-dealers,
banks and other institutions.
RISKS. An investment in the Portfolio is subject to the following risks:
- Call Risk
- Concentration Risk
- Credit Risk
- Extension Risk
- Income Risk
- Inflation Risk
- Interest Rate Risk
- Market Risk
- Portfolio Risk
- Prepayment Risk
- Securities Lending Risk
- Short-Term Trading Risk
A detailed description of these risks is set forth in "- Defining Risks" below.
Additional risk information is provided in the Statement of Additional
Information.
MONEY MARKET PORTFOLIO
Money Market Portfolio seeks maximum current income to the extent consistent
with liquidity and the preservation of capital.
The Portfolio invests in a variety of U.S. dollar denominated money market
securities, including:
- securities issued or guaranteed by the U.S. government or one of its
agencies or instrumentalities (including bills, notes, bonds and
certificates of indebtedness)
- obligations of domestic banks, savings and loan associations, savings
banks with total assets of at least $2 billion (including certificates of
deposit, bank notes, commercial paper, time deposits and bankers'
acceptances)
- U.S. dollar denominated obligations of U.S. branches or agencies of
foreign banks with total assets of at least $2 billion
- U.S. dollar denominated obligations of Canadian chartered banks and London
branches of U.S. banks with total assets of at least $2 billion
- obligations of supranational entities such as the International Bank for
Reconstruction and Development
- domestic corporate, domestic limited partnership and affiliated foreign
corporate obligations (including commercial paper, notes and bonds)
INVESTING IN THE FUND 63
<PAGE>
In addition, the Portfolio may invest lesser portions of its assets in
securities of other mutual funds and restricted and illiquid securities.
The Portfolio invests only in high quality securities. Generally, the Portfolio
may purchase only securities rated within the two highest short-term rating
categories of one or more national rating agencies. The Portfolio only invests
in securities that mature in 397 calendar days or less from the date of
purchase. The Portfolio maintains an average weighted maturity of 90 days or
less.
RISKS. An investment in the Portfolio is subject to the following risks:
- Concentration Risk
- Credit Risk
- Foreign Securities Risk
- Income Risk
- Inflation Risk
- Interest Rate Risk
- Market Risk
- Portfolio Risk
- Stable Price Risk
A detailed description of these risks is set forth in "- Defining Risks" below.
Additional risk information is provided in the Statement of Additional
Information.
ASSET ALLOCATION PORTFOLIO
Asset Allocation Portfolio seeks as high a level of long-term total rate of
return as is consistent with prudent investment risk.
The Portfolio's investments may, at any time, consist of equity securities,
investment-grade debt securities, mortgage-related securities, money market
securities or any combination of these securities. The Portfolio's investments
will be allocated among these asset classes based on Advantus Capital's
risk/return analysis as to current economic or market conditions, trends in
investment yields and investment rates, changes in fiscal or monetary policies
and other relevant factors. If Advantus Capital believes total return from debt
securities will exceed total return from equity securities, the Portfolio will
invest mostly in debt securities. On the other hand, if Advantus Capital
believes total return from equity securities will exceed total return from long
or short-term debt securities, the Portfolio will invest mostly in equity
securities. Further, if Advantus Capital believes interest rates will rise, the
Portfolio may invest mostly in short-term money market securities. As a result,
Advantus Capital has more discretion to invest in a variety of securities than
most mutual funds. The Portfolio may invest up to 75% of its total assets in
equity securities or in long-term and short-term debt securities and
mortgage-related securities, and up to 100% of its total assets in money market
securities.
The Portfolio invests in various types and classes of equity securities such as
common stock but may also invest in preferred stock and securities convertible
into equity securities. In selecting equity securities, Advantus Capital looks
first to an investment's potential for capital appreciation and then to its
income potential. The Portfolio generally invests in companies with strong
long-term growth potential. However, the Portfolio may also invest in equity
securities of companies that Advantus Capital believes are temporarily
undervalued or show promise of improved results due to new management, products,
markets or other factors.
The Portfolio also may invest in long, intermediate and short-term
investment-grade debt securities. These debt securities include U.S. government
and agency debt securities and investment-grade debt obligations of U.S. banks,
savings and loan associations, savings banks with total assets of at least
$2 billion, corporate debt obligations, notes and other investment-grade debt
securities of any maturity and investment-grade commercial paper issued by
U.S. corporations or affiliated foreign corporations.
64 INVESTING IN THE FUND
<PAGE>
The Portfolio may invest in mortgage-related securities such as collateralized
mortgage obligations (CMOs) and stripped mortgage-backed securities and may
purchase securities on a when-issued or forward commitment basis. CMOs are debt
obligations typically issued by a private special-purpose entity that are
collateralized by residential or commercial mortgage loans or pools of
residential mortgage loans. Stripped mortgage-backed securities represent
ownership interests in a pool of mortgages. Securities purchased on a
when-issued or delayed delivery basis require the Portfolio to purchase
securities on a later date with the price fixed at the time of the purchase
commitment.
In addition, the Portfolio may invest in money market securities that mature
within one year from the date of purchase.
As a rule of thumb, a portfolio of debt and mortgage-related securities
generally experiences a decrease in principal value with an increase in interest
rates. The extent of the decrease in principal value may be affected by the
Portfolio's duration of its portfolio of debt and mortgage-related securities.
Duration measures the relative price sensitivity of a security to changes in
interest rates. "Effective" duration takes into consideration the likelihood
that a security will be called or prepaid prior to maturity given current
interest rates. Typically, a security with a longer duration is more price
sensitive than a security with a shorter duration. In general, a portfolio of
debt and mortgage-related securities experiences a percentage decrease in
principal value equal to its effective duration for each 1% increase in interest
rates. For example, if the Portfolio holds securities with an effective duration
of five years and interest rates rise 1%, the principal value of such securities
could be expected to decrease by approximately 5%. The Portfolio expects that
under normal circumstances the effective duration of its debt and
mortgage-related securities portfolio will range from one to seven years.
In addition, the Portfolio may invest lesser portions of its assets in
convertible and non-convertible investment-grade and non-investment grade
corporate debt obligations and mortgage-related securities, securities of other
mutual funds, securities purchased on a when-issued or forward commitment basis,
restricted and illiquid securities, foreign securities, warrants, stock index
futures contracts, interest rate and other bond futures contracts, options (the
Portfolio may purchase, sell and write put and call options), asset-backed and
stripped asset-backed securities, mortgage dollar rolls, index depositary
receipts and repurchase and reverse repurchase agreement transactions. To
generate additional income, the Portfolio may lend securities representing up to
one-third of the value of its total assets to broker-dealers, banks and other
institutions.
RISKS. An investment in the Portfolio is subject to the following risks:
- Call Risk
- Company Risk
- Concentration Risk
- Credit Risk
- Extension Risk
- Income Risk
- Inflation Risk
- Interest Rate Risk
- Large Company Risk
- Market Risk
- Mid Size Company Risk
- Portfolio Risk
- Prepayment Risk
- Sector Risk
- Securities Lending Risk
- Small Company Risk
A detailed description of these risks is set forth in "- Defining Risks" below.
Additional risk information is provided in the Statement of Additional
Information.
MORTGAGE SECURITIES PORTFOLIO
Mortgage Securities Portfolio seeks a high level of current income consistent
with prudent investment risk.
INVESTING IN THE FUND 65
<PAGE>
Under normal circumstances, the Portfolio invests at least 65% of its total
assets in mortgage-related securities. The Portfolio invests a major portion of
its assets in high and investment-grade securities representing interests in
pools of mortgage loans. In addition, the Portfolio may invest in a variety of
other mortgage-related securities including collateralized mortgage obligations
(CMOs) and stripped mortgage-backed securities.
In selecting mortgage-related securities, Advantus Capital considers a variety
of factors, including prepayment risk, credit quality, liquidity, the collateral
securing the underlying loan (I.E., residential versus commercial real estate)
and the type of underlying mortgage loan (I.E., a 30-year fully-amortized loan
versus a 15-year fully-amortized loan). Advantus Capital also considers current
and expected trends in economic conditions, interest rates and the mortgage
market, and selects securities which, in its judgment, are likely to perform
well in those circumstances.
Interests in pools of mortgage loans provide the security holder the right to
receive out of the underlying mortgage loans periodic interest payments at a
fixed rate and a full principal payment at a designated maturity or call date.
Scheduled principal, interest and other payments on the underlying mortgage
loans received by the sponsoring or guarantor entity are then distributed or
"passed through" to security holders net of any service fees retained by the
sponsor or guarantor. Additional payments passed through to security holders
could arise from the prepayment of principal resulting from the sale of
residential property, the refinancing of underlying mortgages, or the
foreclosure of residential property. In "pass through" mortgage loan pools,
payments to security holders will depend on whether mortgagors make payments to
the pooling entity on the underlying mortgage loans. To avoid this non-payment
risk, the Portfolio may also invest in "modified pass through" mortgage loan
pools which provide that the security holder will receive interest and principal
payments regardless of whether mortgagors make payments on the underlying
mortgage loans.
The Portfolio may invest in government or government-related mortgage loan pools
or private mortgage loan pools. In government or government-related mortgage
loan pools, the U.S. government or certain agencies guarantee to mortgage pool
security holders the payment of principal and interest. The principal
governmental guarantors of mortgage-related securities are the Federal National
Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corporation
(FHLMC). FNMA and FHLMC generally guarantee payment of principal and interest on
mortgage loan pool securities issued by certain pre-approved institutions (I.E.,
savings and loan institutions, commercial banks and mortgage bankers).
The Portfolio may also invest in private mortgage loan pools sponsored by
commercial banks, insurance companies, mortgage bankers and other private
financial institutions. Mortgage pools created by these non-governmental
entities offer a higher rate of interest than government or government related
securities. Unlike government agency sponsored mortgage loan pools, payment of
interest and payment to investors is not guaranteed.
The Portfolio may also invest a major portion of its assets in CMOs and stripped
mortgage-backed securities. CMOs are debt obligations issued by both government
agencies and private special-purpose entities that are collateralized by
residential or commercial mortgage loans. Unlike traditional mortgage loan
pools, CMOs allocate the priority of the distribution of principal and level of
interest from the underlying mortgage loans among various series. Each series
differs from another in terms of the priority right to receive cash payments
from the underlying mortgage loans. Each series may be further divided into
classes in which the principal and interest payments payable to classes in the
same series may be allocated. For instance, a certain class in a series may have
right of priority over another class to receive principal and interest payments.
Moreover, a certain class in a series may be entitled to receive only interest
payments while another class in the same
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series may be only entitled to receive principal payments. As a result, the
timing and the type of payments received by a CMO security holder may differ
from the payments received by a security holder in a traditional mortgage loan
pool.
Stripped mortgage-backed securities also represent ownership interests in a pool
of mortgages. However, the stripped mortgage-backed securities are separated
into interest and principal components. The interest component only allows the
security holder to receive the interest portion of cash payments, while the
principal component only allows the security holder to receive the principal
portion of cash payments.
As a rule of thumb, a portfolio of fixed income securities (including
mortgage-related securities) experiences a decrease in principal value with an
increase in interest rates. The extent of the decrease in principal value may be
affected by the Portfolio's duration of its portfolio of mortgage-related
securities. Duration measures the relative price sensitivity of a security to
changes in interest rates. "Effective" duration takes into consideration the
likelihood that a security will be called or prepaid prior to maturity given
current interest rates. Typically, a security with a longer duration is more
price sensitive than a security with a shorter duration. In general, a portfolio
of mortgage-related securities experiences a percentage decrease in principal
value equal to its effective duration for each 1% increase in interest rates.
For example, if the Portfolio holds securities with an effective duration of
five years and interest rates rise 1%, the principal value of such securities
could be expected to decrease by approximately 5%. The Portfolio expects that
under normal circumstances the effective duration of its investment portfolio
will range from one to seven years.
In addition, the Portfolio may invest lesser portions of its assets in
non-investment grade mortgage-related securities, securities issued or
guaranteed by the U.S. government or its agencies and instrumentalities,
certificates of deposits, bankers' acceptances, investment-grade commercial
paper, convertible and non-convertible investment-grade and non-investment grade
corporate debt securities, securities of other mutual funds, restricted and
illiquid securities, direct mortgage investments, interest rate and other bond
futures contracts, asset-backed and stripped asset-backed securities, repurchase
agreement transactions, when-issued or forward commitment transactions and
mortgage dollar rolls. To generate additional income, the Portfolio may lend
securities representing up to one-third of the value of its total assets to
broker-dealers, banks and other institutions.
RISKS. An investment in the Portfolio is subject to the following risks:
- Call Risk
- Concentration Risk
- Credit Risk
- Extension Risk
- Income Risk
- Inflation Risk
- Interest Rate Risk
- Market Risk
- Portfolio Risk
- Prepayment Risk
A detailed description of these risks is set forth in "- Defining Risks" below.
Additional risk information is provided in the Statement of Additional
Information.
INDEX 500 PORTFOLIO
Index 500 Portfolio seeks investment results that correspond generally to the
price and yield performance of the common stocks included in the Standard &
Poor's 500 Composite Stock Price Index (the S&P 500).
Under normal conditions, the Portfolio invests its assets in all of the common
stocks included in the S&P 500. The Portfolio attempts to achieve a correlation
of 100% without considering Portfolio expenses.
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However, the Portfolio is not required to hold a minimum or maximum number of
common stocks included in the S&P 500, and due to changing economic or markets,
may invest in less than all of the common stocks included in the S&P 500.
Advantus Capital utilizes a computer program to confirm the Portfolio's S&P 500
replication and to round off security weightings.
In addition, the Portfolio may invest lesser portions of its assets in
investment-grade short-term fixed income securities, stock index futures
contracts, securities of other mutual funds, restricted and illiquid securities,
index depositary receipts, repurchase agreement transactions and money market
securities. To generate additional income, the Portfolio may lend securities
representing up to one-third of the value of its total assets to broker-dealers,
banks and other institutions.
Standard & Poor's Rating Services (S&P), a division of the McGraw-Hill
Companies, Inc., designates the stocks included in the S&P 500. From time to
time, S&P may add or delete stocks from the S&P 500. Inclusion of a stock in the
S&P 500 does not imply an opinion by S&P as to its investment merit.
"Standard & Poor's," "S&P," "S&P 500," "Standard & Poor's 500," and "500" are
trademarks of The McGraw-Hill Companies, Inc. and have been licensed for use by
the Portfolio. The Portfolio is not sponsored, endorsed, sold or promoted by S&P
and S&P makes no representation regarding the advisability of investing in the
Portfolio. Please see the Statement of Additional Information which sets forth
certain additional disclaimers and limitations on behalf of S&P.
RISKS. An investment in the Portfolio is subject to the following risks:
- Company Risk
- Concentration Risk
- Index Performance Risk
- Inflation Risk
- Large Company Risk
- Market Risk
- Portfolio Risk
- Sector Risk
- Securities Lending Risk
A detailed description of these risks is set forth in "- Defining Risks" below.
Additional risk information is provided in the Statement of Additional
Information.
CAPITAL APPRECIATION PORTFOLIO
Capital Appreciation Portfolio seeks growth of capital.
The Portfolio primarily invests in various types of equity securities of small,
mid and large capitalization companies. Under normal circumstances, the
Portfolio will primarily invest in common stock, preferred stock or securities
convertible into equity securities of small, mid and large capitalization
companies. As of December 31, 1999, the average weighted market capitalization
of the Portfolio's investments was $124.393 billion.
In selecting equity securities, the Portfolio invests in securities that CSAM,
the Portfolio's investment sub-adviser, believes show possibilities for capital
appreciation. In assessing capital appreciation potential, CSAM seeks to
identify growth opportunities for the Portfolio. CSAM looks for sectors and
companies that it believes will outperform the overall market, and also looks
for themes and patterns that are generally associated with growth companies,
such as:
- Significant fundamental changes, including changes in senior management
68 INVESTING IN THE FUND
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- Generation of a large free cash flow
- Proprietary products and services
- Company share-buyback programs
The Portfolio selects growth companies whose stocks appear to be available at a
reasonable price relative to projected growth.
In addition, the Portfolio may invest lesser portions of its assets in
restricted and illiquid securities, investment-grade corporate debt securities,
foreign securities, American Depositary Receipts, European Depositary Receipts,
warrants, index depositary receipts, stock index futures contracts, options (the
Portfolio may purchase, sell and write put and call options), repurchase
agreement transactions, securities of other mutual funds and money market
securities. To generate additional income, the Portfolio may lend securities
representing up to one-third of the value of its total assets to broker-dealers,
banks and other institutions.
RISKS. An investment in the Portfolio is subject to the following risks:
- Company Risk
- Concentration Risk
- Euro Conversion Risk
- Foreign Securities Risk
- Growth Stock Risk
- Inflation Risk
- Large Company Risk
- Market Risk
- Mid Size Company Risk
- Portfolio Risk
- Sector Risk
- Securities Lending Risk
- Small Company Risk
A detailed description of these risks is set forth in "- Defining Risks" below.
Additional risk information is provided in the Statement of Additional
Information.
INTERNATIONAL STOCK PORTFOLIO
International Stock Portfolio seeks long-term capital growth.
Under normal circumstances, the Portfolio invests at least 65% of its assets in
equity securities of small, mid and large capitalization foreign companies. The
Portfolio may invest in securities of companies or governments in developed
foreign markets or in developing or emerging markets. Under normal
circumstances, the Portfolio will maintain investments in at least three foreign
countries.
The Portfolio invests in equity securities. Equity securities generally entitle
the holder to participate in a company's general operating results. These
include common stock, preferred stock, warrants or rights to purchase such
securities. In selecting equity securities, Templeton Counsel, the Portfolio's
investment sub-adviser, performs a company-by-company analysis, rather than
focusing on a specific industry or economic sector. Templeton Counsel
concentrates primarily on the market price of a company's securities relative to
its view regarding the company's long-term earnings potential. A company's
historical value measures, including price/earnings ratios, profit margins and
liquidation value will also be considered.
The Portfolio may also invest a lesser portion of its assets in closed-end
investment companies, restricted and illiquid securities, U.S. government,
domestic and foreign investment-grade debt securities, American Depositary
Receipts, European Depositary Receipts, securities and index futures contracts,
forward foreign currency exchange contracts, exchange-traded foreign currency
futures contracts, options (the Portfolio may
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<PAGE>
purchase, sell and write put and call options), securities of other mutual
funds, non-investment grade debt securities, repurchase agreement transactions,
securities purchased on a when-issued or forward commitment basis and money
market securities. To generate additional income, the Portfolio may lend
securities representing up to one-third of the value of its total assets to
broker-dealers, banks and other institutions.
RISKS. An investment in the Portfolio is subject to the following risks:
- Company Risk
- Concentration Risk
- Credit Risk
- Currency Risk
- Emerging Markets Risk
- Euro Conversion Risk
- Foreign Securities Risk
- Income Risk
- Inflation Risk
- Interest Rate Risk
- Large Company Risk
- Market Risk
- Mid Size Company Risk
- Portfolio Risk
- Sector Risk
- Securities Lending Risk
- Small Company Risk
A detailed description of these risks is set forth in "- Defining Risks" below.
Additional risk information is provided in the Statement of Additional
Information.
SMALL COMPANY GROWTH PORTFOLIO
Small Company Growth Portfolio seeks long-term accumulation of capital.
The Portfolio primarily invests in various types of equity securities of small
capitalization growth companies at the time of purchase. The Portfolio primarily
invests in common stocks but may also invest in preferred stocks and securities
convertible into equity securities. In selecting equity securities, the
Portfolio's investment sub-adviser employs a growth investment style and looks
for either developing or older companies in a growth stage or companies
providing products or services with a high unit-volume growth rate.
Under normal market conditions, the Portfolio will invest at least 65% of assets
in equity securities of small companies. The Portfolio considers a "small"
company to be one whose market capitalization is within the range of
capitalizations of companies in the Russell 2000 Growth Index. As of December
31, 1999, market capitalizations of Russell 2000 Growth companies ranged from
$40 million to $13 billion.
Some companies may outgrow the definition of a small company after the Portfolio
has purchased their securities. These companies continue to be considered small
for purposes of the Portfolio's minimum 65% allocation to small company
equities. In addition, the Portfolio may invest in companies of any size once
the 65% policy is met. As a result, the Portfolio's average market
capitalization may sometimes exceed that of the largest company in the Russell
2000 Growth Index.
From time to time, the Portfolio may also invest a lesser portion of its assets
in securities of mid and large capitalization companies (i.e. companies with
market capitalizations in excess of the range of capitalizations of companies in
the Russell 2000 Growth Index). As of December 31, 1999, the average weighted
market capitalization of the Portfolio's investments was $2.707 billion.
In selecting equity securities of growth companies for the Portfolio, CSAM looks
for:
- Companies still in the developmental stage
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- Older companies that appear to be entering a new stage of growth
- Companies providing products or services with a high unit-volume growth
rate
The Portfolio may also invest in emerging-growth companies - small or
medium-size companies that have passed their start-up phase, show positive
earnings, and offer the potential for accelerated earnings growth.
Emerging-growth companies generally stand to benefit from new products or
services, technological developments, changes in management or other factors.
In addition, the Portfolio may invest lesser portions of its assets in
restricted and illiquid securities, investment-grade corporate debt securities,
foreign securities, warrants, stock index futures contracts, options (the
Portfolio may purchase, sell and write put and call options), index depositary
receipts, repurchase agreement transactions, securities of other mutual funds
and money market securities. To generate additional income, the Portfolio may
lend securities representing up to one-third of the value of its total assets to
broker-dealers, banks and other institutions.
RISKS. An investment in the Portfolio is subject to the following risks:
- Company Risk
- Concentration Risk
- Growth Stock Risk
- Inflation Risk
- Market Risk
- Mid Size Company Risk
- Portfolio Risk
- Sector Risk
- Securities Lending Risk
- Short-Term Trading Risk
- Small Company Risk
A detailed description of these risks is set forth in "- Defining Risks" below.
Additional risk information is provided in the Statement of Additional
Information.
MATURING GOVERNMENT BOND PORTFOLIOS
Each of the Maturing Government Bond Portfolios seeks as high an investment
return as is consistent with prudent investment risk for a specified period of
time ending on a specified liquidation date.
Each of the Portfolios primarily invests in zero coupon securities. Zero coupon
securities are securities that pay no cash income and are sold at a discount
from their stated maturity value. When held to maturity, the entire return on
zero coupon securities generally consists of the difference between each
security's purchase price and its respective maturity value. As a result, an
investor knows this difference at the time of purchase and can determine the
investment return from such securities. However, since each Portfolio may invest
in other non-zero coupon securities and instruments (as discussed below), such
Portfolio's total investment return will vary from the aggregate purchase
price-maturity value spread of its zero coupon securities. Nevertheless, these
non-zero coupon securities will also describe an anticipated yield to a
designated maturity date. In order to obtain an amount approximating the
anticipated return from each Portfolio's zero coupon holdings, an investor
should hold Portfolio shares until the respective maturity date of the
applicable Portfolio.
The anticipated total return on an investment in each Portfolio will vary if
shares of the Portfolio are redeemed prior to the stated maturity date.
Generally, the value of zero coupon and non-zero coupon holdings prior to the
stated maturity date may increase or decrease with changes in prevailing
interest rates. Since shares redeemed prior to maturity are redeemed at net
asset value (I.E. a value based on the current
INVESTING IN THE FUND 71
<PAGE>
market value of the Portfolio's holdings per share), an investor may receive a
significantly different investment return than anticipated at the time of
purchase upon redemption prior to maturity. Return may also be affected by cash
flow transactions affecting the Portfolio (E.G., redemptions by others or
purchases of Portfolio shares).
In light of the above, the Fund may calculate an anticipated growth rate (AGR)
and anticipated value at maturity (AVM) for each Portfolio. AGR estimates the
average total return expected from an investment in a Portfolio until the target
maturity date (assuming no withdrawals or additional investments). AVM estimates
the value of an investment at the Portfolio's target maturity date. As discussed
above, a number of factors can alter a Portfolio's AGR or AVM such as interest
rate changes, transaction costs and other actions taken by Advantus Capital to
improve total return. Despite this, if Portfolio shares are held to the target
maturity date, then the return on the investment will approximate the applicable
AGR and AVM.
Each Portfolio will mature on a specific target date. The current target dates
are September 2002, 2006 and 2010. On each such target date, the Portfolio will
be converted to cash and reinvested in another Fund Portfolio at the direction
of the investor. If the investor does not provide reinvestment instructions,
then the proceeds will automatically be invested in Money Market Portfolio.
Zero coupon securities include securities issued by the United States Treasury
(Stripped Treasury Securities), by the U.S. government and its agencies and
instrumentalities (Stripped Government Securities) and by domestic corporations
(Stripped Corporate Securities). Under normal circumstances, each Portfolio will
invest at least 65% of its net assets in Stripped Treasury Securities and
Stripped Government Securities.
"Stripped Treasury Securities" consist of (a) debt obligations issued by the
U.S. Treasury that are stripped of their respective unmatured interest coupon
and (b) receipts and certificates for such stripped debt obligations and
stripped interest coupons. "Stripped Government Securities" consist of zero
coupon securities issued by the U.S. government and its agencies and
instrumentalities, by trusts to which payment of principal and interest are
guaranteed by the U.S., and by other government sponsored corporations.
"Stripped Corporate Securities" consist of zero coupon debt securities issued by
domestic corporations, interest coupons stripped from corporate debt obligations
and receipts and certificates for such stripped debt obligations and stripped
coupons.
As a rule of thumb, a portfolio of fixed income securities experiences a
decrease in principal value with an increase in interest rates. The extent of
the decrease in principal value may be affected by the Portfolio's duration of
its portfolio of fixed income securities. Duration measures the relative price
sensitivity of a security to changes in interest rates. "Effective" duration
takes into consideration the likelihood that a security will be called or
prepaid prior to maturity given current interest rates. Typically, a security
with a longer effective duration is more price sensitive than a security with a
shorter duration. In general, a portfolio of fixed income securities experiences
a percentage decrease in principal value equal to its effective duration for
each 1% increase in interest rates. For example, if the Portfolio holds
securities with an effective duration of five years and interest rates rise 1%,
the principal value of such securities could be expected to decrease by
approximately 5%. Each Portfolio expects that under normal circumstances the
effective duration of its investment portfolio will range within one year of the
Portfolio's remaining maturity. Thus, if the time remaining to a Portfolio's
target maturity date is five years, the Portfolio's duration will range from
four to six years.
In addition, each Portfolio may invest lesser portions of its assets in other
investment-grade debt obligations, restricted and illiquid securities,
securities of other mutual funds, repurchase agreement transactions, cash,
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cash equivalent items and money market securities. To generate additional
income, the Portfolio may lend securities representing up to one-third of the
value of its total assets to broker-dealers, banks and other institutions.
RISKS. An investment in each of the Portfolios is subject to the following
risks:
- Concentration Risk
- Credit Risk
- Income Risk
- Inflation Risk
- Interest Rate Risk
- Market Risk
- Portfolio Risk
- Securities Lending Risk
A detailed description of these risks is set forth in "- Defining Risks" below.
Additional risk information is provided in the Statement of Additional
Information.
VALUE STOCK PORTFOLIO
Value Stock Portfolio seeks long-term accumulation of capital. The production of
income is a secondary objective of the Portfolio.
The Portfolio primarily invests in various types of equity securities of mid and
large capitalization companies (I.E., companies with a market capitalization of
at least $1.5 billion). Under normal circumstances, the Portfolio will invest at
least 65% of its total assets in common stocks issued by mid and large
capitalization foreign and domestic companies that are publicly traded in the
United States. The Portfolio may also invest in preferred stock and other
securities convertible into equity securities. From time to time the Portfolio
will also invest a lesser portion of its assets in securities of small
capitalization companies. As of December 31, 1999, the average weighted market
capitalization of the Portfolio's investments was $87.099 billion.
In selecting equity securities, Advantus Capital primarily looks to equity
securities it believes are undervalued. Undervalued securities are securities
that Advantus Capital believes: (a) are undervalued relative to other securities
in the market or currently earn low returns with a potential for higher returns,
(b) are undervalued relative to the potential for improved operating performance
and financial strength, and (c) are issued by companies that have recently
undergone a change in management or control and that are undervalued relative to
their potential for improved operating performance. In assessing relative value,
Advantus Capital will consider factors such as a company's ratio of market price
to earnings, ratio of market price to book value, ratio of market price to
assets, ratio of market price to cash flow, estimated earnings growth rate, cash
flow, yield, liquidation value, product pricing, quality of management and
competitive market position. As a secondary focus, Advantus Capital may also
consider an investment's potential to provide current income. In seeking to
achieve its investment objectives, the Portfolio may also invest in equity
securities of companies that Advantus Capital believes show potential for
sustainable earnings growth above the average market growth rate.
In addition, the Portfolio may invest lesser portions of its assets in
restricted and illiquid securities, convertible and non-convertible
investment-grade and non-investment grade debt securities, securities of other
mutual funds, foreign securities, warrants, repurchase agreement transactions,
index depositary receipts, stock index futures contracts, options (the Portfolio
may purchase, sell and write put and call options) and money market securities.
To generate additional income, the Portfolio may lend securities representing up
to one-third of the value of its total assets to broker-dealers, banks and other
institutions.
INVESTING IN THE FUND 73
<PAGE>
RISKS. An investment in the Portfolio is subject to the following risks:
- Company Risk
- Concentration Risk
- Inflation Risk
- Large Company Risk
- Market Risk
- Mid Size Company Risk
- Portfolio Risk
- Sector Risk
- Securities Lending Risk
- Short-Term Trading Risk
- Value Stock Risk
A detailed description of these risks is set forth in "- Defining Risks" below.
Additional risk information is provided in the Statement of Additional
Information.
SMALL COMPANY VALUE PORTFOLIO
Small Company Value Portfolio seeks long-term accumulation of capital.
The Portfolio primarily invests in various types of equity securities of small
capitalization companies (I.E., companies with a market capitalization of less
than $1.5 billion) at the time of purchase. Under normal circumstances, at least
65% of the Portfolio's total assets will be invested in common stocks of small
capitalization domestic companies and foreign companies that are publicly traded
in the United States. Some companies may outgrow the definition of a small
capitalization company after the Portfolio has purchased their securities. These
companies continue to be considered small for purposes of the Portfolio's
minimum 65% allocation to small capitalization companies. The Portfolio may also
invest in preferred stock and other securities convertible into equity
securities. From time to time, the Portfolio will also invest a lesser portion
of its assets in securities of mid and large capitalization companies (I.E.,
companies with a market capitalization of at least $1.5 billion). As of
December 31, 1999, the average weighted market capitalization of the Portfolio's
investments was $1.178 billion.
In selecting value stocks and other equity securities, State Street Research
primarily looks to equity securities it believes are undervalued or trading
below their true worth, but that appear likely to come back into favor with
investors. Undervalued securities are securities that State Street Research
believes: (a) are undervalued relative to other securities in the market or
currently earn low returns with a potential for higher returns, (b) are
undervalued relative to the potential for improved operating performance and
financial strength, or (c) are issued by companies that have recently undergone
a change in management or control, or developed new products or services, that
may improve their business prospects or competitive position. In assessing
relative value, State Street Research will consider factors such as a company's
ratio of market price to earnings, ratio of market price to book value, ratio of
market price to assets, ratio of market price to cash flow, estimated earnings
growth rate, cash flow, yield, liquidation value, product pricing, quality of
management and competitive market position. As a secondary focus, State Street
Research may also consider an investment's potential to provide current income.
In seeking to achieve its investment objectives, the Portfolio may also invest
in equity securities of companies that Advantus Capital believes show potential
for sustainable earnings growth above the average market growth rate.
The Portfolio's purchases of equity securities may include shares of common
stock that are part of a company's initial public offering. In addition, the
Portfolio may invest lesser portions of its assets in restricted and illiquid
securities, convertible and non-convertible investment-grade and non-investment
grade debt securities, securities of other mutual funds, foreign securities,
warrants, repurchase agreement transactions, stock index futures contracts,
options (the Portfolio may purchase, sell and write put and call options), index
depositary receipts and money market securities. To generate additional income,
the Portfolio may lend securities representing up to one-third of its total
assets to broker-dealers, banks and other institutions.
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<PAGE>
RISKS. An investment in the Portfolio is subject to the following risks:
- Company Risk
- Concentration Risk
- Inflation Risk
- Initial Public Offering Risk
- Market Risk
- Mid Size Company Risk
- Portfolio Risk
- Sector Risk
- Securities Lending Risk
- Short-Term Trading Risk
- Small Company Risk
- Value Stock Risk
A detailed description of these risks is set forth in "- Defining Risks" below.
Additional risk information is provided in the Statement of Additional
Information.
GLOBAL BOND PORTFOLIO
Global Bond Portfolio seeks to maximize current income, consistent with the
protection of principal.
The Portfolio invests mainly in a variety of investment-grade debt securities
issued by domestic and foreign issuers. These debt securities include:
- investment-grade corporate debt obligations issued by domestic and foreign
corporate issuers
- investment-grade debt securities issued or guaranteed by the U.S.
government or any of its agencies or instrumentalities (including
U.S. Treasury bills, notes and bonds)
- investment-grade debt securities issued or guaranteed by foreign
governments or any of their agencies, instrumentalities or political
subdivisions, or by supranational organizations
- investment-grade mortgage-backed securities, asset-backed securities
issued or sponsored by domestic governmental agencies and financial
institutions
- investment-grade mortgage-backed and asset-backed securities issued or
sponsored by domestic issuers
- debt obligations of U.S. banks, savings and loan associations and savings
banks
JBIM, the Portfolio's investment sub-adviser, determines the Portfolio's
allocation between foreign and domestic securities and selects and manages the
Portfolio's foreign investments. Advantus Capital selects and manages the
Portfolio's domestic investments.
The Portfolio invests primarily in investment-grade debt obligations issued by
domestic and foreign companies in a variety of industries. However, the
Portfolio may invest in investment-grade and non-investment-grade Brady Bonds.
The Portfolio may invest in long-term debt securities (I.E., maturities of more
than 10 years), intermediate debt securities (I.E., maturities from 3 to 10
years) and short-term debt securities (I.E., maturities of less than 3 years).
In selecting corporate debt securities and their maturities, Advantus Capital
and JBIM seek to maximize current income by engaging in a risk/return analysis
that focuses on various factors such as industry outlook, current and
anticipated market and economic conditions, general levels of debt prices and
issuer operations.
Under normal circumstances, the Portfolio will maintain investments in at least
three foreign countries. The Portfolio may invest in securities or governments
in developed foreign markets or in developing or emerging markets.
The Portfolio may also invest a portion of its assets in CMOs, stripped
mortgage-backed securities and asset-backed securities. CMOs are debt
obligations typically issued by a private special-purpose entity that are
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collateralized by residential or commercial mortgage loans or pools of
residential mortgage loans. CMOs allocate the priority of the distribution of
principal and interest from the underlying mortgage loans among various series.
Each series differs from the other in terms of the priority right to receive
cash payments from the underlying mortgage loans.
Stripped mortgage-backed securities also represent ownership interests in a pool
of mortgages. However, the stripped mortgage-backed securities are separated
into interest and principal components. The interest component only allows the
interest holder to receive the interest portion of cash payments, while the
principal component only allows the interest holder to receive the principal
portion of cash payments.
Asset-backed securities represent interest in pools of consumer loans (such as
credit card, trade or automobile loans). Investors in asset-backed securities
are entitled to receive payments of principal and interest received by the pool
entity from the underlying consumer loans net of any costs and expenses incurred
by the entity.
As a rule of thumb, a portfolio of debt, mortgage-related and asset-backed
securities experiences a decrease in principal value with an increase in
interest rates. The extent of the decrease in principal value may be affected by
the Portfolio's duration of its portfolio of debt, mortgage-related and
asset-backed securities. "Effective" duration takes into consideration the
likelihood that a security will be called or prepaid prior to maturity given
current interest rates. Duration measures the relative price sensitivity of a
security to changes in interest rates. Typically, a security with a longer
duration is more price sensitive than a security with a shorter duration. As a
very broad approximation, a portfolio of debt, mortgage-related and asset-backed
securities experiences a percentage decrease in principal value equal to its
effective duration for each 1% increase in interest rates. For example, if the
Portfolio holds securities with an effective duration of five years and interest
rates rise 1%, the principal value of such securities could be expected to
decrease by approximately 5%. The Portfolio expects that under normal
circumstances the effective duration of its debt, mortgage-related and
asset-backed securities portfolio will range from three to eight years.
In addition, the Portfolio may invest lesser portions of its assets in interest
rate and securities futures contracts, options on interest rate or securities
futures contracts, forward foreign currency exchange contracts, exchange-traded
foreign currency futures contracts, options on foreign currency futures
contracts, non-investment grade debt securities, securities index futures
contracts, options on securities index futures contracts, interest rate and
index swap agreement transactions, restricted and illiquid securities, options
(the Portfolio may purchase, sell and write put and call options), securities
purchased on a when-issued or forward commitment basis, mortgage dollar roll
transactions, American Depositary Receipts, Global Depositary Receipts,
securities of other mutual funds, warrants, repurchase agreement transactions,
reverse repurchase agreement transactions, cash, cash equivalent items and money
market securities. To generate additional income, the Portfolio may lend
securities representing up to one-third of its total assets to broker-dealers,
banks and other institutions.
RISKS. An investment in the Portfolio is subject to the following risks:
- Call Risk
- Concentration Risk
- Credit Risk
- Currency Risk
- Euro Conversion Risk
- Extension Risk
- Foreign Securities Risk
- Income Risk
- Inflation Risk
- Interest Rate Risk
- Market Risk
- Portfolio Risk
- Prepayment Risk
- Securities Lending Risk
- Short-Term Trading Risk
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A detailed description of these risks is set forth in "- Defining Risks" below.
Additional risk information is provided in the Statement of Additional
Information.
INDEX 400 MID-CAP PORTFOLIO
Index 400 Mid-Cap Portfolio seeks investment results generally corresponding to
the aggregate price and dividend performance of the publicly traded common
stocks that comprise the Standard & Poor's 400 MidCap Index (the S&P 400).
Under normal conditions, the Portfolio invests its assets in all of the common
stocks included in the S&P 400. The Portfolio attempts to achieve a correlation
of 100% without considering Portfolio expenses. However, the Portfolio is not
required to hold a minimum or maximum number of common stocks included in the
S&P 400, and due to changing economic or markets, may invest in less than all of
the common stocks included in the S&P 400.
Advantus Capital utilizes a computer program to confirm the Portfolio's S&P 400
replication and to round off security weightings.
In addition, the Portfolio may invest lesser portions of its assets in
investment-grade short-term fixed income securities, securities of other mutual
funds, restricted and illiquid securities, index depositary receipts, stock
index futures contracts, repurchase agreement transactions and money market
securities. To generate additional income, the Portfolio may lend securities
representing up to one-third of the value of its total assets to broker-dealers,
banks and other institutions.
S&P designates the stocks included in the S&P 400. From time to time, S&P may
add or delete stocks from the S&P 400. Inclusion of a stock in the S&P 400 does
not imply an opinion by S&P as to its investment merit. "Standard & Poor's,"
"S&P," "S&P 400" and "Standard & Poor's MidCap 400," are trademarks of The
McGraw-Hill Companies, Inc. and have been licensed for use by the Portfolio. The
Portfolio is not sponsored, endorsed, sold or promoted by S&P and S&P makes no
representation regarding the advisability of investing in the Portfolio. Please
see the Statement of Additional Information which sets forth certain additional
disclaimers and limitations on behalf of S&P.
RISKS. An investment in the Portfolio is subject to the following risks:
- Company Risk
- Concentration Risk
- Index Performance Risk
- Inflation Risk
- Market Risk
- Mid Size Company Risk
- Portfolio Risk
- Sector Risk
- Securities Lending Risk
A detailed description of these risks is set forth in "- Defining Risks" below.
Additional risk information is provided in the Statement of Additional
Information.
MACRO-CAP VALUE PORTFOLIO
Macro-Cap Value Portfolio seeks high total return.
The Portfolio primarily invests in various equity securities of very large
capitalization domestic companies (I.E. typically companies with a market
capitalization of at least $8 billion) at the time of purchase. Under normal
circumstances, at least 65% of the Portfolio's total assets will be invested in
common stocks of such very large
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capitalization domestic companies and foreign issuers that are publicly traded
in the United States. The Portfolio may also invest in preferred stock, other
securities convertible into equity securities, and securities of smaller
capitalization companies (I.E., companies with a market capitalization of less
than $8 billion). As of December 31, 1999, the average weighted market
capitalization of the Portfolio's investments was $114.8 billion and the median
market capitalization was approximately $12 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. J.P. Morgan then uses a dividend discount model to rank companies
within economic sectors according to their relative value. The dividend discount
model also identifies those securities that are undervalued, based on current
market prices, relative to their long-term earnings power.
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.
In addition, the Portfolio may invest lesser portions of its assets in
restricted and illiquid securities, convertible and non-convertible
investment-grade and non-investment grade debt securities, foreign securities,
stock index futures contracts, options (the Portfolio may purchase, sell and
write put and call options), warrants, index depositary receipts, securities
purchased on a when-issued or forward commitment basis, repurchase agreement
transactions, securities of other mutual funds and money market securities. To
generate additional income, the Portfolio may lend securities representing up to
one-third of the value of its total assets to broker-dealers, banks and other
institutions.
RISKS. An investment in the Portfolio is subject to the following risks:
- Company Risk
- Concentration Risk
- Inflation Risk
- Large Company Risk
- Market Risk
- Portfolio Risk
- Sector Risk
- Securities Lending Risk
- Short-Term Trading Risk
- Value Stock Risk
A detailed description of these risks is set forth in "- Defining Risks" below.
Additional risk information is provided in the Statement of Additional
Information.
MICRO-CAP GROWTH PORTFOLIO
Micro-Cap Growth Portfolio seeks long-term capital appreciation.
The Portfolio primarily invests in various types of equity securities of
micro-cap companies (I.E., companies with a market capitalization of less than
$300 million) at the time of purchase. If a company's market capitalization
exceeds $300 million after the Portfolio purchases the company's securities, the
Portfolio may nevertheless hold such securities. The Portfolio primarily invests
in common stocks but may also invest in preferred stocks and securities
convertible into equity securities. Under normal circumstances, at least 65% of
the Portfolio's total assets will be invested in common stocks of micro-cap
companies. From time to time, the
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Portfolio may also invest a lesser portion of its assets in securities of larger
capitalization companies (I.E., companies with market capitalizations of at
least $300 million). As of December 31, 1999, the average weighted market
capitalization of the Portfolio's investments was $1.675 billion.
In selecting equity securities for the Portfolio, WSA, the Portfolio's
investment sub-adviser, primarily looks to an investment's potential for
sustainable earnings growth and improving profitability. In selecting securities
with earnings growth potential, WSA considers factors such as a company's
competitive market position, quality of management, growth strategy, internal
operating trends (such as profit margins, cash flows and earnings and revenue
growth), overall financial condition, and ability to sustain current rate of
growth. In seeking to achieve its investment objective, the Portfolio may also
invest in equity securities of companies that WSA believes are temporarily
undervalued or show promise of improved results due to new management, products,
markets or other factors.
The Portfolio's purchases of equity securities may include shares of common
stock that are part of a company's initial public offering. In addition, the
Portfolio may invest lesser portions of its assets in restricted and illiquid
securities, investment-grade and non-investment grade corporate debt securities,
foreign securities, warrants, stock index futures contracts, options (the
Portfolio may purchase, sell and write put and call options), index depositary
receipts, repurchase agreement transactions, securities of other mutual funds
and money market securities. To generate additional income, the Portfolio may
lend securities representing up to one-third of the value of its total assets to
broker-dealers, banks and other institutions.
RISKS. An investment in the Portfolio is subject to the following risks:
- Company Risk
- Concentration Risk
- Growth Stock Risk
- Inflation Risk
- Initial Public Offering Risk
- Market Risk
- Micro-Cap Company Risk
- Portfolio Risk
- Sector Risk
- Securities Lending Risk
- Short-Term Trading Risk
A detailed description of these risks is set forth in "- Defining Risks" below.
Additional risk information is provided in the Statement of Additional
Information.
REAL ESTATE SECURITIES PORTFOLIO
Real Estate Securities Portfolio seeks above average income and long-term growth
of capital.
Under normal circumstances, at least 65% of the Portfolio's total assets will be
invested in real estate and real estate-related securities. The Portfolio will
primarily invest in real estate and real estate-related equity securities
(including securities convertible into equity securities). The Portfolio does
not invest directly in real estate. "Real estate securities" include securities
issued by companies that receive at least 50% of their gross revenue from the
construction, ownership, management, financing or sale of residential,
commercial or industrial real estate. Real estate securities issuers typically
include real estate investment trusts (REITs), real estate brokers and
developers and real estate holding companies.
The Portfolio may invest in securities of small, mid and large capitalization
companies. Advantus Capital assesses an investment's potential for sustainable
earnings growth over time. In selecting securities, Advantus Capital considers
factors such as a company's financial condition, financial performance, quality
of management, policies and strategies, real estate properties and comparative
market position.
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"Real estate-related securities" include securities issued by companies engaged
in businesses that sell or offer products or services that are closely related
to the real estate industry. Real estate-related securities issuers typically
include construction and related building companies, manufacturers and
distributors of building supplies, financial institutions that issue or service
mortgages and resort companies.
Most of the Portfolio's real estate securities portfolio will consist of
securities issued by REITs that are listed on a securities exchange or traded
over-the-counter. A REIT is a corporation or trust that invests in fee or
leasehold ownership of real estate, mortgages or shares issued by other REITs.
REITs may be characterized as equity REITs (I.E., REITs that primarily invest in
fee ownership and leasehold ownership of land), mortgage REITs (I.E., REITs that
primarily invest in mortgages on real estate) or hybrid REITs which invest in
both fee and leasehold ownership of land and mortgages. The Portfolio mostly
invests in equity REITs but also invests lesser portions of its assets in
mortgage REITs and hybrid REITs. A REIT that meets the applicable requirements
of the Internal Revenue Code of 1986 may deduct dividends paid to shareholders,
effectively eliminating any corporate level federal tax. As a result, REITs are
able to distribute a larger portion of their earnings to investors than other
corporate entities subject to the federal corporate tax.
In addition, the Portfolio may invest lesser portions of its assets in
securities issued by companies outside of the real estate industry. The
Portfolio may also invest in non-real estate related equity securities,
warrants, convertible debt securities, investment-grade fixed income securities,
securities of other mutual funds, repurchase agreement transactions, restricted
and illiquid securities, stock index futures contracts, options (the Portfolio
may purchase, sell and write put and call options), American Depository
Receipts, securities purchased on a when issued or forward commitment basis and
money market securities. To generate additional income, the Portfolio may lend
securities representing up to one-third of the value of its total assets to
broker-dealers, banks and other institutions.
RISKS. An investment in the Portfolio is subject to the following risks:
- Company Risk
- Concentration Risk
- Credit Risk
- Extension Risk
- Income Risk
- Inflation Risk
- Interest Rate Risk
- Limited Portfolio Risk
- Market Risk
- Portfolio Risk
- Prepayment Risk
- Real Estate Risk
- REIT-Related Risk
- Sector Risk
- Securities Lending Risk
- Short-Term Trading Risk
- Small Company Risk
A detailed description of these risks is set forth in "- Defining Risks" below.
INVESTMENT PRACTICES COMMON TO THE PORTFOLIOS
In an attempt to respond to adverse market, economic, political or other
conditions, each of the Portfolios may invest for temporary defensive purposes
in various short-term cash and cash equivalent items. When investing for
temporary defensive purposes, a Portfolio may not always achieve its investment
objective.
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PORTFOLIO TURNOVER
Before investing in a Portfolio, you should review its portfolio turnover rate
for an indication of the potential effect of transaction costs on the
Portfolio's future returns. In general, the greater the volume of buying and
selling by the Portfolio, the greater the impact that brokerage commissions and
other transaction costs will have on its return.
The Portfolios, while they generally do not invest or trade for short-term
profits, are actively managed and the Portfolio managers may trade securities
frequently. As a result, each Portfolio may, from time to time, have an annual
portfolio turnover rate of over 100%. Factors contributing to a Portfolio's
higher turnover rate may include general market volatility, significant positive
or negative developments concerning particular securities holdings, an attempt
to maintain the Portfolio's market capitalization target and the need to sell
holdings to meet redemption requests. While higher turnover rates may result in
increased transaction costs, the managers of the Portfolios attempt to have the
benefits of these transactions outweigh the costs, although this cannot be
assured.
DEFINING RISKS
Investment in each Portfolio involves risks. A Portfolio's yield and price are
not guaranteed, and the value of an investment in a Portfolio will go up or
down. The value of an investment in a particular Portfolio may be affected by
the risks of investing in that Portfolio as identified for each Portfolio in "-
Investment Objective, Policies and Practices" above. The following glossary
describes those identified risks associated with investing in the Portfolios.
- CALL RISK - is the risk that securities with high interest rates (or other
attributes that increase debt cost) will be prepaid by the issuer prior to
maturity, particularly during periods of falling interest rates. In
general, an issuer will call its debt securities if they can be refinanced
by issuing new securities with a lower interest rate. The Portfolio is
subject to the possibility that during periods of falling interest rates,
an issuer will call its securities. As a result, the Portfolio would have
to reinvest the proceeds in other securities with generally lower interest
rates, resulting in a decline in the Portfolio's income.
- COMPANY RISK - is the risk that individual securities may perform
differently than the overall market. This may be a result of specific
factors such as changes in corporate profitability due to the success or
failure of specific products or management strategies, or it may be due to
changes in investor perceptions regarding a company.
- CONCENTRATION RISK - is the risk that the Portfolio's performance may be
more susceptible to a single economic, regulatory or technological
occurrence than more diversified investment portfolios. The Portfolio may
be subject to concentration risk if the Portfolio may invest more than 5%
of its total assets in the securities of a single issuer with respect to
25% of its total investment portfolio (the Money Market Portfolio may not
in any event invest more than 5% of its total assets in the securities of
a single issuer). As a non-diversified investment company, Global Bond
Portfolio may particularly be subject to concentration risk since the
Portfolio may invest more than 5% of its total assets in the securities of
a single issuer with respect to 100% of its total investment portfolio.
- CREDIT RISK - is the risk that an issuer of a debt security,
mortgage-backed security or fixed income obligation will not make payments
on the security or obligation when due, or that the other party to a
contract will default on its obligation. There is also the risk that an
issuer could suffer adverse changes
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in financial condition that could lower the credit quality of a security.
This could lead to greater volatility in the price of the security and in
shares of the Portfolio. Also, a change in the quality rating of a debt
security or other fixed income obligation can affect the security's or
obligation's liquidity and make it more difficult to sell. The Portfolio
may attempt to minimize credit risk by investing in debt securities and
other fixed income obligations considered at least investment grade at the
time of purchase. However, all of these securities and obligations,
especially those in the lower investment grade rating categories, have
credit risk. In adverse economic or other circumstances, issuers of these
lower rated securities and obligations are more likely to have difficulty
making principal and interest payments than issuers of higher rated
securities and obligations. If the Portfolio purchases unrated securities
and obligations, it will depend on its investment adviser's or
sub-adviser's analysis of credit risk more heavily than usual.
- CURRENCY RISK - is the risk that changes in foreign currency exchange
rates will increase or decrease the value of foreign securities or the
amount of income or gain received on such securities. A strong
U.S. dollar relative to these other currencies will adversely affect the
value of the Portfolio. Attempts by the Portfolio to minimize the effects
of currency fluctuations through the use of foreign currency hedging
transactions may not be successful or the Portfolio's hedging transactions
may cause the Portfolio to be unable to take advantage of a favorable
change in the value of foreign currencies.
- EMERGING MARKETS RISK - is the risk that the value of securities issued by
companies located in emerging market countries may be subject to greater
volatility than foreign securities issued by companies in developed
markets. Risks of investing in foreign securities issued by companies in
emerging market countries include, among other things, greater social,
political and economic instability, lack of liquidity and greater price
volatility due to small market size and low trading volume, certain
national policies that restrict investment opportunities and the lack of
legal structures governing private and foreign investments and private
property.
- EURO CONVERSION RISK - is the risk that the value of foreign securities of
companies located in European Monetary Union (EMU) countries may decrease
due to market volatility resulting from the conversion of certain EMU
country currencies to the Euro. It is not possible to predict the impact
of the Euro on the business or financial condition of European issues or
on the Portfolio. The transition and the elimination of currency risk
among EMU countries may change the economic environment and behavior of
investors, particularly in European markets. To the extent the Portfolio
holds non-U.S. dollar (Euro or other) denominated securities, it will
still be exposed to currency risk due to fluctuations in those currencies
versus the U.S. dollar.
- EXTENSION RISK - is the risk that rising interest rates could cause
property owners to prepay their mortgages more slowly than expected,
resulting in slower prepayments of mortgage-related securities.
- FOREIGN SECURITIES RISK - is the risk that the value of foreign companies
or foreign government securities held by the Portfolio may be subject to
greater volatility than domestic securities. Risks of foreign securities
include, among other things:
POLITICAL AND ECONOMIC RISKS. Investing in foreign securities is subject
to the risk of political, social or economic instability in the country of
the issuer of the security, the difficulty of predicting international
trade patterns, the possibility of exchange controls, expropriation,
limits on currency removal or nationalization of assets.
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FOREIGN TAX RISK. The Portfolio's income from foreign issuers may be
subject to non-U.S. withholding taxes. In some countries, the Portfolio
may be subject to taxes on trading profits and, on certain securities
transactions, transfer or stamp duties. To the extent foreign income taxes
are paid by the Portfolio, U.S. shareholders may be entitled to a credit
or deduction for U.S. tax purposes.
FOREIGN INVESTMENT RESTRICTION RISK. Some countries, particularly emerging
market countries, restrict to varying degrees foreign investment in their
securities markets. In some circumstances, these restrictions may limit or
preclude investment in certain countries or may increase the cost of
investing in securities of particular companies.
FOREIGN SECURITIES MARKET RISK. Securities of many foreign companies may
be less liquid and their prices more volatile than securities of domestic
companies. Securities of companies traded outside the U.S. may be subject
to further risks due to the inexperience of local brokers and financial
institutions, the possibility of permanent or temporary termination of
trading, and greater spreads between bid and asked prices for securities.
Moreover, foreign stock exchanges and brokers are subject to less
governmental regulation, and commissions may be higher than in the
U.S. In addition, there may be delays in the settlement of foreign stock
exchange transactions.
INFORMATION AND REMEDIES RISK. Foreign companies generally are not subject
to uniform accounting, auditing and financial reporting standards or to
other regulatory requirements that apply to domestic companies. As a
result, less information may be available to investors concerning foreign
issuers. In addition, the Portfolio may have greater difficulty voting
proxies, exercising shareholder rights, pursuing legal remedies and
obtaining judgments with respect to foreign investments in foreign courts
than with domestic companies in domestic courts.
- GROWTH STOCK RISK - is the risk that if the assessment by the Portfolio's
investment adviser or sub-adviser of a company's prospective earnings
growth or judgment of how other investors assess the company's earnings
growth is wrong, then the value of the company's securities may decrease
or not approach the value that the Portfolio's investment adviser or
sub-adviser has placed on it.
- INCOME RISK - is the risk that the Portfolio may experience a decline in
its income due to falling interest rates.
- INDEX PERFORMANCE RISK - is the risk that the Portfolio's ability to
replicate the performance of a particular securities index may be affected
by, among other things, changes in securities markets, the manner in which
the index's sponsor calculates the applicable securities index, the amount
and timing of cash flows into and out of the Portfolio, commissions and
other expenses.
- INFLATION RISK - is the risk that inflation will erode the purchasing
power of the value of securities held by the Portfolio or the value of the
Portfolio's dividends. Fixed-rate debt securities may be more susceptible
to this risk than floating-rate debt securities or equity securities,
whose value and dividends may increase in the future.
- INITIAL PUBLIC OFFERING RISK - is the risk that the Portfolio will not be
able to sustain the positive effect on performance that may result from
investments in initial public offerings (IPOs). Investments in IPOs can
have a significant positive impact on the Portfolio's performance. The
positive effect of investments of IPOs may not be sustainable because of a
number of factors. The Portfolio may not be able to buy shares in some
IPOs, or may be able to buy only a small number of shares. Also, the
Portfolio may not
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be able to buy the shares at the commencement of the offering, and the
general availability and performance of IPOs are dependent on market
psychology and economic conditions. The relative performance impact of
IPOs is also likely to decline as the Portfolio grows.
- INTEREST RATE RISK - is the risk that the value of a debt security,
mortgage-backed security or fixed income obligation will decline due to
changes in market interest rates. Generally, when interest rates rise, the
value of such a security or obligation decreases. Conversely, when
interest rates decline, the value of a debt security, mortgage-backed
security or fixed income obligation generally increases. Long-term debt
securities, mortgage-backed securities and fixed income obligations are
generally more sensitive to interest rate changes.
- LARGE COMPANY RISK - is the risk that a portfolio of large capitalization
company securities may underperform the market as a whole.
- LIMITED PORTFOLIO RISK - is the risk that an investment in the Portfolio
may present greater volatility, due to the limited number of issuers of
real estate and real estate-related securities, than an investment in
portfolio of securities selected from a greater number of issuers. The
Portfolio is subject to limited portfolio risk because the Portfolio may
invest in a smaller number of individual issuers than other portfolios.
- MARKET RISK - is the risk that equity and debt securities are subject to
adverse trends in equity and debt markets. Securities are subject to price
movements due to changes in general economic conditions, the level of
prevailing interest rates or investor perceptions of the market. In
addition, prices are affected by the outlook for overall corporate
profitability. Market prices of equity securities are generally more
volatile than debt securities. This may cause a security to be worth less
than the price originally paid for it, or less than it was worth at an
earlier time. Market risk may affect a single issuer or the market as a
whole. In addition, market risk may affect a portfolio of equity
securities of micro, small, mid, large and very large capitalization
companies and/or equity securities believed by a Portfolio's investment
adviser or sub-adviser to be undervalued or exhibit above average
sustainable earnings growth potential. As a result, a portfolio of such
equity securities may underperform the market as a whole.
- MID SIZE COMPANY RISK - is the risk that securities of mid capitalization
companies may be more vulnerable to adverse developments than those of
larger companies due to such companies' limited product lines, limited
markets and financial resources and dependence upon a relatively small
management group.
- PORTFOLIO RISK - is the risk that Portfolio performance may not meet or
exceed that of the market as a whole. The performance of the Portfolio
will depend on the Portfolio's investment adviser's or sub-adviser's
judgment of economic and market policies, trends in investment yields and
monetary policy.
- PREPAYMENT RISK - is the risk that falling interest rates could cause
prepayments of mortgage-related securities to occur more quickly than
expected. This occurs because, as interest rates fall, more property
owners refinance the mortgages underlying these securities. The Portfolio
must reinvest the prepayments at a time when interest rates on new
mortgage investments are falling, reducing the income of the Portfolio. In
addition, when interest rates fall, prices on mortgage-related securities
may not rise as much as for other types of comparable debt securities
because investors may anticipate an increase in mortgage prepayments.
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- REAL ESTATE RISK - is the risk that the value of the Portfolio's
investments may decrease due to fluctuations in rental income,
overbuilding and increased competition, casualty and condemnation losses,
environmental costs and liabilities, extended vacancies of property, lack
of available mortgage funds, government regulation and limitations,
increases in property taxes, cash flow dependency, declines in real estate
value, physical depreciation of buildings, inability to obtain project
financing, increased operating costs and changes in general or local
economic conditions.
- REIT-RELATED RISK - is the risk that the value of the Portfolio's equity
REIT securities will be adversely affected by changes in the value of the
underlying property. In addition, the value of equity or mortgage REITs
could be adversely affected if the REIT fails to qualify for tax-free pass
through income under the Internal Revenue Code of 1986 (as amended), or
maintain its exemption from registration under the Investment Company Act
of 1940.
- SECTOR RISK - is the risk that the securities of companies within specific
industries or sectors of the economy can periodically perform differently
than the overall market. This may be due to changes in such things as the
regulatory or competitive environment or to changes in investor
perceptions regarding a company.
- SECURITIES LENDING RISK - is the risk that the Portfolio may experience a
delay in the recovery of loaned securities, or even the loss of rights in
the collateral deposited by the borrower if the borrower should fail
financially. To reduce these risks, the Portfolio enters into loan
arrangements only with institutions that the Portfolio's investment
adviser or sub-adviser has determined are creditworthy.
- SHORT-TERM TRADING RISK - is the risk that a Portfolio may trade
securities frequently and hold securities in its portfolio for one year or
less. Frequent purchases and sales of securities will increase the
Portfolio's transaction costs. Factors that can lead to short-term trading
include market volatility, a significant positive or negative development
concerning a security, an attempt to maintain a Portfolio's market
capitalization target, and the need to sell a security to meet redemption
activity.
- SMALL AND MICRO-CAP COMPANY RISK - is the risk that equity securities of
small and micro-cap capitalization companies are subject to greater price
volatility due to, among other things, such companies' small size, limited
product lines, limited access to financing sources and limited management
depth. In addition, the frequency and volume of trading of such securities
may be less than is typical of larger companies, making them subject to
wider price fluctuations. In some cases, there could be difficulties in
selling securities of micro-cap and small capitalization companies at the
desired time and place.
- STABLE PRICE RISK - is the risk that the Money Market Portfolio will not
be able to maintain a stable share price of $1.00. There may be situations
where the Portfolio's share price could fall below $1.00, which would
reduce the value of an investor's account.
- VALUE STOCK RISK - is the risk that the value of a security believed by
the Portfolio's investment adviser or sub-adviser to be undervalued may
never reach what such investment adviser or sub-adviser believes is its
full value, or that such security's value may decrease.
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BUYING AND SELLING SHARES
BUYING SHARES
Portfolio shares are not offered directly to the public. Portfolio shares are
sold to Minnesota Life in connection with its variable life insurance policies
and variable annuity contracts. Portfolio shares are also offered to certain
life insurance affiliates of Minnesota Life. Ascend Financial serves as the
underwriter of the Fund's shares. It is possible that the Fund may offer
Portfolio shares to other investors in the future.
Eligible investors may purchase Portfolio shares on any day the New York Stock
Exchange (NYSE) is open for business. The price for Portfolio shares is equal to
the Portfolio's net asset value (NAV). NAV is generally calculated as of the
close of normal trading on the NYSE (typically 3:00 p.m. Central time). NAV is
not calculated on (a) days in which changes in a Portfolio's investment
portfolio do not materially change the Portfolio's NAV, (b) days on which no
Portfolio shares are purchased or sold, and (c) customary national business
holidays on which the NYSE is closed for trading. The price for shares of Money
Market Portfolio will normally be $1.00. However, there is no assurance that
Money Market Portfolio will maintain the $1.00 NAV.
NAV for one Portfolio share is equal to the Portfolio's total investments less
any liabilities divided by the number of Portfolio shares. To determine NAV, a
Portfolio (other than Money Market Portfolio) generally values its investments
based on market quotations. If market quotations are not available for certain
Portfolio investments, the investments are valued based on the fair value of the
investments as determined in good faith by the Fund's Board of Directors. Debt
securities may be valued based on calculations furnished to the Portfolio by a
pricing service or by brokers who make a market in such securities. A Portfolio
may hold securities that are listed on foreign stock exchanges. These foreign
securities may trade on weekends or other days when the Portfolio typically does
not calculate NAV. As a result, the NAV of such Portfolio shares may change on
days when an investor will not be able to purchase or sell Portfolio shares.
Securities in Money Market Portfolio's investment portfolio are valued on an
amortized cost basis. This involves valuing an instrument at its cost and
thereafter assuming a constant amortization of any discount or premium until the
instrument's maturity, rather than looking at actual changes in the market value
of the instrument.
A purchase order will be priced at the next NAV calculated after the purchase
order is received by the Fund. If a purchase order is received after the close
of normal trading on the NYSE, the order will be priced at the NAV calculated on
the next day the NYSE is open for trading.
SELLING SHARES
Portfolio shares will be sold at the NAV next calculated after a sale order is
received by the Fund. The amount an investor receives may be more or less than
the original purchase price for the applicable shares.
86 BUYING AND SELLING SHARES
<PAGE>
EXCHANGING SHARES
Owners of the variable life insurance policies and variable annuity contracts
who invest in the Fund may exchange shares of a Portfolio for shares of other
Portfolios as described below and subject to the terms and any specific
limitations on the exchange or "transfer" privilege, described in the
accompanying prospectus for those policies or contracts. An exchange will be
made on the basis of the Portfolios' relative net asset values.
Frequent exchanges may interfere with Fund management or operations and drive up
Fund costs. The Fund's Portfolios are not designed for market timers, or for
large or frequent transfers. To protect shareholders, the Fund may restrict or
refuse purchases or exchanges by market timers. A variable annuity contract or
variable life insurance policy owner will be considered to be a market timer if
that owner has: (i) requested an exchange out of a Portfolio within two weeks of
an earlier exchange request, or (ii) exchanged shares out of a Portfolio more
than twice in a calendar quarter, or (iii) exchanged shares equal to at least $1
million, or more than 1% of the net assets of the Portfolio, or (iv) followed
what otherwise seems to be a timing pattern in the exercise of exchange or
transfer rights. Policies or contracts under common control or ownership are
combined for the purpose of determining these limitations. The Fund reserves the
right to change the terms of or impose other limitations on the exchange
privilege.
BUYING AND SELLING SHARES 87
<PAGE>
GENERAL INFORMATION
DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
Each Portfolio pays its shareholders dividends from its net investment income,
and distributes any net capital gains that it has realized. Except for Money
Market Portfolio, dividends and net capital gains distributions are generally
paid once a year. Dividends for Money Market Portfolio are declared daily and
paid on the last business day of the month. Distributions will be reinvested in
additional Portfolio shares. Distributions of these additional shares are made
at the NAV of the payment date.
TAXES
Each Portfolio is treated as a separate entity for federal income tax purposes.
Since Minnesota Life currently is the sole shareholder of the Fund, no
discussion regarding the tax consequences to Fund investors is included in this
prospectus. For information concerning the tax consequences to purchasers of
variable annuity contracts and variable life insurance policies issued by
Minnesota Life, please see the accompanying prospectus for those contracts.
MIXED FUNDING
The Fund serves as the underlying investment medium for amounts invested in both
Minnesota Life's variable life insurance policies and variable annuity
contracts. It is possible that there may be circumstances where it is
disadvantageous for the owners of variable life insurance policies and variable
annuity contracts to invest in the Fund at the same time. Neither the Fund nor
Minnesota Life currently foresees any disadvantage, but if the Fund determines
it is disadvantageous for Minnesota Life's variable life insurance policies and
variable annuity contracts to invest in the Fund at the same time, due to a
material conflict of interest between such policy owners and contract owners or
for any other reason, the Fund's Board of Directors will notify Minnesota Life
of such conflict of interest or other applicable event. As a result, Minnesota
Life may be required to sell Fund shares with respect to a certain group of
policy owners or contract owners in order to resolve any conflict. Minnesota
Life will bear the entire cost of resolving any material conflict of interest.
88 GENERAL INFORMATION
<PAGE>
SERVICE PROVIDERS
INVESTMENT ADVISER
Advantus Capital Management, Inc.
400 Robert Street North
St. Paul, Minnesota 55101
(651) 665-3826
INVESTMENT SUB-ADVISERS
CAPITAL APPRECIATION PORTFOLIO
Credit Suisse Asset Management, LLC
153 East 53rd Street
One Citicorp Center
New York, New York 10022
(212) 832-2626
INTERNATIONAL STOCK PORTFOLIO
Templeton Investment Counsel, Inc.
500 East Broward Boulevard
Fort Lauderdale, Florida 33394
(954) 527-7500
SMALL COMPANY GROWTH PORTFOLIO
Credit Suisse Asset Management, LLC
153 East 53rd Street
One Citicorp Center
New York, New York 10022
(212) 832-2626
SMALL COMPANY VALUE PORTFOLIO
State Street Research & Management Company
One Financial Center
Boston, Massachusetts 02111
(617) 357-1200
GLOBAL BOND PORTFOLIO
Julius Baer Investment Management Inc.
330 Madison Avenue
New York, New York 10017
(212) 297-3800
MACRO-CAP VALUE PORTFOLIO
J.P. Morgan Investment Management Inc.
522 Fifth Avenue
New York, New York 10036
(212) 837-2300
MICRO-CAP GROWTH PORTFOLIO
Wall Street Associates
La Jolla Financial Building
1200 Prospect Street, Suite 100
La Jolla, California 92037
(800) 925-5787
ADMINISTRATIVE SERVICES AGENT
Minnesota Life Insurance Company
(800) 995-3850
UNDERWRITER
Ascend Financial Services, Inc.
400 Robert Street North
St. Paul, Minnesota 55101-2098
(651) 665-4833
CUSTODIANS
Norwest Bank Minnesota, N.A.
Sixth Street and Marquette Avenue
Minneapolis, Minnesota 55479
Growth, Money Market, Asset Allocation, Index 500, Capital Appreciation,
Small Company Growth, Value Stock, Small Company Value, Index 400 Mid-Cap,
Macro-Cap Value, Micro-Cap Growth and Real Estate Securities Portfolios
Bankers Trust Company
280 Park Avenue
New York, New York 10017
Bond, Mortgage Securities, International Stock, Maturing Government Bond and
Global Bond Portfolios
INDEPENDENT AUDITORS
KPMG LLP
GENERAL COUNSEL
Dorsey & Whitney LLP
GENERAL INFORMATION 89
<PAGE>
ADDITIONAL INFORMATION ABOUT THE FUND
The Fund's annual and semi-annual reports list holdings for each Portfolio, and
discuss recent market conditions, economic trends and investment strategies that
affected the Portfolios during the latest fiscal year.
A Statement of Additional Information (SAI) provides further information about
the Fund and the Portfolios. The current SAI is on file with the Securities and
Exchange Commission and is incorporated by reference (is legally part of this
prospectus).
HOW TO OBTAIN ADDITIONAL INFORMATION
The SAI and the Fund's annual and semi-annual reports are available without
charge upon request. You may obtain additional information or make any
inquiries:
By Telephone - Call 1-800-995-3850
By Mail - Write to Minnesota Life Insurance Company, 400 Robert Street North,
St. Paul, Minnesota 55101-2098
Information about the Fund (including the SAI and annual and semi-annual
reports) can be reviewed and copied at the SEC's Public Reference Room in
Washington, D.C. (telephone 1-202-942-8090 or 1-800-SEC-0330). This information
and other reports about the Fund are also available on the SEC's World Wide Web
site at http://www.sec.gov. Copies of this information may be obtained by
writing to the SEC's Public Reference Section, Washington, D.C. 20549-0102 or
obtained by electronic request to: [email protected]. You will be charged a
duplicating fee for copies.
Investment Company Act No. 811-4279
[LOGO]
- -C-2000 Minnesota Life Insurance Company. All rights reserved.
90 GENERAL INFORMATION
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
ADVANTUS SERIES FUND, INC.
May 1, 2000
This Statement of Additional Information is not a prospectus. This Statement of
Additional Information relates to the separate Prospectus dated May 1, 2000
and should be read in conjunction therewith. A copy of the Prospectus may
be obtained by telephone from Minnesota Life Insurance Company (Minnesota
Life) at (800) 995-3850 or by writing to Minnesota Life at 400 Robert
Street North, St. Paul, Minnesota 55101-2098.
THIS STATEMENT OF ADDITIONAL INFORMATION MUST BE ACCOMPANIED OR PRECEDED BY A
COPY OF THE CURRENT PROSPECTUS FOR THE FUND.
<PAGE>
TABLE OF CONTENTS
GENERAL INFORMATION AND HISTORY
INVESTMENT OBJECTIVES AND POLICIES
Equity Securities of Small Capitalization Companies
Debt and Money Market Securities - Non-Money Market Portfolios
Low Rated Securities
Convertible Securities
Money Market Securities - Money Market Portfolio
U.S. Government Obligations
Obligations of Non-Domestic Banks
Variable Amount Master Demand Notes
Mortgage-Related Securities
U.S. Government Mortgage-Related Securities
Non-Governmental Mortgage-Related Securities
Collateralized Mortgage Obligations
Stripped Mortgage-Backed Securities
Asset-Backed and Stripped Asset-Backed Securities
Direct Investments in Mortgages - Whole Loans
Zero Coupon Securities
Pay-in-Kind and Delayed Interest Securities
Foreign Securities
Foreign Index Linked Securities
Swap Agreements
Currency Exchange Transactions
Foreign Currency Hedging Transactions
Closed-End Investment Companies
Loans of Portfolio Securities
Restricted and Illiquid Securities
When-Issued Securities and Forward Commitments
Mortgage Dollar Rolls
Real Estate Investment Trust Securities
Repurchase Agreements
Reverse Repurchase Agreements
Futures Contracts and Options on Futures Contracts
Options
Warrants
Warrants with Cash Extractions
Index Depositary Receipts
Short Sales Against the Box
Investments in Russia
Defensive Purposes
INVESTMENT RESTRICTIONS
Fundamental Restrictions
Non-Fundamental Restrictions
Additional Restrictions
PORTFOLIO TURNOVER
DIRECTORS AND EXECUTIVE OFFICERS
DIRECTOR LIABILITY
2
<PAGE>
INVESTMENT ADVISORY AND OTHER SERVICES
General
Control and Management of Advantus Capital
Investment Advisory Agreement
Sub-Adviser - CSAM
Investment Sub-Advisory Agreement - CSAM
Sub-Adviser - Templeton Counsel
Investment Sub-Advisory Agreement - Templeton Counsel
Sub-Adviser - JBIM
Investment Sub-Advisory Agreement - JBIM
Sub-Adviser - Morgan Investment
Investment Sub-Advisory Agreement - Morgan Investment
Sub-Adviser - WSA
Investment Sub-Advisory Agreement - WSA
Sub-Adviser - CSAM
Investment Sub-Advisory Agreement - CSAM
Sub-Adviser - State Street Research
Investment Sub-Advisory Agreement - State Street Research
Administrative Services
Code of Ethics
Distribution Agreement
Payment of Certain Distribution Expenses of the Fund
Custodian
Independent Auditors
General Counsel
PORTFOLIO TRANSACTIONS AND ALLOCATION OF BROKERAGE0
Adviser
Sub-Advisers
PURCHASE AND REDEMPTION OF SHARES
FUND SHARES AND VOTING RIGHTS
NET ASSET VALUE
PERFORMANCE DATA
Current Yield Figures for Money Market Portfolio
Current Yield Figures for Other Portfolios
Total Return Figures For All Portfolios
Predictability of Return
TAXES
THE STANDARD & POOR'S LICENSE
FINANCIAL STATEMENTS
----------------------
APPENDIX A - MORTGAGE-RELATED SECURITIES...................................A-1
Underlying Mortgages....................................................A-1
Liquidity and Marketability.............................................A-1
Average Life............................................................A-1
Yield Calculations......................................................A-2
APPENDIX B - BOND AND COMMERCIAL PAPER RATINGS.............................B-1
Bond Ratings............................................................B-1
Commercial Paper Ratings................................................B-2
APPENDIX C - FUTURES CONTRACTS.............................................C-1
Example of Futures Contract Sale........................................C-1
Example of Futures Contract Purchase....................................C-1
Tax Treatment...........................................................C-2
APPENDIX D - BRADY BONDS...................................................D-1
----------------------
3
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GENERAL INFORMATION AND HISTORY
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. The Fund was
organized on February 22, 1985. 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 Portfolios
of the Fund are as follows:
- Growth Portfolio
- Bond Portfolio
- Money Market Portfolio
- Asset Allocation Portfolio
- Mortgage Securities Portfolio
- Index 500 Portfolio
- Capital Appreciation Portfolio
- International Stock Portfolio
- Small Company Growth Portfolio
- Maturing Government Bond Portfolios (three separate portfolios with
maturity dates of 2002, 2006 and 2010)
- Value Stock Portfolio
- Small Company Value Portfolio
- Global Bond Portfolio
- Index 400 Mid-Cap Portfolio
- Macro-Cap Value Portfolio
- Micro-Cap Growth Portfolio
- Real Estate Securities Portfolio
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. Credit Suisse Asset Management, LLC ("CSAM") serves as
investment sub-adviser to the Fund's Capital Appreciation Portfolio and the
Small Company Growth Portfolio. Templeton Investment Counsel, Inc.
("Templeton Counsel") serves as investment sub-adviser to the Fund's
International Stock Portfolio. Julius Baer Investment Management Inc.
("JBIM") 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. ("Morgan Investment") 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 ("WSA")
serves as investment sub-adviser to the Fund's Micro-Cap Growth Portfolio
pursuant to an investment sub-advisory agreement with Advantus Capital. State
Street Research & Management Company ("State Street Research") serves as
investment sub-adviser for the Small Company Value Portfolio.
Currently, the shares of the Fund are sold only to Minnesota Life
Insurance Company ("Minnesota Life"), a Minnesota corporation, 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 Life. The Fund may be used for other
purposes in the future. The Fund may also sell its shares to separate
accounts of Northstar Life
4
<PAGE>
Insurance Company, an indirect wholly-owned subsidiary of Minnesota Life
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 Life, through its separate accounts which fund the Contracts, owns
100% of the shares outstanding of each Portfolio of the Fund. As a result,
Minnesota Life is a controlling person of the Fund and through its ownership of
shares of the Fund, may elect all the directors of the Fund and approve other
Fund actions. Minnesota Life's address is 400 Robert Street North, St. Paul,
Minnesota 55101-2098.
INVESTMENT OBJECTIVES AND POLICIES
The investment objectives and principal investment policies of each of the
Portfolios are set forth in the text of the Fund's Prospectus under "Investing
in the Fund - Investment Objective, Policies and Practices." This section
contains detailed descriptions of the investment policies of the Portfolios as
identified in the Fund's Prospectus.
EQUITY SECURITIES OF SMALL CAPITALIZATION COMPANIES
Small Company Growth Portfolio, Small Company Value Portfolio and
Micro-Cap Growth Portfolio will primarily invest in equity securities issued
by small capitalization companies. To the extent specified in the Prospectus,
certain other Portfolios may invest in equity securities issued by small
capitalization companies. Small capitalization companies may be in a
relatively early stage of development or may produce goods and services which
have favorable prospects for growth due to increasing demand or developing
markets. Frequently, such companies have a small management group and single
product or product-line expertise that may result in an enhanced
entrepreneurial spirit and greater focus which allow such firms to be
successful. The Portfolio's investment adviser or sub-adviser believes that
such companies may develop into significant business enterprises and that an
investment in such companies offers a greater opportunity for capital
appreciation than an investment in larger more established entities. However,
small capitalization companies frequently retain a large part of their
earnings for research, development and investment in capital assets, so that
the prospects for immediate dividend income are limited.
While securities issued by smaller capitalization companies have
historically produced better market results than the securities of larger
issuers, there is no assurance that they will continue to do so or that the
Portfolio will invest specifically in those companies which produce those
results. Because of the risks involved, the Portfolio is not intended to
constitute a complete investment program.
DEBT AND MONEY MARKET SECURITIES - NON-MONEY MARKET PORTFOLIOS
To the extent specified in the Prospectus, certain non-Money Market
Portfolios may invest in long, intermediate and short-term debt securities from
various industry classifications and money market instruments. Such instruments
may include the following:
- Corporate obligations which at the time of purchase are rated within
the four highest grades assigned by Standard & Poor's Corporation
("S&P"), Moody's Investors Services, Inc. ("Moody's") or any other
national rating service, or, if not rated, are of
5
<PAGE>
equivalent investment quality as determined by the Portfolio's
investment adviser or sub-adviser, as the case may be. 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 have speculative elements. As an operating policy,
International Stock Portfolio will not invest more than 5% of its
assets in debt securities rated BBB by S&P or Baa by Moody's. In
addition, Asset Allocation Portfolio, Bond Portfolio and Mortgage
Securities Portfolio may invest up to 10% of their respective net
assets, and International Stock Portfolio and Macro-Cap
Value Portfolio may invest up to 5% of their respective net
assets, in securities rated BB or Ba by S&P or Moody's,
respectively; Global Bond Portfolio may also invest up to 5% of its
net assets in securities rated B or higher by S&P or Moody's; and
Value Stock Portfolio, Small Company Value Portfolio and Micro-Cap
Growth Portfolio may also invest up to 10% of their respective net
assets in securities (including convertible securities) rated at
least B- by S&P or by B3 by Moody's. See "Low Rated -
-Securities," below. For a description of the ratings used by
Moody's and S&P, see Appendix B ("Bond and Commercial Paper
Ratings") below.
- Obligations of, or guaranteed by, the U.S. Government, its agencies or
instrumentalities.
- Debt obligations of banks.
Bond Portfolio may also purchase U.S. dollar denominated debt securities of
foreign governments and companies which are publicly traded in the United States
and rated within the four highest grades assigned by S&P or Moody's.
Global Bond Portfolio may also purchase debt securities of foreign
companies and debt securities issued or guaranteed by foreign governments or any
of their agencies, instrumentalities or political subdivisions, or by
supranational organizations. 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.
Global Bond 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. For a full discussion of Brady
Bonds see Appendix D.
6
<PAGE>
In addition to the instruments described above, which will generally be
long-term, but may be purchased by the Portfolio within one year of the date
of a security's maturity, certain Portfolios specified in the Prospectus may
also purchase other high quality securities including:
- Obligations (including certificates of deposit and bankers
acceptances) of U.S. banks, savings and loan associations, savings
banks which have total assets (as of the date of their most recent
annual financial statements at the time of investment) of not less
than $2,000,000,000; U.S. dollar denominated obligations of Canadian
chartered banks, London branches of U.S. banks and U.S. branches or
agencies of foreign banks which meet the above-stated asset size; and
obligations of any U.S. banks, savings and loan associations and
savings banks, regardless of the amount of their total assets,
provided that the amount of the obligations purchased does not exceed
$100,000 for any one U.S. bank, savings and loan association or
savings bank and the payment of the principal is insured by the
Federal Deposit Insurance Corporation or the Federal Savings and Loan
Insurance Corporation.
- Obligations of the International Bank for Reconstruction and
Development.
- Commercial paper (including variable amount master demand notes)
issued by U.S. corporations or affiliated foreign corporations and
rated (or guaranteed by a company whose commercial paper is rated) at
the date of investment Prime-1 by Moody's or A-1 by S&P or, if not
rated by either Moody's or S&P, issued by a corporation having an
outstanding debt issue rated Aa or better by Moody's or AA or better
by S&P and, if issued by an affiliated foreign corporation, such
commercial paper (not to exceed in the aggregate 10% of such
Portfolio's (other than Mortgage Securities Portfolio's) net assets)
is U.S. dollar denominated and not subject at the time of purchase to
foreign tax withholding.
The Portfolios may also invest in securities which are unrated if the
Portfolio's investment adviser or sub-adviser, as the case may be, determines
that such securities are of equivalent investment quality to the rated
securities described above. In the case of "split-rated" securities, which
result when nationally-recognized rating agencies rate the security at different
rating levels (e.g., BBB by S&P and Ba by Moody's), it is the Portfolio's
general policy to classify such securities at the higher rating level where, in
the judgment of the Portfolio's investment adviser or sub-adviser, such
classification reasonably reflects the security's quality and risk.
The market value of debt securities generally varies in response to changes
in interest rates and the financial condition of each issuer. During periods of
declining interest rates, the value of debt securities generally increases.
Conversely, during periods of rising interest rates, the value of such
securities generally declines. These changes in market value will be reflected
in each 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 the Portfolios' investment adviser or sub-adviser, it
is to the Portfolios' 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-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.
7
<PAGE>
LOW RATED SECURITIES
Bond Portfolio, Asset Allocation Portfolio and Mortgage Securities
Portfolio may also invest up to 10% of their respective net assets, and
International Stock Portfolio and Macro-Cap Value Portfolio may invest up to
5% of their respective net assets, in corporate bonds and mortgage-related
securities, including convertible securities, including convertible
securities which, at the time of acquisition, are rated BB or Ba by S&P or
Moody's, respectively, or rated at a comparable level by another independent
publicly-recognized rating agency, or, if not rated, are of equivalent
investment quality as determined by the Portfolio's investment adviser or
sub-adviser, as the case may be. Global Bond Portfolio may also invest up to
5% of its net assets in securities rated B or higher by S&P or Moody's.
Value Stock Portfolio, Small Company Value Portfolio and Micro-Cap Growth
Portfolio may invest up to 10% of their respective net assets in debt
securities (including convertible securities) which are rated at least B- by
S&P or B3 by Moody's, or rated at a comparable level by another independent
publicly-recognized rating agency, or, if not rated, are of equivalent
investment quality as determined by the Portfolio's investment adviser.
Each of these Portfolios may also hold an additional 5% of its net
assets in securities rated below "investment grade" (i.e. below BBB)
where such securities were either investment grade or eligible low
rated securities at the time of purchase but subsequently down-graded to a
rating not otherwise eligible for purchase by the Portfolio (see "Debt and
Money Market Securities - Non-Money Market Portfolios" above). Debt
securities rated below the four highest categories (i.e., below BBB) are not
considered investment grade obligations and are commonly called "junk bonds."
These securities are predominately speculative and present more credit risk
than investment grade obligations. Bonds rated below BBB are also regarded
as predominately speculative with respect to the issuer's continuing ability
to meet principal and interest payments.
Low rated and unrated debt securities generally involve greater volatility
of price and risk of principal and income, including the possibility of default
by, or bankruptcy of, the issuers of the securities. In addition, the markets
in which low rated and unrated debt securities are traded are more limited than
those in which higher rated securities are traded. The existence of limited
markets for particular securities may diminish the Portfolios' 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 Portfolios' 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 their respective investment objective may, to the extent of
investment in low rated debt securities, be more dependent upon such
creditworthiness analysis than would be the case if the Portfolios were
investing in higher rated securities.
8
<PAGE>
Low rated debt securities may be more susceptible to real or perceived
adverse economic and competitive industry conditions than investment grade
securities. The prices of low rated debt securities have been found to be less
sensitive to interest rate changes than higher rated investments, but more
sensitive to adverse economic downturns or individual corporate developments. A
projection of an economic downturn or of a period of rising interest rates, for
example, could cause a decline in low rated debt securities prices because the
advent of a recession could lessen the ability of a highly leveraged company to
make principal and interest payments on its debt securities. If the issuer of
low rated debt securities defaults, the Portfolios may incur additional expenses
to seek recovery. The low rated bond market is relatively new, and many of the
outstanding low rated bonds have not endured a major business recession.
CONVERTIBLE SECURITIES
To the extent specified in the Prospectus, certain 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. Growth Portfolio, Small Company Growth Portfolio, Real Estate
Securities Portfolio, Macro-Cap Value Portfolio and Capital Appreciation
Portfolio will each limit its purchase of convertible debt securities to
those that, at the time of purchase, are rated at least BBB or Baa by S&P or
Moody's, respectively, or it not rated by S&P or Moody's, are of equivalent
investment quality as determined by the Portfolio's investment adviser or
sub-adviser. Bond Portfolio, Asset Allocation Portfolio and Mortgage
Securities Portfolio will each limit its purchase of convertible debt
securities to those that, at the time of purchase, are rated at least BB or
Ba by S&P or Moody's, respectively, or if not rated by S&P or Moody's, are of
equivalent investment quality as determined by the Portfolio's investment
adviser. Value Stock Portfolio, Small Company Value Portfolio and
Micro-Cap Growth Portfolio will each 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 Portfolio's investment adviser or
sub-adviser. As an operating policy, none of these Portfolios will purchase a
non-investment grade convertible debt security if immediately after such
purchase such Portfolio would have more than 10% of its total assets invested
in such securities. See "Low Rated Securities," above.
MONEY MARKET SECURITIES - MONEY MARKET PORTFOLIO
Subject to the limitations under Rule 2a-7 of the Investment Company Act of
1940 (as described in "Investment Restrictions--Additional Restrictions" below),
Money Market Portfolio will invest in a managed portfolio of money market
instruments as follows:
- Obligations issued or guaranteed as to principal or interest by the
U.S. Government, or any agency or authority controlled or supervised
by and acting as an instrumentality of the U.S. Government pursuant to
authority granted by Congress.
- Obligations (including certificates of deposit and bankers
acceptances) of U.S. banks, savings and loan associations and savings
banks which at the date of the investment have total assets (as of the
date of their most recent annual financial statements) of not less
than $2,000,000,000; U.S. dollar denominated obligations of Canadian
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chartered banks, London branches of U.S. banks, and U.S. branches or
agencies of foreign banks if such banks meet the above-stated asset
size; and obligations of any such U.S. banks, savings and loan
associations and savings banks, regardless of the amount of their
total assets, provided that the amount of the obligations does not
exceed $100,000 for any one U.S. bank, savings and loan association or
savings bank and the payment of the principal is insured by the
Federal Deposit Insurance Corporation.
- Obligations of the International Bank for Reconstruction and
Development.
- Commercial paper (including variable amount master demand notes)
issued by U.S. limited partnerships, corporations or affiliated
foreign corporations.
- Other corporate debt obligations that at the time of issuance were
long-term securities, but that have remaining maturities of 397
calendar days or less.
- Repurchase agreements with respect to any of the foregoing
obligations.
By limiting the maturity of its investments as described above, the
Portfolio seeks to lessen the changes in the value of its assets caused by
market factors. The 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.
U.S. GOVERNMENT OBLIGATIONS
Each of the Portfolios may invest in obligations of the U.S. Government.
These obligations are bills, certificates of indebtedness, notes and bonds
issued or guaranteed as to principal or interest by the U.S. or by agencies or
authorities controlled or supervised by and acting as instrumentalities of the
U.S. Government established under the authority granted by Congress. Bills,
notes and bonds issued by the U.S. Treasury are direct obligations of the U.S.
Government and differ in their interest rates, maturities and times of issuance.
Securities issued or guaranteed by agencies or authorities controlled or
supervised by and acting as instrumentalities of the U.S. Government established
under authority granted by Congress include but are not limited to, the
Government National Mortgage Association ("GNMA"), the Export-Import Bank, the
Student Loan Marketing Association, the U.S. Postal Service, the Tennessee
Valley Authority, the Bank for Cooperatives, the Farmers Home Administration,
the Federal Home Loan Bank, the Federal Financing Bank, the Federal Intermediate
Credit Banks, the Federal Land Banks, the Farm Credit Banks and the Federal
National Mortgage Association. Some obligations of U.S. Government agencies,
authorities and other instrumentalities are supported by the full faith and
credit of the U.S. Treasury, such as securities of the Government National
Mortgage Association and the Student Loan Marketing Association; others by the
right of the issuer to borrow from the U.S. Treasury, such as securities of the
Federal Financing Bank and the U.S. Postal Service; and others only by the
credit of the issuing agency, authority or other instrumentality, such as
securities of the Federal Home Loan Bank and the Federal National Mortgage
Association ("FNMA").
OBLIGATIONS OF NON-DOMESTIC BANKS
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As specified in the Prospectus, certain of the Portfolios may invest in
obligations of Canadian chartered banks, London branches of U.S. banks, and
U.S. branches and agencies of foreign banks, which may involve somewhat
greater opportunity for income than the other money market instruments in
which the Portfolios invest, but may also involve investment risks in
addition to any risks associated with direct obligations of domestic banks.
These additional risks include future political and economic developments,
the possible imposition of withholding taxes on interest income payable on
such obligations, the possible seizure or nationalization of foreign
deposits, the possible establishment of exchange controls or the adoption of
other governmental restrictions, as well as market and other factors which
may affect the market for or the liquidity of such obligations. Generally,
Canadian chartered banks, London branches of U.S. banks, and U.S. branches
and agencies of foreign banks are subject to fewer U.S. regulatory
restrictions than those applicable to domestic banks, and London branches of
U.S. banks may be subject to less stringent reserve requirements than
domestic branches. Canadian chartered banks, U.S. branches and agencies of
foreign banks, and London branches of U.S. banks may provide less public
information than, and may not be subject to the same accounting, auditing and
financial recordkeeping standards as, domestic banks. Each Portfolio will
not invest more than 25% of its total assets in obligations of Canadian
chartered banks, London branches of U.S. banks, and U.S. branches and
agencies of foreign banks.
VARIABLE AMOUNT MASTER DEMAND NOTES
Money Market Portfolio may invest in variable amount master demand notes.
These instruments are short-term, unsecured promissory notes issued by
corporations to finance short-term credit needs. They allow the investment of
fluctuating amounts by the Portfolio at varying market rates of interest
pursuant to direct arrangements between Money Market 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 Portfolio's investment adviser will monitor the creditworthiness
of the borrower throughout the term of the variable amount master demand note.
MORTGAGE-RELATED SECURITIES
Bond Portfolio, Asset Allocation Portfolio, Mortgage Securities Portfolio
and Global Bond Portfolio may invest in mortgage-related securities (including
securities which represent interests in pools of mortgage loans) issued by
government (some of which may be U.S. Government agency issued or guaranteed
securities as described herein) and non-government entities such as banks,
mortgage lenders or other financial institutions. These securities may include
both collateralized mortgage obligations and stripped mortgage-backed
securities. Mortgage loans are originated and formed into pools by various
organizations, including the Government National Mortgage Association ("GNMA"),
the Federal National Mortgage
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Association ("FNMA"), the Federal Home Loan Mortgage Corporation ("FHLMC") and
various private organizations including commercial banks and other mortgage
lenders. Payments on mortgage-related securities generally consist of both
principal and interest, with occasional repayments of principal due to
refinancings, foreclosures or certain other events. Some mortgage-related
securities, such as collateralized mortgage obligations, make payments of both
principal and interest at a variety of intervals. Certain mortgage-related
securities, such as GNMA securities, entitle the holder to receive such
payments, regardless of whether or not the mortgagor makes loan payments;
certain mortgage-related securities, such as FNMA securities, guarantee the
timely payment of interest and principal; certain mortgage-related securities,
such as FHLMC securities, guarantee the timely payment of interest and ultimate
collection of principal; and certain mortgage-related securities contain no such
guarantees but may offer higher rates of return. No mortgage-related securities
guarantee the Portfolio's yield or the price of its shares.
Each Portfolio expects its investments in mortgage-related securities to
be primarily in high-grade mortgage-related securities either (a) issued by
GNMA, FNMA or FHLMC or other United States Government owned or sponsored
corporations or (b) rated A or better by S&P or Moody's, or rated at a
comparable level by another independent publicly-recognized rating agency,
or, if not rated, are of equivalent investment quality as determined by the
Portfolio's investment adviser or sub-adviser, as the case may be. The
Portfolio may invest in mortgage-related securities rated BBB or Baa by S&P
or Moody's, respectively, or rated at a comparable level by another
independent publicly-recognized rating agency, or, if not rated, are of
equivalent investment quality as determined by the Portfolio's investment
adviser or sub-adviser, as the case may be, when deemed by the Portfolio's
investment adviser or sub-adviser to be consistent with the Portfolio's
respective objective. 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 have speculative elements. (Each of these Portfolios may
also invest a portion of its assets in securities rated below BBB or Baa by
S&P or Moody's, respectively. See "Low Rated Securities" and "Convertible
Securities," above, for more information.) Mortgage Securities Portfolio may
not invest more than 35% of its total assets in securities rated BBB or Baa
or lower by S&P or Moody's, respectively. For further information about the
characteristics and risks of mortgage-related securities, and for a
description of the ratings used by Moody's and S&P, see Appendix A and B
("Mortgage-Related Securities" and "Bond and Commercial Paper Ratings") below.
U.S. GOVERNMENT MORTGAGE-RELATED SECURITIES
A governmental guarantor (i.e., backed by the full faith and credit of the
U.S. Government) of mortgage-related securities is GNMA. GNMA is a wholly-owned
U.S. Government corporation within the Department of Housing and Urban
Development. GNMA is authorized to guarantee, with the full faith and credit of
the U.S. Government, the timely payment of principal and interest on securities
issued by institutions approved by GNMA (such as savings and loan institutions,
commercial banks and mortgage bankers) and backed by pools of FHA-insured or
VA-guaranteed mortgages.
Government-related guarantors (i.e., not backed by the full faith and
credit of the U.S. Government) include FNMA and FHLMC. FNMA is a
government-sponsored corporation owned entirely by private stockholders. It is
subject to general regulation by the Secretary of Housing and Urban Development.
FNMA purchases residential mortgages from a list of approved seller/servicers
which include state and federally-chartered savings and loan associations,
mutual savings banks, commercial banks and credit unions and mortgage bankers.
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Pass-through securities issued by FNMA are guaranteed as to timely payment of
principal and interest by FNMA but are not backed by the full faith and credit
of the U.S. Government.
FHLMC is a corporate instrumentality of the U.S. Government and was created
by Congress in 1970 for the purpose of increasing the availability of mortgage
credit for residential housing. Its stock is publicly traded. FHLMC issues
Participation Certificates ("PCs") which represent interests in mortgages from
FHLMC's national portfolio. FHLMC guarantees the timely payment of interest and
principal on most PCs. There are some PCs, however, on which FHLMC guarantees
the timely payment of interest but only the ultimate payment of principal. PCs
are not backed by the full faith and credit of the U.S. Government.
NON-GOVERNMENTAL MORTGAGE-RELATED SECURITIES
Mortgage Securities Portfolio, Bond Portfolio, Asset Allocation
Portfolio and Global Bond Portfolio may invest in non-governmental
mortgage-related securities. Commercial banks, savings and loan
institutions, private mortgage insurance companies, mortgage bankers and
other secondary market issuers also create pass-through pools of conventional
residential and commercial mortgage loans. Such issuers may in addition be
the originators and servicers of the underlying mortgage loans as well as the
guarantors of the mortgage-related securities. Pools created by such
non-governmental issuers generally offer a higher rate of interest than
government and government-related pools because there are no direct or
indirect government guarantees of payments in the former pools. However,
timely payment of interest and principal of these pools is supported by
various forms of insurance, guarantees and credit enhancements, including
individual loan, title, pool and hazard insurance. The insurance and
guarantees are issued by government entities, private insurers and the
mortgage poolers. Such insurance and guarantees and the creditworthiness of
the issuers thereof will be considered in determining whether a
mortgage-related security meets the 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 the Portfolio's investment
adviser determines that the securities meet the Portfolio's quality
standards. Although the market for such securities is becoming increasingly
liquid, securities issued by certain private organizations may not be readily
marketable. The Portfolio will not purchase mortgage-related securities or
any other assets which in its investment adviser's opinion are illiquid if,
as a result, more than 15% of the value of the Portfolio's net assets will be
illiquid.
COLLATERALIZED MORTGAGE OBLIGATIONS
Bond Portfolio, Asset Allocation Portfolio, Mortgage Securities Portfolio
and Global Bond 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
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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 branches of
the CMO in many ways. All residential, and some commercial, mortgage-related
securities are subject to prepayment risk. A CMO does not eliminate that risk,
but, by establishing an order of priority among the various tranches for the
receipt and timing of principal payments, it can reallocate that risk among the
tranches. Therefore, the stream of payments received by a CMO bondholder may
differ dramatically from that received by an investor holding a traditional
pass-through security backed by the same collateral.
In the traditional form of CMO, interest is paid currently on all tranches
but principal payments are applied sequentially to retire each tranche in order
of stated maturity. Traditional sequential payment CMOs have evolved into
numerous more flexible forms of CMO structures which can vary frequency of
payments, maturities, prepayment risk and performance characteristics. The
differences between these new types of CMOs relate primarily to the manner in
which each varies the amount and timing of principal and interest received by
each tranche from the underlying collateral. Under all but the sequential
payment structures, specific tranches of CMOs have priority rights over other
tranches with respect to the amount and timing of cash flow from the underlying
mortgages.
The primary risk associated with any mortgage security is the uncertainty
of the timing of cash flows; specifically, uncertainty about the possibility of
either the receipt of unanticipated principal in falling interest rate
environments (prepayment or call risk) or the failure to receive anticipated
principal in rising interest rate environments (extension risk). In a CMO, that
uncertainty may be allocated to a greater or lesser degree to specific tranches
depending on the relative cash flow priorities of those tranches. By
establishing priority rights to receive and reallocate payments of prepaid
principal, the higher priority tranches are able to offer better call protection
and extension protection relative to the lower priority classes in the same CMO.
For example, when insufficient principal is received to make scheduled principal
payments on all tranches, the higher priority tranches receive their scheduled
premium payments first and thus bear less extension risk than lower priority
tranches. Conversely, when principal is received in excess of scheduled
principal payments on all tranches (call risk), the lower priority tranches are
required to receive such excess principal until they are retired and thus bear
greater prepayment risk than the higher priority tranches. Therefore, depending
on the type of CMO purchased, an investment may be subject to a greater or
lesser risk of prepayment, and experience a greater or lesser volatility in
average life, yield, duration and price, than other types of mortgage-related
securities. A CMO tranche may also have a coupon rate which resets periodically
at a specified increment over an index. These floating rate CMOs are typically
issued with lifetime caps on the level to which the floating coupon rate is
allowed to rise. The 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.
Bond Portfolio, Asset Allocation Portfolio and Mortgage Securities
Portfolio may also purchase CMOs known as "accrual" or "Z" bonds. An accrual or
Z bond holder is not entitled to
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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, Bond
Portfolio, Asset Allocation Portfolio and Mortgage Securities Portfolio will not
purchase a Z bond if the respective 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).
Bond Portfolio, Asset Allocation Portfolio and Mortgage Securities
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, Bond Portfolio, Asset Allocation
Portfolio and Mortgage Securities 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 such Portfolio's net
assets.
STRIPPED MORTGAGE-BACKED SECURITIES
Bond Portfolio, Asset Allocation Portfolio and Mortgage Securities
Portfolio may invest in stripped mortgage-backed securities. Stripped
mortgage-backed securities represent undivided ownership interests in a pool of
mortgages, the cash flow of which has been separated into its interest and
principal components. "IOs" (interest only securities) receive the interest
portion of the cash flow while "POs" (principal only securities) receive the
principal portion. Stripped mortgage-backed securities may be issued by U.S.
Government agencies or by private issuers. As interest rates rise and fall, the
value of IOs tends to move in the same direction as interest rates, unlike other
mortgage-backed securities (which tend to move in the opposite direction
compared to interest rates). Under the Internal Revenue Code of 1986, as
amended, POs may
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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 limit its
investments in IOs and POs to 15% of the Portfolio's net assets, and will
treat them as illiquid securities (which, in the aggregate, may not exceed
15% of a Portfolio's net assets) except to the extent such securities are
deemed liquid by the Portfolio's adviser or sub-adviser in accordance with
standards established by the Fund's Board of Directors. See "Restricted and
Illiquid Securities" below.
ASSET-BACKED AND STRIPPED ASSET-BACKED SECURITIES
Bond Portfolio, Asset Allocation Portfolio, Mortgage Securities Portfolio
and Global Bond Portfolio may invest in asset-backed securities rated within
the four highest grades assigned by Moody's or S&P, or, if not rated, are of
equivalent investment quality as determined by the Portfolio's investment
adviser or sub-adviser. Asset-backed securities usually represent
interests in pools of consumer loans (typically trade, credit card or
automobile receivables). The credit quality of most asset-backed securities
depends primarily on the credit quality of the assets underlying such
securities, how well the entity issuing the security is insulated from the
credit risk of the originator or any other affiliated entities, the quality
of the servicing of the receivables, and the amount and quality of any
credit support provided to the securities. The rate of principal payment on
asset-backed securities may depend on the rate of principal payments received
on the underlying assets which in turn may be affected by a variety of
economic and other factors. As a result, the yield on any asset-backed
security may be difficult to predict with precision and actual yield to
maturity may be more or less than the anticipated yield to maturity. Some
asset-backed transactions are structured with a "revolving period" during
which the principal balance of the asset-backed security is maintained at a
fixed level, followed by a period of rapid repayment. This structure is
intended to insulate holders of the asset-backed security from prepayment
risk to a significant extent. Asset-backed securities may be classified as
pass-through certificates or collateralized obligations.
Pass-through certificates are asset-backed securities which represent an
undivided fractional ownership interest in an underlying pool of assets.
Pass-through certificates usually provide for payments of principal and interest
received to be passed through to their holders, usually after deduction for
certain costs and expenses incurred in administering the pool. Because
pass-through certificates represent an ownership interest in the underlying
assets, the holders thereof bear directly the risk of any defaults by the
obligors on the underlying assets not covered by any credit support.
Asset-backed securities issued in the form of debt instruments, also known
as collateralized obligations, are generally issued as the debt of a special
purpose entity organized solely for the purpose of owning such assets and
issuing such debt. The assets collateralizing such asset-backed securities are
pledged to a trustee or custodian for the benefit of the holders
thereof. Such issuers generally hold no assets other than those underlying the
asset-backed securities and any credit support provided. As a result, although
payments on such asset-backed securities are obligations of the issuers, in the
event of defaults on the underlying assets not covered by any credit support,
the issuing entities are unlikely to have sufficient assets to satisfy their
obligations on the related asset-backed securities.
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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.
Bond Portfolio, Asset Allocation Portfolio and Mortgage Securities
Portfolio may also invest in stripped asset-backed securities. Asset-backed
securities may be stripped to create interest-only and principal-only securities
in the same manner as mortgage-backed securities. See "Stripped Mortgage-Backed
Securities," above. The value of asset-backed IOs also tends to move in the same
direction as changes in interest rates, unlike other asset-backed (or
mortgage-backed) securities, which tend to move in the opposite direction
compared to interest rates. As with stripped mortgage-backed securities, the
cash flows and yields on asset-backed IOs and POs are also extremely sensitive
to the rate of principal payments on the related underlying assets. See
"Stripped Mortgage-Backed Securities," above. As an operating policy, each of
these Portfolios will limit its investments in IOs and POs to 15% of the
Portfolio's net assets, and will treat them as illiquid securities (which, in
the aggregate, may not exceed 15% of each Portfolio's net assets) except to the
extent such securities are deemed liquid by the Portfolio's adviser in
accordance with standards established by the Portfolio's Board of Directors. See
"Restricted and Illiquid Securities" below.
DIRECT INVESTMENTS IN MORTGAGES - WHOLE LOANS
Mortgage Securities Portfolio may invest up to 10% of the value of its net
assets directly in mortgages securing residential or commercial real estate
(i.e., the Portfolio becomes the mortgagee). Such investments are not
"mortgage-related securities" as described above. They are normally available
from lending institutions which group together a number of mortgages for resale
(usually from 10 to 50 mortgages) and which act as servicing agent for the
purchaser with respect to, among other things, the receipt of principal and
interest payments. (Such investments are also referred to as "whole loans".)
The vendor of such mortgages receives a fee from Mortgage Securities Portfolio
for acting as servicing agent. The vendor does not provide any insurance or
guarantees covering the repayment of principal or interest on the mortgages.
Unlike pass-through securities, whole loans constitute direct investment in
mortgages inasmuch as Mortgage Securities Portfolio, rather than a financial
intermediary, becomes the mortgagee with respect to such loans purchased by the
Portfolio. At present, such investments are considered to be illiquid by the
Portfolio's investment adviser or sub-adviser. Mortgage Securities Portfolio
will invest in such mortgages only if its investment adviser has determined
through an examination of the mortgage loans and their originators (which may
include an examination of such factors as percentage of family income dedicated
to loan service and the relationship between loan value and market value) that
the purchase of the mortgages should not represent a significant risk of loss to
the Portfolio.
ZERO COUPON SECURITIES
The Maturing Government Bond Portfolios may invest in zero coupon
securities. In addition, Global Bond Portfolio may invest a lesser portion of
its assets in zero coupon 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
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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 Maturing
Government Bond Portfolio, one such factor which may operate to the detriment of
those Contract owners holding interests in such Portfolios until maturity, is
the ability of other Contract owners to purchase or redeem shares on any
business day.
Because each Maturing Government Bond Portfolio will be primarily
invested in zero coupon securities, Contract owners whose purchase payments
are invested in shares held to maturity, including those obtained through
reinvestment of dividends and distributions, will experience a return
consisting primarily of the amortization of discount on the underlying
securities in the Maturing Government Bond Portfolio. However, the net asset
value of the Portfolio's shares will increase or decrease with the daily
changes in the market value of that Maturing Government Bond Portfolio's
investments which will tend to vary inversely with changes in prevailing
interest rates. If shares of a Maturing Government Bond Portfolio are
redeemed prior to the maturity date of that Maturing Government Bond
Portfolio, a Contract owner may experience a significantly different
investment return than was anticipated at the time of purchase.
Zero coupon securities, 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. Zero coupon securities do not
make any periodic payments of interest prior to maturity and the stripping of
the securities causes the zero coupon securities to be offered at a discount
from their face amounts. The market value of the zero coupon securities and,
therefore the net asset value of the shares of the Maturing Government Bond
Portfolios, will fluctuate, perhaps markedly, and 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
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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.
PAY-IN-KIND AND DELAYED INTEREST SECURITIES
Global Bond Portfolio may also invest in pay-in-kind securities and delayed
interest securities. 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 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
pay-in-kind and delayed interest securities will result in special tax
consequences.
FOREIGN SECURITIES
Growth Portfolio, Small Company Growth Portfolio, Value Stock Portfolio,
Small Company Value Portfolio, Macro-Cap Value Stock and Micro-Cap Growth
Portfolio may invest up to 10% and Capital Appreciation Portfolio may invest
up to 20% of the market value of their respective total assets in securities
of foreign issuers which are not publicly traded in the U.S. (Securities of
foreign issuers which are publicly traded in the U.S., usually in the form of
sponsored American Depositary Receipts (ADRs), are not subject to such
limitations.) Bond Portfolio may also invest in debt securities issued by
foreign governments and companies provided that such securities are U.S.
dollar-denominated and publicly traded in the United States. In addition,
International Stock Portfolio and Global Bond Portfolio may invest in such
securities without limitation. Investing in securities of foreign issuers
may result in greater risk than that incurred in investing in securities of
domestic issuers. There is the possibility of expropriation, nationalization
or confiscatory taxation, taxation of income earned in foreign nations or
other taxes imposed with respect to investments in foreign nations; foreign
exchange controls (which may include suspension of the ability to transfer
currency from a given country), default in foreign government securities,
political or social instability or diplomatic developments which could affect
investments in securities of issuers in those nations. In addition, in many
countries there is less publicly available information about issuers than is
available in reports about companies in the U.S. Foreign companies are not
generally subject to uniform accounting, auditing and financial reporting
standards, and auditing practices and requirements may not be comparable to
those applicable to U.S. companies. Further, the Portfolio may encounter
difficulties or be
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unable to pursue legal remedies and obtain judgments in foreign courts.
Commission rates in foreign countries, which are sometimes fixed rather than
subject to negotiation as in the U.S., are likely to be higher. Further, the
settlement period of securities transactions in foreign markets may be longer
than in domestic markets. In many foreign countries there is less government
supervision and regulation of business and industry practices, stock exchanges,
brokers and listed companies than in the U.S. The foreign securities markets of
many of the countries in which the Portfolio may invest may also be smaller,
less liquid, and subject to greater price volatility than those in the U.S.
Also, some countries may withhold portions of interest, dividends and gains at
the source. The Portfolio may also be unfavorably affected by fluctuations in
the relative rates of exchange between the currencies of different nations
(i.e., when the currency being exchanged has decreased in value relative to the
currency being purchased). There are further risk considerations, including
possible losses through the holding of securities in domestic and foreign
custodial banks and depositories.
The countries of the European Monetary Union began the process of
converting their individual country currencies to the Euro on January 1, 1999.
There is also a risk that the value of foreign securities of companies located
in EMU countries may decrease due to market volatility resulting from the
conversion of certain EMU country currencies to the Euro. It is not possible to
predict the impact of the Euro on the business or financial condition of
European issues or on the Portfolio. The transition and the elimination of
currency risk among EMU countries may change the economic environment and
behavior of investors, particularly in European markets. To the extent the
Portfolio holds non-U.S. dollar (Euro or other) denominated securities, it will
still be exposed to currency risk due to fluctuations in those currencies versus
the U.S. dollar.
Furthermore, International Stock Portfolio may invest in securities issued
by governments, governmental agencies and companies located in developing market
countries. The Portfolio considers countries having developing markets to be
all countries that are generally considered to be developing or emerging
countries by the International Bank for Reconstruction and Development (more
commonly referred to as the World Bank) and the International Finance
Corporation, as well as countries that are classified by the United Nations or
otherwise regarded by their authorities as developing. Currently, the countries
not included in this category are Ireland, Spain, New Zealand, Australia, the
United Kingdom, Italy, the Netherlands, Belgium, Austria, France, Canada,
Germany, Denmark, the United States, Sweden, Finland, Norway, Japan and
Switzerland. In addition, developing market securities means (i) securities of
companies the principal securities trading market for which is a developing
market country, as defined above, (ii) securities, traded in any market, of
companies that derive 50% or more of their total revenue from either goods or
services produced in such developing market countries or sales made in such
developing market countries or (iii) securities of companies organized under the
laws of, and with a principal office in, a developing market country.
International Stock Portfolio will at all times, except during temporary
defensive periods, maintain investments in at least three countries having
developing markets.
An ADR is sponsored if the original issuing company has selected a single
U.S. bank to serve as its U.S. depositary and transfer agent. This relationship
requires a deposit agreement which defines the rights and duties of both the
issuer and depositary. Companies that sponsor ADRs must also provide their ADR
investors with English translations of company information made public in their
own domiciled country. Sponsored ADR investors also generally have the
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same voting rights as ordinary shareholders, barring any unusual circumstances.
ADRs which meet these requirements can be listed on U.S. stock exchanges.
Unsponsored ADRs are created at the initiative of a broker or bank reacting to
demand for a specific foreign stock. The broker or bank purchases the
underlying shares and deposits them in a depositary. Unsponsored shares issued
after 1983 are not eligible for U.S. stock exchange listings. Furthermore, they
do not generally include voting rights.
In addition, International Stock Portfolio, Global Bond Portfolio and
Macro-Cap Value Portfolio may invest in European Depositary Receipts, which are
receipts evidencing an arrangement with a European bank similar to that for ADRs
and which are designed for use in the European securities markets. Furthermore,
Global Bond Portfolio may invest in Global Depositary Receipts, which are
receipts evidencing an arrangement with a foreign bank similar to that for ADRs
and which are designed for use in European and other foreign securities markets.
European Depositary Receipts and Global Depositary Receipts are not necessarily
denominated in the currency of the underlying security.
FOREIGN INDEX LINKED SECURITIES
Global Bond 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
Portfolio's investment sub-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.
SWAP AGREEMENTS
Global Bond 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
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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 to the net amount to be paid or received under the
agreement based on the relative values of 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 or liquid
securities 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 Portfolio's investment
sub-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
Portfolio's investment sub-adviser will cause the 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 relatively new market and is largely unregulated. It is
possible that developments in the swaps market, including potential government
regulation, could adversely affect a portfolio's ability to terminate existing
swap agreements or to realize amounts to be received under such agreements.
CURRENCY EXCHANGE TRANSACTIONS
International Stock Portfolio and Global Bond Portfolio usually effect
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
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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. For example, in order to
realize the value of a foreign investment, the Portfolio must convert that
value, as denominated in its foreign currency, into U.S. dollars using the
applicable currency exchange rate. The exchange rate represents the current
price of a U.S. dollar relative to that foreign currency; that is, the amount of
such foreign currency required to buy one U.S. dollar. If the Portfolio holds a
foreign security which has appreciated in value as measured in the foreign
currency, the level of appreciation actually realized by the Portfolio may be
reduced or even eliminated if the foreign currency has decreased in value
relative to the U.S. dollar subsequent to the date of purchase. In such a
circumstance, the cost of a U.S. dollar purchased with that foreign currency has
gone up and the same amount of foreign currency purchases fewer dollars than at
an earlier date.
FOREIGN CURRENCY HEDGING TRANSACTIONS
FORWARD EXCHANGE CONTRACTS. International Stock Portfolio and Global Bond
Portfolio have authority to deal in forward foreign currency exchange contracts
between currencies of the different countries in which such Portfolios will
invest as a hedge against possible variations in the foreign exchange rate
between these currencies. This is accomplished through contractual agreements
to purchase or sell a specified currency at a specified future date and price
set at the time of the contract. Forward exchange contracts are individually
negotiated and privately traded by currency traders and their customers. The
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 the Portfolio's investment sub-adviser believes that the
currency of a particular foreign country may suffer or enjoy a substantial
movement against another currency, it may enter into a forward contract to sell
or buy the amount of the former foreign currency, approximating the value of
some or all of the Portfolio's securities denominated in such foreign currency.
The projection of short-term currency market movement is extremely difficult,
and the successful execution of a short-term hedging strategy is highly
uncertain.
It is impossible to forecast with absolute precision the market value of
portfolio securities at the expiration of the contract. Accordingly, it may be
necessary for the Portfolio to purchase additional foreign currency on the spot
market (and bear the expense of such purchase) if the market value of the
security is less than the amount of foreign currency the Portfolio is obligated
to deliver and if a decision is made to sell the security and make delivery of
the foreign currency. Conversely, it may be necessary to sell on the spot
market some of the foreign currency received upon the sale of the portfolio
security if its market value exceeds the amount of foreign currency the
Portfolio is obligated to deliver.
If the Portfolio retains the portfolio security and engages in an
offsetting transaction, the Portfolio will incur a gain or a loss to the extent
that there has been movement in forward
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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.
CURRENCY FUTURES CONTRACTS. International Stock Portfolio and Global Bond
Portfolio may also enter into exchange-traded contracts for the purchase or sale
for future delivery of foreign currencies ("foreign currency futures"). This
investment technique will be used only to hedge against anticipated future
changes in exchange rates which otherwise might adversely affect the value of
the Portfolio's securities or adversely affect the prices of securities that the
Portfolio intends to purchase at a later date. The successful use of foreign
currency futures will usually depend on the ability of the Portfolio's
investment sub-adviser to forecast currency exchange rate movements correctly.
Should exchange rates move in an unexpected manner, the Fund may not achieve the
anticipated benefits of foreign currency futures or may realize losses.
CLOSED-END INVESTMENT COMPANIES
Some countries, such as South Korea, Chile and India, have authorized the
formation of closed-end investment companies to facilitate indirect foreign
investment in their capital markets. In accordance with the Investment Company
Act of 1940, International Stock Portfolio may invest up to 10% of its total
assets in securities of closed-end investment companies. This restriction on
investments in securities of closed-end investment companies may limit
opportunities for the International Stock Portfolio to invest indirectly in
certain developing markets. Shares of certain closed-end investment companies
may at times be acquired only at market prices representing premiums to their
net asset values. If the International Stock Portfolio acquires shares of
closed-end investment companies, shareholders would bear both their
proportionate share of expenses of the International Stock Portfolio (including
management and advisory fees) and, indirectly, the expenses of such closed-end
investment companies.
LOANS OF PORTFOLIO SECURITIES
For the purpose of realizing additional income, to the extent specified
in the Prospectus, certain Portfolios may make secured loans of Portfolio
securities amounting to not more than one-third of their respective total
assets. Securities loans are made to broker-dealers or financial institutions
pursuant to agreements requiring that the loans be continuously secured by
collateral at least equal at all times to the value of the securities lent.
The collateral received will consist of cash, letters of credit 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. Although the Portfolio does not expect
to pay commissions or other front-end fees (including finders fees) in
connection with loans of securities (but in some cases may do so), a portion
of the additional income realized will be shared with the Portfolio's
custodian for arranging and administering such loans. The Portfolio has a
right to call each loan and obtain the securities on five business days'
notice. The
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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 or sub- adviser, as the case may be, 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 or
sub-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 or
sub-adviser throughout the term of each loan.
RESTRICTED AND ILLIQUID SECURITIES
Each Portfolio may invest up to 15% (10% in the case of Money Market
Portfolio) of its respective net assets in securities restricted as to
disposition under the federal securities laws or otherwise, or other illiquid
assets. An investment is generally deemed to be "illiquid" if it cannot be
disposed of within seven days in the ordinary course of business at
approximately the amount at which the investment company is valuing the
investment. "Restricted securities" are securities which were originally sold
in private placements and which have not been registered under the Securities
Act of 1933 (the "1933 Act"). Such securities generally have been considered
illiquid by the staff of the Securities and Exchange Commission (the "SEC"),
since such securities may be resold only subject to statutory restrictions and
delays or if registered under the 1933 Act. Because of such restrictions, the
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.
The SEC has acknowledged, however, that a market exists for certain
restricted securities (for example, securities qualifying for resale to
certain "qualified institutional buyers" pursuant to Rule 144A under the 1933
Act). Additionally, the Portfolio's investment adviser and sub-adviser, as
the case may be, believe that a similar market exists for commercial paper
issued pursuant to the private placement exemption of Section 4(2) of the
1933 Act and for certain interest-only and principal-only classes of
mortgage-backed and asset-backed securities. Each Portfolio may invest
without limitation in these forms of restricted securities if such securities
are deemed by the Portfolio's investment adviser or sub-adviser to be liquid
in accordance with standards established by the Fund's Board of Directors.
Under these guidelines, the Portfolio's investment adviser or sub-adviser
must consider (a) the frequency of trades and quotes for the security, (b)
the number of dealers willing to purchase or sell the security and the number
of other potential purchasers, (c) dealer undertakings to make a market in
the security, and (d) the nature of the security and the nature of the
marketplace trades (for example, the time needed to dispose of the security,
the method of soliciting offers and the mechanics of transfer). At the
present time, it is not possible to predict with accuracy how the markets for
certain restricted securities will develop. Investing in such restricted
securities could have the effect of increasing the level of the Portfolio's
illiquidity to the extent that qualified purchasers of the securities become,
for a time, uninterested in purchasing these securities.
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If through the appreciation of restricted securities or the depreciation of
unrestricted securities, the Portfolio is in a position where more than 15% (10%
in the case of Money Market Portfolio) of its net assets are invested in
restricted and other illiquid securities, the Portfolio will take appropriate
steps to protect liquidity.
WHEN-ISSUED SECURITIES AND FORWARD COMMITMENTS
Bond Portfolio, Asset Allocation Portfolio, Mortgage Securities Portfolio,
International Stock Portfolio, Global Bond Portfolio, Macro-Cap Value Portfolio
and Real Estate Securities Portfolio 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 or sub-adviser to correctly anticipate increases
and decreases in interest rates and prices of securities. If the Portfolio's
investment adviser or sub-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 investment adviser or sub-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 or sub-adviser is correct or incorrect in its prediction of interest
rate and price movements, is to reduce the chances of large capital gains or
losses and thereby reduce the likelihood of wide variations in the 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 (as discussed
below), 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
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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 (marked to the market daily), having a value equal to,
or greater than, any commitments to purchase securities on a when-issued or
forward commitment basis and, with respect to forward commitments to sell
portfolio securities of the 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.)
The Portfolio 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. For a description of
mortgage dollar rolls and the Portfolios that may invest in such transactions,
see " Mortgage Dollar Rolls" below.
The purchase of securities on a when-issued or forward commitment basis
exposes the 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 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%
of the value of such Portfolio's (other than Macro-Cap Value 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. No more than 15% of the value of Macro-Cap
Value Portfolio's total assets will be committed to when-issued or forward
commitment transactions.
MORTGAGE DOLLAR ROLLS
In connection with its ability to purchase securities on a when-issued or
forward commitment basis, Bond Portfolio, Asset Allocation Portfolio, Mortgage
Securities Portfolio and Global Bond Portfolio 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
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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 or sub-adviser, as the case may be, 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.
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.
REAL ESTATE INVESTMENT TRUST SECURITIES
Real Estate Securities Portfolio may invest in real estate investment trust
securities ("REIT"). A 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
shareholder 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 Portfolio's investments in REITS will consist
of equity REITs.
REPURCHASE AGREEMENTS
Growth Portfolio, Bond Portfolio, Mortgage Securities Portfolio, Asset
Allocation Portfolio, Index 500 Portfolio, Capital Appreciation Portfolio,
International Stock Portfolio, Small Company Growth Portfolio, the Maturing
Government Bond Portfolios, Value Stock Portfolio, Small Company Value
Portfolio, Global Bond Portfolio, Index 400 Mid-Cap Portfolio, Macro-Cap
Value Portfolio, Micro-Cap Growth Portfolio and Real Estate Securities
Portfolio may enter into repurchase agreements. Repurchase agreements are
agreements by which the Portfolio purchases a security
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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 or sub-adviser throughout the term of the
repurchase agreement. The resale price is in excess of the purchase price and
reflects an agreed upon market rate unrelated to the coupon rate on the
purchased security. Such transactions afford the Portfolio the opportunity to
earn a return on temporarily available cash. The Portfolio's custodian, or a
duly appointed subcustodian, holds the securities underlying any repurchase
agreement in a segregated account or such securities may be part of the Federal
Reserve Book Entry System. The market value of the collateral underlying the
repurchase agreement is determined on each business day. If at any time the
market value of the collateral falls below the repurchase price of the
repurchase agreement (including any accrued interest), the Portfolio promptly
receives additional collateral, so that the total collateral is in an amount at
least equal to the repurchase price plus accrued interest. While the underlying
security may be a bill, certificate of indebtedness, note or bond issued by an
agency, authority or instrumentality of the U.S. Government, the obligation of
the seller is not guaranteed by the U.S. Government. In the event of a
bankruptcy or other default of a seller of a repurchase agreement, the Portfolio
could experience both delays in liquidating the underlying security and losses,
including: (a) possible decline in the value of the underlying security during
the period while the Portfolio seeks to enforce its rights thereto; (b) possible
subnormal levels of income and lack of access to income during this period; and
(c) expenses of enforcing its rights.
REVERSE REPURCHASE AGREEMENTS
Money Market Portfolio, Asset Allocation Portfolio and Global Bond
Portfolio may also enter into reverse repurchase agreements. Reverse repurchase
agreements are the counterparts of repurchase 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. Because certain of the incidents of
ownership of the security are retained by the Portfolio, reverse repurchase
agreements may be considered a form of borrowing by the Portfolio from the
buyer, collateralized by the security. The Portfolio uses the proceeds of a
reverse repurchase agreement to purchase other money market securities either
maturing, or under an agreement to resell, at a date simultaneous with or prior
to the expiration of the reverse repurchase agreement. The Portfolio utilizes
reverse repurchase agreements when the interest income to be earned from
investment of the proceeds of the reverse repurchase transaction exceeds the
interest expense of the transaction.
The use of reverse repurchase agreements by the Portfolio allows it to
leverage its portfolio. While leveraging offers the potential for increased
yield, it magnifies the risks associated with the Portfolio's investments and
reduces the stability of the Portfolio's net asset value per share. To limit
this risk, the Portfolio will not enter into a reverse repurchase agreement
if all such transactions, together with any money borrowed, exceed 5% of the
Portfolio's net assets. In addition, when entering into reverse repurchase
agreements, the Portfolio will deposit and maintain in a segregated account
with its custodian liquid assets, such as cash or cash equivalents and other
appropriate short-term securities and high grade debt obligations, in an
amount equal to the repurchase price (which shall include the interest
expense of the transaction). Moreover, Money Market Portfolio will not enter
into reverse repurchase
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agreements if and to the extent such transactions would, as determined by the
Portfolio's investment adviser, materially increase the risk of a significant
deviation in the Portfolio's net asset value per share. See "Net Asset Value"
below.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
FUTURES CONTRACTS. Consistent with their investment objectives and
strategies, the Portfolios may enter into interest rate futures contracts,
stock index futures contracts and foreign currency futures contracts. (Unless
otherwise specified, interest rate futures contracts, stock index futures
contracts and foreign currency futures contracts are collectively referred to
as "futures contracts.")
A futures contract is a bilateral agreement providing for the purchase
and sale of a specified type and amount of a financial instrument or foreign
currency, or for the making and acceptance of a cash settlement, at a stated
time in the future for a fixed price. By its terms, a futures contract provides
for a specified settlement date on which, in the case of the majority of
interest rate and foreign currency futures contracts, the fixed income
securities or currency underlying the contract are delivered by the seller and
paid for by the purchaser, or on which, in the case of stock index futures
contracts and certain interest rate and foreign currency futures contracts, the
difference between the price at which the contract was entered into and the
contract's closing value is settled between the purchaser and the seller in
cash. Futures contracts differ from options in that they are bilateral
agreements, with both the purchaser and the seller equally obligated to complete
the transaction. Futures contracts call for settlement only on the expiration
date, and cannot be "exercised" at any other time during their term.
Interest rate futures contracts currently are traded on a variety of
fixed income securities, including long-term U.S. Treasury Bonds, Treasury
Notes, Government National Mortgage Association modified pass-through
mortgage-backed securities, and U.S. Treasury Bills. In addition, interest rate
futures contracts include contracts on indexes of municipal securities. Foreign
currency futures contracts currently are traded on the British pound, Canadian
dollar, Japanese yen, Swiss franc, West German mark, and on Eurodollar deposits.
Stock index futures contracts include contracts on the S&P 500 Index
and other broad-based stock market indexes, as well as contracts based on
narrower market indexes or indexes of securities of particular industry groups.
A stock index assigns relative values to the common stocks included in the index
and the index fluctuates with the value of the common stocks so included. The
parties to a stock index futures contract agree to make a cash settlement on a
specific future date in an amount determined by the value of the stock index on
the last trading day of the contract. The amount is a specified dollar amount
times the difference between the value of the index on the last trading day and
the value on the day the contract was struck.
Purchases or sales of stock index futures contracts are used to
attempt to protect current or intended stock investments from broad
fluctuations in stock prices. Interest rate and foreign currency futures
contracts are purchased or sold to attempt to hedge against the effects of
interest or exchange rate changes on a Portfolio's current or intended
investments in fixed income or foreign securities. In the event that an
anticipated decrease in the value of a Portfolio's securities occurs as a
result of a general stock market decline, a general increase in interest
rates, or a decline in the dollar value of foreign currencies in which
portfolio securities are denominated, the adverse
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effects of such changes may be offset, in whole or in part, by gains on the
sale of futures contracts. Conversely, the increased cost of a Portfolio's
securities to be acquired, caused by a general rise in the stock market, a
general decline in interest rates, or a rise in the dollar value of foreign
currencies, may be offset, in whole or in part, by gains on futures contracts
purchased by such Portfolio.
Although many futures contracts by their terms call for actual delivery
or acceptance of the financial instrument, in most cases the contracts are
closed out before the settlement date without the making or taking of delivery.
Closing out a short position is effected by purchasing a futures contract for
the same aggregate amount of the specific type of financial instrument and the
same delivery month. If the price of the initial sale of the futures contract
exceeds the price of the offsetting purchase, the seller is paid the difference
and realizes a gain. Conversely, if the price of the offsetting purchase exceeds
the price of the initial sale, the trader realizes a loss. Similarly, the
closing out of a long position is effected by the purchaser entering into a
futures contract sale. If the offsetting sale price exceeds the purchase price,
the purchaser realizes a gain and, if the purchase price exceeds the offsetting
sale price, the purchaser realizes a loss.
The purchase or sale of a futures contract differs from the purchase or
sale of a security in that no purchase price is paid or received. Instead, an
amount of cash or cash equivalents, which varies but may be as low as 5% or less
of the value of the contract, must be deposited with the broker as "initial
margin." Subsequent payments to and from the broker, referred to as "variation
margin," are made on a daily basis as the value of the index or instrument
underlying the futures contract fluctuates, making positions in the futures
contracts more or less valuable, a process known as "marking to the market."
U.S. futures contracts may be purchased or sold only on an exchange,
known as a "contract market," designated by the Commodity Futures Trading
Commission ("CFTC") for the trading of such contract, and only through a
registered futures commission merchant which is a member of such contract
market. A commission must be paid on each completed purchase and sale
transaction. The contract market clearing house guarantees the performance of
each party to a futures contract by in effect taking the opposite side of such
contract. At any time prior to the expiration of a futures contract, a trader
may elect to close out its position by taking an opposite position on the
contract market on which the position was entered into, subject to the
availability of a secondary market, which will operate to terminate the initial
position. At that time, a final determination of variation margin is made and
any loss experienced by the trader is required to be paid to the contract market
clearing house while any profit due to the trader must be delivered to it.
Futures contracts may also be traded on foreign exchanges.
OPTIONS ON FUTURES CONTRACTS. The Portfolios also may purchase and
sell put and call options on futures contracts and enter into closing
transactions with respect to such options to terminate existing positions.
The Portfolios may use such options on futures contracts in connection with
their hedging strategies in lieu of purchasing and writing options directly
on the underlying securities or purchasing and selling the underlying futures
contracts.
An option on a futures contract provides the holder with the right to
enter into a "long" position in the underlying futures contract, in the case of
a call option, or a "short" position in the
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underlying futures contract, in the case of a put option, at a fixed exercise
price up to a stated expiration date or, in the case of certain options, on
such date. Upon exercise of the option by the holder, the contract market
clearing house establishes a corresponding short position for the writer of
the option, in the case of a call option, or a corresponding long position,
in the case of a put option. In the event that an option is exercised, the
parties will be subject to all the risks associated with the trading of
futures contracts, such as payment of variation margin deposits. In addition,
the writer of an option on a futures contract, unlike the holder, is subject
to initial and variation margin requirements on the option position.
A position in an option on a futures contract may be terminated by the
purchaser or the seller prior to expiration by affecting a closing purchase or
sale transaction, subject to the availability of a liquid secondary market,
which is the purchase or sale of an option of the same series (i.e., the same
exercise price and expiration date) as the option previously purchased or sold.
The difference between the premiums paid and received represents the trader's
profit or loss on the transaction.
Options on futures contracts that are written or purchased by the
Portfolios on United States exchanges are traded on the same contract market
as the underlying futures contract and, like futures contracts, are subject
to regulation by the CFTC and the performance guarantee of the exchange
clearing house. In addition, options on futures contracts may be traded on
foreign exchanges.
RISKS OF FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. The use of
futures contracts and options on futures contracts will expose the Portfolios to
additional investment risks and transactions costs.
Risks include:
- - the risk that interest rates, securities prices or currency markets
will not move in the direction that the Portfolio's investment adviser
or sub-adviser anticipates;
- - an imperfect correlation between the price of the instrument and
movements in the prices of any securities or currencies being hedged;
- - the possible absence of a liquid secondary market for any particular
instrument and possible exchange imposed price fluctuation limits;
- - leverage risk, which is the risk that adverse price movements in an
instrument can result in a loss substantially greater than a
Portfolio's initial investment in that instrument; and
- - the risk that the counterparty to an instrument will fail to perform
its obligations.
REGULATORY MATTERS. To the extent required to comply with applicable
Securities and Exchange Commission releases and staff positions, when entering
into futures contracts each Portfolio will maintain, in a segregated account,
cash or liquid securities equal to the value of such contracts.
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The CFTC, a federal agency, regulates trading activity on the exchanges
pursuant to the Commodity Exchange Act, as amended. The CFTC requires the
registration of "commodity pool operators," defined as any person engaged in a
business which is of the nature of a company, syndicate or a similar form of
enterprise, and who, in connection therewith, solicits, accepts or receives from
others, funds, securities or property for the purpose of trading in any
commodity for future delivery on or subject to the rules of any contract market.
The CFTC has adopted Rule 4.5, which provides an exclusion from the definition
of commodity pool operator for any registered investment company which meets the
requirements of the Rule. Rule 4.5 requires, among other things, that an
investment company wishing to avoid commodity pool operator status use futures
and options positions only (a) for "bona fide hedging purposes" (as defined in
CFTC regulations) or (b) for other purposes so long as aggregate initial margins
and premiums required in connection with non-hedging positions do not exceed 5%
of the liquidation value of the investment company's portfolio. Any investment
company wishing to claim the exclusion provided in Rule 4.5 must file a notice
of eligibility with both the CFTC and the National Futures Association. Before
engaging in transactions involving interest rate futures contracts, the Funds
will file such notices and meet the requirements of Rule 4.5, or such other
requirements as the CFTC or its staff may from time to time issue, in order to
render registration as a commodity pool operator unnecessary.
For examples of futures contracts and their tax treatment, see Appendix
C to this Statement of Additional Information.
OPTIONS
To the extent permitted in the Prospectus, each Portfolio may write
(i.e., sell) covered call and secured put options and purchase and sell put
and call options written by others. Each Portfolio will limit the total
market value of securities against which it may write call or put options to
20% of its total assets. In addition, no Portfolio will commit more than 5%
of its total assets to premiums when purchasing put or call options.
A put option gives the purchaser the right to sell a security or
other instrument to the writer of the option at a stated price during the
term of the option. A call option gives the purchaser the right to purchase a
security or other instrument from the writer of the option at a stated price
during the term of the option. Thus, if a Portfolio writes a call option on a
security, it becomes obligated during the term of the option to deliver the
security underlying the option upon payment of the exercise price. If a
Portfolio writes a put option, it becomes obligated during the term of the
option to purchase the security underlying the option at the exercise price
if the option is exercised.
Portfolios may use put and call options for a variety of purposes.
For example, if a portfolio manager wishes to hedge a security a Portfolio
owns against a decline in price, the manager may purchase a put option on the
underlying security; I.E., purchase the right to sell the security to a third
party at a stated price. If the underlying security then declines in price,
the manager can exercise the put option, thus limiting the amount of loss
resulting from the decline in price. Similarly, if the manager intends to
purchase a security at some date in the future, the manager may purchase a
call option on the security today in order to hedge against an increase in
its price
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before the intended purchase date. Put and call options also can be used for
speculative purposes. For example, if a portfolio manager believes that the
price of stocks generally is going to rise, the manager may purchase a call
option on a stock index, the components of which are unrelated to the stocks
held or intended to be purchased. Finally, a portfolio manager may write
options on securities owned in order to realize additional income. Portfolios
receive premiums from writing call or put options, which they retain whether
or not the options are exercised.
By writing a call option, a Portfolio might lose the potential for
gain on the underlying security while the option is open, and by writing a
put option a Portfolio might become obligated to purchase the underlying
security for more than its current market price upon exercise. If a Portfolio
purchases a put or call option, any loss to the Portfolio is limited to the
premium paid for, and transaction costs paid in connection with, the option.
OPTIONS ON SECURITIES. An option on a security provides the
purchaser, or "holder," with the right, but not the obligation, to purchase,
in the case of a "call" option, or sell, in the case of a "put" option, the
security or securities underlying the option, for a fixed exercise price up
to a stated expiration date or, in the case of certain options, on such date.
The holder pays a nonrefundable purchase price for the option, known as the
"premium." The maximum amount of risk the purchaser of the option assumes is
equal to the premium plus related transaction costs, although this entire
amount may be lost. The risk of the seller, or "writer," however, is
potentially unlimited, unless the option is "covered." A call option written
by a Portfolio is "covered" if the Portfolio owns the underlying security
covered by the call or has an absolute and immediate right to acquire that
security without additional cash consideration (or for additional cash
consideration held in a segregated account by its custodian) upon conversion
or exchange of other securities held in its portfolio. A call option is also
covered if the Portfolio holds a call on the same security and in the same
principal amount as the call written where the exercise price of the call
held (a) is equal to or less than the exercise price of the call written or
(b) is greater than the exercise price of the call written if the difference
is maintained by the Portfolio in cash and liquid securities in a segregated
account with its custodian. A put option written by a Portfolio is "covered"
if the Portfolio maintains cash and liquid securities with a value equal to
the exercise price in a segregated account with its custodian, or else holds
a put on the same security and in the same principal amount as the put
written where the exercise price of the put held is equal to or greater than
the exercise price of the put written. If the writer's obligation is not so
covered, it is subject to the risk of the full change in value of the
underlying security from the time the option is written until exercise.
Upon exercise of the option, the holder is required to pay the purchase
price of the underlying security, in the case of a call option, or to deliver
the security in return for the purchase price in the case of a put option.
Conversely, the writer is required to deliver the security, in the case of a
call option, or to purchase the security, in the case of a put option. Options
on securities which have been purchased or written may be closed out prior to
exercise or expiration by entering into an offsetting transaction on the
exchange on which the initial position was established, subject to the
availability of a liquid secondary market.
Options on securities and options on indexes of securities, discussed
below, are traded on national securities exchanges, such as the Chicago Board
Options Exchange and the New York
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Stock Exchange, which are regulated by the SEC. The Options Clearing
Corporation guarantees the performance of each party to an exchange-traded
option, by in effect taking the opposite side of each such option. A holder
or writer may engage in transactions in exchange-traded options on securities
and options on indexes of securities only through a registered broker-dealer
which is a member of the exchange on which the option is traded.
In addition, options on securities and options on indexes of securities
may be traded on exchanges located outside the United States and
over-the-counter through financial institutions dealing in such options as well
as the underlying instruments. While exchange-traded options have a continuous
liquid market, over-the-counter options may not.
OPTIONS ON STOCK INDEXES. In contrast to an option on a security, an
option on a stock index provides the holder with the right to make or receive a
cash settlement upon exercise of the option, rather than the right to purchase
or sell a security. The amount of this settlement is equal to (a) the amount, if
any, by which the fixed exercise price of the option exceeds (in the case of a
call) or is below (in the case of a put) the closing value of the underlying
index on the date of exercise, multiplied by (b) a fixed "index multiplier." The
purchaser of the option receives this cash settlement amount if the closing
level of the stock index on the day of exercise is greater than, in the case of
a call, or less than, in the case of a put, the exercise price of the option.
The writer of the option is obligated, in return for the premium received, to
make delivery of this amount if the option is exercised. As in the case of
options on securities, the writer or holder may liquidate positions in stock
index options prior to exercise or expiration by entering into closing
transactions on the exchange on which such positions were established, subject
to the availability of a liquid secondary market.
A Portfolio will cover all options on stock indexes by owning
securities whose price changes, in the opinion of the Portfolio's adviser or
sub-adviser, are expected to be similar to those of the index, or in such
other manner as may be in accordance with the rules of the exchange on which
the option is traded and applicable laws and regulations. Nevertheless, where
a Portfolio covers a call option on a stock index through ownership of
securities, such securities may not match the composition of the index. In
that event, the Portfolio will not be fully covered and could be subject to
risk of loss in the event of adverse changes in the value of the index. The
Portfolios will secure put options on stock indexes by segregating assets
equal to the option's exercise price, or in such other manner as may be in
accordance with the rules of the exchange on which the option is traded and
applicable laws and regulations.
The index underlying a stock option index may be a "broad-based" index,
such as the Standard & Poor's 500 Index or the New York Stock Exchange Composite
Index, the changes in value of which ordinarily will reflect movements in the
stock market in general. In contrast, certain options may be based upon narrower
market indexes, such as the Standard & Poor's 100 Index, or on indexes of
securities of particular industry groups, such as those of oil and gas or
technology companies. A stock index assigns relative values to the stocks
included in the index and the index fluctuates with changes in the market values
of the stocks so included.
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WARRANTS
Growth Portfolio, Asset Allocation Portfolio, Bond Portfolio, Capital
Appreciation Portfolio, International Stock Portfolio, Small Company Growth
Portfolio, Value Stock Portfolio, Small Company Value Portfolio, Global Bond
Portfolio, Macro-Cap Value Portfolio, Micro-Cap Growth Portfolio and Real
Estate Securities Portfolio may invest in warrants; however, not more than 5%
of their respective net 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's respective
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 instruments
that allow investors to purchase underlying shares at a specified price
(exercise price) at a given future date. The market price of a warrant is
determined by market participants by the addition of two distinct components:
(1) the price of the underlying shares less the warrant's exercise price,
and (2) the warrant's premium that is attributed to volatility and leveraging
power. Warrants are pure speculation in that they have no voting rights, pay
no dividends and have no rights with respect to the assets of the corporation
issuing them. The prices of warrants do not necessarily move parallel to the
prices of the underlying securities.
It is not expected that Bond Fund or Global Bond Portfolio will invest in
common stocks or equity securities other than warrants, but it may retain for
reasonable periods of time up to 5% of their respective total assets in common
stocks acquired upon conversion of debt securities or preferred stocks or upon
exercise of warrants.
WARRANTS WITH CASH EXTRACTIONS
International Stock Portfolio may also invest up to 5% of its assets in
warrants used in conjunction with the cash extraction method. If an investor
wishes to replicate an underlying share, the investor can use the warrant with
cash extraction method by purchasing warrants and holding cash. The cash
component would be determined by subtracting the market price of the warrant
from the underlying share price.
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For example, ASSUME one share for company "Alpha" has a current share price
of $40 and issued warrants can be converted one for one share at an exercise
price of $31 exercisable two years from today. Also ASSUME that the market
price of the warrant is $10 ($40 - $31 + $1) because investors are willing to
pay a premium ($1) for previously stated reasons. If an investor wanted to
replicate an underlying share by engaging in a warrant with cash extraction
strategy, the amount of cash the investor would need to hold for every warrant
would be $30 ($40 - $10 = $30). A warrant with cash extraction is, thus, simply
a synthetically created quasi-convertible bond.
If an underlying share issues no or a low dividend and has an associated
warrant with a market price that is low relative to its share price, a warrant
with cash extraction may provide attractive cash yields and minimize capital
loss risk, provided the underlying share is also considered a worthy investment.
For example, ASSUME Alpha's share is an attractive investment opportunity and
its share pays no dividend. Given the information regarding Alpha provided
above, also ASSUME that short-term cash currently yields 5% per year and that
the investor plans to hold the investment at least two years, barring
significant near-term capital appreciation. If the share price were to fall
below $30, the warrant with cash extraction strategy would yield a lower loss
than the underlying share because an investor cannot lose more than the purchase
cost of the warrant (capital risk minimized). The cash component for this
strategy would yield $3.08 after two years (compound interest). The total value
of the underlying investment would be $43.08 versus $40.00 for the non-yielding
underlying share (attractive yield). Finally, it is important to note that this
strategy will not be pursued if it is not economically more attractive than
underlying shares.
INDEX DEPOSITARY RECEIPTS
Growth Portfolio, Asset Allocation Portfolio, Index 500 Portfolio, Capital
Appreciation Portfolio, Small Company Growth Portfolio, Value Stock Portfolio,
Small Company Value Portfolio, Index 400 Mid-Cap Portfolio, Macro-Cap Value
Portfolio and Micro-Cap Growth Portfolio 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 Portfolio may invest in S&P 500 Depositary Receipts ("SPDRs"),
which track the S&P 500 Index; S&P MidCap 400 Depositary Receipts ("MidCap
SPDRs"), which track the S&P MidCap 400 Index; and "Dow Industrial Diamonds,"
which track the Dow Jones Industrial Average, or in other DRs which track
indexes, provided that such investments are consistent with the Portfolio's
investment objective as determined by the Portfolio's investment adviser or
sub-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 Portfolio).
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
37
<PAGE>
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.
SHORT SALES AGAINST THE BOX
Each Portfolio may sell securities "short against the box"; provided that
each Portfolio will not at the time of any short sales aggregate in total sales
price more than 10% of its total assets. Whereas a short sale is the sale of a
security the Portfolio does not own, a short sale is "against the box" if, at
all times during which the short position is open, the Portfolio owns at least
an equal amount of the securities sold short or other securities convertible
into or exchangeable without further consideration for securities of the same
issue as the securities sold short. Short sales against the box are typically
used by sophisticated investors to defer recognition of capital gains or losses.
The Portfolios have no present intention to sell securities short in this
fashion.
INVESTMENTS IN RUSSIA
International Stock Portfolio may invest in securities of Russian
companies, which involves risks and special considerations not typically
associated with investing in United States securities markets. Since the
breakup of the Soviet Union at the end of 1991, Russia has experienced dramatic
political and social change. The political system in Russia is emerging from a
long history of extensive state involvement in economic affairs. The country is
undergoing a rapid transition from a centrally-controlled command system to a
market-oriented, democratic model. The Portfolio may be affected unfavorably by
political or diplomatic developments, social instability, changes in government
policies, taxation and interest rates, currency repatriation restrictions and
other political and economic developments in the law or regulations in Russia
and, in particular, the risks of expropriation, nationalization and confiscation
of assets and changes in legislation relating to foreign ownership.
The planned economy of the former Soviet Union was run with qualitatively
different objectives and assumptions from those prevalent in a market system and
Russian businesses do not have any recent history of operating within a
market-oriented economy. In general, relative to companies operating in Western
economies, companies in Russian are characterized by a lack of: (i) management
with experience of operating in a market economy; (ii) modern technology; and,
(iii) a sufficient capital base with which to develop and expand their
operations. It is unclear what will be the future effect on Russian companies,
if any, of Russia's continued attempts to move toward a more market-oriented
economy. Russia's economy has experienced severe economic recession, if not
depression, since 1990 during which time the economy has been characterized by
high rates of inflation, high rates of unemployment, declining gross domestic
product, deficit government spending, and a devaluing currency. The economic
reform program has involved major disruptions and dislocations in various
sectors of the economy, and those problems have been exacerbated by growing
liquidity problems. Further, Russian presently receives significant financial
assistance from a number of countries through various programs. To the extent
these programs are reduced or eliminated in the future, Russian economic
development may be adversely impacted.
The Russian securities markets are substantially smaller, less liquid and
significantly more volatile than the securities markets in the United States.
In addition, there is little historical
38
<PAGE>
data on these securities markets because they are of recent origin. A
substantial proportion of securities transactions in Russia are privately
negotiated outside of stock exchanges and over-the-counter markets. A limited
number of issuers represent a disproportionately large percentage of market
capitalization and trading volume. Although evolving rapidly, even the largest
of Russia's stock exchanges are not well developed compared to Western stock
exchanges. The actual volume of exchange-based trading in Russia is low and
active on-market trading generally occurs only in the shares of a few private
companies. Most secondary market trading of equity securities occurs through
over-the-counter trading facilitated by a growing number of licensed brokers.
Shares are traded on the over-the-counter market primarily by the management of
enterprises, investment funds, short-term speculators and foreign investors.
The securities of Russian companies are mostly traded over-the-counter and,
despite the large number of stock exchanges, there is still no organized public
market for such securities. This may increase the difficulty of valuing the
Portfolio's investments. No established secondary markets may exist for many of
the securities in which the Portfolio may invest. Reduced secondary market
liquidity may have an adverse effect on market price and the Portfolio's ability
to dispose of particular instruments when necessary to meet its liquidity
requirements or in response to specific economic events such as a deterioration
in the creditworthiness of the issuer. Reduced secondary market liquidity for
securities may also make it more difficult for the Portfolio to obtain accurate
market quotations for purposes of valuing its portfolio and calculating its net
asset value. Market quotations are generally available on many emerging country
securities only from a limited number of dealers and may not necessarily
represent firm bids of those dealers or prices for actual sales.
Because of the recent formation of the securities markets as well as the
underdeveloped state of the banking and telecommunications systems,
settlement, clearing and registration transactions are subject to significant
risks not normally associated with investments in the United States and other
more developed markets. Ownership of shares (except where shares are held
through depositories that meet the requirements of the 1940 Act) is defined
according to entries in the company's share register and normally evidenced
by extracts from the register or in certain limited cases by formal share
certificates. However, there is not a central registration system and these
services are carried out by the companies themselves or by registrars located
throughout Russia. These registrars are not necessarily subject to effective
state supervision and its possible for the Portfolio to lose its registration
through fraud, negligence and even mere oversight. The laws and regulations
in Russia affecting Western investment business continue to evolve in an
unpredictable manner. Russian laws and regulations, particularly those
involving taxation, foreign investment and trade, title to property or
securities, and transfer of title, applicable to the Portfolio's activities
are relatively new and can change quickly and unpredictably in a manner far
more volatile than in the United States or other developed market economies.
Although basic commercial laws are in place, they are often unclear or
contradictory and subject to varying interpretation, and may at any time be
amended, modified, repealed or replaced in a manner adverse to the interest
of the Portfolio. There is still lacking a cohesive body of law and
precedents normally encountered in business environments. Foreign investment
in Russian companies is, in certain cases, legally restricted. Sometimes
these restrictions are contained in constitutional documents of an enterprise
which are not publicly available. Russian foreign investment legislation
currently guarantees the right of foreign investors to transfer abroad income
received on investments such as profits, dividends and interest payments.
This right is subject to settlement of all applicable taxes and duties.
However, more recent legislation governing currency regulation and control
guarantees the right to export interest, dividends and
39
<PAGE>
other income on investments, but does not expressly permit the repatriation
of capital from the realization of investments. Current practice is to
recognize the right to repatriation of capital. Authorities currently do not
attempt to restrict repatriation beyond the extent of the earlier law. No
guarantee can be made, however, that amounts representing realization of
capital of income will be capable of being remitted. If, for any reason, the
Portfolio were unable to distribute an amount equal to substantially all of
its investment company taxable income (as defined for U.S. tax purposes)
within applicable time periods, the Portfolio would not qualify for the
favorable U.S. federal income tax treatment afforded to regulated investment
companies, or, even if it did so qualify, it might become liable for income
and excise taxes on undistributed income.
Russian courts lack experience in commercial dispute resolution and many of
the procedural remedies for enforcement and protection of legal rights typically
found in Western jurisdictions are not available in Russia. There remains
uncertainty as to the extent to which local parties and entities, including
Russian state authorities, will recognize the contractual and other rights of
the parties with which they deal. Accordingly, there will be difficulty and
uncertainty in the Portfolio's ability to protect and enforce its rights against
Russian state and private entities. There is also no assurance that the Russian
courts will recognize or acknowledge that the Portfolio has acquired title to
any property or securities in which the Portfolio invests, or that the Portfolio
is the owner of any property or security held in the name of a nominee which has
acquired such property or security on behalf of the Portfolio, because there is
at present in Russia no reliable system or legal framework regarding the
registration of titles. There can be no assurance that this difficulty in
protecting and enforcing rights in Russia will not have a material adverse
effect on the Portfolio and its operations. Difficulties are likely to be
encountered enforcing judgments of foreign courts within Russia or of Russian
courts in foreign jurisdictions due to the limited number of countries which
have signed treaties for mutual recognition of court judgments with Russia.
DEFENSIVE PURPOSES
Each Portfolio may invest up to 20% of its respective net assets in cash or
cash items. In addition, for temporary or defensive purposes, the Portfolio may
invest in cash or cash items without limitation. The "cash items" in which the
Portfolio may invest, include short-term obligations such as rated commercial
paper and variable amount master demand notes; United States dollar-denominated
time and savings deposits (including certificates of deposit); bankers'
acceptances; obligations of the United States Government or its agencies or
instrumentalities; repurchase agreements collateralized by eligible investments
of a Portfolio; securities of other mutual funds which invest primarily in debt
obligations with remaining maturities of 13 months or less (which investments
also are subject to the advisory fee); and other similar high-quality short-term
United States dollar-denominated obligations.
INVESTMENT RESTRICTIONS
The Fund has adopted the following restrictions relating to the investment
of the assets of the Portfolios.
Each Portfolio is subject to certain "fundamental" investment restrictions
which 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
40
<PAGE>
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 which more than 50% of the outstanding voting shares are represented or
(ii) more than 50% of the outstanding voting shares. An investment restriction
which is not fundamental may be changed by a vote of the Board of Directors
without further shareholder approval. Except as otherwise noted, each of the
investment restrictions below is fundamental. The fundamental investment
restrictions were most recently considered at a Special Meeting of
Shareholders held on April 17, 2000.
FUNDAMENTAL RESTRICTIONS
1. The Portfolios will not borrow money or issue senior securities except
as permitted under the Investment Company Act of 1940, as amended, and
as interpreted or modified from time to time by any regulatory
authority having jurisdiction.
2. The Portfolios will not concentrate their investments in a particular
industry, except that:
(a) with respect to Money Market Portfolio, this limitation does not
apply to investments in domestic banks;
(b) under normal market conditions, Mortgage Securities Portfolio
will concentrate its investments in the mortgage and
mortgage-finance industry. Mortgage Securities Portfolio will not
concentrate its investments in any other particular industry;
(c) under normal market conditions, Real Estate Securities Portfolio
will concentrate its investments in the real estate or real
estate related industry. Real Estate Portfolio will not
concentrate its investments in any other particular industry;
(d) Index 500 Portfolio may concentrate its investments in a
particular industry if the S&P 500 Index is so concentrated; and
(e) Index 400 Mid-Cap Portfolio may concentrate its investments in a
particular industry if the S&P 400 Mid-Cap Index is so
concentrated.
For purposes of this limitation, the U.S. Government, and state or
municipal governments and their political subdivisions, are not
considered members of any
41
<PAGE>
industry. Whether a Portfolio is concentrating in an industry
shall be determined in accordance with the Investment Company Act
of 1940, as amended, and as interpreted or modified from time to
time by any regulatory authority having jurisdiction.
3. The Portfolios will not purchase or sell real estate unless acquired
as a result of ownership of securities or other instruments, but this
shall not prevent the Portfolios from investing in securities or other
instruments backed by real estate investments therein or in securities
of companies that deal in real estate or mortgages.
4. The Portfolios will not purchase physical commodities or contracts
relating to physical commodities.
5. The Portfolios may not make loans except as permitted under the
Investment Company Act of 1940, as amended, and as interpreted or
modified from time to time by any regulatory authority having
jurisdiction.
6. The Portfolios may not 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.
NON-FUNDAMENTAL RESTRICTIONS
The Fund has adopted a number of non-fundamental policies which appear below.
7. The Portfolios will not acquire any new securities while borrowings,
including borrowings through reverse repurchase agreements, exceed 5%
of total assets.
8. The Portfolios will use futures contracts and options on futures
contracts only (a) for "bona fide hedging purposes" (as defined in
regulations of the Commodity Futures Trading Commission) or (b) for
other purposes so long as the aggregate initial margins and premiums
required in connection with non-hedging positions do not exceed 5% of
the liquidation value of the Portfolio.
9. The Portfolios may mortgage, pledge or hypothecate their assets only
to secure permitted borrowings. Collateral arrangements with respect
to futures contracts, options thereon and certain options transactions
are not considered pledges for purposes of this limitation.
10. The Portfolios may not make short sales of securities, other than
short sales "against the box."
11. The Portfolios may not purchase securities on margin, but it may
obtain such short-term credits as may be necessary for the clearance
of securities transactions and it may make margin deposits in
connection with futures contracts.
12. The Portfolios will not invest more than 15% (10% in the case of Money
Market Portfolio) of their net assets in illiquid securities.
13. The total market value of securities against which a Portfolio may
write call or put options will not exceed 2% of the Portfolios' total
assets. In addition, a Portfolio will not commit more than 5% of its
total assets to premiums when purchasing put or call options.
42
<PAGE>
If a percentage restriction described above or in the Fund's Prospectus 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.
ADDITIONAL RESTRICTIONS
The Money Market 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 Fund is required to invest exclusively in securities that mature
within 397 days from the date of purchase and to maintain an average weighted
maturity of not more than 90 days. Rule 2a-7 also requires that all investments
by the 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 S&P, or Prime-1 or Prime-2 by Moody's.
Rule 2a-7 also requires, among other things, that the Money Market
Portfolio may not invest, other than in U.S. "Government Securities" (as defined
in the 1940 Act), (a) more than 5% of its total assets in Second Tier Securities
(i.e., Eligible Securities that are not rated by two NRSROs in the highest
category such as A-1 and Prime-1 and (b) more than the greater of 1% of its
total assets or $1,000,000 in Second Tier Securities of any one issuer. The
present practice is not to purchase any Second Tier Securities.
PORTFOLIO TURNOVER
Portfolio turnover is the ratio of the lesser of annual purchases or sales
of portfolio securities to the average monthly value of portfolio securities,
not including short-term securities. A 100% portfolio turnover rate would
occur, for example, if the lesser of the value of purchases or sales of
portfolio securities for a particular year were equal to the average monthly
value of the portfolio securities owned during such year.
Each Portfolio has a different expected annual rate of portfolio
turnover. 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.
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<PAGE>
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:
<TABLE>
<CAPTION>
Portfolio Turnover Rate
-------------------------
Portfolio 1999 1998 1997
--------- ---- ---- ----
<S> <C> <C> <C>
Growth 65.3% 66.4% 120.1%
Bond 140.8 252.1 200.0
Money Market N/A N/A N/A
Asset Allocation 97.0 129.6 140.2
Mortgage Securities 79.4 116.7 106.4
Index 500 25.6 30.2 8.3
Capital Appreciation 114.1 82.7 74.0
International Stock 34.7 22.4 12.5
Small Company Growth 105.1 75.5 63.8
Maturing Government Bond -
2002 Portfolio 21.1 35.2 36.9
2006 Portfolio 19.8 21.6 3.1
2010 Portfolio 28.4 28.2 39.3
Value Stock 131.2 88.9 115.4
Small Company Value 101.5 70.2 13.0
Global Bond 287.4 285.3 120.5
Index 400 Mid-Cap 76.6 85.4 4.9
Macro-Cap Value 103.4 164.0 36.7
Micro-Cap Growth 108.5 67.4 28.9
Real Estate Securities 106.3 54.0 N/A
</TABLE>
44
<PAGE>
DIRECTORS AND EXECUTIVE OFFICERS
Under Minnesota Law, the Board of Directors of the Fund has overall
responsibility for managing the Fund in good faith and in a manner reasonably
believed to be in the best interests of the Fund. The names, addresses,
principal occupations, and other affiliations of directors and executive
officers of the Fund are given below:
<TABLE>
<CAPTION>
Position with Principal Occupation and other
Name and Address the Funds Affiliations (past 5 years)
- ---------------- --------- ---------------------------
<S> <C> <C>
William N. Westhoff* President and President, Treasurer and Director,
Advantus Capital Director Advantus Capital Management, Inc.;
Management, Inc. Senior Vice President and Treasurer,
400 Robert Street North Minnesota Life Insurance Company;
St. Paul, Minnesota 55101 Vice President and Director, Robert Street
Energy, Inc.; President, MCM Funding 1997-1,
Inc.; President, MCM Funding 1998-1, Inc.;
Senior Vice President, Global Investments,
American Express Financial Corporation,
Minneapolis, Minnesota, from August 1994 to
October 1997
Frederick P. Feuerherm* Vice President, Vice President, Assistant Secretary and
Advantus Capital Director and Director, Advantus Capital
Management, Inc. Treasurer Management, Inc.; Vice President,
400 Robert Street North Minnesota Life Insurance Company;
St. Paul, Minnesota 55101 Vice President and Director, MIMLIC Funding,
Inc.; Vice President and Assistant Secretary,
MCM Funding 1997-1, Inc.; Vice President and
Assistant Secretary, MCM Funding 1998-1, Inc.
Ralph D. Ebbott Director Retired, Vice President and Treasurer
409 Birchwood Avenue of Minnesota Mining and Manufacturing Company
White Bear Lake, (industrial and consumer products) through June
Minnesota 55110 1989
Charles E. Arner Director Retired, Vice Chairman of The First
E-1430 First National National Bank of Saint Paul from
Bank Building November 1983 through June 1984;
332 Minnesota Street Chairman and Chief Executive Officer
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<PAGE>
St. Paul, Minnesota 55101 of The First National Bank of Saint Paul
from October 1980 through November
1983
Ellen S. Berscheid Director Regents' Professor of Psychology at the
University of Minnesota University of Minnesota
N309 Elliott Hall
Minneapolis, Minnesota 55455
Michael J. Radmer Secretary Partner with the law firm of
Dorsey & Whitney LLP Dorsey & Whitney LLP
220 South Sixth Street
Minneapolis, Minnesota 55402
</TABLE>
- -------------------------
* Denotes directors of the Funds who are "interested persons" (as defined under
the Investment Company Act of 1940) of the Funds.
- -------------------------
The Fund has both an Audit Committee and a Nominations Committee, 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 Management, Inc. ("Advantus
Capital"). Each director of the Fund who is not affiliated with Advantus
Capital is also a director of thirteen other investment companies of which
Advantus Capital is the investment adviser (the "Fund Complex"). As of the date
hereof, such directors receive compensation in connection with all such
investment companies which, in the aggregate, is equal to $8,000 per year and
$2,000 per meeting attended (and reimbursement of travel expenses to attend
directors' meetings). The portion of such compensation borne by 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. During the fiscal year ended December
31, 1999, each Director not affiliated with Advantus Capital was compensated by
the Fund in accordance with the following table:
<TABLE>
<CAPTION>
Pension or Total
Retirement Compensation
Aggregate Benefits Estimated From Fund and
Compensation Accrued as Annual Fund Complex
from the Part of Fund Benefits Upon Paid to
Name of Director Fund Expenses Retirement Directors
---------------- ---- -------- ---------- ---------
<S> <C> <C> <C> <C>
Charles E. Arner $16,303 n/a n/a $20,000
Ellen S. Berscheid $16,303 n/a n/a $20,000
Ralph D. Ebbott $16,303 n/a n/a $20,000
</TABLE>
46
<PAGE>
As of December 31, 1999, the directors and executive officers of the Fund
did not own any shares of the Fund.
DIRECTOR LIABILITY
Under Minnesota law, the Board of Directors of the Fund owes certain
fiduciary duties to the Fund and to its shareholders. Minnesota law provides
that a director "shall discharge the duties of the position of director in good
faith, in a manner the director reasonably believes to be in the best interest
of the corporation, and with the care an ordinarily prudent person in a like
position would exercise under similar circumstances." Fiduciary duties of a
director of a Minnesota corporation include, therefore, both a duty of "loyalty"
(to act in good faith and act in a manner reasonably believed to be in the best
interests of the corporation) and a duty of "care" (to act with the care an
ordinarily prudent person in a like position would exercise under similar
circumstances). Minnesota law also authorizes corporations to eliminate or
limit the personal liability of a director to the corporation or its
shareholders for monetary damages for breach of the fiduciary duty of "care."
Minnesota law does not, however, permit a corporation to eliminate or limit the
liability of a director (i) for any breach of the directors' duty of "loyalty"
to the corporation or its shareholders, (ii) for acts or omissions not in good
faith or that involve intentional misconduct or a knowing violation of law,
(iii) for authorizing a dividend, stock repurchase or redemption or other
distribution in violation of Minnesota law or for violation of certain
provisions of Minnesota securities laws, or (iv) for any transaction from which
the director derived an improper personal benefit. The Articles of
Incorporation of the Fund limit the liability of directors to the fullest extent
permitted by Minnesota statutes, except to the extent that such liability cannot
be limited as provided in the Investment Company Act of 1940 (which prohibits
any provisions which purport to limit the liability of directors arising from
such directors' willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of heir role as directors).
Minnesota law does not eliminate the duty of "care" imposed upon a
director. It only authorizes a corporation to eliminate monetary liability for
violations of that duty. Minnesota law, further, does not permit elimination or
limitation of liability of "officers" to the corporation for breach of their
duties as officers (including the liability of directors who serve as officers
for breach of their duties as officers). Minnesota law does not permit
elimination or limitation of the availability of equitable relief, such as
injunctive or recessionary relief. Further, Minnesota law does not permit
elimination or limitation of a director's liability under the Securities Act of
1933 or the Securities Exchange Act of 1934, and it is uncertain whether and to
what extent the elimination of monetary liability would extend to violations of
duties imposed on directors by the Investment Company Act of 1940 and the rules
and regulations adopted under such Act.
INVESTMENT ADVISORY AND OTHER SERVICES
GENERAL
Advantus Capital Management, Inc. ("Advantus Capital") has been the
investment adviser and manager of the Fund and its Portfolios since May 1, 1997.
Advantus Capital acts as investment adviser to the Portfolios pursuant to a
written agreement that will be periodically
47
<PAGE>
considered for approval by the directors or shareholders of the Fund. The
address of Advantus Capital is 400 Robert Street North, St. Paul, Minnesota
55101.
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 investment 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 investment
sub-advisers or continue the employment of an investment sub-adviser after an
event which would otherwise cause the automatic termination of services.
Shareholders would be notified of any investment sub-adviser changes.
Shareholders have the right to terminate arrangements with an investment
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 investment sub-adviser, the
order also permits the Fund to disclose such investment 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 investment sub-advisers due to its responsibility to oversee the
investment sub-advisers and recommend their hiring, termination and replacement.
Credit Suisse Asset Management, LLC ("CSAM") serves as investment
sub-adviser to the Fund's Capital Appreciation Portfolio and Small Company
Growth Portfolio pursuant to an investment sub-advisory agreement with
Advantus Capital. Templeton Investment Counsel, Inc. 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. ("Julius Baer") serves as investment sub-adviser
to the Fund's Global Bond Portfolio, pursuant to an investment sub-advisory
agreement with Advantus Capital. Julius Baer determines the Portfolio's
allocation between foreign and domestic securities and selects and manages
the Portfolio's foreign investments (Advantus Capital selects and manages
domestic investments). 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. State Street Research & Management Company ("State Street Research")
serves as investment sub-adviser to the Fund's Small Company Value Portfolio
pursuant to an investment sub-advisory agreement with Advantus Capital.
CONTROL AND MANAGEMENT OF ADVANTUS CAPITAL
Advantus Capital was incorporated in Minnesota in June 1994, and is a
wholly-owned subsidiary of Minnesota Life Insurance Company ("Minnesota Life").
Minnesota Life is a third-tier subsidiary of a mutual insurance holding company
called Minnesota Mutual Companies, Inc. Minnesota Life was organized in 1880,
and has assets of more than $16 billion. William N. Westhoff, President and a
Director of the Fund, is President, Treasurer and Director of Advantus Capital.
Frederick P. Feuerherm, Vice President, Treasurer and a Director of the Fund, is
a Vice President, Assistant Secretary and Director of Advantus Capital.
INVESTMENT ADVISORY AGREEMENT
Advantus Capital acts as investment adviser and manager of the Fund
under an Investment Advisory Agreement dated May 1, 2000 (the "Investment
Advisory Agreement"), which became effective the same date, and was
approved by shareholders on April 17, 2000. The Investment Advisory
Agreement 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 February 10, 2000. Prior to
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May 1,1997, the Fund obtained advisory services from MIMLIC Asset Management
Company ("MIMLIC Management"),formerly the parent company of 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 Investment Advisory Agreement, will terminate automatically in the
event of assignment. In addition, the Investment Advisory 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 Investment Advisory Agreement
shall continue in effect for more than two years after its execution only so
long as such continuance is specifically approved at least annually 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 Investment Advisory 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 Investment Advisory 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 Investment Advisory Agreement, 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 investment 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 Investment Advisory Agreement in respect
of such Portfolio, whichever is less.
The Investment Advisory Agreement may be amended by the parties only if
such amendment is specifically approved by the vote of a majority of the
outstanding voting securities of the Fund and by the vote of a majority of the
directors of the Fund who are not interested persons of any party to the
Investment Advisory 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.
Pursuant to the Investment Advisory Agreement, the Fund pays Advantus
Capital an advisory fee equal on an annual basis to a percentage of a
Portfolio's average daily net assets as set forth in the following table:
<TABLE>
<CAPTION>
Advisory Fee Paid Prior
to May 1, 2000
(as a percentage of
Portfolio Average Daily Net Assets)(1)
--------- --------------------------
<S> <C>
Growth Portfolio 0.45% of assets to $1 billion; and
0.40% of assets exceeding $1 billion
Bond Portfolio 0.30% of assets to $500 million;
0.25% of assets exceeding $500 million
to $1 billion; and
0.20% of assets exceeding $1 billion
Money Market Portfolio 0.25% of assets to $1billion; and
0.20% of assets exceeding $1 billion
Asset Allocation Portfolio 0.35% of assets to $1 billion; and
0.30% of assets exceeding $1 billion
Mortgage Securities Portfolio 0.30% of assets to $1 billion; and
0.25% of assets exceeding $1 billion
Index 500 Portfolio 0.15% of assets to $250 million;
0.10% of assets exceeding $250 million
to $1 billion; and
0.075% of assets exceeding $1 billion
Capital Appreciation Portfolio 0.50% of assets to $1 billion; and
0.45% of assets exceeding $1 billion(1)
International Stock Portfolio 0.60% of assets to $250 million;
0.55% of assets exceeding $250 million
to $500 million;
0.50% of assets exceeding $500 million
to $1 billion; and
0.45% of assets exceeding $1 billion(2)
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Small Company Growth 0.65% of assets to $1 billion; and
Portfolio 0.60% of assets exceeding $1 billion(3)
Maturing Government Bond Portfolios 0.25%
Value Stock Portfolio 0.50% of assets to $500 million;
0.45% of assets exceeding $500 million
to $1 billion; and
0.40% of assets exceeding $1 billion
Small Company Value Portfolio 0.70% of assets to $1 billion; and
0.65% of assets exceeding $1 billion(4)
Global Bond Portfolio 0.60% of assets to $1 billion; and
0.55% of assets exceeding $1 billion(5)
Index 400 Mid-Cap Portfolio 0.15% of assets to $250 million;
0.10% of assets exceeding $250 million
to $1 billion; and
0.075% of assets exceeding $1 billion
Macro-Cap Value Portfolio 0.50%(6)
Micro-Cap Growth Portfolio 0.95%(7)
Real Estate Securities Portfolio 0.60% of assets to $1 billion; and
0.55% of assets exceeding $1 billion
</TABLE>
(1) Advantus Capital uses a portion of these fees to pay CSAM an annual
sub-advisers fee equal to 0.50% of total assets between $0 and $500 million;
0.45% of total assets between $500 million and $1 billion; 0.35% of total assets
between $1 billion and $2 billion; and 0.30% of total assets exceeding $2
billion. The term "assets" includes all assets advised or sub-advised by CSAM
for Advantus Capital or its affiliates, in addition to the assets of the
Portfolio. The fee rate is applied to all assets back to the first dollar in the
Portfolio.
(2) Advantus Capital uses a portion of these fees to pay Templeton Counsel an
annual sub-advisers fee equal to 0.70% of total assets between $0 and $10
million; 0.65% of total assets exceeding $10 million to $25 million; 0.55% of
assets exceeding $25 million to $50 million; 0.50% of assets exceeding $50
million to $100 million; and 0.40% of assets exceeding $100 million. For the
purpose of establishing the appropriate breakpoints at which the Portfolio's
sub-advisory fee shall be calculated, the Portfolio will benefit from the
aggregation of the monthly market value of any non-mutual fund account of
Minnesota Life or any affiliate thereof, advised or sub-advised by Templeton
Counsel or any advisory affiliate thereof as well as the average daily net
assets of any U.S. registered mutual fund advised by Advantus and sub-advised
by Templeton Counsel or any advisory affiliate. For fee-stacking purposes,
the asset classes so managed with the highest fee schedules shall be counted
first as assets of this Portfolio in order to determine this Portfolio's
appropriate starting breakpoint when Franklin Advisors, Inc., an affiliate of
Templeton Counsel, provides other sub-advisory services to Advantus Capital,
covering small company domestic equities in an amount in excess of $100
million and Minnesota Life, offers as investment options in its registered
variable insurance contracts the Templeton Developing Markets Securities Fund
and any other two funds in the Franklin Templeton Variable Insurance Products
Trust.
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(3) Advantus Capital uses a portion of these fees to pay CSAM an annual
sub-advisers fee equal to 0.65% of total assets between $0 and $500 million;
0.60% of total assets between $500 million and $1 billion; 0.50% of total
assets between $1 billion and $2 billion; and 0.45% of total assets exceeding
$2 billion. The term "assets" includes all assets advised or sub-advised by
CSAM for Advantus Capital or its affiliates, in addition to the assets of the
Portfolio. The fee rate is applied to all assets back to the first dollar in
the Portfolio.
(4) Advantus Capital uses a portion of these fees to pay State Street
Research an annual sub-advisers fee equal to 0.65% on the first $500 million
of assets; 0.60% on the next $500 million of assets; and 0.50% of assets in
excess of $1 billion. The term "assets" includes all 'small company value'
assets sub-advised by State Street Research for Advantus Capital or its
affiliates, in addition to the assets of the Portfolio.
(5) Advantus Capital uses a portion of these fees to pay JBIM an annual
sub-advisers fee equal to .030% of the Portfolio's average daily net assets.
(6) Advantus Capital uses a portion of these fees to pay J.P. Morgan an annual
sub-advisers fee equal to .45% of the Portfolio's average daily net assets.
(7) Advantus Capital uses a portion of these fees to pay WSA an annual
sub-advisers fee equal to .85% of the Portfolio's average daily net assets.
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The fees paid by the Fund during the fiscal years ended December 31, 1999,
1998 and 1997 (before absorption of certain expenses, described below)
were as follows:
<TABLE>
<CAPTION>
Advisory Fees Paid
--------------------------------------------
Portfolio 1999 1998 1997
--------- ---- ---- ----
<S> <C> <C> <C>
Growth Portfolio $2,494,891 $1,933,104 $1,466,591
Bond Portfolio 905,784 797,554 673,785
Money Market Portfolio 715,791 365,699 353,186
Asset Allocation Portfolio 3,331,000 2,789,366 2,284,255
Mortgage Securities Portfolio 664,424 558,926 413,651
Index 500 Portfolio 2,380,660 1,883,032 1,171,693
Capital Appreciation Portfolio 2,859,868 2,474,808 1,879,870
International Stock Portfolio 2,264,526 2,179,226 1,856,022
Small Company Growth Portfolio 1,449,287 1,377,138 1,223,927
Maturing Government Bond -
2002 Portfolio 19,643 10,114 1,959
2006 Portfolio 16,349 12,908 8,471
2010 Portfolio 13,438 10,545 6,719
Value Stock Portfolio 1,511,048 1,593,193 1,171,946
Small Company Value Portfolio 77,509 47,485 9,775
Global Bond Portfolio 188,285 160,962 41,149
Index 400 Mid-Cap Portfolio 61,826 26,300 5,014
Macro-Cap Value Portfolio 113,418 7,048 N/A
Micro-Cap Growth Portfolio 171,857 15,671 N/A
Real Estate Securities Portfolio 41,354 N/A N/A
</TABLE>
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Under the Investment Advisory Agreement, Advantus Capital furnishes the
Fund office space and all necessary office facilities, equipment and personnel
for servicing the investments of the Fund. 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 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.
Prior to May 1, 2000, Minnesota Life had voluntarily agreed to absorb
all fees and expenses that exceed .65% of average daily net assets for the
Growth Portfolio, Bond Portfolio, Money Market Portfolio, Asset Allocation
Portfolio and Mortgage Securities Portfolio, .55% of average daily net assets
for the Index 500 Portfolio and Index 400 Mid-Cap Portfolio, .90% of average
daily net assets for the Capital Appreciation Portfolio, Small Company Growth
Portfolio, Value Stock Portfolio, Small Company Value Portfolio and Real
Estate Securities Portfolio, .40% of average daily net assets for each of
the three Maturing Government Bond 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 Life had voluntarily agreed to
absorb expenses, excluding investment advisory fees, that exceed 1.00% for
International Stock Portfolio. Effective May 1, 2000, Advantus Capital
has voluntarily agreed to absorb all fees and expenses that exceed, for each
Portfolio, the percentage of average daily net assets set forth above. For
each of the last three calendar years, the expenses voluntarily absorbed by
Minnesota Life for the various Portfolios were as follows:
<TABLE>
<CAPTION>
Expenses Voluntarily Absorbed
--------------------------------
Portfolio 1999 1998 1997
--------- ---- ---- ----
<S> <C> <C> <C>
Growth Portfolio -0- $-0- $-0-
Bond Portfolio -0- -0- -0-
Money Market Portfolio -0- -0- -0-
Asset Allocation Portfolio -0- -0- -0-
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<PAGE>
Mortgage Securities Portfolio -0- -0- -0-
Index 500 Portfolio -0- -0- -0-
Capital Appreciation Portfolio -0- -0- -0-
International Stock Portfolio -0- -0- -0-
Small Company Growth Portfolio -0- -0- -0-
Maturing Government Bond -
2002 Portfolio 53,336 37,949 36,833
2006 Portfolio 56,178 37,165 37,425
2010 Portfolio 55,419 39,052 38,967
Value Stock Portfolio -0- -0- -0-
Small Company Value Portfolio 67,886 58,848 11,517
International Bond Portfolio -0- -0- -0-
Index 400 Mid-Cap Portfolio 70,044 52,946 14,670
Macro-Cap Value Portfolio 102,703 114,468 22,940
Micro-Cap Growth Portfolio 50,020 46,960 11,102
Real Estate Securities Portfolio 63,511 31,736 N/A
</TABLE>
There is no specified or minimum period of time during which Advantus
Capital has agreed to continue its voluntary absorption of these expenses,
and Advantus Capital may in its discretion cease its absorption of expenses
at any time. Should Advantus Capital 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.
SUB-ADVISER - CSAM
Credit Suisse Asset Management, LLC ("CSAM") 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. CSAM is a registered investment adviser under the
Investment Advisers Act of 1940.
CSAM, located at 153 East 53rd Street, New York, New York 10022, serves
as an investment sub-adviser to the Portfolio pursuant to a written agreement.
CSAM is an indirect wholly-owned U.S. subsidiary of Credit Suisse Group
("Credit Suisse"). Credit Suisse is a global financial services company,
providing a comprehensive range of banking and insurance products. Active on
every continent and in all major financial centers, Credit Suisse comprises
five business units - Credit Suisse Asset Management (asset management);
Credit Suisse First Boston (investment banking); Credit Suisse Private
Banking (private banking); Credit Suisse (retail banking); and Winterthur
(insurance). Credit Suisse has approximately 62,000 people worldwide. The
principal business address of Credit Suisse is Paradeplatz 8, CH 8070,
Zurich, Switzerland. CSAM, together with its predecessor firms, has been
engaged in the investment advisory business for over 60 years.
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<PAGE>
INVESTMENT SUB-ADVISORY AGREEMENT - CSAM
CSAM acts as investment sub-adviser to the Fund's Capital Appreciation
Portfolio under an Investment Sub-Advisory Agreement (the "CSAM Capital
Appreciation Agreement") with Advantus Capital dated May 1, 2000, which
became effective the same date. Prior to May 1, 2000, the Capital
Appreciation Portfolio was managed by Winslow Capital Management, Inc. of
Minneapolis, Minnesota. The CSAM Agreement will terminate automatically upon
the termination of the Investment Advisory Agreement and in the event of its
assignment. In addition, the CSAM Agreement is terminable at any time,
without penalty, by the Board of Directors of the Fund, by Advantus Capital
on 60 days' written notice to CSAM, and by CSAM on 60 days' written notice to
Advantus Capital. Unless sooner terminated, the CSAM Agreement shall continue
in effect from year to year if approved at least annually either by the Board
of Directors of the Fund, provided that in either event such continuance is
also approved by the vote of a majority of the Directors who are not
interested persons of any party to the CSAM Agreement, cast in person at a
meeting called for the purpose of voting on such approval.
In payment for the investment sub-advisory services to be rendered by CSAM
for the Capital Appreciation the Portfolio, the Adviser pays to CSAM, 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 is accrued daily and shall be
based on the net asset value 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 is 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 applied as follows: total assets between $0
and $500 million, 0.50%; total assets between $500 million and $1 billion,
0.45%; total assets between $1 billion and $2 billion, 0.35%; total assets
exceeding $2 billion, 0.30%. For the purpose of applying the breakpoints in the
fee calculation, the term "assets" shall include all assets advised or
sub-advised by the Sub-Adviser for the Adviser in addition to those assets of
the Portfolio. The assets shall be calculated quarterly based upon the aggregate
assets on March 31st, June 30th, September 30th and December 31st of each
calendar year (or portion thereof) that the CSAM Capital Appreciation Agreement
is effective, with the fee rate determined on each such date being applicable to
the following period and applied to all assets back to the first dollar in the
Portfolio.
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 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., Ft. Lauderdale,
Florida, which in turn is a wholly-owned subsidiary of Franklin Resources, Inc.
("Franklin").
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<PAGE>
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.
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, and was approved by shareholders of International Stock
Portfolio on April 24, 1997. The Templeton Agreement, as amended, was last
approved for continuance by the Board of Directors of the Fund, including a
majority of the Directors who are not a party to the Templeton Agreement or
interested persons of any such party, on February 10, 2000. The Templeton
Agreement will terminate automatically upon the termination of the Investment
Advisory Agreement and in the event of its assignment. In addition, the
Templeton Agreement is terminable at any time, without penalty, by the Board of
Directors of the Fund, by Advantus Capital or by a vote of the majority of the
International 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 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.
From the advisory fee received from International Stock Portfolio,
Advantus Capital pays Templeton Counsel a sub-advisory fee equal to .70% on
the first $10 million of International Stock Portfolio's average daily net
assets, .65% on the next $15 million, .55% on the next $25 million, .50% on
the next $50 million, and .40% on the next $100 million and thereafter. For
the purpose of establishing the appropriate breakpoints at which the
Portfolio's sub-advisory fee shall be calculated, the Portfolio will benefit
from the aggregation of the monthly market value of any non-mutual fund
account of Minnesota Life or any affiliate thereof, advised or sub-advised by
Templeton Counsel or any advisory affiliate thereof as well as the average
daily net assets of any U.S. registered mutual fund advised by Advantus and
sub-advised by Templeton Counsel or any advisory affiliate. For fee-stacking
purposes, the asset classes so managed with the highest fee schedules shall
be counted first as assets of this Portfolio in order to determine this
Portfolio's appropriate starting breakpoint when Franklin Advisors, Inc., an
affiliate of Templeton Counsel, provides other sub-advisory services to
Advantus Capital, covering small company domestic equities in an amount in
excess of $100 million and Minnesota Life, offers as investment options in
its registered variable insurance contracts the Templeton Developing Markets
Securities Fund and any other two funds in the Franklin Templeton Variable
Insurance Products Trust.
SUB-ADVISER - JBIM
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
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<PAGE>
agreement to provide investment advice and, in general, to conduct the
management investment program for the Global Bond Portfolio's foreign securities
and to determine the Portfolio's total allocation of domestic and foreign
securities, 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 1983. Directly and through
Julius Baer Securities, Inc., JBIM provides investment management services to a
wide variety of individual and institutional clients, including registered
investment companies.
INVESTMENT SUB-ADVISORY AGREEMENT - JBIM
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 last approved by the Board of
Directors of the Fund, including a majority of the Directors who are not a party
to the JBIM Agreement or interested persons of any such party, on February 10,
2000.
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
Global 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 Global 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.
From the advisory fee received from Global Bond Portfolio, Advantus Capital
pays JBIM a sub-advisory fee equal to .30% of Global Bond Portfolio's average
daily net assets.
SUB-ADVISER - MORGAN INVESTMENT
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.
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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") with 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 Board of Directors of the Fund,
including a majority of the Directors who are not a party to the Morgan
Management Agreement or interested persons of any such party, on February 10,
2000.
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 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.
In payment for the investment sub-advisory services to be rendered by
Morgan Management to the Macro-Cap Portfolio, the Adviser pays to Morgan
Management a fee computed at an annual rate which shall be a percentage of the
average daily net assets of the Portfolio. The fee is accrued daily and based on
the net asset value 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 is payable in arrears on the last
day of each calendar month. From the advisory fee received from Macro-Cap Value
Portfolio, Advantus Capital pays Morgan Management a sub-advisory fee equal to
.45% of Macro-Cap Value Portfolio's average daily net assets.
SUB-ADVISER - WSA
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.
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 Agreement") with Advantus
Capital dated May 1, 1997 and became effective after it was approved by
shareholders on September 15, 1997.
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<PAGE>
The WSA 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 WSA Agreement
or interested persons of any such party, on February 10, 2000.
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.
In payment for the investment sub-advisory services to be rendered by WSA
to the Micro-Cap Growth Portfolio, the Adviser pays to WSA, a fee computed at an
annual rate which is a percentage of the average daily net assets of the
Portfolio. The fee is accrued daily and based on the net asset value 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 is payable in arrears on the last day of each calendar month. From
the advisory fee received from Micro-Cap Growth Portfolio, Advantus Capital pays
WSA a sub-advisory fee equal to .85% of Micro-Cap Growth Portfolio's average
daily net assets.
SUB-ADVISER - CSAM
Credit Suisse Asset Management, LLC ("CSAM") 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 Small
Company Growth Portfolio, subject to the general control of the Board of
Directors of the Fund. CSAM is a registered investment adviser under the
Investment Advisers Act of 1940.
CSAM, located at 153 East 53rd Street, New York, New York 10022, serves as an
investment sub-adviser to the Portfolio pursuant to a written agreement. CSAM is
an indirect wholly-owned U.S. subsidiary of Credit Suisse Group ("Credit
Suisse"). Credit Suisse is a global financial services company, providing a
comprehensive range of banking and insurance products. Active on every continent
and in all major financial centers, Credit Suisse comprises five business units
- - Credit Suisse Asset Management (asset management); Credit Suisse First Boston
(investment banking); Credit Suisse Private Banking (private banking); Credit
Suisse (retail banking); and Winterthur (insurance). Credit Suisse has
approximately 62,000 people worldwide. The principal business address of Credit
Suisse is Paradeplatz 8, CH 8070, Zurich, Switzerland. CSAM, together with its
predecessor firms, has been engaged in the investment advisory business for over
60 years.
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<PAGE>
INVESTMENT SUB-ADVISORY AGREEMENT - CSAM
CSAM acts as investment sub-adviser to the Fund's Small Company Growth
Portfolio under an Investment Sub-Advisory Agreement (the "CSAM Small Company
Growth Agreement") with Advantus Capital dated March 7, 2000, which became
effective the same date. The CSAM Small Company Growth Agreement represents a
new agreement with this firm for the management of the Small Company Growth
Portfolio. Prior to that date, the Portfolio had been managed by the Portfolio's
advisor, Advantus Capital. The CSAM Small Company Growth Agreement will
terminate automatically upon the termination of the Investment Advisory
Agreement and in the event of its assignment. In addition, the CSAM Small
Company Growth Agreement is terminable at any time, without penalty, by the
Board of Directors of the Fund, by Advantus Capital or, and by CSAM on 60 days'
written notice to Advantus Capital. Unless sooner terminated, the CSAM Small
Company Growth Agreement shall continue in effect from year to year if approved
at least annually either by the Board of Directors of the Fund, provided that in
either event such continuance is also approved by the vote of a majority of the
Directors who are not interested persons of any party to the CSAM Agreement,
cast in person at a meeting called for the purpose of voting on such approval.
In payment for the investment sub-advisory services to be rendered by CSAM
to the Small Company Growth Portfolio, the Adviser pays to CSAM, a fee computed
at an annual rate which is a percentage of the average daily net assets of the
Portfolio. The fee is accrued daily and based on the net asset value 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 is 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 applied as follows: total assets between $0
and $500 million, 0.65%; total assets between $500 million and $1 billion,
0.60%; total assets between $1 billion and $2 billion, 0.50%; On all assets in
excess of $2 billion, 0.45%. For the purpose of the fee calculation, the term
"assets" for purposes of the schedule shall include all assets advised or
sub-advised by the Sub-Adviser for the Adviser in addition to those assets of
the Portfolio. The aggregation of assets for purposes of the breakpoints shall
be calculated quarterly based upon the aggregate assets on March 31st, June
30th, September 30th and December 31st of each calendar year (or portion
thereof) that this Agreement is effective, with the fee rate determined on each
such date being applicable to the following period and applied to all assets
back to the first dollar in the Portfolio.
SUB-ADVISER - STATE STREET RESEARCH
State Street Research & Management Company ("State Street Research") 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 Small Company Value Portfolio, subject to the general control
of the Board of Directors of the Fund. State Street Research is a registered
investment adviser under the Investment Advisers Act of 1940.
60
<PAGE>
State Street Research, a Delaware corporation, with offices at One
Financial Center, Boston, Massachusetts 02111-2690, acts as the investment
sub-adviser to the Portfolio. State Street Research was founded by Paul
Cabot, Richard Saltonstall and Richard Paine to serve as investment adviser
to one of the nation's first mutual funds, presently known as State Street
Research Investment Trust, which they had formed in 1924. Their investment
management philosophy emphasized comprehensive fundamental reach and
analysis, including meetings with the management of companies under
consideration for investment. State Street Research's portfolio management
group has extensive investment industry experience managing equity and debt
securities. State Street Research is an indirect wholly-owned subsidiary of
Metropolitan Life Insurance Company.
INVESTMENT SUB-ADVISORY AGREEMENT - STATE STREET RESEARCH
State Street Research acts as investment sub-adviser to the Fund's Small
Company Value Portfolio under an Investment Sub-Advisory Agreement (the
"State Street Research Small Company Value Agreement") with Advantus Capital
dated March 7, 2000, which became effective the same date. The State Street
Research Small Company Value Agreement represents a new agreement with this
firm for the management of the Small Company Value Portfolio. Prior to March
1, 2000, the Small Company Value Portfolio was managed by Portfolio's
advisor, Advantus Capital. The State Street Research Small Company Value
Agreement will terminate automatically upon the termination of the Investment
Advisory Agreement and in the event of its assignment. In addition, the State
Street Research Small Company Value Agreement is terminable at any time,
without penalty, by the Board of Directors of the Fund, by Advantus Capital
on 60 days' written notice to State Street Research, and by State Street
Research on 60 days' written notice to Advantus Capital. Unless sooner
terminated, the State Street Research Agreement shall continue in effect from
year to year if approved at least annually either by the Board of Directors
of the Fund, provided that in either event such continuance is also approved
by the vote of a majority of the Directors who are not interested persons of
any party to the State Street Research Agreement, cast in person at a meeting
called for the purpose of voting on such approval.
In payment for the investment sub-advisory services to be rendered by
State Street Research to the Small Company Value Portfolio, the Adviser pays
to State Street Research, a fee computed at an annual rate which is a
percentage of the average daily net assets of the Portfolio. The fee is
accrued daily and shall be based on the net asset value 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 is payable in arrears on the last day of each calendar month.
The amount of such annual fee, as applied to the average daily net
assets of the Portfolio is: on the first $500 million, 0.65%; on the next
$500 million, 0.60%; on all assets in excess of $1 billion, 0.50%. For the
purpose of the fee calculation and the indicated breakpoints, the term
"assets" shall include all 'small company value' assets sub-advised by State
Street Research for Advantus Capital, in addition to the assets of the
Portfolio. The aggregation of those assets for purposes of the breakpoints,
shall be calculated quarterly based upon the aggregate assets on March 31st,
June 30th, September 30th, and December 31st of each calendar year (or
portion thereof) that the State Street Research Small Company Value Agreement
is effective.
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<PAGE>
ADMINISTRATIVE SERVICES
The Fund has entered into an agreement with Minnesota Life under which
Minnesota Life provides accounting, legal and other administrative services
to the Fund. Minnesota Life currently provides such services at a monthly
cost of $3,900 per Portfolio, except for International Stock Portfolio,
Global Bond Portfolio and Macro-Cap Value Portfolio which pay $2,800 per
Portfolio. During each of the last three calendar years, the amounts paid by
each Portfolio to Minnesota Life for these services were as follows:
<TABLE>
<CAPTION>
Portfolio 1999 1998 1997
--------- ---- ---- ----
<S> <C> <C> <C>
Growth $45,400 $30,000 $29,600
Bond 45,400 30,000 29,600
Money Market 45,400 30,000 29,600
Asset Allocation 45,400 30,000 29,600
Mortgage Securities 45,400 30,000 29,600
Index 500 45,400 30,000 29,600
Capital Appreciation 45,400 30,000 29,600
International Stock 33,300 30,000 29,600
Small Company Growth 45,400 30,000 29,600
Maturing Government Bond -
2002 Portfolio 45,400 30,000 29,600
2006 Portfolio 45,400 30,000 29,600
2010 Portfolio 45,400 30,000 29,600
Value Stock 45,400 30,000 29,600
Small Company Value 45,400 30,000 8,750
Global Bond 33,300 30,000 8,750
Index 400 Mid-Cap 45,400 30,000 8,750
Macro-Cap Value 33,300 30,000 7,500
Micro-Cap Growth 45,400 30,000 8,750
Real Estate Securities 45,400 20,000 N/A
</TABLE>
The Fund has also entered into a separate agreement with SEI Investments
Mutual Fund Services (SEI) pursuant to which SEI provides daily accounting
services for International Stock Portfolio, Global Bond Portfolio and
Macro-Cap Value Portfolio. Minnesota Life, pursuant to its administrative
services agreement with the Fund, provides these three Portfolios with
financial reporting services and generally oversees SEI's performance of its
services. Under the agreement with SEI, the cost to each Portfolio for SEI's
services is an annual fee equal to the greater of $45,000 or .08% of the
Portfolio's first $150 million of net assets and .05% of its net assets in
excess of $150 million. During the last three calendar years, the amounts
paid by each Portfolio to SEI for these services were as follows:
<TABLE>
<CAPTION>
Portfolio 1999 1998 1997
--------- ---- ---- ----
<S> <C> <C> <C>
International Stock $195,103 $176,673 $149,792
Global Bond 44,649 66,208 14,000
Macro-Cap Value 46,021 61,031 11,250
</TABLE>
62
<PAGE>
CODE OF ETHICS
Advantus Capital, Ascend Financial and the Fund, together with each of
the Fund's sub-advisers, has each adopted a Code of Ethics in accordance with
the Investment Company Act of 1940 and the rules and regulations thereunder.
The private investment activities of personnel covered by the Code of Ethics
are restricted in accordance with the Code's provisions, but, subject to such
provisions, personnel may invest in securities including securities that may be
purchased or held by the Fund.
DISTRIBUTION AGREEMENT
Ascend Financial Services, Inc. ("Ascend Financial") acts as the
underwriter of the Funds' shares, pursuant to a written agreement. The Board
of Directors of the Fund, including a majority of the directors who are not
parties to the contract, or interested persons of any such party, approved
the Fund's Underwriting and Distribution Agreement dated May 1, 2000 with
Ascend Financial (the "Distribution Agreement") on February 10, 2000. Under
the Distribution Agreement, Ascend Financial does not receive any compensation
for its services as principal underwriter for the Fund, except for certain fees
paid pursuant to the Fund's Rule 12b-1 Plan of Distribution. See "Payment of
Certain Distribution Expenses of the Fund," below.
The Distribution Agreement may be terminated by the Fund or Ascend
Financial at any time by the giving of 60 days' written notice, and terminates
automatically in the event of its assignment. Unless sooner terminated, the
Distribution Agreement shall continue in effect for more than two years after
its execution only so long as such continuance is specifically approved at least
annually by either the Board of Directors of the Fund or by a vote of a majority
of the outstanding voting securities, provided that in either event such
continuance is also approved by the vote of a majority of the directors who are
not parties to the Distribution Agreement, or interested persons of such
parties, cast in person at a meeting called for the purpose of voting on such
approval.
In the Distribution Agreement Ascend Financial undertakes to indemnify the
Fund against all costs of litigation and other legal proceedings, and against
any liability incurred by or imposed upon the Fund in any way arising out of or
in connection with the sale or distribution of the Fund's shares, except to the
extent that such liability is the result of information which was obtainable by
Ascend Financial only from persons affiliated with the Fund but not with Ascend
Financial.
PAYMENT OF CERTAIN DISTRIBUTION EXPENSES OF THE FUND
The Fund has adopted a Plan of Distribution (the "Plan") relating to the
payment of certain distribution and/or shareholder servicing expenses pursuant
to Rule 12b-1 under the Investment Company Act of 1940. Under the Plan, each
Portfolio of the Fund, with the exception of the Maturing Government Bond
Portfolio 2002, the Maturing Government Bond Portfolio 2006 and the Maturing
Government Bond Portfolio 2010 (each of which is not part of the Plan), pays a
fee to Ascend Financial, or to life insurance companies ("Insurance Companies")
whose variable insurance contracts ("Variable Contracts") offer shares of the
Fund,
63
<PAGE>
which, on an annual basis, is equal to .25% of each Portfolio's average daily
net assets, and is to be used to pay certain expenses incurred in connection
with servicing shareholder accounts and to promote the distribution of the
Fund's shares.
The distribution fees may be used by Ascend Financial for the purpose of
financing any activity, which is primarily intended to result in the sale of
shares of the Fund or Variable Contracts offering such shares.
Distribution-related payments made under the Plan may be used for, among other
things, the printing of prospectuses and reports used for sales purposes,
preparing and distributing sales literature and related expenses,
advertisements, education of Variable Contract owners or dealers and their
representatives, trail commissions, and other distribution-related expenses,
including a prorated portion of the overhead expenses of the Distributor or the
Insurance Companies which are attributable to the distribution of the Variable
Contracts. Payments under the Plan may also be used to pay Insurance Companies,
dealers or others for non-distribution services, including, among other things,
responding to inquiries from owners of Variable Contracts regarding the Fund,
printing and mailing Fund prospectuses and other shareholder communications to
existing Variable Contract owners, direct communications with Variable Contract
owners regarding Fund operations and Portfolio composition and performance,
furnishing personal services or such other enhanced services as the Fund or a
Variable Contract owner may require, or maintaining customer accounts and
records.
In addition, the Plan contains, among other things, provisions complying
with the requirements of Rule 12b-1 discussed below. In particular, the Plan
provides that (1) the Plan will not take effect until it has been approved by a
vote of a majority of the outstanding voting securities of the Portfolios of the
Fund covered by the Plan, except for the voting securities attributable to the
Maturing Government Bond Portfolio 2002, the Maturing Government Bond Portfolio
2006 and the Maturing Government Bond Portfolio 2010 (each of which is not part
of the Plan), and by a majority vote of both the full Board of Directors of the
Fund and those directors who are not interested persons of the Fund and who have
no direct or indirect financial interest in the operation of the Plan or in any
agreements relating to it (the Independent Directors), (2) the Plan will
continue in effect from one year to another so long as its continuance is
specifically approved annually by a majority vote of both the full Board of
Directors and the Independent Directors, (3) the Plan may be terminated at any
time, without penalty, by vote of a majority of the Independent Directors or by
a vote of a majority of the outstanding voting securities of the Fund, (4) the
Plan may not be amended to increase materially the amount of the fees payable
thereunder unless the amendment is approved by a vote of a majority of the
outstanding voting securities of the Fund, and all material amendments must be
approved by a majority vote of both the full Board of Directors and the
Independent Directors, (5) while the Plan is in effect, the selection and
nomination of any new Independent Directors is committed to the discretion of
the Independent Directors then in office, and (6) the Fund's underwriter, the
Insurance Companies or others will prepare and furnish to the Board of
Directors, and the Board of Directors will review, at least quarterly, written
reports which set forth the amounts expended under the Plan and the purposes for
which those expenditures were made.
Rule 12b-1(b) provides that any payments made by an investment company in
connection with the distribution of its shares may only be made pursuant to a
written plan describing all material aspects of the proposed financing of
distribution and also requires that all agreements with any person relating to
implementation of the plan must be in writing. In addition, Rule 12b-1(b)(2)
requires that such plan, together with any related agreements, be approved by a
vote of
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<PAGE>
the Board of Directors and of the directors who are not interested persons of
the investment company and have no direct or indirect financial interest in the
operation of the plan or in any agreements related to the plan, cast in person
at a meeting called for the purpose of voting on such plan or agreements. Rule
12b-1(b)(3) requires that the plan or agreement provide, in substance: (1) that
it shall continue in effect for a period of more than one year from the date of
its execution or adoption only so long as such continuance is specifically
approved at least annually in the manner described in paragraph (b)(2) of Rule
12b-1; (2) that any person authorized to direct the disposition of monies paid
or payable by the investment company pursuant to the plan or any related
agreement shall provide to the investment company's Board of Directors, and the
directors shall review, at least quarterly, a written report of the amounts so
expended and the purposes for which such expenditures were made; and (3) in the
case of a plan, that it may be terminated at any time by vote of a majority of
the members of the Board of Directors of the investment company who are not
interested persons of the investment company and have no direct or indirect
financial interest in the operation of the plan or in any agreements related to
the plan or by vote of a majority of the outstanding voting securities of the
investment company. Rule 12b-1(b)(4) requires that such plans may not be amended
to increase materially the amount to be spent for distribution without
shareholder approval and that all material amendments of the plan must be
approved in the manner described in paragraph (b)(2) of Rule 12b-1. Rule
12b-1(c) provides that the investment company may rely upon Rule 12b-1(b) only
if selection and nomination of the investment company's disinterested directors
are committed to the discretion of such disinterested directors. Rule 12b-1(e)
provides that the investment company may implement or continue a plan pursuant
to Rule 12b-1(b) only if the directors who vote to approve such implementation
or continuation conclude, in the exercise of reasonable business judgment and in
light of their fiduciary duties under state law, and under Sections 36(a) and
(b) of the Investment Company Act of 1940, that there is a reasonable likelihood
that the plan will benefit the investment company and its shareholders. At the
Board of Directors meeting held February 10, 2000, the Board of Directors of the
Fund so concluded.
The Plan of Distribution could be construed as "compensation plans" because
Ascend Financial is paid a fixed fee and is given discretion concerning what
expenses are payable under the Plan of Distribution. Under a compensation plan,
the fee to the distributor is not directly tied to distribution expenses
actually incurred by the distributor, thereby permitting the distributor to
receive a profit if amounts received exceed expenses. Ascend Financial may spend
more or less for the distribution and promotion of the Fund's shares than it
receives as distribution fees pursuant to the Plan of Distribution for the
Portfolios covered by the Plan. However, to the extent fees received exceed
expenses, including indirect expense such as overhead, Ascend Financial could be
said to have received a profit.
In accordance with the Plan of Distribution, Ascend Financial has entered
into a Fund Shareholder Services Agreement with Minnesota Life Insurance Company
(Minnesota Life), dated May 1, 2000. This Agreement provides that Minnesota Life
will provide to the Fund, on behalf of Ascend Financial, distribution and
non-distribution related services, of the type described above. Ascend Financial
agrees to pay Minnesota Life an amount equal, on an annual basis, to 0.25% of
the average combined daily net assets of all the designated Portfolios of the
Fund which are attributable to the Variable Contracts and are a part of the Plan
of Distribution. This Agreement was approved by a vote of the Board of
Directors, including a majority of the Independent Directors, on February 10,
2000.
65
<PAGE>
CUSTODIANS
The assets of each Portfolio of the Fund are held in custody by an independent
custodian pursuant to a custodian agreement approved by the Fund's Board of
Directors.
Norwest Bank Minnesota, N.A., Sixth Street and Marquette Avenue,
Minneapolis, Minnesota 55479, is the custodian for the Money Market, Growth,
Asset Allocation, Index 500, Capital Appreciation, Small Company Growth,
Value Stock, Small Company Value, Index 400 Mid-Cap, Macro-Cap Value,
Micro-Cap Growth and Real Estate Securities Portfolios.
Bankers Trust Company, 280 Park Avenue, New York, New York 10017, is the
custodian for the Bond, Mortgage, Maturing Government Bond, International
Stock and Global Bond Portfolios.
INDEPENDENT AUDITORS
KPMG LLP, 90 South Seventh Street, Minneapolis, Minnesota 55402, acts as
the Fund's independent auditors, providing audit services including audits of
the Fund's annual financial statements and assistance and consultation in
connection with SEC filings.
GENERAL COUNSEL
The Fund's independent general counsel is Dorsey & Whitney LLP.
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
66
<PAGE>
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.
During the fiscal years ended December 31, 1999, 1998 and 1997, brokerage
commissions paid were:
<TABLE>
<CAPTION>
Brokerage Commissions Paid
--------------------------------------------
Portfolio 1999 1998 1997
--------- ---- ---- ----
<S> <C> <C> <C>
Growth Portfolio $642,621 $538,168 $707,244
Bond Portfolio -- -- --
Money Market Portfolio -- -- --
Asset Allocation Portfolio 836,927 650,690 412,404
Mortgage Securities Portfolio -- -- --
Index 500 Portfolio 186,851 150,419 92,649
Capital Appreciation Portfolio 500,124 356,002 342,165
International Stock Portfolio 298,978 256,337 163,231
Small Company Growth Portfolio 238,273 217,936 168,318
Maturing Government Bond -
2002 Portfolio -- -- --
2006 Portfolio -- -- --
2010 Portfolio -- -- --
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<PAGE>
Value Stock Portfolio 620,615 488,264 494,532
Small Company Value Portfolio 35,368 19,653 5,739
Global Bond Portfolio -- -- --
Index 400 Mid-Cap Portfolio 31,118 12,882 3,192
Macro-Cap Value Portfolio 25,056 20,044 5,661
Micro-Cap Growth Portfolio 6,993 6,288 7,115
Real Estate Securities Portfolio 31,384 24,017 --
</TABLE>
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 Life 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, 1999, 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>
Morgan Stanley Dean Witter $17,910,000
Prudential Home Mortgage 14,210,000
GE Capital Corporation 10,611,000
Bear Stearns Mortgage, Inc. 4,498,000
Merrill Lynch & Company, Inc. 2,814,000
Paine Webber 2,328,000
Charles Schwab Corp. 1,662,000
Lehman Structured Securities 1,398,000
Lehman Brothers, Inc. 538,000
The Goldman Sachs Group, Inc. 235,000
Investment Technology Group, Inc. 43,000
</TABLE>
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<PAGE>
SUB-ADVISERS
Except as indicated below, each of the investment 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 Life, and
to certain of its life insurance affiliates, in connection with its variable
life insurance policies and variable annuity contracts. Ascend Financial
serves as the Fund's 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.
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FUND SHARES AND VOTING RIGHTS
The authorized capital of the Fund consists of one trillion shares of
capital stock 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.
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 of 1940 (as
amended) 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. 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
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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). The net asset value per share of each Portfolio is computed by
adding the sum of the value of the securities held by 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 of 1%, and the taking of such remedial action by the Board
as it deems appropriate
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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.
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 Life 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 current yield and effective yield of the Money Market Portfolio
for the seven-day period ended December 31, 1999 were 5.20% and 5.34%,
respectively.
CURRENT YIELD FIGURES FOR OTHER PORTFOLIOS
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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 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. The yield figures published by
the Fund will reflect Minnesota Life's voluntary absorption of certain Fund
expenses (as previously discussed in "Investment Advisory and Other Services
- -- Investment Advisory Agreement" above). For the 30-day period ended
December 31, 1999, the yields of the Portfolios are shown in the table below.
The figures in parentheses show what the yield would have been had Minnesota
Life not absorbed Fund expenses as described above.
<TABLE>
<CAPTION>
Portfolio Yield
--------- -----
<S> <C> <C>
Growth Portfolio -.12% (-.12%)
Bond Portfolio 6.34 (6.34)
Money Market Portfolio N/A N/A
Asset Allocation Portfolio 1.98 (1.98)
Mortgage Securities Portfolio 7.20 (7.20)
Index 500 Portfolio .74 (.74)
Capital Appreciation Portfolio -.69 (-.69)
International Stock Portfolio .18 (.18)
Small Company Growth Portfolio -.69 (-.69)
Maturing Government Bond -
2002 Portfolio 6.47 (6.10)
2006 Portfolio 6.70 (6.11)
2010 Portfolio 6.68 (5.92)
Value Stock Portfolio .82 (.82)
Small Company Value Portfolio .90 (.49)
Global Bond Portfolio 7.45 (7.45)
Index 400 Mid-Cap Portfolio .54 (.42)
Macro-Cap Value Portfolio .63 (.63)
Micro-Cap Growth Portfolio -.88 (.88)
Real Estate Securities Portfolio 4.79 (3.97)
</TABLE>
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 Life's voluntary absorption of certain Fund expenses (as previously
discussed in "Investment Advisory and Other Services--Investment Advisory
Agreement" above). The cumulative total returns for the Portfolios for the
specified
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<PAGE>
periods ended December 31, 1999 are shown in the table below. The figures in
parentheses show what the cumulative total returns would have been had Minnesota
Life not absorbed Fund expenses as described above.
<TABLE>
<CAPTION>
From Inception Date of
To 12/31/99 Inception
----------- ---------
<S> <C> <C> <C>
Growth Portfolio 660.51 (651.29) 12/3/85
Bond Portfolio 181.38 (178.82) 12/3/85
Money Market Portfolio 106.72 (100.18) 12/3/85
Asset Allocation Portfolio 425.56 (424.24) 12/3/85
Mortgage Securities Portfolio 167.52 (166.58) 5/1/87
Index 500 Portfolio 561.42 (559.27) 5/1/87
Capital Appreciation Portfolio 568.89 (559.46) 5/1/87
International Stock Portfolio 165.70 (165.52) 5/1/92
Small Company Growth Portfolio 178.31 (178.31) 5/3/93
Maturing Government Bond -
2002 Portfolio 50.94 (44.38) 5/2/94
2006 Portfolio 58.25 (49.44) 5/2/94
2010 Portfolio 62.09 (49.20) 5/2/94
Value Stock Portfolio 125.20 (124.54) 5/2/94
Small Company Value Portfolio -7.54 (-8.70) 10/1/97
Global Bond Portfolio 7.19 (7.19) 10/1/97
Index 400 Mid-Cap Portfolio 35.39 (34.24) 10/1/97
Macro-Cap Value Portfolio 28.31 (25.84) 10/15/97
Micro-Cap Growth Portfolio 144.93 (143.74) 10/1/97
Real Estate Securities Portfolio -18.21 (-19.80) 5/1/98
</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 Life's voluntary absorption of certain Fund expenses (as discussed in
"Investment Advisory and Other Services--Investment Advisory Agreement" above).
The average annual rates of return for the Portfolios for the specified
periods ended December 31, 1999 are shown in the table below. The figures in
parentheses show what the
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<PAGE>
average annual rates of return would have been had Minnesota Life not absorbed
Fund expenses as described above.
75
<PAGE>
<TABLE>
<CAPTION>
Year Ended Five Years Ten Years From Inception Date of
12/31/99 Ended 12/31/99 Ended 12/31/99 to 12/31/99 Inception
---------------- -------------- -------------- --------------- ---------
<S> <C> <C> <C> <C> <C>
Growth Portfolio 25.67% (25.67%) 26.88% (26.88%) 17.19% (17.19%) 15.49% (15.39%) 12/3/85
Bond Portfolio -2.73 (-2.73) 6.84 (6.84) 7.02 (7.00) 7.62 (7.55) 12/3/85
Money Market Portfolio 4.71 (4.71) 5.03 (5.03) 4.78 (4.70) 5.29 (5.05) 12/3/85
Asset Allocation Portfolio 15.17 (15.17) 18.97 (18.97) 13.61 (13.61) 12.50 (12.48) 12/3/85
Mortgage Securities Portfolio 1.99 (1.99) 8.06 (8.06) 7.73 (7.71) 8.07 (8.04) 5/1/87
Index 500 Portfolio 20.28 (20.28) 27.67 (27.67) 17.56 (17.55) 16.18 (16.15) 5/1/87
Capital Appreciation Portfolio 21.51 (21.51) 24.11 (24.11) 17.11 (17.08) 16.17 (16.04) 5/1/87
International Stock Portfolio 21.43 (21.43) 14.67 (14.67) N/A (N/A) 13.58 (13.57) 5/1/92
Small Company Growth
Portfolio 45.63 (45.63) 17.44 (17.44) N/A (N/A) 16.59 (16.59) 5/3/93
Maturing Government Bond-
2002 Portfolio -.48 (1.00) 8.52 (7.75) N/A (N/A) 7.53 (6.69) 5/2/94
2006 Portfolio -7.81 (-8.64) 9.58 (8.62) N/A (N/A) 8.43 (7.34) 5/2/94
2010 Portfolio -11.54 (-12.45) 10.20 (8.92) N/A (N/A) 8.89 (7.31) 5/2/94
Value Stock Portfolio .27 (.27) 16.57 (16.57) N/A (N/A) 15.39 (15.33) 5/2/94
Small Company Value Portfolio -3.07 (-3.61) N/A (N/A) N/A (N/A) -3.42 (-3.96) 10/1/97
Global Bond Portfolio -7.81 (-7.81) N/A (N/A) N/A (N/A) 3.13 (3.13) 10/1/97
Index 400 Mid-Cap Portfolio 15.96 (15.62) N/A (N/A) N/A (N/A) 14.40 (13.98) 10/1/97
Macro-Cap Value Portfolio 7.17 (6.68) N/A (N/A) N/A (N/A) 11.92 (10.94) 10/15/97
Micro-Cap Growth Portfolio 148.77 (148.45) N/A (N/A) N/A (N/A) 48.85 (48.53) 10/1/97
Real Estate Securities Portfolio -3.89 (-5.18) N/A (N/A) N/A (N/A) -11.33 (-12.37) 5/1/98
</TABLE>
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<PAGE>
Purchasers of variable contracts issued by Minnesota Life 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
(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 Advantus Capital 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:
- - - - - - - AVM = P(l + AGR/2)2T
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<PAGE>
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 Advantus Capital
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.
TAXES
The Fund and each Portfolio qualified for the year ended December 31, 1999,
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
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<PAGE>
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.
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
Maturing Government Bond 2002 Portfolio, Maturing Government Bond 2006
Portfolio, Small Company Value Portfolio, Index 400 Mid-Cap Portfolio,
Macro-Cap Value Portfolio, Micro-Cap Growth Portfolio, Global Bond Portfolio
and Real Estate Securities Portfolio 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 Life and the separate
accounts of Minnesota Life, 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.
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 500-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 S&P 500 Index or the S&P
MidCap 400 Index 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 MidCap 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 MidCap 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 MIDCAP 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 MIDCAP 400 INDEX OR ANY DATA INCLUDED
THERIN. S&P MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIMS
ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OF USE
WITH RESPECT TO THE S&P 500 INDEX, THE S&P MIDCAP 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
FINANCIAL STATEMENTS
The Fund's financial statements for the year ended December 31, 1999,
including the financial highlights for each of the respective periods
presented, appearing in the Fund's Annual Report to Shareholders, and the
report thereon of the Fund's independent auditors, KPMG LLP, also appearing
therein, are incorporated by reference in this Statement of Additional
Information.
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APPENDIX A
MORTGAGE-RELATED SECURITIES
Mortgage-related securities represent an ownership interest in a pool of
residential mortgage loans. These securities are designed to provide monthly
payments of interest and principal to the investor. The mortgagor's monthly
payments to his lending institution are "passed-through" to investors such as
the Fund. Most insurers or services provide guarantees of payments, regardless
of whether or not the mortgagor actually makes the payment. The guarantees made
by issuers or servicers are backed by various forms of credit, insurance and
collateral.
UNDERLYING MORTGAGES
Pools consist of whole mortgage loans or participations in loans. The
majority of these loans are made to purchasers of 1-4 family homes. Some of
these loans are made to purchasers of mobile homes. The terms and
characteristics of the mortgage instruments are generally uniform within a pool
buy may vary among pools. For example, in addition to fixed-rate fixed-term
mortgages, the fund may purchase pools of variable rate mortgages, growing
equity mortgages, graduated payment mortgages and other types.
All servicers apply standards for qualification to local lending
institutions which originate mortgages for the pools. Servicers also establish
credit standards and underwriting criteria for individual mortgages included in
the pools. In addition, many mortgages included in pools are insured through
private mortgage insurance companies.
LIQUIDITY AND MARKETABILITY
Since the inception of the mortgage-related pass-through security in 1970,
the market for these securities has expanded considerably. The size of the
primary issuance market and active participation in the secondary market by
securities dealers and many types of investors makes government and
government-related pass-through pools highly liquid. The recently introduced
private conventional pools of mortgages (pooled by commercial banks, savings and
loans institutions and others, with no relationship with government and
government-related entities) have also achieved broad market acceptance and
consequently an active secondary market has emerged. However, the market for
conventional pools is smaller and less liquid than the market for the government
and government-related mortgage pools. The Fund may purchase some
mortgage-related securities through private placements, in which case only a
limited secondary market exists, and the security is considered illiquid.
AVERAGE LIFE
The average life of pass-through pools varies with the maturities of the
underlying mortgage instruments. In addition, a pool's term may be shortened by
unscheduled or early payments of principal and interest on the underlying
mortgages. The occurrence of mortgage prepayments is affected by factors
including the level of interest rates, general economic conditions, the location
and age of the mortgage and other social and demographic conditions.
A-1
<PAGE>
As prepayment rates of individual pools vary widely, it is not possible to
accurately predict the average life of a particular pool. For pools of
fixed-rate 30-year mortgages, common industry practice is to assume that
prepayments will result in a 12-year average life. Pools of mortgages with
other maturities or different characteristics will have varying assumptions for
average life. The assumed average life of pools of mortgages having terms of
less than 30 years is less than 12 years, but typically not less than 5 years.
YIELD CALCULATIONS
Yields on pass-through securities are typically quoted by investment
dealers and vendors based on the maturity of the underlying instruments and the
associated average life assumption. In periods of falling interest rates the
rate of prepayment tends to increase, thereby shortening the actual average life
of a pool of mortgage-related securities. Conversely, in periods of rising
rates and the rate of prepayment tends to decrease, thereby lengthening the
actual average life of the pool. Historically, actual average life has been
consistent with the 12-year assumption referred to above.
Actual prepayment experience may cause the yield to differ from the assumed
average life yield. Reinvestment of prepayments may occur at higher or lower
interest rates than the original investment, thus affecting the yield of the
Fund. The compounding effect from reinvestments of monthly payments received by
the Fund will increase the yield to shareholders compared to bonds that pay
interest semi-annually.
A-2
<PAGE>
APPENDIX B
BOND AND COMMERCIAL PAPER RATINGS
BOND RATINGS
Moody's Investors Service, Inc. describes its six highest ratings for corporate
bonds and mortgage-related securities as follows:
Bonds which are rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt edge."
Interest payments are protected by a large or by an exceptionally stable margin
and principal is secure. While the various protective elements are likely to
change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long term risks appear somewhat larger than in Aaa securities.
Bonds which are rated A possess many favorable investment attributes and are to
be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment some time in the future.
Bonds which are rated Baa are considered medium grade obligations, i.e., they
are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Bonds which are rated Ba are judged to have speculative elements; their future
cannot be considered as well-assured. Often the protection of interest and
principal payments may be very moderate, and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of position characterizes
bonds in this class.
Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Moody's Investors Service, Inc. also applies numerical modifiers, 1, 2, and 3,
in each of these generic rating classifications. The modifier 1 indicates that
the security ranks in the higher end of its generic rating category; the
modifier 2 indicates a mid-range ranking; and the modifier 3 indicates that the
issue ranks in the lower end of its generic rating category.
B-1
<PAGE>
Standard & Poor's Corporation describes its six highest ratings for corporate
bonds and mortgage-related securities as follows:
AAA. Debt rated "AAA" has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA. Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in small degree.
A. Debt rated "A" has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB. Debt rated "BBB" is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB. Debt rated "BB" has less near-term vulnerability to default than other
speculative grade debt. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions that could lead
to inadequate capacity to meet timely interest and principal payments.
B. Debt rated "B" has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The "B" rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied "BB" or "BB-"
rating.
Standard & Poor's Corporation applies indicators "+", no character, and "-" to
the above rating categories. The indicators show relative standing within the
major rating categories.
COMMERCIAL PAPER RATINGS
The rating Prime-1 is the highest commercial paper rating assigned by Moody's
Investors Service, Inc. Among the factors considered by Moody's Investors
Service, Inc. in assigning the ratings are the following: (1) evaluation of the
management of the issuer, (2) economic evaluation of the issuer's industry or
industries and an appraisal of speculative-type risks which may be inherent in
certain areas; (3) evaluation of the issuer's products in relation to
competition and customer acceptance; (4) liquidity; (5) amount and quality of
long-term debt; (6) trend of earnings over a period of ten years; (7) financial
strength of a parent company and the relationships which exist with the issuer;
an (8) recognition by the management of obligations which may be present or may
arise as a result of public interest questions and preparations to meet such
obligations.
The rating A-1 is the highest rating assigned by Standard & Poor's Corporation
to commercial paper which is considered by Standard & Poor's Corporation to have
the following characteristics:
B-2
<PAGE>
Liquidity ratios of the issuer are adequate to meet cash redemptions. Long-term
senior debt is rated "A" or better. The issuer has access to at least two
additional channels of borrowing. Basic earnings and cash flow have an upward
trend with allowance made for unusual circumstances. Typically, the issuer's
industry is well established and the issuer has a strong position within the
industry. The reliability and quality of management are unquestioned.
B-3
<PAGE>
APPENDIX C
FUTURES CONTRACTS
EXAMPLE OF FUTURES CONTRACT SALE
The Fund would engage in a futures contract sale to maintain the income
advantage from continued holding of a long-term security while endeavoring to
avoid part or all of the loss in market value that would otherwise accompany a
decline in long-term securities prices. Assume that the market value of a
certain security in the Fund's portfolio tends to move in concert with the
futures market prices of long-term United States Treasury bonds ("Treasury
bonds"). The Fund wishes to fix the current market value of this portfolio
security until some point in the future. Assume the portfolio security has a
market value of $100, and the Fund believes that, because of an anticipated rise
in interest rates, the value will decline to $95. The Fund might enter into
futures contract sales of Treasury bonds for a price of $98. If the market
value of the portfolio security does indeed decline from $100 to $95, the
futures market price for the Treasury bonds might also decline from $98 to $93.
In that case, the $5 loss in the market value of the portfolio security
would be offset by the $5 gain realized by closing out the futures contract
sale. Of course, the futures market price of Treasury bonds might decline to
more than $93 or to less than $93 because of the imperfect correlation between
cash and futures prices mentioned above.
The Fund could be wrong in its forecast of interest rates and the futures
market price could rise above $98. In this case, the market value of the
portfolio securities, including the portfolio security being protected, would
increase. The benefit of this increase would be reduced by the loss realized on
closing out the futures contract sale.
If interest rate levels did not change prior to settlement date, the Fund,
in the above example, would incur a loss of $2 if it delivered the portfolio
security on the settlement date (which loss might be reduced by an offsetting
transaction prior to the settlement date). In each transaction, nominal
transaction expenses would also be incurred.
EXAMPLE OF FUTURES CONTRACT PURCHASE
The Fund would engage in a futures contract purchase when it is not fully
invested in long-term securities but wishes to defer for a time the purchase of
long-term securities in light of the availability of advantageous interim
investments, e.g., short-term securities whose yields are greater than those
available on long-term securities. The Fund's basic motivation would be to
maintain for a time the income advantage from investing in the short-term
securities; the Fund would be endeavoring at the same time to eliminate the
effect of all or part of the increases in market price of the long-term
securities that the Fund may purchase.
For example, assume that the market price of a long-term security that the
Fund may purchase, currently yielding 10%, tends to move in concert with futures
market prices of Treasury bonds. The Fund wishes to fix the current market
price (and thus 10% yield) of the
C-1
<PAGE>
long-term security until the time (four months away in this example) when it may
purchase the security.
Assuming the long-term security has a market price of $100, and the Fund
believes that, because of an anticipated fall in interest rates, the price will
have risen to $105 (and the yield will have dropped to about 9-1/2%) in four
months, the Fund might enter into futures contracts purchases of Treasury bonds
for a price of $98. At the same time, the Fund would assign a pool of
investments in short-term securities that are either maturing in four months or
earmarked for sale in four months, for purchase of the long-term security at an
assumed market price of $100. Assume these short-term securities are yielding
15%. If the market price of the long-term bond does indeed rise from $100 to
$105, the futures market price for Treasury bonds might also rise from $98 to
$103. In that case, the $5 increase in the price that the Fund pays for the
long-term security would be offset by the $5 gain realized by closing out the
futures contract purchase.
The Fund could be wrong in its forecast of interest rates; long-term
interest rates might rise to above 10%, and the futures market price could fall
below $98. If short-term rates at the same time fall to 10% or below, it is
possible that the Fund would continue with its purchase program for long-term
securities. The market prices of available long-term securities would have
decreased. The benefit of this price decrease, and thus yield increase, will be
reduced by the loss realized on closing out the futures contract purchase.
If, however, short-term rates remained above available long-term rates, it
is possible that the Fund would discontinue its purchase program for long-term
securities. The yields on short-term securities in the portfolio, including
those originally in the pool assigned to the particular long-term security,
would remain higher than yields on long-term bonds. The benefit of this
continued incremental income will be reduced by the loss realized on closing out
the futures contract purchase.
In each transaction, nominal transaction expenses would also be incurred.
TAX TREATMENT
The amount of any gain or loss realized by the Fund on closing out a
futures contract may result in a capital gain or loss for federal income tax
purposes. Generally, futures contracts held by the Fund at the close of the
Fund's taxable year will be treated for federal income tax purposes as sold for
their fair market value on the last business day of such year. Forty percent of
any gain or loss resulting from such constructive sale will be treated as
short-term capital gain or loss and 60 percent of such gain or loss will be
treated as long-term capital gain or loss. The amount of any capital gain or
loss actually realized by the Fund in a subsequent sale or other disposition of
these futures contracts will be adjusted to reflect any capital gain or loss
taken into account by the Fund in a prior year as a result of the constructive
sale of the contract. Notwithstanding the rules described above, with respect
to futures contracts which are part of futures contract sales, and in certain
other situations, the Fund may make an election which may have the effect of
exempting all or a part of those identified future contracts from being treated
for federal income tax purposes as sold on the last business day of the Fund's
taxable year; all or part of any gain or loss otherwise realized by the Fund on
any closing transaction may be deferred until all of the Fund's positions with
respect to the futures contract sales are closed; and, all or part of any gain
or loss may be treated as short-term capital gain or loss.
C-2
<PAGE>
Under the Federal income tax provisions applicable to regulated investment
companies, at least 90% of the Fund's annual gross income must be derived from
dividends, interest, payments with respect to loans of securities, and gains
from the sale or other disposition of securities ("qualifying income"). Under
the Internal Revenue Code of 1986, as amended (the "Code"), the Fund may include
gains from forward contracts in determining qualifying income. In addition, in
order that the Fund continue to qualify as a regulated investment company for
Federal income tax purposes, less than 30% of its gross income for any year must
be derived from gains realized on the sale or other disposition of securities
held by the Fund for less than three months. For this purpose, the Fund will
treat gains realized on the closing out of futures contracts as gains derived
from the sale of securities. This treatment could, under certain circumstances,
require the Fund to defer the closing out of futures contracts until after three
months from the date the fund acquired the contracts, even if it would be more
advantageous to close out the contracts prior to that time. However, under the
Code, a special rule is provided with respect to certain hedging transactions
which has the effect of allowing the Fund to engage in such short-term
transactions in limited circumstances. Any gains realized by the Fund as a
result of the constructive sales of futures contacts held by the Fund at the end
of its taxable year, as described in the preceding paragraph, will in all
instances be treated as derived from the sale of securities held for three
months or more, regardless of the actual period for which the Fund has held the
futures contracts at the end of the year.
C-3
<PAGE>
APPENDIX D
BRADY BONDS
Brady Bonds are debt securities issued under the framework of the Brady
Plan, an initiative announced by U.S. Treasury Secretary Nicholas F. Brady in
1989 as a mechanism for debtor nations to restructure their outstanding external
indebtedness. The Brady Plan contemplates, among other things, the adoption by
debtor nations of certain economic reforms and the exchange of commercial bank
debt. Under the Brady Plan framework, a debtor nation negotiates with its
existing bank lenders as well as the World Bank and/or the IMF. The World Bank
and/or the IMF support the restructuring by providing funds pursuant to loan
agreements or other arrangements which enable the debtor nation to collateralize
the new Brady Bonds or to replenish reserves used to reduce outstanding bank
debt. Under these loan agreements or other arrangements with the World Bank or
the IMF, debtor nations have been required to agree to the implementation of
certain domestic monetary and fiscal reforms. The Brady Plan only sets forth
general guiding principles for economic reform and debt reduction, emphasizing
that solutions must be negotiated on a case-by-case basis between debtor nations
and their creditors. Brady Bonds have been issued only recently, and
accordingly do not have a long payment history. Agreements implemented under
the Brady Plan to date are designed to achieve debt and debt-service reduction
through specific options negotiated by a debtor nation with its creditors. As a
result, the financial packages offered by each country differ. The types of
options have included the exchange of outstanding commercial bank debt for bonds
issued at 100% of face value of such debt, and bonds bearing an interest rate
which increases over time and the advancement of the new money for bonds. The
principal of certain Brady Bonds has been collateralized by Treasury zero coupon
bonds with a maturity equal to the final maturity of such Brady Bonds.
Collateral purchases are financed by the IMF, the World Bank and the debtor
nations' reserves. In addition, the first two or three interest payments on
certain types of Brady Bonds may be collateralized by cash or securities agreed
upon by creditors.
D-1
<PAGE>
PART C
OTHER INFORMATION
ITEM 23. EXHIBITS
The exhibits to this Registration Statement are listed in the Exhibit
Index hereto and are incorporated herein by reference.
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE DEPOSITOR OR
REGISTRANT
Wholly-owned subsidiary of Minnesota Mutual Companies, Inc.:
Securian Holding Company (Delaware)
Wholly-owned subsidiary of Securian Holding Company:
Securian Financial Group, Inc. (Delaware)
Capitol City Property Management, Inc.
Wholly-owned subsidiary of Securian Financial Group, Inc.
Minnesota Life Insurance Company
HomePlus Insurance Agency, Inc.
Wholly-owned subsidiaries of Minnesota Life Insurance Company:
Advantus Capital Management, Inc.
HomePlus Insurance Company
Northstar Life Insurance Company (New York)
The Ministers Life Insurance Company
Robert Street Energy, Inc.
Personal Finance Company (Delaware)
Enterprise Holding Corporation
Wholly-owned subsidiary of Advantus Capital Management, Inc.:
Ascend Financial Services, Inc.
Wholly-owned subsidiaries of Ascend Financial Services, Inc.:
MIMLIC Insurance Agency of Massachusetts, Inc. (Massachusetts)
MIMLIC Insurance Agency of Texas, Inc. (Texas)
Ascend Insurance Agency of Nevada, Inc. (Nevada)
Ascend Insurance Agency of Oklahoma, Inc. (Oklahoma)
Worthmark Financial Services, LLC (Delaware)
Wholly-owned subsidiaries of Enterprise Holding Corporation:
Financial Ink Corporation
Oakleaf Service Corporationn
Concepts in Marketing Research Corporation
Lafayette Litho, Inc.
DataPlan Securities, Inc. (Ohio)
MIMLIC Imperial Corporation
MIMLIC Funding, Inc.
MCM Funding 1997-1, Inc.
MCM Funding 1998-1, Inc.
<PAGE>
Ministers Life Resources, Inc.
Wedgewood Valley Golf, Inc.
Wholly-owned subsidiary of HomePlus Insurance Agency, Inc.:
HomePlus Insurance Agency of Texas, Inc. (Texas)
Majority-owned subsidiary of Ascend Financial Services, Inc.:
MIMLIC Insurance Agency of Ohio, Inc. (Ohio)
Open-end registered investment company offering shares solely to separate
accounts of Minnesota Life Insurance Company:
Advantus Series Fund, Inc.
Fifty percent-owned subsidiary of MIMLIC Imperial Corporation:
C.R.I. Securities, Inc.
Majority-owned subsidiaries of Minnesota Life Insurance Company:
MIMLIC Life Insurance Company (Arizona)
Advantus Enterprise Fund, Inc.
Advantus International Balanced Fund, Inc.
Advantus Venture Fund, Inc.
Advantus Real Estate Securities Fund, Inc.
Less than majority owned, but greater than 25% owned, subsidiaries of Minnesota
Life Insurance Company:
Advantus Cornerstone Fund, Inc.
Less than 25% owned subsidiaries of Minnesota Life Insurance Company:
Advantus Horizon Fund, Inc.
Advantus Spectrum Fund, Inc.
Advantus Mortgage Securities Fund, Inc.
Advantus Bond Fund, Inc.
Advantus Money Market Fund, Inc.
Advantus Index 500 Fund, Inc.
Unless indicated otherwise parenthetically, each of the above corporations is a
Minnesota corporation.
ITEM 25. 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
<PAGE>
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 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
See "Managing the Portfolios" in the Prospectus and "Investment
Advisory and Other Services" in the Statement of Additional Information for
information regarding the business of the Adviser and each of the
Sub-Advisers. For information as to the business, profession, vocation or
employment of a substantial nature of each director, officer or partner of
the Adviser and each of the Sub-Advisers, reference is made to the respective
Form ADV, as amended, filed under the Investment Advisers Act of 1940, each
of which is herein incorporated by reference.
<PAGE>
ITEM 27. PRINCIPAL UNDERWRITERS
Not applicable.
ITEM 28. 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 Life, 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
by: (a) Norwest Bank Minnesota, N.A., 733 Marquette Avenue, Minneapolis,
Minnesota 55479, as to the Growth, Money Market, Asset Allocation, Index
500, Capital Appreciation, Small Company Growth, Value Stock, Small Company
Value, Index 400 Mid-Cap, Macro-Cap Value, Micro-Cap Growth and Real Estate
Securities Portfolios; and (b) Bankers Trust Company, 280 Park Avenue, New
York, New York 10017, as to the Bond, International Stock, Mortgage
Securities, the three Maturing Government Bond Portfolios and the Global Bond
Portfolios.
ITEM 29. MANAGEMENT SERVICES
Not applicable.
ITEM 30. 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 Securities Act of 1933 and the Investment
Company Act of 1940 the Registrant certifies that it meets all of the
requirements for effectiveness of this 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, thereto duly authorized, in the City of St. Paul
and the State of Minnesota on the 27th day of April, 2000.
ADVANTUS SERIES FUND, INC.
By
----------------------------------
William N. Westhoff, 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.
President (principal April 27, 2000
- ---------------------------- executive officer)
William N. Westhoff and Director
Director and Treasurer April 27, 2000
- ---------------------------- (principal financial
Frederick P. Feuerherm and accounting officer)
Ralph D. Ebbott* Director)
- ---------------------------- ) By_______________________
Ralph D. Ebbott ) William N. Westhoff
) Attorney-in-Fact
Charles E. Arner* Director)
- ---------------------------- ) Dated: April 27, 2000
Charles E. Arner )
)
Ellen S. Berscheid* Director)
- ---------------------------- )
Ellen S. Berscheid
_______________
*Registrant's director executing power of attorney dated October 22, 1998, a
copy of which is filed herewith.
<PAGE>
ADVANTUS SERIES FUND, INC.
EXHIBIT INDEX
Exhibit Number and Description:
(a) Articles of Incorporation - Previously filed as Exhibit
23(a) to Registrant's Form N-1A, File Number 2-96990,
Post-Effective Amendment Number 21, is hereby
incorporated by reference.
(a)(1) Articles of Correction - Previously filed as Exhibit
23(a)(1) to Registrant's Form N-1A, File Number
2-96990, Post-Effective Amendment Number 21, is hereby
incorporated by reference.
(b)(1) 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.
(b)(2) 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.
(b)(3) Amendment to the Bylaws - Previously filed as Exhibit
23(b)(3) to Registrant's Form N-1A, File Number
2-96990, Post-Effective Amendment Number 21, is hereby
incorporated by reference.
(c) Not applicable.
(d)(1) Investment Advisory Agreement between the Registrant and Advantus
Capital Management, Inc. - Previously filed as Exhibit 23(d)(1)
to Registrant's Form N-1A, File Number 2-96990, Post-Effective
Amendment Number 21, is hereby incorporated by reference.
(d)(2) 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.
(d)(3) 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.
(d)(3)(a) Amendment No. 1 to the Investment Sub-Advisory Agreement -
Previously filed as Exhibit 23(d)(3)(a) to Registrant's Form
N-1A, File Number 2-96990, Post-Effective Amendment Number 21, is
hereby incorporated by reference.
(d)(4) 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.
(d)(5) 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-
<PAGE>
Effective Amendment Number 15, is hereby incorporated by
reference.
(d)(6) Investment Sub-Advisory Agreement between Advantus Capital
Management, Inc. and Julius Baer Investment Management Inc. -
Previously filed as Exhibit 24(b)(5)(F), File Number 2-96990,
Post-Effective Amendment Number 18, is hereby incorporated by
reference.
(d)(7) Investment Sub-Advisory Agreement between Advantus Capital
Management, Inc. and Credit Suisse Asset Management, LLC -
Previously filed as Exhibit 23(d)(7) to Registrant's Form N-1A,
File Number 2-96990, Post-Effective Amendment Number 21, is
hereby incorporated by reference.
(d)(8) Investment Sub-Advisory Agreement between Advantus Capital
Management, Inc. and State Street Research & Management Company -
Previously filed as Exhibit 23(d)(8) to Registrant's Form N-1A,
File Number 2-96990, Post-Effective Amendment Number 21, is
hereby incorporated by reference.
(e) Underwriting and Distribution Agreement between the
Fund and Advantus Series Fund, Inc. - Previously filed
as Exhibit 23(e) to Registrant's Form N-1A, File Number
2-96990, Post-Effective Amendment Number 21, is hereby
incorporated by reference.
(f) Not applicable.
(g)(1)(A) Form of Custodian Agreement between the Registrant and Norwest
Bank Minnesota, N.A. - Previously filed as Exhibit 23(g)(1)(A) to
Registrant's Form N-1A, File Number 2-96990, Post-Effective
Amendment Number 21, is hereby incorporated by reference.
(g)(2)(A) 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.
(g)(2)(B) Cash Management Addendum to the Custodian Agreement
between the Registrant and Bankers Trust Company -
Previously filed as Exhibit 23(g)(3)(c) to Registrant's
N-1A, File Number 2-96990, Post-Effective Amendment
Number 20, is hereby incorporated by reference.
(g)(2)(C) Addendum Number Two to the Custodian Agreement between
the Registrant and Bankers Trust Company - Previously
filed as Exhibit 23(g)(3)(C) to Registrant's N-1A, File
Number 2-96990, Post-Effective Amendment Number 20, is
hereby incorporated by reference.
(g)(2)(D) Schedule A, as amended, to the Custodian Agreement -
Previously filed as Exhibit 23(g)(2)(D) to Registrant's
Form N-1A, File Number 2-96990, Post-Effective
Amendment Number 21, is hereby incorporated by
reference.
<PAGE>
(h)(1) 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.
(h)(2) Administrative Service Agreement between MIMLIC Series Fund, Inc.
and The Minnesota Mutual Life Insurance Company - Previously
filed as Exhibit 23(h)(2) to Registrant's Form N-1A, File Number
2-96990, Post-Effective Amendment Number 21, is hereby
incorporated by reference.
(h)(3) Participation Agreement - Previously filed as Exhibit
23(h)(3) to Registrant's Form N-1A, File Number
2-96990, Post-Effective Amendment Number 21, is hereby
incorporated by reference.
(h)(4) Fund Shareholder Service Agreement - Previously filed as Exhibit
23(h)(4) to Registrant's Form N-1A, File Number 2-96990,
Post-Effective Amendment Number 21, is hereby incorporated by
reference.
(i) Opinion and Consent of Dorsey & Whitney LLP.
(j) Consent of KPMG LLP.
(k) Not applicable.
(l) 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.
(m) Rule 12b-1 Distribution Plan - Previously filed as
Exhibit 23(m) to Registrant's Form N-1A, File Number
2-96990, Post-Effective Amendment Number 21, is hereby
incorporated by reference.
(n) Not applicable.
(p) Code of Ethics - Previously filed as Exhibit 23(p) to
Registrant's Form N-1A, File Number 2-96990,
Post-Effective Amendment Number 21, is hereby
incorporated by reference.
(q) Power of Attorney to sign Registration Statement executed by
Directors of Registrant.
<PAGE>
DORSEY & WHITNEY LLP
Advantus Series Fund, Inc.
400 Robert Street North
St. Paul, Minnesota 55101
Dear Sir/Madam:
Reference is made to the Registration Statement on Form N-1A which you
will file with the Securities and Exchange Commission pursuant to the Securities
Act of 1933 for the purpose of the registration for sale by the nineteen
separate portfolios of Advantus Series Fund, Inc. (the "Fund") of an indefinite
number of shares of the Fund's Common Stock, par value $.01 per share.
We are familiar with the proceedings to date with respect to the
proposed sale by the Fund, and have examined such records, documents and matters
of law and have satisfied ourselves as to such matters of fact as we consider
relevant for the purposes of this opinion. We have assumed, with your
concurrence, that no portfolio has issued or will issue shares in excess of the
number authorized in the Fund's articles of incorporation.
We are of the opinion that:
(a) the Fund is a legally organized corporation under Minnesota
law; and
(b) the shares of Common Stock to be sold by the nineteen separate
portfolios of the Fund will be legally issued, fully paid and
nonassessable when issued and sold upon the terms and in the
manner set forth in said Registration Statement of the Fund.
We consent to the reference to this firm under the caption "Service
Providers" in the Prospectus, under the caption "Investment Advisory and Other
Services - General Counsel" in the Statement of Additional Information, and to
the use of this opinion as an exhibit to the Registration Statement.
Dated: April 10, 2000
Very truly yours,
/s/ Dorsey & Whitney LLP
Dorsey & Whitney LLP
MJR
<PAGE>
KPMG LLP
4200 Norwest Center
90 South Seventh Street
Minneapolis, MN 55402
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Advantus Series Fund, Inc.:
We consent to the use of our report dated February 4, 2000 incorporated by
reference herein and the references to our Firm under the headings
"Financial Highlights" and "Service Providers -Independent Auditors" in Part
A and "Independent Auditors" and "Financial Statements" in Part B of the
Registration Statement.
KPMG LLP
Minneapolis, Minnesota
April 27, 2000
<PAGE>
POWER OF ATTORNEY
TO SIGN REGISTRATION STATEMENT
The undersigned, Directors of 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., Advantus Real Estate
Securities Fund, Inc., MIMLIC Cash Fund, Inc., and Advantus Series Fund, Inc.
(the "Funds"), appoint William N. Westhoff, Eric J. Bentley, Donald F. Gruber
and Michael J. Radmer, and each of them individually, as attorney-in-fact for
the purpose of signing in their names and on their behalf as Directors of the
Funds and filing with the Securities and Exchange Commission Registration
Statements on Form N-1A, or any amendments thereto, for the purpose of
registering shares of Common Stock of the Funds for sale by the Funds and to
register the Funds under the Investment Company Act of 1940.
Dated: October 22, 1998 /s/Charles E. Arner
-----------------------------------
Charles E. Arner
/s/Ellen S. Berscheid
-----------------------------------
Ellen S. Berscheid
/s/Ralph D. Ebbott
-----------------------------------
Ralph D. Ebbott
/s/Frederick P. Feuerherm
-----------------------------------
Frederick P. Feuerherm
/s/William N. Westhoff
-----------------------------------
William N. Westhoff
