<PAGE>
REGISTRATION NOs. 333-__________
811-________
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 X
-----
PRE-EFFECTIVE AMENDMENT NO.
-----
POST-EFFECTIVE AMENDMENT NO.
-----
AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY
ACT OF 1940 X
-----
AMENDMENT NO. _____
-----
MASON STREET FUNDS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
720 EAST WISCONSIN AVENUE
MILWAUKEE, WISCONSIN 53202
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(414) 271-1444
(REGISTRANT'S TELEPHONE NUMBER)
JAMES R. EBEN
THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY
LAW DEPARTMENT
720 EAST WISCONSIN AVENUE
MILWAUKEE, WISCONSIN 53202
(NAME AND ADDRESS OF AGENT FOR SERVICE)
COPIES TO:
CATHY G. O'KELLY
VEDDER, PRICE, KAUFMAN & KAMMHOLZ
222 NORTH LASALLE STREET
CHICAGO, ILLINOIS 60601-1003
Approximate Date of Proposed Public Offering: Upon this Registration
Statement being declared effective.
Pursuant to Rule 24f-2 promulgated under the Investment Company Act of 1940,
Registrant hereby elects to register an indefinite number of shares of its
Common Stock, $0.001 par value, by this Registration Statement under the
Securities Act of 1933.
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said section 8(a),
may determine.
<PAGE>
MASON STREET FUNDS, INC.
CROSS REFERENCE SHEET
Cross reference sheet showing location in Prospectus of
information required by the Items in Part A of Form N-1A.
ITEM NUMBER HEADING IN PROSPECTUS
----------- ---------------------
1 Cover Page
2 Summary
3 *
4 The Funds In Detail, Other Information
5 Management Of the Funds
5A *
6 Other Information, Distributions And
Taxes
7 Buying And Selling Fund Shares,
Shareholders Guide
8 Buying And Selling Fund Shares,
Shareholders Guide
9 *
* Indicates inapplicable or negative
<PAGE>
MASON STREET FUNDS
[LOGO]
PROSPECTUS
<PAGE>
MASON STREET FUNDS
720 East Wisconsin Avenue
Milwaukee, Wisconsin 53202
(414) 271-1444
Prospectus dated __________, 1997
This Prospectus offers you nine mutual funds presenting you a wide choice of
investment objectives, including growth of capital, income or a combination of
the two. Each Fund identified below is a series of the Mason Street Funds, Inc.
("MSF"), an open-end management investment company registered with the
Securities and Exchange Commission.
Aggressive Growth Stock Fund
International Equity Fund
Growth Stock Fund
Growth and Income Stock Fund
Index 500 Stock Fund
Asset Allocation Fund
High Yield Bond Fund
Municipal Bond Fund
Select Bond Fund
Northwestern Mutual Investment Services, Inc., a wholly owned subsidiary of The
Northwestern Mutual Life Insurance Company, serves as investment advisor to each
of the Funds, with certain of the Funds also being served by a subadvisor.
This Prospectus contains information about each of the Funds that you should
know before investing and should be kept for future reference. Additional
information about the Funds is contained in a Statement of Additional
Information ("SAI") filed with the SEC. The SAI for the Funds dated __________,
1997, as amended from time to time, is incorporated by reference into this
Prospectus. For a copy of the SAI, write or call at the address or phone number
listed above.
THESE SECURITIES HAVE NOT BEEN APPROVED BY THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH
SUCH OFFERING MAY NOT LAWFULLY BE MADE. NO PERSON IS AUTHORIZED TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS AND IN THE STATEMENT OF ADDITIONAL INFORMATION.
CONTENTS
Page
- --------------------------------------------------------------------------------
SUMMARY
About the Advisors
Funds at a Glance
Risk Comparison
Description of Classes of Shares
Expense Information
PERFORMANCE
THE FUNDS IN DETAIL
Stock Funds
Multi-Asset Fund
Bond Funds
Other Fund Policies and Associated Risks
Investment Restrictions
MANAGEMENT OF THE FUNDS
BUYING AND SELLING FUND SHARES
Investment Minimums
Flexible Sales Charge Program
How Shares are Priced
SHAREHOLDERS GUIDE
How To Buy Shares
How To Exchange Shares
How To Sell Shares
DISTRIBUTIONS AND TAXES
OTHER INFORMATION
APPENDIX A
APPENDIX B
- --------------------------------------------------------------------------------
<PAGE>
SUMMARY
ABOUT THE ADVISORS
Northwestern Mutual Investment Services, Inc. ("NMIS") is the investment
advisor to the Funds. NMIS is a wholly-owned subsidiary of The Northwestern
Mutual Life Insurance Company ("Northwestern Mutual Life"), the sixth largest
life insurance company in the United States, with more than $60 billion in
assets. Founded in 1857, Northwestern Mutual Life is one of the best
established and well respected companies in operation today. Headquartered in
Milwaukee, Wisconsin, Northwestern Mutual Life has developed its reputation by
providing excellence in both financial management and personal service over the
past 140 years. In addition to the Funds, NMIS has been responsible for
directing the investments of the Northwestern Mutual Series Fund, Inc. ("Series
Fund"), which serves as the investment fund for Northwestern Mutual Life's
variable annuity and life insurance contracts.
J.P. Morgan Investment Management, Inc. ("J.P. Morgan") is the subadvisor
for the Growth and Income Stock Fund.
Templeton Investment Counsel, Inc. ("Templeton") is the subadvisor for the
International Equity Fund.
FUNDS AT A GLANCE
This section will give you a brief summary of the Funds and their
investment objectives. Please refer to the detailed description of investment
objectives and policies (beginning at page ___) for those Funds you wish to
purchase. Many of the Funds have the same investment objectives and policies,
and the same portfolio managers, as corresponding Portfolios of the Series Fund
(and their predecessor funds). The investment performance for each of these
Portfolios is shown below based upon the average annual total return for one,
five and ten year periods (or since inception) ending December 31, 1996,
adjusted to reflect the expenses and the maximum sales charges for Class A
shares of the Funds as shown in the Expense Information tables on page __. The
performance of these funds without the deduction of sales charges is shown on
page ___. The investment policies of each of the Series Fund Portfolios are
essentially the same as those of the respective MSF Funds, with the exception of
the Select Bond Fund, which is permitted to invest to a limited extent in
foreign securities and high yield bonds, whereas the Select Bond Portfolio of
the Series Fund is not. NMIS does not believe these differences in investment
policy would cause a material difference in performance. A glossary of terms is
included in Appendix A.
STOCK FUNDS
AGGRESSIVE GROWTH STOCK FUND
OBJECTIVE: To seek long-term growth of capital primarily by investing in the
common stocks of companies that can be expected to increase their sales and
earnings at a pace that will exceed the growth rate of the U.S. economy over an
extended period.
PORTFOLIO: Primarily common stocks of small and medium sized companies.
STRATEGY: To locate and invest in companies with above-average potential for
growth.
FOCUS: To pursue higher returns by accepting a higher risk.
SERIES FUND PERFORMANCE:
1 Year: ___%
5 Years: ___%
Since inception: ___%
(11/30/90)*
* This includes the performance of the predecessor fund that was merged with
the Series Fund on 5/3/94.
INTERNATIONAL EQUITY FUND
OBJECTIVE: To seek long-term growth of capital by investing primarily in stocks
of companies outside the United States.
PORTFOLIO: Primarily common stocks of companies in foreign countries.
STRATEGY: To locate and invest in the under-valued stocks of foreign companies
offering the greatest discounts to their long-term values.
FOCUS: To achieve international diversification and long-term total return.
SUBADVISOR: Templeton
SERIES FUND PERFORMANCE:
1 Year: ___%
Since inception: ___%
(4/30/93)*
* This includes the performance of the predecessor that was merged into the
Series Fund on 5/3/94.
GROWTH STOCK FUND
OBJECTIVE: To seek long-term growth of capital by investing in companies
believed to have above
2
<PAGE>
average earnings growth potential; current income is secondary.
PORTFOLIO: Diversified mix of high-quality growth stocks in medium and large
companies.
STRATEGY: To analyze economic trends to determine their impact on various
sectors and industries. Select high-quality stocks from industries with best
earnings potential.
FOCUS: To achieve attractive total return by investing in stocks with above-
average earnings growth potential.
SERIES FUND PERFORMANCE:
1 Year: ___%
Since inception: ___%
(5/3/94)
GROWTH AND INCOME STOCK FUND
OBJECTIVE: To seek long-term growth of capital and income by investing
primarily in dividend-paying common stocks.
PORTFOLIO: Primarily common stocks of medium and large companies identified as
strong candidates for significant long-term returns.
STRATEGY: To actively manage a portfolio of selected equity securities with a
goal of out-performing the total return of the S&P 500-Registered Trademark-
Index.
FOCUS: To remain fully-invested, during ordinary market conditions, in equity
securities of fundamentally sound companies to maximize long-term total returns.
SUBADVISOR: J.P. Morgan
SERIES FUND PERFORMANCE:
1 Year: ___%
Since inception: ___%
(5/3/94)
INDEX 500 STOCK FUND
OBJECTIVE: To seek investment results that approximate the performance of the
Standard & Poor's 500 Composite Stock Price Index ("S&P 500 Index"), by
investing in stocks included in the S&P 500-Registered Trademark- Index. During
the ten-year period ended December 31, 1996, the S&P 500 Index had an average
annual return of ____%. Because the S&P 500 Index is an unmanaged index, this
return does not reflect the deduction of expenses that would exist with a mutual
fund.
FOCUS: To capture broad market performance, at low cost, by investing in a
portfolio modeled after a broadly based stock index.
MULTI-ASSET FUND
ASSET ALLOCATION FUND
OBJECTIVE: To seek to realize as high a level of total return, including
current income and capital appreciation, as is consistent with reasonable
investment risk. The Fund will follow a flexible policy for allocating assets
among common stocks, bonds and cash.
PORTFOLIO: The normal range of investments is 50-70% stocks, 25-35% bonds and
0-15% cash. Up to 50% of its stock allocation may be invested in foreign
stocks. See "Foreign Securities," p. __.
STRATEGY: To adjust the mix between asset sectors to capitalize on the changing
financial markets and economic conditions.
FOCUS: To achieve diversification and long-term total return.
BOND FUNDS
HIGH YIELD BOND FUND
OBJECTIVE: To seek high current income and capital appreciation by investing
primarily in fixed income securities that are rated below investment grade by
the major rating agencies.
PORTFOLIO: Diversified mix of below investment grade fixed income securities,
commonly known as "junk bonds."
STRATEGY: To identify attractive investment opportunities through rigorous
industry and credit analysis. Generate superior performance by selecting
companies with stable or improving credit fundamentals.
FOCUS: Actively manage to maximize total return within prudent investment risk
parameters.
SERIES FUND PERFORMANCE:
1 Year: ___%
Since inception: ___%
(5/3/94)
MUNICIPAL BOND FUND
OBJECTIVE: To seek a high level of current income exempt from federal income
taxes, consistent with the preservation of capital, by investing primarily in
investment grade municipal obligations.
PORTFOLIO: Diversified investment grade bonds.
STRATEGY: Actively manage the portfolio to take advantage of changes in
interest rates, quality, sector, and maturity of fixed income securities.
FOCUS: To provide a competitive level of federally tax-exempt income and an
attractive total return plus a degree of safety.
SELECT BOND FUND
OBJECTIVE: To seek high income and total return, consistent with preservation
of capital.
3
<PAGE>
PORTFOLIO: Diversified investment-grade corporate, Treasury and government
agency bonds with maturities generally exceeding one year.
STRATEGY: To actively manage the portfolio to take advantage of changes in
interest rates, quality and maturity of fixed income securities.
FOCUS: To provide a stable, high rate of return plus a degree of safety.
SERIES FUND PERFORMANCE:
1 Year: ___%
5 Years: ___%
10 Years: ____%
RISK COMPARISON
You should select the Funds that reflect your special financial goals,
investment time horizon and willingness to accept risk. When you invest in a
Fund, you assume the risks of investing in the types of securities held by the
Fund. Investing in securities involves varying degrees of market or interest
rate risk, credit or financial risk, and prepayment risk. Market or interest
rate risk is the risk that market conditions, including interest rates, will
change and adversely affect the security. With common stock, market risk is the
risk that the value may fluctuate in response to general market and/or economic
conditions. The prices of bonds generally move in the opposite direction from
interest rates. Credit or financial risk is the risk that the issuer of a bond
may fail to pay principal and interest when due or, with stocks, that the
company will have adverse financial experience. Prepayment risk is the risk
that bonds which include the ability on the part of the issuer to prepay the
amount owed, will be prepaid at a time when interest rates have gone down, and
that the cash received can only be reinvested at a lower rate of return.
Certain instruments such as foreign securities, junk bonds and derivatives
present additional special risks. The risks that are specific to certain types
of securities are discussed in greater detail under "The Funds in Detail" on
page __.
Each Fund's net asset value per share (i.e., share price) will fluctuate to
reflect changes in the value of the securities in its portfolio. The value you
may receive upon redemption of a Fund's shares may be higher or lower than their
original cost.
DESCRIPTION OF CLASSES OF SHARES
To provide you with more flexibility, each Fund has adopted a purchase
program that offers you two alternative ways to purchase shares (Class A or
Class B), each with a different combination of sales charges, ongoing fees,
eligibility requirements, and other features. This program is designed to
permit you to choose the method of purchasing shares that you believe is most
beneficial given the amounts of your investment and current holdings of Fund
shares, the length of time you expect to hold your investment, and other
relevant circumstances.
Under the purchase program, Class A shares may be purchased subject to an
initial sales charge. Class B shares are not subject to a sales charge at the
time of purchase but may be subject to a contingent deferred sales charge at the
time they are sold. (Please see Buying and Selling Fund Shares at page ___ for
a description of the specific sales charges or contingent deferred sales charges
which might apply to your purchase.)
EXPENSE INFORMATION
The expense tables and the example below are intended to help you
understand the direct or indirect costs and expenses that you will bear as an
investor in a Fund. Shareholder Transaction Expenses are charged to your
account directly when you buy or sell shares. Annual Fund Operating Expenses
are paid out of a Fund's assets and include fees for advisory services,
distribution services and expenses relating to the maintenance of shareholder
accounts, such as transfer agent, administrative and similar expenses.
4
<PAGE>
SHAREHOLDER TRANSACTION EXPENSES (ALL FUNDS):
Class A Class B
- --------------------------------------------------------------------------------
Maximum Sales Charge on purchases (as 4.75% 0.00%
% of Offering Price) (1)
- --------------------------------------------------------------------------------
Maximum Contingent Deferred Sales 0.00% 4.00% first year
Charge(2) 4.00% second year
3.00% third year
3.00% fourth year
2.00% fifth year
1.00% sixth year
- --------------------------------------------------------------------------------
Redemption fee(3) None None
- --------------------------------------------------------------------------------
Exchange fee None None
- --------------------------------------------------------------------------------
(1) The maximum sales charge is applied only to purchases of less than $50,000.
Larger purchases are subject to lower sales charges. Purchases of $1
million or more incur no sales charge, but may be subject to a contingent
deferred sales charge ("CDSC") if the shares are redeemed within 18 months
of purchase.
(2) The CDSC is computed as a percentage of the redemption proceeds when you
redeem your shares. The maximum CDSC only applies if you sell your shares
during the first year after the purchase of less than $100,000. Larger
purchases of Class B shares may be subject to a reduced CDSC. See
"Contingent Deferred Sales Charge" on page ___.
(3) A wire transfer fee (currently $15) may be imposed on a redemption when
you have the proceeds wire transferred.
ANNUAL FUND OPERATING EXPENSES:(1)
<TABLE>
<CAPTION>
Aggressive Growth and
Growth International Growth Income Index 500
- -------------------------------------------------------------------------------------------------------------------------------
Class A Class B Class A Class B Class A Class B Class A Class B Class A Class B
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Management Fees 0.75% 0.75% 0.85% 0.85% 0.75% 0.75% 0.65% 0.65% 0.30% 0.30%
12b-1 Distribution and Service 0.35% 1.00% 0.35% 1.00% 0.35% 1.00% 0.35% 1.00% 0.35% 1.00%
Fees(2)
Other Expenses (after 0.20% 0.20% 0.45% 0.45% 0.20% 0.20% 0.20% 0.20% 0.20% 0.20%
reimbursement)(3)
Total Operating Expenses (after 1.30% 1.95% 1.65% 2.30% 1.30% 1.95% 1.20% 1.85% 0.85% 1.50%
reimbursement)(3)
- -------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Asset High Yield
Allocation Bond Municipal Bond Select Bond
- -------------------------------------------------------------------------------------------------------------------------------
Class A Class B Class A Class B Class A Class B Class A Class B
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Management Fees 0.70% 0.70% 0.75% 0.75% 0.30% 0.30% 0.30% 0.30%
12b-1 Distribution and 0.35% 1.00% 0.35% 1.00% 0.35% 1.00% 0.35% 1.00%
Service Fees(2)
Other Expenses (after 0.30% 0.30% 0.20% 0.20% 0.20% 0.20% 0.20% 0.20%
reimbursement)(3)
Total Operating Expenses 1.35% 2.00% 1.30% 1.95% 0.85% 1.50% 0.85% 1.50%
(after reimbursement)(3)
</TABLE>
(1) An annual custodial fee of $15 per taxpayer identification number is
charged to investors who maintain IRA accounts, which if not paid by the
investor, may be charged against the assets of the account.
5
<PAGE>
(2) The 12b-1 Distribution and Service Fees include a 0.25% shareholder
servicing fee with a 0.10% distribution fee on Class A shares and a 0.75%
distribution fee on Class B shares. As the result of the accrual of 12b-1
fees, long-term shareholders may pay more than the economic equivalent of
the maximum initial sales charge permitted by the National Association of
Securities Dealers.
(3) NMIS has agreed to waive its management fees and absorb certain other
operating expenses during the first year of operations to the extent
necessary so that Total Operating Expenses will not exceed the amount shown
for each Fund. After the first year of operations, NMIS expects the Funds'
total operating expenses, after reimbursement, not to exceed the amounts
shown.
EXPENSE EXAMPLES
An investor would have paid the following expenses at the end of the period
shown on a $1,000 investment, assuming a 5% annual return and redemption at the
end of each period.
FUND 1 YEAR 3 YEARS
- ---- ------ -------
Class A Class B Class A Class B
Aggressive Growth Stock Fund $60 $70 $87 $91
International Equity Fund $63 $73 $97 $102
Growth Stock Fund $60 $70 $87 $91
Growth and Income Stock Fund $59 $69 $84 $88
Index 500 Stock Fund $56 $65 $73 $77
Asset Allocation Fund $61 $70 $88 $93
High Yield Bond Fund $60 $70 $87 $91
Municipal Bond Fund $56 $65 $73 $77
Select Bond Fund $56 $65 $73 $77
Using the same assumptions as for the first table but assuming that you did
not redeem your shares at the end of each period, you would bear the following
expenses:
FUND 1 YEAR 3 YEARS
- ---- ------ -------
Class A Class B Class A Class B
Aggressive Growth Stock Fund $60 $20 $87 $61
International Equity Fund $63 $23 $97 $72
Growth Stock Fund $60 $20 $87 $61
Growth and Income Stock Fund $59 $19 $84 $58
Index 500 Stock Fund $56 $15 $73 $47
Asset Allocation Fund $61 $20 $88 $63
High Yield Bond Fund $60 $20 $87 $61
Municipal Bond Fund $56 $15 $73 $47
Select Bond Fund $56 $15 $73 $47
THE EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE RETURNS
OR EXPENSES WHICH MAY BE MORE OR LESS THAN THOSE SHOWN. The example assumes a
5% annual rate of return pursuant to requirements of the Securities and Exchange
Commission.
PERFORMANCE
The performance of the Funds is generally measured in terms of TOTAL
RETURN. In addition, the Bond Funds may measure YIELD as well. Our newsletters
and advertisements may include comparisons of a Fund's performance to the
performance of other mutual funds, mutual fund averages or recognized indices.
PERFORMANCE TERMS
CUMULATIVE TOTAL RETURN represents the actual return on an investment for a
specified period without any deduction of a sales charge. Cumulative total
return is generally quoted for more than one year (e.g., the life of the Fund).
A cumulative total return does not show interim fluctuations in the value of an
investment
AVERAGE ANNUAL TOTAL RETURN represents the average annual percentage change of
an investment over a specified period, after the deduction of the maximum
applicable sales charge. It is calculated by taking the cumulative total return
for the stated period (less the sales charge) and determining what constant
annual return would have produced the same cumulative return. Average annual
returns for more than one year tend to smooth out variations in a Fund's return
and are not the same as actual annual results.
YIELD shows the rate of income a Fund earns on its investments as a percentage
of the Fund's share price. It is calculated by dividing
6
<PAGE>
a Fund's net investment income for a 30-day period by the average number of
shares entitled to receive dividends, annualizing this number, and dividing the
result by the Fund's NAV per share at the end of the 30-day period. Yield does
not include changes in NAV.
Yields are calculated according to standardized SEC formulas and may not equal
the income on an investor's account. Yield is usually quoted on an annualized
basis. An annualized yield represents the amount you would earn if you remained
in a Fund for a year and that Fund continued to have the same net investment
income for the entire year.
DISTRIBUTION RATE is a measure of the level of income dividends and may include
short-term capital gains distributed for a specific period. A distribution rate
is not a complete mirror of performance, and may be higher than yield for
certain periods.
TAX-EQUIVALENT YIELD. For the Municipal Bond Fund, tax-equivalent yield shows
the before-tax yield that an investor would have to earn to equal the Fund's
tax-free yield. It is calculated by dividing a Fund's tax-free yield by the
result of one minus a stated federal tax rate.
FUND PERFORMANCE FIGURES ARE BASED UPON HISTORICAL RESULTS AND ARE NOT INTENDED
TO INDICATE FUTURE PERFORMANCE. INVESTMENT RETURNS AND NET ASSET VALUE WILL
FLUCTUATE SO THAT YOUR SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN
THEIR ORIGINAL COST.
<TABLE>
<CAPTION>
The table below sets forth each Fund, and its
corresponding Series Fund Portfolio, its inception date ASSUMING CLASS A SHARE TOTAL FUND OPERATING EXPENSES AND THE MAXIMUM
and asset size as of December 31, 1996: INITIAL SALES CHARGE APPLICABLE TO CLASS A SHARES.
10 Years
Corresponding Portfolio Portfolio or Since
Fund (Inception Date and Asset Size) (Inception Date) 1 Year 3 Years 5 Years Inception
- ---- ------------------------------- ---------------- ------ ------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Aggressive Growth Aggressive Growth Stock Aggressive Growth Stock
Stock (November 30, 1990*) (November 30, 1990*)
$_______________
International Equity International Equity International Equity
(April 30, 1993*) (April 30, 1993*)
$______________
Growth Stock Growth Stock Growth Stock
(May 3, 1994) (May 3, 1994)
$___________
Growth and Income Growth and Income Stock Growthand Income Stock
Stock (May 3, 1994) (May 3, 1994)
$___________
High Yield Bond High Yield Bond High Yield Bond
(May 3, 1994) (May 3, 1994)
$___________
Select Bond Select Bond Select Bond
(June 26, 1984) (June 26, 1984)
$___________
<CAPTION>
ASSUMING CLASS A SHARE TOTAL FUND OPERATING EXPENSES WITH NO INITIAL
SALES CHARGE.
<S> <C>
The following four tables show the average annualized Aggressive Growth Stock
total returns for the Series Fund Portfolios and (November 30, 1990*)
predecessor funds for the one, three, five and International Equity
ten year (or life of the Portfolio, if shorter) periods (April 30, 1993*)
ended December 31, 1996. These figures are based on the Growth Stock
actual gross investment performance of the Portfolios. (May 3, 1994)
From the gross investment performance figures, the Growth and Income Stock
maximum Total Fund Operating Expenses reflected in the (May 3, 1994)
fee table on
7
<PAGE>
page __ are deducted to arrive at the net return. The High Yield Bond
first table for each Class shown reflects a deduction (May 3, 1994)
for the maximum applicable sales charge, while the Select Bond
second table for each Class shown reflects no deduction (June 26, 1984)
for sales charges. Performance figures will be lower
when sales charges are taken into effect.
* Includes performance of predecessor fund that was merged into the
Series Fund on May 3, 1994
<CAPTION>
ASSUMING CLASS B SHARE TOTAL FUND OPERATING EXPENSES AND ASSUMING CLASS B SHARE TOTAL FUND OPERATING EXPENSES AND NO
REDEMPTION AT THE END OF THE APPLICABLE TIME PERIOD. REDEMPTION AT THE END OF THE APPLICABLE TIME PERIOD.
10 Years 10 Years
Portfolio or Since Portfolio or Since
(Inception Date) 1 Year 3 Years 5 Years Inception (Inception Date) 1 Year 3 Years 5 Years Inception
- ---------------- ------ ------- ------- --------- ---------------- ------ ------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Aggressive Growth Aggressive Growth
Stock Stock
November 30, 1990* November 30, 1990*
International Equity International Equity
April 30, 1993* April 30, 1993*
Growth Stock Growth Stock
May 3, 1994 May 3, 1994
Growth and Income Growth and Income
Stock Stock
May 3, 1994 May 3, 1994
High Yield Bond High Yield Bond
May 3, 1994 May 3, 1994
Select Bond Select Bond
June 26, 1984 June 26, 1984
</TABLE>
* Includes performance of predecessor fund that was merged into the Series Fund
on May 3, 1994
THE FUNDS IN DETAIL
This section takes a closer look at the Funds' investment objectives and
policies and the securities that may be purchased. Please review the "Other
Fund Policies and Associated Risks" section on page ___ for more detailed
information about risks associated with each investment. As with any mutual
fund, there is no assurance that a Fund will achieve its objective.
The investment objective of each Fund is "fundamental" and may not be
changed without a shareholder vote. All other policies, unless noted as
"fundamental," may be changed by MSF's Board of Directors without a vote of the
shareholders. This allows for flexibility in the management of the Funds, for
example, to permit investments in new types of instruments. You will be
notified of any changes that are material.
The investment horizon is the amount of time you should plan to hold your
investment in a Fund to increase the likelihood of achieving the Fund's
objective. Descriptions of ratings are provided in Appendix B.
STOCK FUNDS
STOCK FUNDS PROFILE
<TABLE>
<S> <C> <C>
Investment Objective: Who May Want to Invest: These Funds may be appropriate for investors who
are willing to tolerate stock market fluctuations in return for
Aggressive Growth Stock Fund potentially high long-term returns. These Funds are designed for those
International Equity Fund Growth of Capital looking for long-term growth potential.
Growth Stock Fund
The fundamental risk associated with any common stock fund is the risk
Growth and Income Stock Growth of Capital that the value of the stocks it holds might decrease. Stock values may
Fund and Income fluctuate in response to the activities of an individual company or in
response to general market and/or
8
<PAGE>
Index 500 Stock Fund Approximate the S&P economic conditions. Historically, common stocks have provided greater
500 Stock Index long-term returns and have entailed greater short-term risks than other
Performance investment choices. Smaller or newer issuers are more likely to realize
more substantial growth as well as suffer more significant losses than
Primary Holdings Common Stocks larger or more established issuers. Investments in such companies can be
both more volatile and more speculative. Investments in foreign
Shareholder's Investment Long Term securities may involve additional risks not present when investing in
Horizon comparable domestic securities.
</TABLE>
AGGRESSIVE GROWTH STOCK FUND
The investment objective of the Aggressive Growth Stock Fund is long-term
growth of capital. The Fund will seek to achieve this objective primarily by
investing in the common stocks of companies that the advisor believes can
reasonably be expected to increase their sales and earnings at a pace that will
exceed the growth rate of the U.S. economy over an extended period. These
companies, for the most part, are smaller and newer companies whose stock may
experience substantial price volatility.
INTERNATIONAL EQUITY FUND
The investment objective of the International Equity Fund is long-term
growth of capital. The Fund will seek to achieve this objective by investing
primarily in stocks of companies outside the United States. The Fund will
invest at least 65% of its assets in securities of issuers in a minimum of three
countries outside the United States. Although the Fund generally invests in
common stocks, it may also invest in preferred stocks and certain debt
securities such as convertible bonds.
The International Equity Fund has an unlimited right to purchase securities
in any foreign country, developed or developing. You should consider carefully
the risks involved in investing in securities issued by companies and
governments of foreign nations, particularly those in developing countries,
which are in addition to the usual risks inherent in domestic securities. See
"Foreign Securities," p. [ ].
GROWTH STOCK FUND
The investment objective of the Growth Stock Fund is long-term growth of
capital; current income is secondary. The Fund will seek to achieve this
objective by selecting investments in companies which have above average
earnings growth potential.
The Growth Stock Fund invests primarily in common stocks of well-
established companies, with emphasis placed on high quality companies with
strong financial characteristics. The investment process is initiated with an
analysis of the economic outlook. Further study of economic sectors leads to
the identification of growth-oriented industries, and to detailed studies of
individual companies. In evaluating individual companies, factors such as the
company management team, product outlook, global exposure, industry leadership
position, and financial characteristics are important variables used in the
analysis.
The market capitalization of companies the Fund may invest in is not
limited by size, but the Fund will generally invest in large- and medium-sized
companies.
GROWTH AND INCOME STOCK FUND
The investment objectives of the Growth and Income Stock Fund are long-term
growth of capital and income. The Fund seeks to achieve these objectives
consistent with reasonable investment risk. Ordinarily, the Fund pursues its
investment objectives by investing primarily in dividend-paying common stocks.
The Fund may also invest in other equity securities, consisting of, among other
things, nondividend-paying common stock.
The Fund is not subject to any limit on the size of companies in which it
may invest, but intends, under normal circumstances, to be fully invested to the
extent practicable in the large- and medium-sized companies. In managing the
Fund, the potential for appreciation and dividend growth is given more weight
than current dividends. Nonetheless, the manager of the Fund will normally
strive for gross income for the Fund at a level not less than 75% of the
dividend income generated on the stocks included in the S&P 500 Index, although
this income level is merely a guideline and there can be no certainty that this
income level will be achieved.
The Fund attempts to reduce risk by investing in many different economic
sectors, industries and companies. The manager of the Fund may under-weight or
over-weight selected economic sectors against the sector weightings of the S&P
500 Index to seek to enhance the Fund's total return or reduce fluctuations in
market value relative to the S&P 500 Index. In selecting securities, the
manager may emphasize securities that it believes to be undervalued. Securities
of a company may be
9
<PAGE>
undervalued for a variety of reasons such as an overreaction by investors to
unfavorable news about a company, an industry or the stock markets in general;
or as a result of a market decline, poor economic conditions, tax-loss selling,
or actual or anticipated unfavorable developments affecting a company.
During normal market conditions, the Fund will be as fully invested as
practicable in equity securities.
INDEX 500 STOCK FUND
The investment objective of the Index 500 Stock Fund is to achieve
investment results that approximate the performance of the Standard & Poor's 500
Composite Stock Price Index ("S&P 500 Index"). The Fund will attempt to meet
this objective by investing in stocks included in the S&P 500 Index in
proportion to their weighting in the index.
The S&P 500 Index* is composed of 500 common stocks representing more than
70% of the total market value of all publicly-traded common stocks in the United
States.
The Index 500 Stock Fund will not be managed in the traditional sense
using economic, financial and market analysis. A computer program will be
used to determine which stocks are to be purchased or sold to achieve the
Fund's objective. The Fund will, to the extent feasible, remain fully
invested and will normally hold at least 450 of the 500 issues that comprise
the S&P 500 Index.
The Index 500 Stock Fund's ability to match the performance of the S&P 500
Index will be affected to some extent by the size and timing of cash flows into
and out of the Fund. The Fund will be managed with a view to reducing such
effects.
*"Standard & Poor's-Registered Trademark-", "S&P-Registered Trademark-", "S&P
500-Registered Trademark-", "Standard & Poor's 500", and "500" are trademarks of
McGraw-Hill, Inc. and have been licensed for use by Northwestern Mutual Life and
MSF. The Fund is not sponsored, endorsed, sold or promoted by Standard & Poor's
and Standard & Poor's makes no representation regarding the advisability of
investing in the Fund.
OTHER INVESTMENTS
In addition to investments in equity securities, the Stock Funds may from
time to time invest in investment grade debt securities, certificates of
deposit, bank time deposits in the currency of any nation, bankers acceptances,
corporate debt obligations, commercial paper, short-term U.S. Treasury
obligations, or temporarily hold assets in cash. They may also invest in
options contracts, stock index futures contracts, including indexes on specific
industries, foreign currency futures and forward contracts and repurchase
agreements. See "Financial Futures Contracts," p. __. Although the Funds
generally invest in common stocks, they may also invest in preferred stocks and
securities convertible into common stock, including debt securities with
conversion privileges or warrants.
The Funds may also invest in American Depositary Receipts (ADRs). The
Aggressive Growth Stock and Growth Stock Funds have the authority to invest up
to 25% of their assets in ordinary shares of foreign securities. These Funds
will normally not invest in ordinary shares of foreign securities, but may do
so from time to time. See "Foreign Securities," p.___. The Funds may enter
into firm commitment agreements and purchase securities on a "when-issued"
basis.
The International Equity Fund may purchase and sell financial futures
contracts, stock index futures contracts, and foreign currency futures contracts
for hedging purposes only and not for speculation. It may engage in such
transactions only if the total contract value of the futures contracts does not
exceed 20% of the Portfolio's total assets. See "Financial Futures Contracts,"
p.__.
DIVERSIFICATION
The aim of each Fund is to seek to reduce overall risk by diversifying its
assets in an appropriate manner. This diversification will span economic
sectors, industry groups, and companies, while emphasizing high quality
investments.
10
<PAGE>
MULTI-ASSET FUND
MULTI-ASSET FUND PROFILE
<TABLE>
<S> <C> <C>
Investment Objective: Total Return Who May Want to Invest: This Fund may be appropriate for investors
who seek a combination of growth of capital and income, and are
Primary Holdings Common Stocks and Fixed willing to ride out stock market fluctuations in pursuit of
Income Securities potentially high long-term returns. The Asset Allocation Fund is
designed for investors who want their investments actively managed
among the major asset classes in pursuit of potentially high total
return. It is not designed for an investor who wishes to have a
consistent level of income.
Shareholder's Investment Long-Term The value of the Fund's investments and income will vary from day to
Horizon day, and generally reflect market conditions, interest rates, and
other company, political or economic news. In the short-term, stock
prices can fluctuate dramatically in response to these factors.
Over time, however, stocks have shown greater appreciation potential
than other types of securities. The prices of fixed income
securities generally move in the opposite direction from interest
rates. Investments in foreign securities may involve additional
risks not present when investing in comparable domestic securities.
</TABLE>
ASSET ALLOCATION FUND
The investment objective of the Asset Allocation Fund is as high a level of
total return, including current income and capital appreciation, as is
consistent with reasonable investment risk. The Fund seeks to achieve its
objective through a flexible policy of allocating assets among common stocks,
bonds and cash.
Under normal market conditions, the Fund's net assets will be allocated
according to a benchmark of 50-70% stocks, 25-35% bonds and 0-15% cash. NMIS
intends to actively manage the Fund's assets, maintaining a balance over time
between investment opportunities and their associated potential risks. In
response to changing market and economic conditions, NMIS may reallocate the
Fund's net assets among these asset categories. Those allocations normally will
be within the ranges indicated above. However, in pursuit of total return, NMIS
may under-allocate or over-allocate the Fund's net assets in a particular
category.
Not more than 75% of the Fund's net assets may be invested in either the
stock sector or the bond sector. Up to 100% of the Fund's net assets may be
invested in money market instruments. No minimum percentage has been
established for any of the sectors.
The stock portion of the portfolio may be invested in any of the types of
securities eligible for the Stock Funds, including foreign securities. To take
advantage of investment opportunities around the world, the Fund will normally
invest 20-25% of its stock investments in foreign stocks (including both direct
investments and depository receipts) but will not invest more than 50% of its
equity investments in foreign equities. Foreign investments involve risks not
normally found when investing in securities of U.S. issuers. See "Foreign
Securities," p.__.
The bond portion of the portfolio may be invested in any of the types of
securities eligible for the Select Bond Fund or the High Yield Bond Fund. The
Fund may purchase securities on a "when-issued" or forward commitment basis.
Bonds purchased by the Fund will be primarily investment-grade debt obligations,
although the Fund may invest up to 10% of its total assets in non-investment-
grade debt obligations.
The cash portion of the Fund may include, but is not limited to, debt
securities issued or guaranteed by the U.S. Government or its agencies or
instrumentalities, commercial paper, banker's acceptances, certificates of
deposit and time deposits. The Fund may invest in obligations of domestic and
foreign banks and their subsidiaries and branches.
Within the asset-allocation categories described above, NMIS will allocate
the Fund's investments among countries
11
<PAGE>
(including developing countries), geographic regions, and currencies in response
to changing market and economic trends. In making geographical allocations of
investments, NMIS will consider such factors as the historical and prospective
relationships among currencies and governmental policies that influence
currency-exchange rates, current and anticipated interest rates, inflation
levels, and business conditions within various countries, as well as other
macroeconomic, social, and political factors.
The Fund may invest in or write option contracts, stock index futures
contracts, including indexes on specific industries, interest rate futures
contracts, foreign currency futures and forward contracts, repurchase agreements
and warrants. See "Financial Futures Contracts," p. __.
BOND FUNDS
BOND FUNDS PROFILE
<TABLE>
<S> <C> <C>
Investment Objective: Who May Want to Invest: Thee Funds are designed for investors who
primarily seek current income.
High Yield Bond Fund High Current Income and
Capital Appreciation The High Yield Bond Fund is designed for investors who are willing to
accept higher levels of credit and market risks in return for
Municipal Bond Fund High Level of current potentially higher return. Because of these risks, this Fund is not
income exempt from appropriate for short-term investment purposes.
federal income taxes and
preservation of capital
The Municipal Bohd Fund is designed for investors who want income that
Select Bond Fund High Income and is exempt from regular federal income tax and are willing to accept
Total Return Consistent higher interest rate risk and moderate credit risks.
With Preservation of
Capital The Select Bond Fund is designed for investors who want moderate
levels of interest rate and credit risks while seeking high current
Primary Holdings: income.
High Yield Bond Fund Corporate Bonds - A fundamental risk associated with any fund investing in fixed income
Non Investment Grade securities is that fixed income securities tend to decline in value
when interest rates rise. This effect is generally greater for
Municipal Bond Fund Municipal Securities longer-term bonds, but they generally offer higher yields to
compensate for these risks. In addition, securities that permit
prepayment have the risk that they will be paid during periods when
Select Bond Fund Corporate Bonds - interest rates are falling, which generally results in the proceeds
Investment Grade being invested at a lower rate of return.
Shareholder's Investment Intermediate to Long-Term
Horizon:
</TABLE>
12
<PAGE>
HIGH YIELD BOND FUND
The investment objective of the High Yield Bond Fund is high current income
and capital appreciation. The High Yield Bond Fund seeks to achieve its
objective by investing primarily in a diversified selection of fixed income
securities rated below investment grade by Moody's or Standard & Poor's. The
Fund may also invest in nonrated securities. These securities are considered
speculative and are sometimes known as "junk bonds."
The primary investment strategy of the High Yield Bond Fund is to invest in
industries or individual companies that have stable or improving fundamental
financial characteristics. The success of this strategy depends on the
manager's analytical and portfolio management skills. These skills are more
important in the selection of high yield/high risk securities than would be the
case with a portfolio of high quality bonds. In selecting securities, the
manager will consider the ratings assigned by the major rating agencies, but
primary reliance will be placed on the manager's evaluation of credit and market
risk in relationship to the expected rate of return. The manager of the Fund
seeks to reduce the volatility of these securities through careful evaluation of
credit risk and market risk and diversification of the Fund's investments.
The value of the securities held by the Fund will be directly affected by
the market perception of the creditworthiness of the securities' issuers and
will fluctuate inversely with changes in interest rates. Lower rated securities
are more likely to react to developments affecting market and credit risk than
are more highly rated securities. In addition, the secondary market for high
yield/high risk securities, which is concentrated in relatively few market
makers, may not be as liquid as the secondary market for more highly rated
securities.
In addition to notes and bonds, the Fund may invest in preferred stocks and
convertible securities, including warrants or other equity securities issued as
part of a fixed income offering. The Fund may purchase put and call options, on
individual securities as well as indexes, and may write covered call and secured
put options. The Fund may invest available temporary cash in short-term
obligations. The Fund may invest more substantially in such short-term
obligations or in investment grade securities rated by Moody's or Standard &
Poor's when market conditions warrant a more defensive investment posture.
The High Yield Bond Fund may invest in foreign securities consistent with
its investment objective. Such investments may be in United States currency
denominated debt issues or in debt securities in the currency of other nations.
The Fund may, but will not necessarily, attempt to hedge its exposures by
engaging in transactions in foreign currency futures contracts. For a
discussion of the risks involved in these contracts see "Financial Futures
Contracts", below.
MUNICIPAL BOND FUND
The investment objective of the Municipal Bond Fund is a high level of
current income exempt from federal income taxes, consistent with preservation
of capital. The Fund invests primarily in a diversified portfolio of
investment-grade municipal obligations.
Municipal obligations are debt obligations issued by states, territories
and possessions of the United States and the District of Columbia and their
political subdivisions, agencies and instrumentalities, or multistate agencies
or authorities, the interest from which is, in the opinion of bond counsel to
the issuer, exempt from federal income tax. Municipal obligations generally
include debt obligations issued to obtain funds for various public purposes as
well as certain industrial development bonds issued by or on behalf of public
authorities.
Normally the Fund will invest at least 80% of the value of its net assets
in municipal obligations, exempt from Federal taxes. However, taxable debt
securities are also permitted for investment. Taxable debt may exceed 20% at
times for liquidity or defensive purposes. At least 80% of the value of the
Fund's net assets will be invested in (1) securities rated in the top four
categories by a nationally recognized statistical rating organization (NRSRO),
such as Moody's Investors Service, Inc. ("Moody's") or Standard & Poor's Ratings
Group ("S&P"), or (2) commercial paper rated in the top two categories by a
NRSRO, or (3) cash or cash equivalents. Up to 20% of the value of the Fund's
net assets may be invested in lower rated securities (below investment grade).
See High Yield/High Risk Securities on p. ___. The Fund also may invest in
securities which, while not rated, are determined by the advisor to be of
comparable quality to those rated securities in which the Fund may invest; for
purposes of the 80% requirement described in this paragraph, such unrated
securities shall be deemed to have the ratings so determined.
While the Fund has no security maturity restrictions, its average maturity
will normally be 10 years or longer.
13
<PAGE>
The Fund may invest up to 30% of the value of its net assets in alternative
minimum tax (AMT) bonds. AMT bonds are tax-exempt "private activity" bonds
issued after August 7, 1986, whose proceeds are directed at least in part to a
private, for-profit organization. While the income from AMT bonds is exempt
from regular federal income tax, it is a tax preference item for purposes of the
"alternative minimum tax." The alternative minimum tax is a special tax that
applies to a limited number of taxpayers who have certain adjustments to income
or tax preference items.
The Fund may engage in various investment techniques, such as lending
portfolio securities and options and futures transactions. Use of certain of
these techniques may give rise to taxable income. See "Investment Policies" in
the Statement of Additional Information.
Even though interest-bearing securities are investments which promise a
stable stream of income, the prices of such securities are inversely affected by
changes in interest rates and, therefore, are subject to the risk of market
price fluctuations.
Certain provisions in the Internal Revenue Code relating to the issuance of
municipal obligations may reduce the volume of municipal obligations qualifying
for federal tax exemption. One effect of these provisions could be to increase
the cost of the municipal obligations available for purchase by the Fund and
thus reduce available yield. Proposals that may restrict or eliminate the
income tax exemption for interest on municipal obligations may be introduced in
the future. If any such proposal were enacted that would reduce the
availability of municipal obligations for investment by the Fund so as to
adversely affect Fund shareholders, the Fund would reevaluate its investment
objective and policies and submit possible changes in the Fund's structure to
shareholders for their consideration. If legislation were enacted that would
treat a type of municipal obligation as taxable, the Fund would treat such
securities as a permissible taxable investment within the applicable limits set
forth herein.
Federal income tax law requires the holders of a zero coupon security or of
certain pay-in-kind bonds to accrue income with respect to these securities
prior to the receipt of cash payments. To maintain its qualification as a
regulated investment company and avoid liability for Federal income taxes, the
Fund may be required to distribute such income accrued with respect to these
securities and may have to dispose of portfolio securities under disadvantageous
circumstances in order to generate cash to satisfy these distribution
requirements.
The Fund may invest, to a limited extent, in options and futures. See
"Financial Futures Contracts," p. __ and "Options," p.__.
The Fund may also invest in repurchase agreements or may purchase
securities on a "when-issued" or forward commitment basis.
The Fund may also invest in any of the securities in which the Select Bond
Fund may invest, including, but not limited to, preferred stock, mortgage-backed
and asset-backed fixed income securities, and obligations of or guaranteed by
the United States Government or its agencies.
SELECT BOND FUND
The primary investment objective of the Select Bond Fund is as high a level
of income and total return, as is consistent with preservation of shareholders'
capital.
The Select Bond Fund's assets will be invested primarily in the following
types of securities: investment grade corporate debt securities rated by Moody's
or Standard & Poor's; obligations of or guaranteed by the United States
Government or its agencies; up to 10% in high grade obligations (payable in U.S.
dollars) of or guaranteed by the Government of Canada or of a Province of Canada
or any instrumentality or political subdivision thereof rated by Moody's or
Standard & Poor's; and high quality debt securities issued or guaranteed by a
national or state bank or bank holding company.
At least 70% of the Select Bond Fund's total assets will normally be
invested in bonds and debentures which have maturities of at least one year.
However, during periods of particular volatility or when an unusual decline in
the value of long-term obligations is anticipated, for temporary defensive
purposes the Fund may place a larger portion of its assets in cash and short-
term obligations, which may include: certificates of deposit of banks or bank
holding companies; high quality commercial paper rated by Moody's or Standard &
Poor's and cash or cash equivalents. In addition, the Fund may invest in
unrated privately placed corporate debt securities that in the judgment of MSF's
Board of Directors, are of comparable quality to debt securities rated
investment grade or better by Moody's or Standard & Poor's; preferred stocks,
convertible securities; and securities carrying warrants to purchase equity
securities.
The Select Bond Fund will not invest in common stocks
14
<PAGE>
directly, but may retain up to 10% of its total assets in common stocks acquired
upon conversion of debt securities or upon exercise of warrants acquired with
debt securities.
The Select Bond Fund invests in obligations of a number of U.S. Government
agencies. Obligations of some agencies are supported by the full faith and
credit of the U.S. Treasury, others are supported only by the credit of an
agency. No assurance can be given that the U.S. Government would provide
financial support to any agency if it is not obligated to do so by law. The
Select Bond Fund will invest in the securities of a particular agency only when
the investment advisor is satisfied that the credit risk with respect to such
agency is minimal.
The Select Bond Fund may invest up to 15% of its total net assets in high
yield bonds and up to 15% of its total net assets in foreign securities,
consistent with its investment objective. See "Foreign Securities," pp. ___ and
"High Yield/High Risk Securities," pp. ___. The Fund may also invest in
preferred stock and mortgage-backed and asset-backed fixed income securities.
The Select Bond Fund may also invest in interest rate futures contracts and
repurchase agreements. See "Financial Futures Contracts," p. ___.
The Select Bond Fund may purchase securities on a "when-issued" or forward
commitment basis.
OTHER FUND POLICIES AND ASSOCIATED RISKS
FOREIGN SECURITIES
INVESTMENTS IN FOREIGN SECURITIES, INCLUDING THOSE OF FOREIGN GOVERNMENTS,
INVOLVE ADDITIONAL RISKS NOT NORMALLY PRESENT WHEN INVESTING IN COMPARABLE
DOMESTIC SECURITIES.
Some securities of foreign companies and governments may be traded in the
United States, such as ADRs, but most are traded primarily in foreign markets.
The risks of investing in foreign securities include:
- - CURRENCY RISK. For securities that are based in value on foreign currencies
(including ADRs), the Fund in essence must buy the local currency in order to
buy a foreign security and sell the same local currency after it sells the
security.
Therefore, the value of that security to the Fund is affected by the value of
the local currency relative to the U.S. currency. As a result, if the value of
the local currency falls relative to U.S. currency, the value of that security
falls, even though the security has not decreased in value in its home country.
- - POLITICAL AND ECONOMIC RISK. Foreign investments can be subject to greater
political and economic risks. In some countries, there is the risk that the
government may take over assets or operation of the company or impose taxes or
place limits on the removal of assets that would adversely affect the value of
the security. The possibility of default in foreign government securities,
political or social instability or diplomatic developments generally are more of
a concern in developing countries, where the possibility of political
instability (including revolution) and dependence on foreign economic assistance
may be greater than in developed countries.
- - REGULATORY RISK. In many countries there is less publicly available
information about issuers than is available for companies in the United States.
Foreign companies are not generally subject to uniform accounting, auditing and
financial reporting standards, and auditing practices and requirements may not
be comparable to those applicable to United States companies. In many foreign
countries there is less government supervision and regulation of business and
industry practices, and it may be more difficult to obtain or enforce judgments
obtained against foreign entities.
- - MARKET RISKS. Foreign securities often trade with less frequency and volume
than domestic securities and are therefore less liquid and more volatile than
securities of comparable domestic issuers. Further, the settlement period of
securities transactions in foreign markets may be longer than in domestic
markets.
- - TRANSACTION COSTS. Commission rates in foreign countries, which are generally
fixed rather than subject to negotiation as in the United States, are likely to
be higher. In addition, other costs, such as tax and custody costs, are
generally higher than for domestic transactions.
- - PARTICULAR RISKS FOR DEVELOPING COUNTRIES. In general, the risks noted above
are heightened for developing countries. In addition, certain developing
countries have
15
<PAGE>
experienced substantial, and in some cases, rapidly fluctuating rates of
inflation for a number of years. Inflation has, and may continue to have a
debilitating effect on the underlying economies of these countries. Many
developing countries are heavily dependent on international trade and can be
adversely affected by trade barriers and protectionist measures, as well as the
depreciation or devaluation of their currencies.
HIGH YIELD/HIGH RISK SECURITIES
These securities tend to offer higher yields than higher rated securities
of comparable maturities because the historical financial condition of the
issuers of these securities is usually not as strong as that of other issuers.
High yield fixed income securities usually present greater risk of loss of
income and principal than higher rated securities.
For example, because investors generally perceive that there are greater
risks associated with investing in medium or lower rated securities, the yields
and price of such securities may tend to fluctuate more than those of higher
rated securities. Moreover, in the lower quality segments of the fixed income
securities market, changes in perception of the creditworthiness of individual
issuers tend to occur more frequently and in a more pronounced manner than do
changes in higher quality segments of the fixed income securities market. The
yield and price of medium to lower rated securities therefore may experience
greater volatility than is the case with higher rated securities.
Under adverse market or economic conditions, the secondary market for high
yield/high risk securities could contract further, independent of any specific
adverse changes in the condition of a particular issuer. As a result, MSF could
find it more difficult to sell such securities or may be able to sell the
securities only at prices lower than if such securities were widely traded.
Prices realized upon the sale of such lower rated securities therefore may be
less than the prices used in calculating the Fund's net asset value. In the
absence of readily available market quotations, high yield/high risk securities
will be valued by MSF's Directors using a method that, in the good faith belief
of the Directors, accurately reflects fair value. Valuing such securities in an
illiquid market is a difficult task. The Directors' judgment plays a more
significant role in valuing such securities than those securities for which more
objective market data are available.
FINANCIAL FUTURES CONTRACTS
Each of the Funds (except the Bond Funds) may enter into stock index
futures contracts, including indexes on specific securities, as a hedge against
changes in the market values of common stocks. The Bond Funds, the Asset
Allocation Fund and the International Equity Fund may enter into interest rates
futures contracts as a hedge against changes in prevailing levels of interest
rates. In both cases, the purpose is to establish more definitely the effective
return on securities held or intended to be acquired by the Funds. The Funds'
hedging may include sales of futures as an offset against the effect of expected
decreases in stock values or increases in interest rates, and purchases of
futures as an offset against the effect of expected increases in stock values or
decreases in interest rates.
A Fund will not enter into a futures contract if, as a result thereof, the
sum of the initial margin deposits of all open futures positions (other than an
offsetting transaction) would be more than 5% of the Fund's total assets. More
than 5% of the Fund's total assets may be committed to the aggregate of initial
and variation margin payments however. Furthermore, in order to be certain that
the Fund has sufficient assets to satisfy its obligations under a futures
contract, the Fund deposits cash or cash equivalents equal in value to the
market value of the futures contract in a segregated account for the Fund with
the Fund's custodian.
Financial futures prices are volatile and difficult to forecast and the
correlation between changes in prices of futures contracts and the securities
being hedged can only be approximate. A decision of whether, when and how to
hedge involves the exercise of skill and judgment, and even a well-conceived
hedge may be unsuccessful to some degree because of market behavior or
unexpected stock market or interest rate trends.
Because of the low margin deposits required, futures trading involves an
extremely high degree of leverage. A relatively small price movement in a
futures contract may result in immediate and substantial loss, as well as gain,
to the investor. Thus, a purchase or sale of a futures contract may result in
losses in excess of the amount invested in the futures contract.
A description of financial futures contracts is included in the
16
<PAGE>
Statement of Additional Information.
OPTIONS
Each of the Funds may purchase put or call options or write covered put or
call options with respect to certain securities, indices or foreign currencies.
A description of put and call options and covered put and call options is
included in the Statement of Additional Information.
EURODOLLAR CERTIFICATES OF DEPOSIT
The Growth Stock, Growth and Income Stock, Asset Allocation, High Yield
Bond and Municipal Bond Funds may purchase Eurodollar certificates of deposit
issued by foreign branches of U.S. banks, but consideration will be given to
their marketability and possible restrictions on the flow of international
currency transactions. Investment in such securities involves considerations
which are not ordinarily associated with investing in domestic instruments,
including currency exchange control regulations, the possibility of
expropriation, seizure, or nationalization of foreign deposits, less liquidity
and increased volatility in foreign securities markets as well as the impact of
political, social or diplomatic developments or the adoption of other foreign
government restrictions that might adversely affect the payment of principal and
interest. If the Fund were to invoke legal processes, it might encounter
greater difficulties abroad than in the United States.
REPURCHASE AGREEMENTS AND WARRANTS
Certain securities of each Fund may be subject to repurchase agreements.
Each of the Funds (except the Select Bond Fund) may also invest in warrants. A
description of repurchase agreements and warrants is included in the Statement
of Additional Information.
INVESTMENT RESTRICTIONS
The significant investment restrictions common to all the Funds are described
below. The investment restrictions of a Fund may be changed only with the
approval of the majority of the Fund's shares outstanding. These investment
restrictions provide that each Fund will not:
1. Acquire more than 25% of any class of equity securities of any one issuer.
2. With respect to at least 75% of the value of the total assets of the Fund,
invest more than 5% of the value of such assets in the securities of any
one issuer (except securities issued or guaranteed by the U.S. Government
or its agencies), or invest in more than 10% of the outstanding voting
securities of any one issuer.
3. Purchase the securities of any other investment company in amounts
exceeding 10% of the total assets of the Fund, except in connection with
mergers, consolidations or acquisitions of assets.
4. Invest more than 15% of the value of the total assets of the Fund in
securities which are restricted as to disposition under federal securities
laws and in other illiquid assets.
5. Invest 25% or more of the value of the total assets of the Fund in
securities of issuers in any one industry except for obligations of or
guaranteed by the U.S. Government, its agencies or instrumentalities.
6. Make loans aggregating more than 10% of the total assets of the Fund at any
one time, provided that none of the following is to be considered a loan:
(1) the purchase of a portion of an issue of publicly distributed bonds,
debentures, or other debt securities; (2) the purchase of short-term debt
securities; (3) lending portfolio securities; or (4) repurchase agreements.
Additional investment restrictions are included in the Statement of Additional
Information.
MANAGEMENT OF THE FUNDS
DIRECTORS
The Board of Directors of MSF is responsible for setting and overseeing the
investment objectives and policies of each Fund, but delegates daily management
of the Funds to the investment advisor, the sub-advisors where applicable and
the officers of MSF.
INVESTMENT ADVISORS
17
<PAGE>
ALL FUNDS
The Funds' investment advisor is NMIS, a wholly-owned subsidiary of
Northwestern Mutual Life. The address of NMIS is 720 East Wisconsin Avenue,
Milwaukee, Wisconsin 53202. NMIS has served as investment advisor to each of
the mutual funds sponsored by Northwestern Mutual Life, including Northwestern
Mutual Series Fund, Inc., subject to the supervision and control of the boards
of directors of the funds, since their incorporation. NMIS provides investment
advice and recommendations regarding the purchase and sale of securities for the
Funds. Northwestern Mutual Life employs a full staff of investment personnel to
manage its investment assets. Northwestern Mutual Life's personnel and related
facilities are utilized by NMIS in performing its investment advisory functions.
For the Funds identified below, NMIS has retained a subadvisor to provide
investment advice and, in general, to conduct the management investment program
of the Fund, subject to the general control of the advisor and the Board of
Directors of MSF.
GROWTH AND INCOME STOCK FUND
J.P. Morgan Investment Management, Inc. ("J.P. Morgan"), a Delaware
corporation with principal offices at 522 Fifth Avenue, New York, New York
10036, a wholly-owned subsidiary of J.P. Morgan & Co., is the sub-advisor for
the Growth and Income Fund.
INTERNATIONAL EQUITY FUND
Templeton Investment Counsel, Inc. ("Templeton"), a Florida corporation
with principal offices at 500 East Broward Boulevard, Ft. Lauderdale, Florida
33394, a wholly-owned indirect subsidiary of Franklin Resources, Inc., is the
sub-advisor for the International Equity Fund.
FUND MANAGERS
MARK G. DOLL, Senior Vice President of Northwestern Mutual Life, joined
Northwestern Mutual Life in 1972 and holds B.A. and M.B.A. degrees from the
University of Wisconsin-Milwaukee. He is a Chartered Financial Analyst. Mr.
Doll is responsible for investment management of the Asset Allocation Fund and
supervision of investment management for all of the Funds. He is also
responsible for the publicly traded investments of Northwestern Mutual Life, and
for investment management of the Balanced Portfolio of the Series Fund.
PATRICIA L. VANKAMPEN, Vice President of Common Stocks of Northwestern
Mutual Life, joined Northwestern Mutual Life in 1974. She holds a B.A. degree
from St. Norbert College and an M.B.A. from Marquette University, and is a
Chartered Financial Analyst. Ms. Van Kampen is responsible for the equity
portion of the Asset Allocation Fund. She is also responsible for all common
stock investments of Northwestern Mutual Life, and for investment management of
the equity portion of the Balanced Portfolio of the Series Fund.
WILLIAM R. WALKER, Director of Common Stocks of Northwestern Mutual Life,
joined Northwestern Mutual Life in 1984. Prior to this, he worked for the
Chicago Board Options Exchange, the Milwaukee Company, and Armco Insurance. Mr.
Walker is a Chartered Financial Analyst, and holds a B.S. degree from Marquette
University and an M.B.A. from Miami of Ohio. He has primary responsibility for
the management of the Aggressive Growth Stock Fund. He also has primary
responsibility for the Aggressive Growth Stock Portfolio of the Series Fund, as
well as the small company portfolio of Northwestern Mutual Life.
JULIE M. VANCLEAVE, Director of Common Stocks of Northwestern Mutual Life,
joined Northwestern Mutual Life in 1984 and holds B.A. and M.B.A. degrees from
the University of Wisconsin-Madison. Ms. Van Cleave is a Chartered Financial
Analyst and has primary responsibility for the Growth Stock Fund. She also has
primary responsibility for the Growth Stock Portfolio of the Series Fund and the
large company portfolio of Northwestern Mutual Life.
STEVEN P. SWANSON, Vice President of Securities of Northwestern Mutual
Life, joined Northwestern Mutual Life in 1981. He received a B.A. degree from
Lawrence University and an M.B.A. from the University of Michigan. Mr. Swanson
is responsible for the High Yield Bond Fund. He is also responsible for the
High Yield Bond Portfolio of the Series Fund and also manages the high yield
bond portfolio of Northwestern Mutual Life.
18
<PAGE>
JEFFERSON V. DEANGELIS, Vice President - Fixed Income of Northwestern
Mutual Life, joined Northwestern Mutual Life in 1983. Subsequently, he was a
portfolio manager for Van Kampen Merritt. Before returning to Northwestern
Mutual Life in 1992, he served as a portfolio manager for Putnam Management
Company from February of 1987 through February of 1992. He received a BA degree
from Carroll College and a MBA degree from Marquette University, and is a
Chartered Financial Analyst. Mr. DeAngelis has primary investment
responsibility for the Select Bond Fund and the fixed income portion of the
Asset Allocation Fund. He also has primary investment responsibility for the
Select Bond Portfolio of the Series Fund, the fixed-income securities of the
Balanced Portfolio of the Series Fund and various portfolios of Northwestern
Mutual Life.
RONALD C. ALBERTS, Investment Officer of Northwestern Mutual Life, joined
Northwestern Mutual Life in 1984. He received a B.A. degree from Carroll
College and an MBA degree from Marquette University, and is a Chartered
Financial Analyst. Mr. Alberts is responsible for the Municipal Bond Fund as
well as management of other client accounts.
LISA WALLER ORAM, Managing Director of J.P. Morgan Investment, joined J.P.
Morgan in 1982. She holds undergraduate and graduate degrees from the
University of Wisconsin-Madison. Ms. Oram is a Chartered Financial Analyst.
She has primary responsibility for the Growth and Income Stock Fund. She also
has primary responsibility for the Growth and Income Stock Portfolio of the
Series Fund, and also manages several pension fund and other mutual fund
accounts.
MARC S. JOSEPH, Vice President/Portfolio Manager of Templeton Investment
Counsel, Inc., joined Templeton in September of 1993. Prior to this, Mr. Joseph
served as Vice President of Pacific Financial Research from May of 1990 through
August of 1993. He holds a BS degree in Computer Science from the College of
William & Mary, an MBA from Harvard Business School, and a JD from Harvard Law
School. He has primary responsibility for the International Equity Fund. He
also has primary responsibility for the International Equity Portfolio of the
Series Fund, and manages several other mutual funds and separate accounts.
Mr. Joseph also has various research responsibilities at Templeton.
INVESTMENT ADVISORY FEES
Each Fund pays NMIS an annual fee, payable in monthly installments, for
investment advisory services. The investment advisory agreement describes the
services to be provided and the fee to be paid, which is an annual rate based on
the average daily net assets of the Fund according to the following schedule:
Fund Fee
---- ---
Aggressive Growth Stock 0.75%
International Equity 0.85%
Growth Stock 0.75%
Growth and Income Stock 0.65%
Index 500 Stock 0.30%
Asset Allocation 0.70%
High Yield Bond 0.75%
Municipal Bond 0.30%
Select Bond 0.30%
Of the amounts received from the Fund, NMIS pays the sub-advisor for the
Growth and Income Stock Fund at the annual rate of .45% on the first $100
million of assets, .40% on the next $100 million, .35% on the next $200 million
and .30% on assets over $400 million. For the International Equity Fund, NMIS
pays the sub-advisor at the annual rate of .50% of assets, reduced to .40% on
assets over $100 million. The breakpoints for the fees paid to the sub-advisors
will be based on the aggregate assets of the respective Fund and the
corresponding Portfolio of the Series Fund.
NMIS has agreed to waive its fee or reimburse each Fund for expenses if the
total operating expenses of the Fund exceed the Total Operating Expenses set
forth in the table on p.__.
OTHER SERVICE PROVIDERS
19
<PAGE>
The following parties provide the Funds with administrative and other
services:
TRANSFER AGENT
National Financial Data Services ("NFDS")
Post Office Box ________
Kansas City, Missouri ________
CUSTODIAN
For the domestic assets of Growth and For the domestic assets of
Income Stock Fund, High Yield Bond AggressiveGrowth Stock Fund,
Fund and Municipal Bond Fund: Growth Stock Fund,Index 500 Stock
Fund, Asset Allocation Fund and
Select Bond Fund:
Bankers Trust Company The Chase Manhattan Bank, N.A.
16 Wall Street One Chase Manhattan Plaza
New York, New York 10015 New York, New York 10081
For the International Equity Fund and
any foreign assets of the other
Funds:
Brown Brothers Harriman & Co.
40 Water Street
Boston, Massachusetts 02109
ADMINISTRATOR
The Northwestern Mutual International Equity Fund fund
Life Insurance Company accounting:
720 East Wisconsin Avenue Brown Brothers Harriman & Co.
Milwaukee, Wisconsin 53202 40 Water Street
Boston, Massachusetts 02109
DISTRIBUTOR
Robert W. Baird & Co. Incorporated ("Baird")
777 East Wisconsin Avenue
Milwaukee, Wisconsin 53202
The Distributor is controlled by Northwestern Mutual Life and, therefore,
an affiliate of NMIS.
FUND EXPENSES
In addition to the investment advisory fee, each Fund pays fees to certain
other service providers, such as the transfer agent, custodian and
administrator. Each Fund also bears certain expenses, such as brokerage and
other transaction costs, outside professional and auditing fees, registration
fees, association fees, trademark fees, organizational costs, insurance
premiums, printing and mailing costs of sending reports and other information to
existing shareholders, the fees and expenses of the Directors who are not
officers or employees of an affiliated company and any interest, taxes and
extraordinary expenses incurred by the Funds. In addition, each Fund pays the
Distributor certain fees for shareholder servicing and distribution expenses,
which vary based on the class of shares. (See "Distribution and Service Fees,"
p.__)
20
<PAGE>
ADMINISTRATIVE FEES
Each Fund pays Northwestern Mutual Life a monthly fee at an annual rate of
0.10% plus costs of pricing securities; for administrative services, which
include recordkeeping, preparation of reports and filing tax returns; and for
fund accounting (except for the International Equity Fund). For the
International Equity Fund, Northwestern Mutual Life waives a portion of its fee
equal to the fund accounting fee paid to Brown Brothers Harriman & Co.
PORTFOLIO TRANSACTIONS
In executing portfolio transactions, the investment advisor or sub-advisor
will attempt to obtain the best net results for a Fund, taking into account such
factors as price (including the applicable brokerage commission or dollar
spread), size of order, the nature of the market for the security, the timing of
the transaction, the reputation, experience and financial stability of the
broker-dealer involved, the quality of the service, the difficulty of execution
and operational facilities of the firms involved, and the firm's risk in
positioning a block of securities. In effecting purchases and sales of
portfolio securities in transactions on United States stock exchanges for the
account of a Fund, the investment advisor or sub-advisor may pay higher
commission rates than the lowest available when the investment advisor or
sub-advisor believes it is reasonable to do so in light of the value of the
brokerage and research services provided by the broker effecting the
transaction. The advisor and sub-advisors are authorized to place orders with
the Distributor, subject to all applicable legal requirements, when they believe
that the combination of price and execution are comparable to that of other
broker-dealers.
The frequency of portfolio transactions, a Fund's turnover rate, will vary
from year to year depending on market conditions. It is anticipated that the
annual portfolio turnover rate for the Index 500 Stock Fund will not exceed 10%
and that the rate for the High Yield Bond Fund will not exceed 140%. For the
other Funds, it is anticipated that the rate will not exceed 100%.
BUYING AND SELLING FUND SHARES
INVESTMENT MINIMUMS
<TABLE>
<CAPTION>
TYPE OF ACCOUNT INVESTMENT MINIMUMS
--------------- -------------------
<S> <C> <C> <C>
Shares of the Funds are available through
registered representatives of Robert W. INITIAL SUBSEQUENT
Baird & Co. Inc. ("Baird"), including INVESTMENT INVESTMENT
Northwestern Mutual Life agents and Baird ---------- ----------
Investment Officers or, in certain cases, Regular Account $1,000 $100
from the Fund itself. The following table
illustrates the minimum investment Individual IRAs (regularor spousal) $ 500 $100
requirements for the initial and
subsequent investments in each of the Other Tax Qualified
Funds, which may be changed at any time at Retirement Plans $ 50 $ 50
the sole discretion of the Fund.
Automatic Investment Plans $ 50 $ 50
FLEXIBLE SALES CHARGE OPTIONS
</TABLE>
21
<PAGE>
WHICH OPTION IS RIGHT FOR YOU?
Each Fund offers its shares in two classes to allow you to choose the
method of purchasing shares that is most beneficial to you in light of such
factors as the amount of your investment, your holdings of Fund shares, how long
you expect to hold your investment and other such circumstances.
Class A shares are available for investors choosing an initial sales charge
and Class B shares are for investors who prefer a deferred sales charge. The
two classes of shares each represent interests in the same Fund, have the same
rights and, except with respect to differences in sales charge and distribution
charges, are identical in all respects. Class A and Class B shares each bear
expenses of shareholder servicing fees and distribution fees as well as any
expenses (which may include incremental transfer agency costs) resulting from
such arrangements, and have exclusive voting rights with respect to their
particular distribution plan. The two Classes have different exchange
privileges, as described below.
The net income attributable to Class A or Class B shares and the dividends
payable thereon will be reduced by the amount of the shareholder servicing and
distribution fees attributable to such shares and incremental expenses
associated with such class. Sales personnel will receive equal compensation for
selling Class A and Class B shares.
CLASS A SHARES
INITIAL SALES CHARGE
The following table sets forth the initial sales charge that applies to
purchases of Class A shares of the Funds.
- --------------------------------------------------------------------------------
Sales charge as
percentage of
- --------------------------------------------------------------------------------
Amount of Purchase Offering Net Dealer
Price Amount Allowance(1)
Invested
- --------------------------------------------------------------------------------
Less than $50,000 4.75% 4.99% 4.00%
$50,000 but less than 100,000 3.75% 3.90% 3.00%
$100,000 but less than 250,000 2.75% 2.83% 2.00%
$250,000 but less than 500,000 2.00% 2.04% 1.50%
$500,000 but less than 1,000,000 1.50% 1.52% 1.00%
$1,000,000 or more None(2) None 1.00%(3)
- --------------------------------------------------------------------------------
(1) Dealer allowance may be changed periodically.
(2) No sales charge is imposed at the time of purchase on amounts of $1 million
or more. However a contingent deferred sales charge will be charged if
shares are redeemed within 18 months following their purchase at the rate
of 1% on the lesser of the value of the shares redeemed (exclusive of
reinvested dividends and capital gains distributions) or the cost of such
shares. The contingent deferred sales charge may be waived in certain
circumstances. See "When Will the Contingent Deferred Sales Charge Be
Waived," p.__.
(3) A dealer allowance is paid on sales of $1 million or more at the rates of
1.00% on the amount up to $2.5 million; 0.50% on the next $2.5 million; and
0.25% on amounts over $5 million.
WHICH INVESTMENTS IN RELATED ACCOUNTS QUALIFY FOR REDUCED SALES CHARGES?
Investments in related accounts in both Class A and Class B shares (in
certain circumstances) which may be aggregated to qualify for a reduced sales
charge include purchases made for you, your spouse and children under the age of
21 as well as those made in a tax qualified plan such as an IRA for those
individuals or by a company solely controlled by those individuals or in a trust
established exclusively for the benefit of those individuals. Purchases by a
trustee or other fiduciary if the investment is for a single trust, estate or
fiduciary account including pension, profit-sharing or other
22
<PAGE>
employee benefit trusts created pursuant to a qualified plan may be combined to
qualify for a reduction of the sales charge. Reduced sales charges may also be
applied to purchases by qualified employee benefit plans of a single corporation
or of corporations affiliated with each other. Purchases made for a customer in
nominee or street name accounts (accounts which hold the customer's shares in
the name of a broker or another nominee such as a bank trust department) may not
be aggregated with those made for other accounts and may not be aggregated with
other nominee or street name accounts unless otherwise qualified as noted above.
WHEN WILL THE SALES CHARGE ON CLASS A SHARES BE REDUCED OR WAIVED?
There are several ways to reduce or eliminate the initial sales
charge:
- combined purchases
- cumulative discount
- letter of intent
- special waivers for certain categories of investors
COMBINED PURCHASES. Purchases made at the same time for any of the Funds
in related accounts may be aggregated for the purpose of receiving a discounted
sales charge. Notice must be given at the time the orders are placed that there
are multiple orders which qualify for a reduced sales charge.
CUMULATIVE DISCOUNT. Purchases may also qualify for a reduced sales charge
based on the current total net asset value of your account and any related
accounts in any of the Funds or the SSGA Money Market Fund. Notice must be
given at the time the order is placed that it qualifies for a reduced sales
charge based on related holdings in existing Fund accounts.
LETTER OF INTENT. Reduced sales charges may be applied to purchases over a
period of 13 months by entering into a non-binding Letter of Intent. Existing
holdings may be combined with new purchases in related accounts as shown above
to reach the investment commitment of the Letter of Intent. Purchases resulting
from the reinvestment of distributions (dividends and capital gains) which are
done at net asset value, do not count towards completion of the Letter of
Intent. Up to 5% of the stated amount of the Letter of Intent will be held in
escrow to cover additional sales charges which may be due if investments over
the 13 month period are not sufficient to qualify for the sales charge
reduction. See the Statement of Additional Information and the Fund account
application for further details.
SPECIAL WAIVERS. Class A shares may be purchased without an initial sales
charge in the following situations. No dealer allowance is paid on such
purchases.
- Shares purchased by the officers, directors, employees, agents,
employees of agents, and employees of agencies of MSF, Northwestern
Mutual Life, NMIS, or the Distributor, or their spouse or children
under the age of 21 or trust or retirement plans for their benefit.
- Shares purchased by reinvesting the proceeds of the redemption of
shares of one or more open-end mutual funds. The purchaser must
provide appropriate documentation that the redemption occurred not
more than 90 days prior to the reinvestment of the proceeds in Class A
shares, and that no contingent deferred sales charge was paid on the
redemption.
- Shares purchased by the reinvestment of dividends or other
distributions from a Fund.
- Shares purchased by the reinvestment of loan repayments by
participants in retirement plans.
- Shares issued in connection with the acquisition by a Fund of another
investment company.
Class A shares may also be purchased without an initial sales charge in the
following situations. However, redemptions of such shares within 18 months of
purchase are subject to a contingent deferred sales charge of 1% of the
23
<PAGE>
lesser of the value of the shares redeemed or the total cost of the shares. A
dealer allowance is paid on such purchases at the rates of 1.00% on the amount
up to $2.5 million; 0.50% on the next $2.5 million; and 0.25% on amounts over $5
million.
- any purchase of $1 million or more of the Funds' shares;
- purchases by qualified retirement plans with an initial investment of
$250,000 or more, or which have at least 50 eligible participants; and
- purchases by bank trust departments investing funds over which they
exercise exclusive discretionary investment authority and that are
held in a fiduciary, agency, advisory, custodial or similar capacity.
REINSTATEMENT PRIVILEGE. If you redeem some or all of your Fund shares,
you have up to 90 days to reinvest all or part of the redemption proceeds in
Class A shares of the Fund without paying a sales charge. This privilege
applies only to redemptions of Class A shares on which an initial or deferred
sales charge was paid or to redemptions of Class A shares of the Fund that you
purchased by reinvesting dividends or distributions. You must ask the Transfer
Agent or your registered representative to apply this privilege when you send
your payment.
The reduced sales charge programs may be changed or discontinued at any
time upon prior written notice to shareholders of the Funds.
DISTRIBUTION AND SERVICE FEES
Each Fund has adopted plans pursuant to Rule 12b-1 under the Investment
Company Act of 1940, which provide that all shareholders shall be subject to a
distribution fee. Class A shares are subject to a distribution fee of up to
0.10% per year of the average daily net assets of Class A shares. The
distribution fee is payable to the Distributor to reimburse it for services and
expenses incurred in connection with the distribution of Fund shares. These
expenses include payments to registered representatives, expenses of printing
and distributing prospectuses to persons other than Fund shareholders, expenses
of preparing and printing and distributing advertising and sales literature.
In addition, each Fund is subject to a shareholder servicing fee. Each
class pays a shareholder servicing fee of up to 0.25% per year of the average
daily net assets of that class, which may be paid to brokers who provide ongoing
account services to shareholders. These services may include establishing and
maintaining shareholder accounts, answering shareholder inquiries and providing
other personal services to shareholders.
CLASS B SHARES
CONTINGENT DEFERRED SALES CHARGE
Unlike an initial sales charge, which is paid when you purchase shares, a
contingent deferred sales charge is only paid if you sell your shares during a
certain period of time. Class B shares are offered at net asset value without
an initial sales charge but subject to a contingent deferred sales charge as set
forth in the table below. The schedule shows the contingent deferred sales
charges applicable for the first through seventh years of redemption after
purchase for different purchase amounts. The schedule applicable to a specific
purchase varies by the amount of that purchase and is determined at the time the
purchase is made; it may be reduced as described under "Combined Purchase" and
"Cumulative Discount," p.__.
24
<PAGE>
<TABLE>
<CAPTION>
Contingent Deferred Sales Charge Applicable in the Year of Redemption After
Purchase(1)
- ---------------------------------------------------------------------------------------------------------------------------------
Amount of Purchases First Second Third Fourth Fifth Sixth Seventh Dealer
on Allowance(2)
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Less than $50,000 5% 4% 3% 3% 2% 1% 0% 4.00%
$50,000 but less than 100,000 4% 3% 3% 2% 1% 0% 0% 3.00%
$100,000 but less than 250,000 3% 3% 2% 1% 0% 0% 2.00%
$250,000 but less than 500,000 3% 2% 1% 0% 0% 1.50%
$500,000 but less than 1,000,000 2% 1% 0% 0% 1.00%
$1,000,000 or more N/A(3)
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- ---------------
(1) No contingent deferred sales charge is paid on an exchange of shares nor is
one paid on the sale of shares received as a reinvestment of dividends or
capital gains distributions. Class B shares will convert to Class A shares
two years after the expiration of the contingent deferred sales charge for
that purchase. Shares received as a reinvestment of dividends or capital
gains distributions will be converted to Class A shares in the same
proportion as purchased shares are converted.
(2) Dealer allowance may be changed periodically.
(3) Purchases of $1 million or more are not accepted in Class B shares. Class
A shares will be issued in these cases.
In determining whether a contingent deferred sales charge is applicable to
a redemption of Class B shares, the calculation will be made in a manner that
results in the lowest possible charge. It will be assumed that the redemption
is made first from shares acquired through the reinvestment of dividends and
distributions; then from amounts representing the increase in net asset value of
your holdings of Class B shares above the total amount of payments for the
purchase of Class B shares during the preceding six years; then from shares held
beyond the applicable contingent deferred sales charge period; and finally, from
shares subject to the lowest conditional deferred sales charge.
If you are exchanging shares for shares of the SSGA Money Market Fund, no
contingent deferred sales charge is charged at the time of the exchange. If you
later redeem your Money Market Fund shares, you will be charged the applicable
contingent deferred sales charge as if your shares were redeemed as of the time
of your exchange into the Money Market Fund. The contingent deferred sales
charge will not decrease for the time amounts are held in the Money Market Fund.
AUTOMATIC CONVERSION OF CLASS B SHARES
Class B shares are automatically converted to Class A shares two years
after the expiration of any contingent deferred sales charge. This conversion
feature relieves Class B shareholders of the higher asset-based sales charge
that otherwise applies to Class B shares under the Class B distribution plan
described below. The conversion is based on the relative net asset value of the
two classes, and no charge is imposed in connection with the conversion.
WHEN WILL THE CONTINGENT DEFERRED SALES CHARGE SCHEDULE BE REDUCED?
There are two ways to reduce the contingent deferred sales charge
schedule:
COMBINED PURCHASES. Purchases made at the same time for any of the Funds
in related accounts may be aggregated for the purpose of receiving a reduced
contingent deferred sales charge schedule. Notice must be given at the time the
orders are placed that there are multiple orders which qualify for a reduced
contingent deferred sales charge schedule.
25
<PAGE>
CUMULATIVE DISCOUNT. Purchases may also qualify for a reduced contingent
deferred sales charge schedule based on the current total net asset value of
your account and related accounts in any of the Funds or the SSGA Money Market
Fund. Notice must be given at the time the purchase order is placed that it
qualifies for a reduced contingent deferred sales charge schedule based on
related holdings in existing Fund accounts.
The Letter of Intent option is not available for Class B shares.
WHEN WILL THE CONTINGENT DEFERRED SALES CHARGE BE WAIVED?
A contingent deferred sales charge will not be assessed on Class A or B
shares for:
- exchanges of Class A or B shares of one Fund for the same class of
shares of another Fund;
- redemptions from tax deferred retirement plans and Individual
Retirement Accounts for required minimum distributions due to
attainment of age 70 1/2;
- redemptions from tax deferred retirement plans for returns of excess
contributions to the plan, termination of employment, participant
loans and hardship withdrawals;
- redemptions as a result of death of the registered shareholder or in
the case of joint accounts, of all registered shareholders;
- redemptions as a result of the disability of the registered
shareholder (as determined in writing by the Social Security
Administration) which occurs after the account was established;
- redemptions for failure to meet minimum account balances; and
- systematic withdrawal amounts provided amounts withdrawn do not exceed
on an annual basis 10% of the account value at the time the Transfer
Agent receives the request.
DISTRIBUTION AND SHAREHOLDER SERVICING FEES
Class B shares are charged fees at an annual rate of 1.00% of the average
daily net assets of Class B shares to compensate the Distributor for certain
distribution and shareholder servicing expenses. These fees consist of a fee at
an annual rate of 0.75% for distribution expenses pursuant to a plan adopted
under Rule 12b-1 under the Investment Company Act of 1940 and a fee at an annual
rate of 0.25% for shareholder servicing expenses. See "Distribution and Service
Fees," p.__. Upon the conversion of Class B shares to Class A shares, those
fees are lowered from 1.00% to 0.35%.
HOW SHARES ARE PRICED
Shares are purchased at their public offering price, which is based upon a
Fund's net asset value per share, plus an initial sales charge on the Class A
shares. Each Fund calculates its net asset value ("NAV") as follows:
NAV = (Value of Fund Assets) - (Fund Liabilities)
-------------------------------------------
Number of Outstanding Shares
Net asset value is determined as of the end of regular trading hours on the
New York Stock Exchange (the "Exchange") (normally 4:00 p.m. Eastern time) on
days the Exchange is open.
Each Fund values its assets at their current market value when market
quotations are readily available. If a market value cannot be established,
assets are valued at fair value as determined in good faith by or under the
direction of MSF's Board of Directors. Short-term securities which mature in
60 days or less are valued by using the amortized cost method, unless the Board
determines that this does not represent fair value. All investments by the
International Equity Fund are valued daily in U.S. dollars based on the then
prevailing
26
<PAGE>
exchange rate. Specific information about how the Funds value certain assets is
set forth in the Statement of Additional Information.
SHAREHOLDERS GUIDE
HOW TO BUY SHARES
GENERAL
You must indicate at the time of investment whether you are purchasing
Class A shares or Class B shares. You also are required by federal regulations
to certify your taxpayer identification (social security) number when opening
your account. Failure to provide an identification number could subject you to
back-up withholding on any distributions, redemptions or disbursements from your
account.
Purchase orders are effected at the net asset value per share next
determined after receipt of the order in proper form by the Transfer Agent.
If your check used for investment does not clear, a fee may be imposed by
the Transfer Agent. All payments should be in U.S. dollars and, to avoid fees
and delays, should be drawn only on U.S. banks. The Funds reserve the right to
reject any purchase order.
All checks should be made payable to Mason Street Funds. Third party
checks will not be accepted.
OPENING AN ACCOUNT
Contact your registered representative for instructions.
ADDING TO AN ACCOUNT
Contact your registered representative for instructions
or
By Mail Identify the Fund and account number or use the remittance
slip attached to your account statement. Send a check
payable to Mason Street Funds. Mail all subsequent
investments to the address on the left.
[NFDS]
By Wire Initial or subsequent purchase payments can also be made by
Federal Funds wire, transferred along with proper
[Bank] instructions directly to your account. Before an initial
wire transfer can be accepted, an account must be
established for you. See your registered representative or
call 1-800-_______ for further instructions. Your financial
institution may charge a fee for wiring funds to your
account. Consult your bank for information on remitting
funds by wire and any associated bank charges.
27
<PAGE>
By Telephone This service allows you to purchase additional shares
[telephone number] quickly and conveniently through an electronic transfer of
money. When you make a purchase by telephone, your
predesignated bank account will be debited for the desired
amount. You can establish this privilege when you open your
account or, if your account is already established, call 1-
800-________ to request the appropriate form. This option
will become effective ___ days after the form is received.
AUTOMATIC INVESTMENT PROGRAMS
Automatic Investing Money is automatically transferred from your bank account to
your Fund account monthly or quarterly. The minimum amount
per transfer is $50 per Fund account. This privilege may be
set up when your account is opened or at any later date by
completing the appropriate section of the Fund application.
You may discontinue your participation in this program at
any time.
Payroll Deduction If your employer can initiate an automatic payroll
deduction, you may make regular investments of $50 or more
per Fund account up to once per month from your paycheck.
To obtain information on establishing this option call 1-
800-_______.
Systematic Exchange In order to assist you in a dollar-cost averaging purchase
program, you may designate the amount of money ($50 minimum
per Fund account) to be automatically exchanged from one
Fund to another once per month. In order to set up this
option, you must have at least $5,000 in the Fund from which
you are exchanging. You may discontinue your participation
in this program at any time. For more information on how to
establish this option, call 1-800-________.
HOW TO EXCHANGE SHARES
On any business day you may exchange your shares for shares of another Fund
of the same class.
By Mail To exchange your shares, your written request should include
[Address] the following information:
- the name of the Fund(s) exchanging out of and into;
- the account number(s);
- the amount of money or number of shares being redeemed;
- the name(s) on the account;
- the signature(s) of all registered account owners (see
How to Sell Shares for more information about the
signature requirements based on the type of account);
and
- your daytime telephone number.
By Telephone
[telephone number] Accounts are automatically eligible for the telephone
exchange option unless this privilege was declined on the
application or otherwise in writing Call the number noted
with the same information as noted above.
General Exchange Policies
28
<PAGE>
- - Except for Systematic Exchanges and qualified plans, the exchange minimum
is $1,000, or the total account value if less.
- - You may make twelve exchanges out of each Fund during a calendar year
(exclusive of Systematic Exchanges). There is no charge for exchanges.
Special rules apply for qualified plans.
- - Exchanges between accounts will only be accepted if the registrations are
identical.
- - The Funds reserve the right to reject any exchange request and to modify or
terminate the exchange privilege at any time.
- - An exchange represents the sale of shares from one Fund and the purchase of
shares of another Fund, which may produce a taxable gain or loss in a non-
tax deferred account.
You may also exchange your shares for shares of the SSGA Money Market Fund.
- - A copy of the SSGA Money Market Fund prospectus should be read before
making such exchange.
- - General Exchange Policies apply to exchanges to the SSGA Money Market Fund.
- - If you are exchanging Class A shares, the shares are exchanged at net asset
value (in or out).
- - If you are exchanging Class B shares, no contingent deferred sales charge
is charged at the time of the exchange See "Contingent Deferred Sales
Charge," p.__.
HOW TO SELL SHARES
THROUGH YOUR REGISTERED REPRESENTATIVE
Contact your representative directly for instructions
THROUGH THE TRANSFER AGENT
By Mail
[Address] Send a written request, signed by each owner (if joint
account) to the Transfer Agent at the address on the left.
By Wire As soon as appropriate information regarding your bank
account has been established for your Fund account, you may
write or telephone redemption requests to the Transfer
Agent, and redemption proceeds will be wired in federal
funds to the commercial bank you have specified.
Information regarding your bank account may be provided on
the Account Application or in a signature guaranteed letter
of instruction to the Transfer Agent. Signature guarantee
requirements are discussed below.
Redemption proceeds will normally be wired the next business
day following the day on which your request and any other
necessary documents have been received by the Transfer
Agent.
Requests must be for at least $______ and may be subject to
limits on frequency and amount. A charge of $15 will be
imposed for wire redemptions.
29
<PAGE>
Wire Privileges may be modified or suspended at any
time.
Contact your bank for information on any charges
imposed by the bank in connection with receipt of
redemptions by wire.
By Telephone
[telephone number] Accounts have this option unless this option was
specifically declined on the application or in writing.
You may redeem up to $50,000 daily from your account by
calling the listed number before 4:00 p.m. Eastern
time. Checks will be sent to the address of record.
AUTOMATIC REDEMPTION
Systematic Withdrawals You may provide for the automatic redemption of a
specific dollar amount from your account on a regular
basis. The minimum amount of a withdrawal is $100 and
the minimum account size is $10,000.
Minimum Accounts The Fund reserves the right to redeem any Regular
Account if, after sixty days written notice, the
account's value remains below a $1000 minimum balance.
General Redemption Policies
- - Redemption orders are effected at the net asset value per share next
determined after receipt of the order in proper form by the Transfer Agent.
When you redeem your Class B shares within six years of purchase, you may
be subject to a contingent deferred sales charge as set forth in this
prospectus.
- - Redemption requests must be signed by each shareholder, including each
joint owner. When redeeming shares, you should indicate whether you are
redeeming Class A or Class B shares. If you own both Class A and Class B
shares, Class A shares will be redeemed first unless you request otherwise.
Certain types of redemption requests will need to include a signature
guarantee. Signature guarantees must accompany redemption requests for:
(i) an amount in excess of $50,000; or (ii) any amount if the redemption
proceeds are to be sent somewhere other than the address of record on the
Funds' books or if the current address of record has not been on the Fund's
books for sixty days.
- - You may obtain a signature guarantee from: (i) a bank which is a member of
the FDIC; (ii) a trust company; (iii) a member firm of a national
securities exchange; or (iv) another eligible guarantor institution.
Guarantees must be signed by an authorized signatory of the guarantor
institution and be accompanied by the words "Signature Guaranteed." A
notary public cannot provide a signature guarantee.
- - The Fund ordinarily will make payment for all shares redeemed within three
business days after the Transfer Agent receives a request in proper form,
except as provided by the rules of the Securities and Exchange Commission.
However, if the shares to be redeemed have been purchased by check, the
Fund will, upon the clearance of the purchase check, mail the redemption
proceeds. It may take up to 15 days for the purchase check to clear. This
does not apply to situations where a Fund receives payment via immediately
available funds for the purchase of shares.
QUICK ADDRESS AND TELEPHONE REFERENCE
Regular Mail Express or Certified Mail
Mason Street Funds Mason Street Funds
[telephone numbers]
DISTRIBUTIONS AND TAXES
30
<PAGE>
DIVIDENDS AND DISTRIBUTIONS
Each Fund distributes substantially all of its net realized capital gains
and net investment income to its shareholders. A capital gain or loss is the
difference between the purchase and sale price of a security. The Funds will
have net capital gains if their capital gains exceed their capital losses, which
cannot be assured. Net investment income is determined by subtracting expenses
from any interest and dividend income earned by a Fund.
All the Funds distribute any net realized short and long-term capital gains
at least annually.
The Stock Funds and the Asset Allocation Fund distribute any net investment
income to shareholders annually. The Bond Funds declare net investment income
dividends daily and distribute such dividends to the shareholders monthly.
Each Fund pays its dividends and other distributions in additional Fund
shares at net asset value unless the shareholder requests cash payments.
Shareholders who elect to receive dividends and/or other distributions in cash
or in shares of another Fund should contact their registered representative or
the Transfer Agent or complete the applicable item on the Fund application.
TAXES
Each Fund is separate for investment and accounting purposes and will be
treated as a separate entity for federal income tax purposes. Each Fund intends
to qualify as a regulated investment company under the Internal Revenue Code so
that it will not be subject to federal income taxes on net investment income and
net capital gains distributed to its shareholders.
TAXES ON REDEMPTIONS
When shares of any of the Funds are redeemed, including by exchange into
another Fund, a shareholder may realize a taxable gain or a loss. The gain or
loss is measured by the difference between the redemption proceeds and the
shareholder's adjusted basis for the redeemed shares.
TAXES ON FUND DISTRIBUTIONS
THE FOLLOWING SUMMARY DOES NOT APPLY TO ACCOUNTS THAT ARE OPENED FOR
QUALIFIED RETIREMENT PLANS OR BY TAX-EXEMPT INVESTORS. TAXES ON FUND
DISTRIBUTIONS TO QUALIFIED RETIREMENT PLAN ACCOUNTS ARE DEFERRED UNTIL MONEY IS
WITHDRAWN FROM THOSE ACCOUNTS. THIS SUMMARY ALSO DOES NOT APPLY TO
DISTRIBUTIONS FROM THE MUNICIPAL BOND FUND. INFORMATION ABOUT DISTRIBUTIONS
FROM THE MUNICIPAL BOND FUND APPEARS SEPARATELY BELOW.
Dividends and capital gains distributions from the Funds are taxable
whether received in cash or additional Fund shares. If such dividends and
distributions are declared in October, November or December, they are taxable
for the year in which they were declared, if paid by February 1 of the following
calendar year. Net investment income dividends and short-term capital gains
distributions are taxable as ordinary income. A capital gain distribution is
short-term or long-term depending on how long the Fund held the securities that
produced it, not how long the shareholder held his or her shares in the Fund.
Dividends paid by Funds that are attributable to the Fund's investments in U.S.
government securities may be exempt from state and local income taxes.
Among other things, a Fund's net asset value reflects undistributed income
and capital gains. When such income and gains are distributed, the net asset
value is reduced by the amount of the distribution. An investor who acquires
shares prior to or on the record date for distributions is entitled to receive
these distributions.
DISTRIBUTIONS FROM THE MUNICIPAL BOND FUND
Net investment income dividends declared and paid by the Municipal Bond
Fund are, for the most part, "exempt-interest" dividends, whether received in
cash or additional shares of the Fund. Exempt-interest dividends are not
subject to federal income tax, but they may affect the tax liabilities of
taxpayers who are subject to the alternative minimum tax ("AMT"). Exempt-
interest dividends are also includible in the modified income of shareholders
who receive Social Security
31
<PAGE>
benefits for purposes of determining the extent to which such benefits may be
taxed. Generally, exempt-interest dividends are not exempt from state or local
taxes. However, a state or locality may provide tax exemptions for its
residents who receive exempt-interest dividends that relate to Municipal
Obligations issued within that state or locality.
Net investment income dividends derived from taxable obligations held in
the Municipal Bond Fund and any capital gains distributions by the Fund are
normally taxable as ordinary income and capital gain, respectively, whether
received in cash or additional shares of the Fund. Market discount on Municipal
Obligations acquired after April 30, 1993 is also treated as ordinary income.
NMIS intends to manage the Fund to minimize taxable distributions to the Fund's
shareholders. However, there can be no assurance that the Fund will never make
such distributions.
Certain individuals and corporations may be subject to the AMT. For them,
exempt-interest dividends derived from private activity bonds are treated as a
tax preference item. In addition, for corporate shareholders only, all other
exempt-interest dividends are a component of the adjusted current earnings
preference item for purposes of the AMT, and a component for computing the
corporate environmental tax.
Corporations and Social Security beneficiaries should consult their tax
advisors about the possible consequences to them of investing in the Municipal
Bond Fund.
WITHHOLDING
The Funds are currently required to withhold 31% of all taxable
distributions and redemption proceeds payable to any shareholder who has not
certified his taxpayer identification number, or who is otherwise subject to
backup withholding. Corporate and governmental entities are generally exempt
from withholding requirements.
TAX INFORMATION FOR SHAREHOLDERS
Following the end of each calendar year, each Fund notifies its
shareholders of the amount of dividends and capital gains distributions paid (or
deemed paid) during that year, and shows the portion of those dividends that
qualifies for the corporate dividends-received deduction. The Funds identify
amounts taxable as ordinary income and amounts taxable as capital gains, and
indicate whether any portion of such income is possibly exempt from state or
local taxes. The Municipal Bond Fund provides its shareholders with information
about the exempt-interest dividends paid to them (since they must disclose it on
their federal income tax returns), and reports the amount that relates to
private activity bonds which could be subject to the AMT. Under certain
circumstances, notices provided to the International Equity Fund shareholders
also specify their respective shares of foreign taxes paid by that Fund.
International Equity Fund shareholders are required to include their pro-rata
share of those taxes in gross income, but may be entitled to claim a credit or
deduction for them.
The foregoing is only a summary of some important federal tax law
provisions that can affect the Funds and their shareholders. There may be other
federal, state or local tax law provisions which affect some or all investors.
Prospective investors and current shareholders are urged to consult their tax
advisors about their individual circumstances.
OTHER INFORMATION
ORGANIZATION
MSF was incorporated in Maryland on August 30, 1996.
MSF issues a separate series of capital stock for each Fund. Each share of
capital stock issued with respect to a Fund has a pro rata interest in the
assets of that Fund and has no interest in the assets of any other Fund. Each
share of capital stock is entitled to one vote on all matters submitted to a
vote of shareholders. Shares of a Fund will be voted separately, however, on
matters affecting only that Fund, including approval of the Investment Advisory
Agreement and changes in fundamental investment polices of a Fund. The assets
of each Fund are charged with the liabilities of the Fund and their
proportionate share of the general liabilities of MSF generally based on the
relative asset size of the Funds at the time the liabilities are incurred. All
shares may be redeemed for cash at any time.
VOTING RIGHTS
32
<PAGE>
Neither MSF nor its Funds are required to hold annual meetings of
shareholders, but special meetings may be called to elect or remove Directors,
change fundamental policies or the 12b-1 plans, or to approve an investment
advisory agreement. All shares of the Funds have equal voting rights. Shares
are voted in the aggregate, unless voting by series is required by law, or when
an issue affects the series or class separately. Shares of each Fund are fully
paid and nonassessable when issued, are transferrable without restriction and
have no preemptive or conversion rights.
APPENDIX A
GLOSSARY
The following glossary gives you a more detailed description of some of the
types of securities in which the Funds may invest, subject to their specific
restrictions and policies. It also discusses other investment techniques and
other terminology that is included in this Prospectus. Additional information
on eligible investments can be found elsewhere in this Prospectus and in the
Statement of Additional Information.
EQUITY AND DEBT SECURITIES
AMERICAN DEPOSITORY RECEIPTS (ADRS): see Depositary receipts.
BONDS are debt securities issued by a company, municipality or government
agency. The issuer of a bond is required to pay the holder the amount of the
loan (or par value) at a specified maturity and to make scheduled interest
payments.
COMMERCIAL PAPER is a short-term debt obligation with a maturity ranging from 1
to 270 days issued by banks, corporations and other borrowers to investors
seeking to invest idle cash. The Funds may purchase commercial paper issued
under Section 4(2) of the Securities Act of 1933. NMIS may determine that such
securities are liquid under guidelines established by the Directors.
COMMON STOCK represents a share of ownership in a company and usually carries
voting rights and earns dividends. Unlike preferred stock, dividends on common
stock are not fixed but are declared at the discretion of the issuer's board of
directors.
CONVERTIBLE SECURITIES are preferred stocks or bonds that pay a fixed dividend
or interest payment and are convertible into common stock at a specified price
or conversion ratio.
DEPOSITARY RECEIPTS are receipts for shares of a foreign-based corporation that
entitle the holder to dividends and capital gains on the underlying security.
Receipts include those issued by domestic banks (American Depositary Receipts),
foreign banks (Global or European Depositary Receipts) and broker-dealers
(depositary shares).
FIXED-INCOME SECURITIES are securities that pay a fixed rate of return. The
term generally includes short- and long-term government, corporate and municipal
obligations that pay a fixed rate of interest or coupons for a specified period
of time and preferred stock, which pays fixed dividends. Coupon and dividend
rates may be fixed for the life of the issue or, in the case of adjustable and
floating rate securities, for a shorter period.
HIGH QUALITY INSTRUMENTS are securities rated AA or better by Standard & Poor's
and Aa or better by Moody's.
HIGH GRADE INSTRUMENTS are securities rated A or better by Standard & Poor's or
Moody's.
HIGH-YIELD/HIGH-RISK BONDS are securities that are rated below investment grade
by the primary rating agencies (BB or lower by Standard & Poor's and Ba or lower
by Moody's). Other terms commonly used to describe such securities include
"lower rated bonds," "noninvestment grade bonds" and "junk bonds."
INDUSTRIAL DEVELOPMENT BONDS are revenue bonds that are issued by a public
authority but which may be backed only by the credit and security of a private
issuer and may involve greater credit risk. See "Municipal securities" below.
33
<PAGE>
INVESTMENT GRADE BONDS are securities rated BBB or higher by Standard & Poor's
and Baa or higher by Moody's.
MORTGAGE- AND ASSET-BACKED SECURITIES are shares in an organized pool of
mortgages or other debt. These securities are generally pass-through
securities, which means that principal and interest payments on the underlying
securities (less servicing fees) are passed through to shareholders on a pro
rata basis. These securities involve prepayment risk, which is the risk that the
underlying mortgages or other debt may be refinanced or paid off prior to their
maturities during periods of declining interest rates. In that case, a
portfolio manager may have to reinvest the proceeds from the securities at a
lower rate. Potential market gains on a security subject to prepayment risk may
be more limited than potential market gains on a comparable security that is not
subject to prepayment risk.
MUNICIPAL SECURITIES are bonds or notes issued by a U.S. state or political
subdivision. A municipal security may be a general obligation backed by the
full faith and credit (i.e., the borrowing and taxing power) of a municipality
or a revenue obligation paid out of the revenues of a designated project,
facility or revenue source.
PASSIVE FOREIGN INVESTMENT COMPANIES (PFICS) are foreign investment funds or
trusts. In addition to bearing their proportionate share of a Fund's expenses,
shareholders may indirectly bear similar expenses of PFICS and similar trusts.
PREFERRED STOCK is a class of stock that generally pays dividends at a specified
rate and has preference over common stock in the payment of dividends and
liquidation. Preferred stock generally does not carry voting rights.
REPURCHASE AGREEMENTS involve the purchase of a security by a Fund and a
simultaneous agreement (generally with a bank or dealer) to repurchase the
security from the Fund at a specified date or upon demand. This technique
offers a method of earning income on idle cash. These securities involve the
risk that the seller will fail to repurchase the security, as agreed. In that
case, a Fund will bear the risk of market value fluctuations until the security
can be sold and may encounter delays and incur costs in liquidating the
security.
U.S. GOVERNMENT SECURITIES includes direct obligations of the U.S. government
that are supported by its full faith and credit. Treasury bills have initial
maturities of less than one year, Treasury notes have initial maturities of one
to ten years and Treasury bonds may be issued with any maturity but generally
have maturities of at least ten years. U.S. government securities also include
indirect obligations of the U.S. government that are issued by federal agencies
and government sponsored entities. Unlike Treasury securities, agency
securities generally are not backed by the full faith and credit of the U.S.
government. Some agency securities are supported by the right of the issuer to
borrow from the Treasury, others are supported by the discretionary authority of
the U.S. government to purchase the agency's obligations and others are
supported only by the credit of the sponsoring agency.
WARRANTS are securities, typically issued with preferred stock or bonds, that
give the holder the right to buy a proportionate amount of common stock at a
specified price, usually at a price that is higher than the market price at the
time of issuance of the warrant. The right may last for a period of years or
indefinitely.
WHEN-ISSUED, DELAYED DELIVERY AND FORWARD TRANSACTIONS generally involve the
purchase of a security with payment and delivery due at some time in the future,
i.e., beyond normal settlement. The Funds do not earn interest on such
securities until settlement and bear the risk of market value fluctuations in
between the purchase and settlement dates. New issues of stocks and bonds,
private placements and U.S government securities may be sold in this manner.
ZERO COUPON BONDS are debt securities that do not pay regular intervals, but are
issued at a significant discount from face value. The discount approximates the
total amount of interest the security will accrue from the date of issuance to
maturity. The market value of these securities generally fluctuates more in
response to changes in interest rates than interest-paying securities of
comparable maturity.
FUTURES, OPTIONS AND OTHER DERIVATIVES
FUTURES CONTRACTS are contracts the obligate the buyer to receive and the seller
to deliver an instrument or money at a specified price on a specified date. The
Funds may buy and sell futures contracts on foreign currencies, securities and
financial indices including interest rates or an index of U.S. government,
foreign government, equity or fixed-income securities. An option on a
34
<PAGE>
futures contract gives the buyer the right, but not the obligation, to buy or
sell a futures contract at a specified price on or before a specified date.
Futures contracts and options on futures are standardized and traded on
designated exchanges.
OPTIONS are the right, but not the obligation, to buy or sell a specified amount
of securities or other assets on or before a fixed date at a predetermined
price. The Funds may purchase put and call options on certain securities,
securities indices and foreign currencies and may write covered put or call
options.
FORWARD CONTRACTS are contracts to purchase or sell a specified amount of
property for an agreement upon price at a specified time. Forward contracts
are not currently exchange traded and are typically negotiated on an individual
basis. The Funds may enter into forward currency contracts to hedge against
declines in the value of non-dollar denominated securities or to reduce the
impact of currency appreciation on purchases of non-dollar denominated
securities. They may also enter into forward contracts to purchase or sell
securities or other financial indices.
OTHER TERMS
NET ASSET VALUE ("NAV") is the value of a single share of a Fund. It is computed
by adding the value of all of a Fund's investments and other assets, subtracting
any liabilities and dividing the result by the number of shares outstanding.
FUND TURNOVER RATE is a measure of the amount of a Fund's buying and selling
activity. It is computed by dividing total purchases or sales, whichever is
less, by the averaging monthly market value of a Fund's securities.
TOTAL RETURN is the percentage increase or decrease in the value of an
investment over a stated period of time. A total return percentage includes
both income and changes in NAV. For the purposes of calculating total return,
it is assumed that dividends and distributions are reinvested at the net asset
value on the day of the distribution.
35
<PAGE>
APPENDIX B
BOND
RATING EXPLANATION
- --------------------------------------------------------------------------------
STANDARD & POOR'S AAA Highest rating; extremely strong capacity
CORPORATION to pay principal and interest.
AA High quality; very strong capacity to pay
principal and interest.
A Strong capacity to pay principal and
interest; somewhat more susceptible to the
adverse effects of changing circumstances
and economic conditions.
BBB Adequate capacity to pay principal and
interest; normally exhibits adequate
protection parameters, but adverse
economic conditions or changing
circumstances more likely to lead to a
weakened capacity to pay principal and
interest than for higher rated bonds.
BB, B, Predominantly speculative with respect to
CCC, CC the issuer's capacity to meet required
interest and principal payments. BB-
lowest degree of speculation; CC- the
highest degree of speculation. Quality
and protective characteristics outweighed
by large uncertainties or major risk
exposure to adverse conditions.
D In default.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
MOODY'S INVESTORS Aaa Highest quality, smallest degree of
SERVICE, INC. investment risk.
Aa High quality; together with Aaa bonds,
they compose the high-grade bond group.
A Upper-medium grade obligations; many
favorable investment attributes.
Baa Medium-grade obligations; neither highly
protected nor poorly secured. Interest
and principal appear adequate for the
present but certain protective elements
may be lacking or may be unreliable over
any great length of time.
Ba More uncertain, with speculative elements.
Protection of interest and principal
payments not well safeguarded during good
and bad times.
B Lack characteristics of desirable
investment; potentially low assurance of
timely interest and principal payments or
maintenance of other contract terms over
time.
Caa Poor standing, may be in default; elements
of danger with respect to principal or
interest payments.
Ca Speculative in a high degree; could be in
default or have other marked shortcomings.
C Lowest-rated; extremely poor prospects of
ever attaining investment standing.
<PAGE>
MASON STREET FUNDS, INC.
CROSS REFERENCE SHEET
Cross reference sheet showing location in Statement of Additional
Information required by the Items in Part B of Form N-1A.
Heading in Statement
Item Number of Additional Information
----------- -------------------------
10 Cover Page
11 Table of Contents
12 Not Applicable
13 Investment Policies
14 Management of MSF
15 Ownership of Shares of MSF
16 Investment Advisory Services, Distribution
Arrangements
17 Portfolio Transactions and Brokerage Allocation
and Other Practices
18 Other Information About MSF
19 Determination of Net Asset Value, Purchase and
Redemption of Shares
20 Taxes
21 Distribution Arrangements, Underwriter
22 Investment Performance
23 Report of Independent Accountants, Financial
Statements
<PAGE>
MASON STREET FUNDS, INC.
Consisting of
Aggressive Growth Stock Fund
International Equity Fund
Growth Stock Fund
Growth and Income Stock Fund
Index 500 Stock Fund
Asset Allocation Fund
High Yield Bond Fund
Municipal Bond Fund
Select Bond Fund
This Statement of Additional Information is not a prospectus but
supplements and should be read in conjunction with the Prospectus for Mason
Street Funds, Inc. ("MSF"). A copy of the Prospectus may be obtained from
The Northwestern Mutual Life Insurance Company, 720 East Wisconsin Avenue,
Milwaukee, Wisconsin 53202, telephone number (414) 271-1444.
The date of the Prospectus to which this Statement of
Additional Information Relates is ________________.
The date of this Statement of Additional Information is _____________.
B-1
<PAGE>
TABLE OF CONTENTS
CROSS-REFERENCE TO
PAGE PAGE IN PROSPECTUS
---- ------------------
Investment Policies B-4 __
Investment Restrictions B-4 __
Portolio Securities for the Municipal Bond Fund B-5 -
Repurchase Agreements B-7 __
Financial Futures Contracts B-8 __
Options - In General B-14 -
Future Developments B-15 -
Reverse Repurchase Agreements B-15 -
Warrants B-15 __
Asset-Backed and Variable Rate Securities B-15 -
Short-Term Trading B-16 -
Firm Commitment Agreements and "When-Issued" B-16 -
Securities
Private Placement Transactions B-16 __
and Illiquid Assets
Risk Factors for the International
Equity Fund and International Investments
of the Other Funds B-17 __
Portfolio Turnover B-19 -
Management of MSF B-20 __
Other Information About MSF B-22 -
Investment Advisory Services B-23 __
Fund Expenses B-26
Distribution Arrangements B-26
Distribution Financing Plans and
Shareholder Servicing Agreement B-27
Class A Plan and Agreement B-27
Class B Plan and Agreement B-27
General B-28
Portfolio Transactions and
Brokerage Allocation and Other Practices B-28 -
Determination of Net Asset Value B-30
Purchase and Redemption of Shares B-32
Cumulative Discount B-32
Letter of Intent B-32
Systematic Withdrawal Plan B-32
Special Redemptions B-33
B-2
<PAGE>
Suspension of Redemptions B-33
Investment Performance B-33
Standardized Average Annual Total
Return Quotations B-33
Standardized Yield Quotations B-35
Non-Standardized Performance B-35
General Information B-35
Taxes B-37
Municipal Bond Fund B-41
State and Local B-42
Custodians B-42
Transfer Agent Services B-42
Independent Certified Public Accountants B-42
Financial Statements B-42
Appendix A B-43 __
Appendix B B-51 __
Report of Independent Accountants B-__ __
Financial Statements B-__ __
B-3
<PAGE>
INVESTMENT POLICIES
The following information supplements and should be read in conjunction
with the sections in MSF's Prospectus entitled "The Funds in Detail."
INVESTMENT RESTRICTIONS
The investment restrictions not listed in the Prospectus and generally
common to the Index 500 Stock, Select Bond, Municipal Bond, Asset Allocation,
Growth and Income Stock, Growth Stock, Aggressive Growth Stock, High Yield Bond
and International Equity Funds of MSF (the "Funds") are described below. The
investment restrictions of the Funds numbered 1-8 below are "fundamental
policies" and may be changed only with the approval of the majority of the
Fund's shares outstanding. These investment restrictions provide that each Fund
will not:
1. Invest for the purpose of influencing management or exercising
control, but freedom of action is reserved with respect to exercise of
voting rights in respect of each Fund's securities.
2. Purchase any security on margin, but each Fund may obtain such
short-term credits as are necessary for the clearance of purchases and
sales of securities.
3. Make short sales of securities.
4. Act as a securities underwriter for other issuers, but each Fund may
purchase securities under circumstances where, if the securities are
later publicly offered or sold by the Fund, it might be deemed to be
an underwriter for purposes of the Securities Act of 1933.
5. Purchase or sell real estate. However, each Fund may invest in
securities issued by companies, including real estate investment
trusts, which invest in real estate or interests therein.
6. Invest in commodities or commodity contracts. However, each Fund
(except the Select Bond, Municipal Bond and High Yield Bond Funds) may
invest in stock index futures contracts, including indexes on specific
industries, and the Municipal Bond, Select Bond, High Yield Bond,
International Equity and Asset Allocation Funds may invest in interest
rate futures contracts in accordance with their investment objectives
and policies. The International Equity, Asset Allocation, Select
Bond, Aggressive Growth Stock, Growth Stock and High Yield Bond Funds
may invest in foreign currency futures and forward contracts.
7. Issue senior securities or borrow money except for short-term credits
as may be necessary for the clearing of transactions and except for
temporary purposes to the extent of 5% of the total assets of the
Fund. Reverse repurchase agreements and financial futures contracts
are not considered to be "senior securities" or "borrowing money" for
the purpose of this restriction.
8. Make loans to persons who intend to use the proceeds for non-business
purposes or to companies which (including predecessors) have been in
business for less than three years.
B-4
<PAGE>
Repurchase agreements are not considered to be "loans" for the purpose
of this restriction.
As a non-fundamental investment policy, which may be changed by the Board
of Directors without shareholder approval, the International Equity Fund will
not invest more than 15% of its total assets in securities of foreign issuers
which are not listed on a recognized United States or foreign securities
exchange.
PORTFOLIO SECURITIES FOR THE MUNICIPAL BOND FUND
Municipal Obligations. The term "Municipal Obligations" generally
includes debt obligations issued to obtain funds for various public purposes,
including the construction of a wide range of public facilities such as
airports, bridges, highways, housing, hospitals, mass transportation, schools,
streets and water and sewer works. Other public purposes for which Municipal
Obligations may be issued include refunding outstanding obligations, obtaining
funds for general operating expenses and lending such funds to other public
institutions and facilities. In addition, certain types of industrial
development bonds are issued by or on behalf of public authorities to obtain
funds to provide for the construction, equipment, repair or improvement of
privately operated housing facilities, sports facilities, convention or trade
show facilities, airport, mass transit, industrial, port or parking facilities,
air or water pollution control facilities and certain local facilities for water
supply, gas, electricity or sewage or solid waste disposal; the interest paid on
such obligations may be exempt from Federal income tax, although current tax
laws place substantial limitations on the size of such issues. Such obligations
are considered to be Municipal Obligations if the interest paid thereon
qualifies as exempt from Federal income tax in the opinion of bond counsel to
the issuer. There are, of course, variations in the security of Municipal
Obligations, both within a particular classification and between
classifications.
Floating and variable rate demand notes and bonds are tax exempt obligations
ordinarily having stated maturities in excess of one year, but which permit the
holder to demand payment of principal at any time, or at specified intervals.
The issuer of such obligations ordinarily has a corresponding right, after a
given period, to prepay in its discretion the outstanding principal amount of
the obligations plus accrued interest upon a specified number of days' notice to
the holders thereof. The interest rate on a floating rate demand obligation is
based on a known lending rate, such as a bank's prime rate, and is adjusted
automatically each time such rate is adjusted. The interest rate on a variable
rate demand obligation is adjusted automatically at specified intervals.
For the purpose of diversification under the Investment Company Act of 1940, as
amended (the "1940 Act"), the identification of the issuer of Municipal
Obligations depends on the terms and conditions of the security. When the
assets and revenues of an agency, authority, instrumentality or other political
subdivision are separate from those of the government creating the subdivision
and the security is backed only by the assets and revenues of the subdivision,
such subdivision would be deemed to be the sole issuer. Similarly, in the case
of an industrial development bond, if that bond is backed only by the assets and
revenues of the non-governmental user, then such non-governmental user would be
deemed to be the sole issuer. If, however, in either case, the creating
government or some other entity guarantees a security, such a guaranty would be
considered a separate security and will be treated as an issue of such
government or other entity.
B-5
<PAGE>
The yields on Municipal Obligations are dependent on a variety of factors,
including general economic and monetary conditions, money market factors,
conditions in the Municipal Obligations market, size of a particular offering,
maturity of the obligation and rating of the issue. The imposition of the
Fund's investment advisory fee, as well as other operating expenses, will have
the effect of reducing the yield to investors.
Municipal lease obligations or installment purchase contract obligations
(collectively, "lease obligations") have special risks not ordinarily associated
with Municipal Obligations. Although lease obligations do not constitute
general obligations of the municipality for which the municipality's taxing
power is pledged, a lease obligation ordinarily is backed by the municipality's
covenant to budget for, appropriate and make the payments due under the lease
obligation. However, certain lease obligations contain "non-appropriation"
clauses which provide that the municipality has no obligation to make lease or
installment purchase payments in future years unless money is appropriated for
such purpose on a yearly basis. Although "non-appropriation" lease obligations
are secured by the leased property, disposition of the property in the event of
foreclosure might prove difficult. The staff of the Securities and Exchange
Commission currently considers certain lease obligations to be illiquid.
Determination as to the liquidity of such securities is made in accordance with
guidelines established by MSF's Board. Pursuant to such guidelines, the Board
has directed NMIS to monitor carefully the Municipal Bond Fund's investment in
such securities with particular regard to (1) the frequency of trades and quotes
for the lease obligation; (2) the number of dealers willing to purchase or sell
the lease obligation and the number of other potential buyers; (3) the
willingness of dealers to undertake to make a market in the lease obligation;
(4) the nature of the marketplace trades including the time needed to dispose of
the lease obligation, the method of soliciting offers and the mechanics of
transfer; and (5) such other factors concerning the trading market for the lease
obligation as NMIS may deem relevant. In addition, in evaluating the liquidity
and credit quality of a lease obligation that is unrated, the Fund's Board has
directed NMIS to consider (a) whether the lease can be cancelled; (b) what
assurance there is that the assets represented by the lease can be sold; (c) the
strength of the lessee's general credit (e.g., its debt, administrative,
economic, and financial characteristics); (d) the likelihood that the
municipality will discontinue appropriating funding for the leased property
because the property is no longer deemed essential to the operations of the
municipality (e.g., the potential for an "event of nonappropriation"); (e) the
legal recourse in the event of failure to appropriate; and (f) such other
factors concerning credit quality as NMIS may deem relevant. The Fund will not
invest more than 15% of the value of its net assets in lease obligations that
are illiquid and in other illiquid securities.
Tender option bonds are generally long-term securities that have been coupled
with an option to tender the securities to a bank, broker-dealer or other
financial institution at periodic intervals and receive the face value of the
bond. The Municipal Bond Fund will purchase tender option bonds only when it is
satisfied that the custodial and tender option arrangements, including the fee
payment arrangements, will not adversely affect the tax exempt status of the
underlying Municipal Obligations and that payment of any tender fees will not
have the effect of creating taxable income for the Fund. Based on the tender
option bond agreement, the Fund expects to be able to value the tender option
bond at par; however, the value of the instrument will be monitored to assure
that it is valued at fair value.
B-6
<PAGE>
Ratings of Municipal Obligations. Subsequent to its purchase by the Municipal
Bond Fund, an issue of rated Municipal Obligations may cease to be rated or its
rating may be reduced below the minimum required for purchase by the Fund.
Neither event will require the sale of such Municipal Obligations by the Fund,
but NMIS will consider such event in determining whether the Fund should
continue to hold the Municipal Obligations. To the extent that the ratings
given by Moody's, S&P or Fitch for Municipal Obligations may change as a result
of changes in such organizations or their rating systems, the Fund will attempt
to use comparable ratings as standards for its investments in accordance with
the investment policies contained in the Prospectus and this Statement of
Additional Information. The ratings of Moody's, S&P and Fitch represent their
opinions as to the quality of the Municipal Obligations which they undertake to
rate. It should be emphasized, however, that ratings are relative and
subjective and are not absolute standards of quality. Although these ratings
may be an initial criterion for selection of portfolio investments, NMIS also
will evaluate these securities.
REPURCHASE AGREEMENTS
Each of the Funds may invest in repurchase agreements. A repurchase
agreement customarily obligates the seller at the time it sells securities to
the Fund to repurchase the securities at a mutually agreed upon time and price.
The total amount received on repurchase would be calculated to exceed the price
paid by the Fund, reflecting an agreed upon market rate of interest for the
period from the time of the repurchase agreement to the settlement date, and
would not necessarily be related to the interest rate on the underlying
securities. The differences between the total amount to be received upon
repurchase of the securities and the price which was paid by the Fund upon their
acquisition is accrued as interest and is included in the Fund's net income
declared as dividends. Each Fund intends to limit repurchase agreements to
transactions with financial institutions having total assets in excess of
$1,000,000,000 and with broker-dealers. Securities subject to repurchase
agreements shall be limited to obligations of or guaranteed by the U.S.
Government or its agencies or by the Government of Canada or of a Province of
Canada or any instrumentality or political subdivision thereof, certificates of
deposit of banks or commercial paper which meets the criteria for other
commercial paper in which the Fund may invest. A Fund will not invest more than
10% of its total assets in repurchase agreements which have maturities of more
than seven days and will not invest in repurchase agreements with maturities of
over 30 days. Under no circumstances will a Fund enter into a repurchase
agreement with The Northwestern Mutual Life Insurance Company ("Northwestern
Mutual Life").
Each Fund has the right to sell securities subject to repurchase agreements
but would be required to deliver identical securities upon maturity of the
repurchase agreement unless the seller fails to pay the repurchase price. It is
each Fund's intention not to sell securities subject to repurchase agreements
prior to the agreement's maturity. To the extent that the proceeds from any
sale upon a default in the obligation to repurchase were less than the
repurchase price, the Fund would suffer a loss. the Fund might also incur
disposition costs in connection with liquidating its collateral and, if
bankruptcy proceedings are commenced with respect to the seller, realization
upon the collateral by the Fund may be delayed or limited and a loss may be
incurred if the collateral securing the repurchase agreement declines in value
during the bankruptcy proceedings. To minimize the possibility of losses due to
the default or bankruptcy of the seller, MSF has adopted standards of
creditworthiness for all broker-dealers with which MSF
B-7
<PAGE>
enters into repurchase agreements and will review compliance by such
broker-dealers periodically.
FINANCIAL FUTURES CONTRACTS
The Index 500 Stock, Asset Allocation, Growth and Income Stock, Growth
Stock, Aggressive Growth Stock, and International Equity Funds may invest in
stock index futures contracts, including indexes on specific industries, and the
Select Bond, High Yield Bond, Municipal Bond, International Equity and Asset
Allocation Funds may invest in interest rate futures contracts. The following
describes the stock index and interest rate futures markets and the manner in
which the Funds will implement the policy.
USE. The Funds, as identified above, may enter into stock index futures
contracts as a hedge against changes in the market values of common stocks and
may enter into interest rate futures contracts as a hedge against changes in
prevailing levels of interest rates. In both cases, the purpose is to establish
more definitely the effective return on securities held or intended to be
acquired by the Funds. The Funds' hedging may include sales of futures as an
offset against the effect of expected decreases in stock values or increases in
interest rates, and purchases of futures as an offset against the effect of
expected increases in stock values or decreases in interest rates.
The Funds will not enter into financial futures contracts for speculation,
and will only enter into futures contracts that are traded on national futures
exchanges and are standardized as to maturity date and underlying securities.
Currently, stock index futures contracts can be purchased or sold with respect
to various Standard and Poor's stock indicies on the Chicago Mercantile
Exchange, the New York Stock Exchange Composite Index on the New York Futures
Exchange and the Value Line Stock Index on the Kansas City Board of Trade. The
principal interest rate futures exchanges in the United States are the Chicago
Board of Trade, the Chicago Mercantile Exchange and the New York Futures
Exchange. Futures exchanges and trading are regulated under the Commodity
Exchange Act by the Commodity Futures Trading Commission.
A Fund will not enter into a futures contract if, as a result thereof the
sum of the initial margin deposits of all open futures positions (other than an
offsetting transaction) would be more than 5% of the Fund's total assets. More
than 5% of the Fund's total assets may be committed to the aggregate of initial
and variation margin payments however.
The Funds will incur brokerage commissions in connection with transactions
in futures contracts.
DESCRIPTION. A stock index futures contract is an agreement whereby one
party agrees to take and another party agrees to make delivery of an amount of
cash equal to a specified dollar amount times the difference between the stock
index value at the close of the last trading day of the contract and the price
at which the futures contract is originally struck. A stock index assigns
relative values to the common stocks included in the index, and the index
fluctuates with changes in the market values of the common stocks included. No
physical delivery of the underlying stocks in the index is made.
Currently, stock index futures contracts covering the stock market as a
whole and covering certain industries are being traded. It is expected that
futures contracts covering stock indexes of additional industries will
eventually be traded.
B-8
<PAGE>
An interest rate futures contract is an agreement whereby one party agrees
to sell and another party agrees to purchase a specified amount of a specified
financial instrument (debt security) at a specified price at a specified date,
time and place. Although interest rate futures contracts typically require
actual future delivery of and payment for financial instruments, the contracts
are usually closed out before the delivery date.
A public market exists in interest rate futures contracts covering
primarily the following financial instruments: U.S. Treasury bonds; U.S.
Treasury notes; Government National Mortgage Association (GNMA) modified
pass-through mortgage-backed securities; three-month U.S. Treasury bills; 90-day
commercial paper; bank certificates of deposit; and Eurodollar certificates of
deposit. It is expected that futures contracts trading in additional financial
instruments will be authorized. The standard contract size is $100,000 for
futures contracts in U.S. Treasury bonds, U.S. Treasury notes and GNMA
pass-through securities and $1,000,000 for the other designated contracts.
It is each Fund's policy to close out open futures contracts before
delivery. Closing out an open futures contract sale or purchase is effected by
entering into an offsetting futures contract purchase or sale, respectively, for
the same aggregate amount of the stock index or the financial instrument and the
same delivery date. If the offsetting purchase price is less than the original
sale price, the Fund realizes a gain, and if it is more, the Fund realizes a
loss. Conversely, if the offsetting sale price is more than the original
purchase price, the Fund realizes a gain, and if it is less, the Fund realizes a
loss. The transaction costs must also be included in these calculations. There
can be no assurance, however, that the Fund will be able to enter into an
offsetting transaction with respect to a particular contract at a particular
time. If the Fund is not able to enter into an offsetting transaction, the Fund
will continue to be required to maintain the margin deposits on the contract.
As an example of an offsetting transaction, the contractual obligations
arising from the sale of one contract of September Treasury Bills on an exchange
may be fulfilled at any time before delivery of the contract is required (i.e.,
on a specified date in September, the "delivery month") by the purchase of one
contract of September Treasury Bills on the same exchange. In such instance
the difference between the price at which the futures contract was sold and the
price paid for the offsetting purchase, after allowance for transaction costs,
represents the profit or loss to the Fund.
Persons who trade in futures contracts may be broadly classified as
"hedgers" and "speculators." Hedgers, such as the Funds, whose business
activity involves investment or other commitment in equity and debt securities
or other obligations, use the financial futures markets primarily to offset
unfavorable changes in value that may occur because of fluctuations in the value
of the securities or obligations held or expected to be acquired by them.
The speculator, like the hedger, generally expects neither to deliver nor
to receive the security underlying the futures contract, but unlike the hedger,
hopes to profit from fluctuations in prevailing stock market values or interest
rates.
Each Fund's futures transactions will be entered into for traditional
hedging purposes--that is, futures contracts will be sold to protect against a
B-9
<PAGE>
decline in the price of securities that the Fund owns, or futures contracts will
be purchased to protect the Fund against an increase in the price of securities
it intends to purchase. As evidence of this hedging intent, each Fund expects
that approximately 75% of such futures contract purchases will be "completed";
that is, upon sale (offsetting) of these long contracts, equivalent amounts of
related securities will have been or are then being purchased by the Fund in the
cash market.
MARGIN. Initial margin is the amount of funds that must be deposited by a
Fund with its broker in order to initiate futures trading. An initial margin
deposit is intended to assure the Fund's performance of the futures contract.
The margin required for a particular futures contract is set by the exchange on
which the contract is traded and may range upward from less than 5% of the value
of the contract being traded.
Variation margin is the amount of subsequent payments that must be made to
and from the broker to maintain the Fund's open position in the futures
contracts. Variation margin payments are made on a daily basis as the price of
the underlying stock index or financial instrument fluctuates. If the value of
the open futures position changes (by increase, in the case of a sale, or by
decrease, in the case of a purchase) so that the loss on the futures contract
reaches a point at which the margin on deposit does not satisfy margin
requirements, the broker will require the Fund to make a variation margin
payment in the amount of the insufficiency. However, if the value of a position
increases because of favorable price changes in the futures contract so that the
margin deposit exceeds the required margin, the Fund will promptly demand
payment by the broker of variation margin in the amount of the excess. All
variation margin payments received by the Fund will be held by the Fund's
custodian in a separate account for the Fund.
In computing net asset value daily each Fund will mark to market the
current value of its open futures contracts. Each Fund expects to earn interest
income on its initial margin deposits.
EXAMPLE OF PURCHASE OF STOCK INDEX FUTURES CONTRACT. A Fund might purchase
a stock index futures contract when it anticipates a significant market or
market sector advance and wishes to participate in such advance at a time when
the Fund is not fully invested, for example, because the Fund has not selected
the individual stocks which it wishes to purchase. The Fund would be endeavoring
to eliminate the effect of all or part of an expected increase in the market
price of the stocks that the Fund may purchase at a later date.
For example, assume that the prices of certain stocks that the Fund may
later purchase tend to move in concert with the Standard and Poor's 500 Stock
Index. The Fund wishes to attempt to fix the purchase price of its anticipated
stock investment until the time (three months in this example) when it may
purchase the stock. Assume the stock has a market price of 125 and the Fund
believes that, because of an anticipated advance in the stock market, the price
will have risen in three months. The Fund might enter into futures contract
purchases of the Standard and Poor's 500 Stock Index for a price of 125. If the
market price of the stock should increase from 125 to 130, the futures market
price for the Standard and Poor's 500 Stock Index might also increase, e.g.,
from 125 to 130. In that case, the five-point increase in the price that the
Fund would have to pay for the stock would be offset by the five-point gain
realized by closing out the futures contract purchase.
B-10
<PAGE>
If the Fund should be mistaken in its forecast of market values, and the
stock index should decline below 125, the market value of the stocks being
hedged would presumably decline. Unless the Fund would purchase the stocks for
the decreased price, the Fund would realize a loss on the sale of the futures
contract which would not be offset by the price decrease.
EXAMPLE OF SALE OF STOCK INDEX FUTURES CONTRACT. The Fund might sell stock
index futures contracts in anticipation of a general market or market sector
decline that may adversely affect the market values of the stocks held by the
Fund. The Fund would be endeavoring to substantially reduce the risk of a
decline in the value of its stocks without selling the stocks with resultant
transaction costs.
For example, assume that the market price of certain stocks held by the
Fund tend to move in concert with the Standard and Poor's 500 Stock Index. The
stock currently has a market value of 125, which the Fund believes will decline
because of an anticipated decline in the stock market. The Fund wishes to
attempt to fix the current market value of the stock until some time in the
future. The Fund might enter into a futures contract sale of the Standard and
Poor's 500 Stock Index at a price of 125. If the market price of the stock
should decline from 125 to 120, the futures market price of the Standard and
Poor's 500 Stock Index might also decline, e.g. from 125 to 120. In that case
the five-point loss in the market value of the stock would be offset by the
five-point gain realized by closing out the futures contract. The futures
market price of the Standard and Poor's 500 Stock Index might decline to more or
less than 120 because of the imperfect correlation with the prices of the stocks
hedged.
If the Fund should be mistaken in its forecast of the stock market, and the
futures market price of the Standard and Poor's 500 Stock Index should increase
above 125, the market price of the stock would increase. The benefit of this
increase would be offset by the loss realized on closing out the futures
contract sale.
EXAMPLE OF PURCHASE OF INTEREST RATE FUTURES CONTRACT. The Fund might
purchase an interest rate futures contract when it wishes to defer for a time a
fully invested position in longer term securities, for example, in order to
continue holding shorter term securities with higher yields. The Fund would be
endeavoring to eliminate the effect of all or part of an expected increase in
market price of the longer term bonds that the Fund may wish to purchase at a
later date.
For example, assume that the market price of a type of longer term bonds
that the Fund may later purchase, currently yielding 10%, tends to move in
concert with futures market prices of long-term U.S. Treasury bonds. The Fund
wishes to attempt to fix the purchase price (and thus the 10% yield) of its
anticipated longer term bond investment until the time (four months away in this
example) when it may purchase the bond. Assume the longer term bond has a
market price of 100, and the Fund believes that, because of an anticipated
decline in interest rates, the price will have risen (and correspondingly the
yield will have declined) in four months. The Fund might enter into futures
contract purchases of Treasury bonds for a price of 98. If the market price of
the longer term bond should increase from 100 to 105, the futures market price
for Treasury bonds might also increase, e.g., from 98 to 103. In that case, the
five-point increase in the price that the Fund would have to pay for the longer
term bond would be offset by the five-point gain realized by closing out the
futures contract purchase.
B-11
<PAGE>
If the Fund should be mistaken in its forecast of interest rates, and the
futures market price of the U.S. Treasury obligation should decline below 98,
the market price of the security being hedged would presumably decline. The
benefit of this price decrease, and thus the yield increase, would be offset by
the loss realized on closing out the futures contract purchase.
EXAMPLE OF SALE OF INTEREST RATE FUTURES CONTRACT. The Fund might sell an
interest rate futures contract in order to maintain the income derived from its
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 prices
of longer term securities because of an increase in prevailing interest rates.
For example, assume that the market price of a certain longer term security
held by the Fund tends to move in concert with the futures market prices of
long-term U.S. Treasury bonds. The security has a current market price of 100,
which the Fund believes will decline because of an anticipated rise in interest
rates. The Fund wishes to attempt to fix the current market value of this
security until some point in the future. The Fund might enter into a futures
contract sale of Treasury bonds at a price of 98. If the market value of the
security should decline from 100 to 95, the futures market price of Treasury
bonds might also decline, e.g., from 98 to 93. In that case, the five-point
loss in the market value of the security would be offset by the five-point gain
realized by closing out the futures contract sale. The futures market price of
Treasury bonds might decline to more or less than 93 because of the imperfect
correlation with the prices of the securities hedged.
If the Fund should be mistaken in its forecast of interest rates, and the
futures market price of the U.S. Treasury obligation should increase above 98,
the market price of the securities, including the security being hedged, would
increase. The benefit of this increase would be offset by the loss realized on
closing out the futures contract sale.
RISKS. Financial futures prices are volatile and difficult to forecast.
Stock index futures prices reflect the market values of the stocks included in
the index, while interest rate futures contracts are influenced, among other
things, by changes in prevailing interest rates and anticipation of future
interest rate changes. The factors influencing interest rate futures prices are
in turn affected by government fiscal and monetary policies and actions, and
national and international political and economic events, while stock market
values are also influenced by corporate management policies, consumer demand,
competition, sources of raw materials and supplies and government regulation.
At best, the correlation between changes in prices of futures contracts and
the securities being hedged can be only approximate. The degree of imperfection
of correlation depends upon circumstances, such as: variations in speculative
market demand for futures and for equity or debt securities, including technical
influences in futures trading, and differences between the securities being
hedged and the instruments underlying the standard futures contracts available
for trading. A decision of whether, when and how to hedge involves the exercise
of skill and judgment, and even a well-conceived hedge may be unsuccessful to
some degree because of market behavior or unexpected stock market or interest
rate trends.
Because of the low margin deposits required, futures trading involves an
extremely high degree of leverage. As a result, a relatively small price
movement in a futures contract may result in immediate and substantial loss,
B-12
<PAGE>
as well as gain, to the investor. For example, if at the time of purchase, 10%
of the value of the futures contract is deposited as initial margin, a 10%
decrease in the value of the futures contract would result in a total loss of
the initial margin deposit before any deduction for the transaction costs, if
the account were then closed out, and a 15% decrease would result in a loss
equal to 150% of the initial margin deposit. Thus, a purchase or sale of a
futures contract may result in losses in excess of the amount invested in the
futures contract. However, the Fund would presumably have sustained comparable
losses if, instead of the futures contract, it had invested in the underlying
security. Furthermore, in order to be certain that the Fund has sufficient
assets to satisfy its obligations when it purchases a futures contract, the Fund
deposits cash or cash equivalents equal in value to the market value of the
futures contract in a segregated account for the Fund with the Fund's custodian.
Most United States interest rate futures exchanges and the Chicago
Mercantile Exchange limit the amount of fluctuation permitted in futures
contract prices during a single trading day. The daily limit establishes the
maximum amount that the price of a futures contract may vary either up or down
from the previous day's settlement price at the end of a trading session. Once
the daily limit has been reached in a particular type of contract, no trades may
be made on that day at a price beyond that limit. The daily limit governs only
price movement during a particular trading day and therefore does not limit
potential losses because the limit may prevent the liquidation of unfavorable
positions. Futures contract prices have occasionally moved to the daily limit
for several consecutive trading days with little or no trading, thereby
preventing prompt liquidation of futures positions and subjecting some futures
traders to substantial losses.
FOREIGN CURRENCY FUTURES. The International Equity, Asset Allocation,
Select Bond, Aggressive Growth Stock, Growth Stock and High Yield Bond Funds
have the authority to deal in forward foreign exchange between currencies of the
different countries in which the Fund may invest as a hedge against possible
variations in the foreign exchange rate between these currencies. This is
accomplished through contractual agreements to purchase or sell a specified
currency at a specified future date and price set at the time of the contract.
The Funds' dealings in forward foreign exchange will be limited to hedging
involving either specific transactions or Fund positions. Transaction hedging
is the purchase or sale of forward foreign currency with respect to specific
receivables or payables of the Fund arising from the purchase and sale of Fund
securities, the sale and redemption of shares of the Fund, or the payment of
dividends and distributions by the Fund. Position hedging is the sale of
forward foreign currency with respect to Fund security positions denominated or
quoted in such foreign currency. The International Equity, Asset Allocation,
Select Bond, Aggressive Growth Stock, Growth Stock and High Yield Bond Funds
will not speculate in forward foreign exchange.
FEDERAL INCOME TAX TREATMENT. For Federal income tax purposes, each Fund
is required to recognize as income for each taxable year its net unrealized
gains and losses on futures contracts as of the end of the year as well as those
actually realized during the year. Any gain or loss recognized with respect to
a futures contract is considered to be 60% long-term and 40% short-term, without
regard to the holding period of the contract. In the case of a futures
transaction classified as a "mixed straddle," the recognition of losses may be
deferred to a later taxable year.
In order for each Fund to continue to qualify for Federal income tax
treatment as a regulated investment company, at least 90% of its gross income
B-13
<PAGE>
for a taxable year must be derived from qualifying income, i.e., dividends,
interest, income derived from loans of securities, and gains from the sale of
securities. Any net gain realized from the closing out of futures contracts,
for purposes of the 90% requirement, is considered gain from the sale of
securities and therefore is qualifying income. In addition, gains realized on
the sale or other disposition of securities held for less than three months must
be limited to less than 30% of the Fund's annual gross income including gross
capital gains. Consequently, in order for the Fund to avoid realizing a gain
within a three-month period, the Fund may be required to defer the closing out
of a contract beyond the time when it would otherwise be advantageous to do so.
OPTIONS -- IN GENERAL
The Funds may purchase call or put options and write covered call or put
options with respect to specific securities. Any option written or purchased by
a Fund must be listed on a domestic exchange. A call option gives the purchaser
of the option the right to buy, and obligates the writer to sell, the underlying
security or securities at the exercise price at any time during the option
period, or at a specific date. Conversely, a put option gives the purchaser of
the option the right to sell, and obligates the writer to buy, the underlying
security or securities at the exercise price at any time during the option
period.
A covered call option written by a Fund is a call option with respect to
which the Fund owns the underlying security or otherwise covers the transaction
by segregating cash or other securities. A put option written by the Fund is
covered when, among other things, cash or liquid securities having a value equal
to or greater than the exercise price of the option are placed in a segregated
account with the Fund's custodian to fulfill the obligation undertaken. The
principal reason for writing covered call and put options is to realize, through
the receipt of premiums, a greater return than would be realized on the
underlying securities alone. The Fund receives a premium from writing covered
call or put options which it retains whether or not the option is exercised.
There is no assurance that sufficient trading interest to create a liquid
secondary market on a securities exchange will exist for any particular option
or at any particular time, and for some options no such secondary market may
exist. A liquid secondary market in an option may cease to exist for a variety
of reasons. In the past, for example, higher than anticipated trading activity
or order flow, or other unforeseen events, at times have rendered certain of the
clearing facilities inadequate and resulted in the institution of special
procedures, such as trading rotations, restrictions on certain types of orders
or trading halts or suspensions in one or more options. There can be no
assurance that similar events, or events that may otherwise interfere with the
timely execution of customers' orders, will not recur. In such event, it might
not be possible to effect closing transactions in particular options. If, as a
covered call option writer, the Fund is unable to effect a closing purchase
transaction in a secondary market, it will not be able to sell the underlying
security until the option expires or it delivers the underlying security upon
exercise or it otherwise covers its position.
Option transactions may increase a Fund's transaction costs and turnover
rate and will be initiated only where appropriate to achieve a Fund's investment
objectives.
B-14
<PAGE>
FUTURE DEVELOPMENTS The Funds may take advantage of opportunities in the area
of options and futures contracts and options on futures contracts and any other
derivatives which are not presently contemplated for use by the Funds or which
are not currently available but which may be developed, to the extent such
opportunities are both consistent with the Fund's investment objective and
legally permissible for the Fund. Before entering into such transactions or
making any such investment, a Fund will provide appropriate disclosure in its
Prospectus or Statement of Additional Information.
REVERSE REPURCHASE AGREEMENTS
The Municipal Bond and Asset Allocation Funds may enter into reverse
repurchase agreements with banks and broker-dealers. Such agreements involve
the sale of money market securities held by a Fund pursuant to an agreement to
repurchase the securities at an agreed upon price, date and interest payment.
The Fund will use the proceeds of reverse repurchase agreements to purchase
other money market securities which either mature, or can be sold under an
agreement to resell, at or prior to the expiration of the reverse repurchase
agreement. A Fund will utilize reverse repurchase agreements when the interest
income to be earned from the investment of proceeds from the transaction is
greater than the interest expense of the reverse repurchase transaction. When
effecting reverse repurchase transactions, a Fund will hold securities of a
dollar amount equal in value to the securities subject to the reverse
repurchase agreement in a segregated account. Amounts subject to reverse
repurchase agreements are also subject to a 300% asset coverage requirement. If
such amounts in the aggregate exceed this asset coverage requirement, the Fund
would be obligated within three days to reduce such amounts to meet the
requirement. Under no circumstances will a Fund enter into a reverse repurchase
agreement with Northwestern Mutual Life.
WARRANTS
The Index 500 Stock, Asset Allocation, Growth and Income Stock, Growth
Stock, Aggressive Growth Stock and High Yield Bond Funds may invest in warrants.
No Fund intends to invest more than 2% of its net assets in warrants that are
not listed on a national securities exchange. In no event will a Fund's
investment in warrants exceed 5% of its net assets. (A warrant is a right to
buy a certain security at a set price during a certain time period.)
ASSET-BACKED AND VARIABLE RATE SECURITIES
Consistent with their investment objectives and policies, the Select Bond
Fund and Municipal Bond Fund may invest in asset-backed and variable rate
securities.
Asset-backed securities represent fractional interests in pools of retail
installment loans or revolving credit receivables. These assets are generally
held by a special purpose trust and payments of principal and interest, or
interest only, are passed through or paid through monthly or quarterly to
certificate holders. Payments may be guaranteed up to certain amounts by
letters of credit issued by a financial institution affiliated or unaffiliated
with the trustee or originator of the trust. Underlying receivables are
generally subject to prepayment, which may reduce the overall return to
certificate holders. Nevertheless, for asset-backed securities, principal
repayment rates tend not to vary much with interest rates and the short-term
nature of the underlying loans or other receivables tends to dampen the impact
of any change in the prepayment level. Certificate holders may also experience
delays in payment on the certificates if the full amounts due
B-15
<PAGE>
on underlying sales contracts or other receivables are not realized by the trust
because of unanticipated legal or administrative costs of enforcing the
contracts, or because of depreciation or damage to the collateral securing
certain contracts, or other factors.
Variable rate securities bear rates of interest that are adjusted
periodically or which "float" continuously according to formulae intended to
minimize fluctuations in values of the instruments. For the Select Bond Fund
and Municipal Bond Fund, the Fund determines the maturity of variable rate
securities in accordance with Securities and Exchange Commission rules that
allow the Fund to consider certain of such instruments as having maturities less
than the maturity date on the instrument.
SHORT-TERM TRADING
Each Fund will generally not engage in short-term trading (purchases and
sales within seven days).
FIRM COMMITMENT AGREEMENTS AND "WHEN-ISSUED" SECURITIES
Each Fund may enter into firm commitment agreements for the purchase of
securities at an agreed upon price on a specified future date. A Fund may
purchase new issues of securities on a "when-issued" basis, whereby the payment
obligation and interest rate on the instruments are fixed at the time of the
transaction. Such transactions might be entered into, for example, when the
advisor of a Fund anticipates a decline in the yield of securities of a given
issuer and is able to obtain a more advantageous yield by committing currently
to purchase securities to be issued or delivered later.
A Fund will not enter into such a transaction for the purpose of
investment leverage. Liability for the purchase price - and all the rights and
risks of ownership of the securities - accrue to the Fund at the time it becomes
obligated to purchase such securities, although delivery and payment occur at a
later date. Accordingly, if the market price of the security should decline,
the effect of the agreement would be to obligate the Fund to purchase the
security at a price above the current market price on the date of delivery and
payment. During the time the Fund is obligated to purchase such securities it
will maintain in a segregated account U.S. Government securities, high-grade
debt obligations, or cash or cash equivalents of an aggregate current value
sufficient to make payment for the securities.
PRIVATE PLACEMENT TRANSACTIONS AND ILLIQUID ASSETS
Each Fund may invest up to 15% of its total assets in securities acquired
in private placement transactions and other illiquid assets. For the purpose of
determining each Fund's net asset value, these assets will be valued at their
fair value as determined in good faith by MSF's Directors or under procedures
established by the Directors. If a Fund should have occasion to sell an
investment in restricted securities at a time when the market for such
investments is unfavorable, a considerable period may elapse between the time
when the decision to sell it is made and the time when the Fund will be able to
sell the investment, with a possible adverse effect upon the amount to be
realized from the sale.
Notwithstanding these limitations a Fund may purchase securities which,
though not registered under the Securities Act of 1933 (the "1933 Act"), are
eligible for purchase and sale pursuant to Rule 144A under the 1933 Act. Rule
144A permits unregistered securities to be traded among qualified
B-16
<PAGE>
institutional investors, including the Funds. Rule 144A securities that are
determined to be liquid are not subject to the limitations on illiquid assets.
The Fund's investment adviser, Northwestern Mutual Investment Services, Inc.,
determines and monitors the liquidity status of each Rule 144A security in which
a Fund invests, subject to supervision and oversight by the Board of Directors
of MSF. The investment adviser takes into account all of the factors which may
have a material bearing on the ability of the Fund to dispose of the security in
seven days or less, at a price reasonably consistent with the value used to
determine the Fund's net asset value per share, including the following factors:
(1) the frequency and volume of trades, (2) the number and sources of price
quotes, (3) the number, and identity, of dealers willing to purchase or sell the
issue, and the number and identity of other potential purchasers, (4) any dealer
undertakings to make a market in the security, (5) the nature of the security,
and (6) the nature of the market in which the issue is traded, including the
time typically required to make trades, the methods of soliciting offers and the
mechanics of transfer.
RISK FACTORS FOR THE INTERNATIONAL EQUITY FUND AND INTERNATIONAL INVESTMENTS OF
THE OTHER FUNDS
The International Equity Fund has an unlimited right to purchase securities
in any foreign country, developed or developing, if they are listed on an
exchange, as well as a limited right to purchase such securities if they are
unlisted. The Asset Allocation Fund, High Yield Bond Fund, Select Bond Fund,
Aggressive Growth Stock Fund and Growth Stock Fund also have the limited right
to purchase securities in foreign countries. Investors should consider
carefully the risks involved in securities of companies and governments of
foreign nations, which are in addition to the usual risks inherent in domestic
investments.
Investments in companies domiciled in developing countries may be subject
to potentially higher risks than investments in developed countries. These
risks include (i) less social, political and economic stability; (ii) the small
current size of the markets for such securities and the currently low or
nonexistent volume of trading, which result in a lack of liquidity and in
greater price volatility; (iii) certain national policies which may restrict the
Fund's investment opportunities, including restrictions on investment in issuers
or industries deemed sensitive to national interests; (iv) foreign taxation; (v)
the absence of developed structures governing private or foreign investment or
allowing for judicial redress for injury to private property; (vi) the absence,
until recently in certain Eastern European countries, of a capital market
structure or market-oriented economy; and (vii) the possibility that recent
favorable economic developments in Eastern Europe may be slowed or reversed by
unanticipated political or social events in such countries.
Despite the dissolution of the Soviet Union, the Communist Party may
continue to exercise a significant role in certain Eastern European countries.
To the extent of the Communist Party's influence, investments in such countries
may involve risks of nationalization, expropriation and confiscatory taxation.
The communist governments of a number of Eastern European countries expropriated
a large amount of private property in the past, in many cases without adequate
compensation, and there can be no assurance that such expropriation will not
occur in the future. In the event of such expropriation, the Fund could lose a
substantial portion of any investments it has made in the affected countries.
Further, no or developing accounting standards may exist in certain Eastern
European countries. Finally, even
B-17
<PAGE>
though certain Eastern European currencies may be convertible into U.S. dollars,
the conversion rates may be artificial to the actual market values and may be
adverse to the Fund's shareholders.
There may be less publicly available information about foreign companies
comparable to the reports and ratings published about companies in the United
States. Foreign companies are not generally subject to uniform accounting,
auditing and financial reporting standards, and auditing practices and
requirements may not be comparable to those applicable to United States
companies. Foreign markets have substantially less volume than the New York
Stock Exchange, and securities of some foreign companies are less liquid and
more volatile than securities of comparable United States companies. Commission
rates in foreign countries, which are generally fixed rather than subject to
negotiation as in the United States, are likely to be higher. In many foreign
countries there is less government supervision and regulation of stock
exchanges, brokers and listed companies than in the United States.
The Fund endeavors to buy and sell foreign currencies on as favorable a
basis as practicable. Some price spread on currency exchange (to cover service
charges) may be incurred, particularly when the Fund changes investment from one
country to another or when proceeds of the sale of shares in U.S. dollars are
used for the purchase of securities in foreign countries. Also, some countries
may adopt policies which would prevent the Fund from transferring cash out of
the country or withhold portions of interest and dividends at the source, or
impose other taxes with respect to the Fund's investments in securities of
issuers of that country. There is the possibility of expropriation,
nationalization or confiscatory taxation, 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.
The Fund may be affected either unfavorably or favorably by fluctuations in
the relative rates of exchange between the currencies of different nations, by
exchange control regulations and by indigenous economic and political
developments. Through the Fund's flexible policy, the Fund's advisor endeavors
to avoid unfavorable consequences and to take advantage of favorable
developments in particular nations where from time to time it places the Fund's
investments. The exercise of this flexible policy may include decisions to
purchase securities with substantial risk characteristics and other decisions
such as changing the emphasis on investments from one nation to another and from
one type of security to another. Some of these decisions may later prove
profitable and others may not. No assurance can be given that profits, if any,
will exceed losses.
The Directors of MSF consider at least annually the likelihood of the
imposition by any foreign government of exchange control restrictions which
would affect the liquidity of the Fund's assets maintained with custodians in
foreign countries, as well as the degree of risk from political acts of foreign
governments to which such assets may be exposed. They also consider the degree
of risk involved through the holding of Fund securities in domestic and foreign
securities depositories. However, in the absence of willful misfeasance, bad
faith or gross negligence on the part of the Fund's investment adviser, or
reckless disregard of its obligations and duties under the Investment Advisory
Agreement, any losses resulting from the holding of the Fund's securities in
foreign countries and/or with securities depositories will be at risk of the
shareholders. No assurance can be given that the
B-18
<PAGE>
Directors' appraisal of the risks will always be correct or that such exchange
control restrictions or political acts of foreign governments might not occur.
The Fund may enter into a contract for the purchase or sale of a
security denominated in a foreign currency and may enter into a forward foreign
currency contract ("forward contract") in order to "lock in" the U.S. dollar
price of the security. In addition, when the Fund's advisor believes that the
currency of a particular foreign country may suffer or enjoy a substantial
movement against another currency, it may enter into a forward contract to sell
or buy the amount of the former foreign currency, approximating the value of
some or all of the Fund's securities denominated in such foreign currency. The
projection of short-term currency market movement is extremely difficult, and
the successful execution of a short-term hedging strategy is highly uncertain.
It is impossible to forecast with absolute precision the market value of
Fund securities at the expiration of the contract. Accordingly, it may be
necessary for the Fund to purchase additional foreign currency on the spot
market (and bear the expense of such purchase) if the market value of the
security is less than the amount of foreign currency the Fund is obligated to
deliver and if a decision is made to sell the security and make delivery of the
foreign currency. Conversely, it may be necessary to sell on the spot market
some of the foreign currency received upon the sale of the Fund security if its
market value exceeds the amount of foreign currency the Fund is obligated to
deliver.
If the Fund retains the security and engages in an offsetting transaction,
the Fund will incur a gain or a loss to the extent that there has been movement
in forward contract prices. If the Fund engages in an offsetting transaction,
it may subsequently enter into a new forward contract to sell the foreign
currency. Should forward prices decline during the period between the Fund
entering into a forward contract for the sale of a foreign currency and the date
it enters into an offsetting contract for the purchase of the foreign currency,
the Fund will realize a gain to the extent the price of the currency it has
agreed to sell exceeds the price of the currency it has agreed to purchase.
Should forward prices increase, the Fund will suffer a loss to the extent the
price of the currency it has agreed to purchase exceeds the price of the
currency it has agreed to sell.
PORTFOLIO TURNOVER
Portfolio turnover may vary from year to year or within a year depending
upon economic, market and business conditions. The annual portfolio turnover
rates of the Funds cannot be accurately predicted. It is anticipated that the
annual Fund turnover rate for the Index 500 Stock Fund will not exceed 10% and
that the rate for the High Yield Bond Fund will not exceed 140%. For the other
Funds, it is anticipated that the rate will not exceed 100%. Short-term debt
securities are excluded in the calculation of Fund turnover rates. U.S.
Government securities are included in the calculation of Fund turnover rates.
The annual Fund turnover rate of each Fund is the lesser of purchases or
sales of the Fund's securities for the year stated as a percentage of the
average value of the Fund's assets.
B-19
<PAGE>
MANAGEMENT OF MSF
The following is a list of the Directors and Officers of MSF together with
a brief description of their principal occupations during the past five years.
James D. Ericson (61), President and Director*
720 East Wisconsin Avenue
Milwaukee, WI 53202
Trustee of Northwestern Mutual Life; President and Chief Executive
Officer of Northwestern Mutual Life since 1993; President and Chief
Operating Officer from 1991 to 1993; prior thereto, President
Stephen N. Graff (62), Director*
805 Lone Tree Road
Elm Grove, WI 53212
Retired Partner, Arthur Andersen LLP (Public Accountants) since 1994;
Senior Partner, 1993-1994; prior thereto, Managing Partner -
Milwaukee, WI office; Trustee of Northwestern Mutual Life since 1996
Martin F. Stein (59), Director
1800 East Capitol Drive
Milwaukee, WI 53211
Chairman of the Board of EyeCare One Corporation (retail sales of
eyewear)
John K. MacIver (65), Director
100 East Wisconsin Avenue
Milwaukee, WI 53202
Partner, Michael Best & Friedrich, Attorneys at Law
William J. Blake (64), Director
1105 North Waverly Place
Milwaukee, WI 53202
Chairman, Blake Financial Corporation (real estate investments and
venture capital)
Mark G. Doll (47), Vice President and Treasurer
720 East Wisconsin Avenue
Milwaukee, WI 53202
Senior Vice President of Northwestern Mutual Life since 1996; Senior
Vice President and Treasurer, 1995; prior thereto, Vice President and
Treasurer; Executive Vice President, Investment Advisory Services of
Northwestern Mutual Investment Services, Inc. since 1996; prior
thereto, President
B-20
<PAGE>
Meridee J. Maynard (41), Vice President - Marketing and Operations
720 East Wisconsin Avenue
Milwaukee, WI 53202
Vice President-Annuity and Accumulation Products of Northwestern
Mutual Life since 1996; Vice President-Compliance and Sales Standards
from 1994 to 1996; Managing Director-Sales Standards/Compliance from
1993 to 1994; Director-New Business from 1992 to 1993; prior thereto,
Director-Annuity Marketing; Vice President, Variable Annuity
Administration and Marketing of Northwestern Mutual Investment
Services, Inc. since 1996; Superintendent-Sales Standards/Compliance
from 1994 to 1996; Superintendent-Underwriting Standards and New
Business from 1993 to 1994.
Patricia L. Van Kampen (45), Vice President-Investments
720 East Wisconsin Avenue
Milwaukee, WI 53202
Vice President-Common Stocks of Northwestern Mutual Life; Vice
President-Common Stocks of Northwestern Mutual Investment Services,
Inc.
William R. Walker (39), Vice President-Investments
720 East Wisconsin Avenue
Milwaukee, Wisconsin 53202
Director of Common Stocks of Northwestern Mutual Life since 1993;
Associate Director of Common Stocks from 1992 to 1993; prior thereto,
Investment Officer; Vice President of Northwestern Mutual Investment
Services, Inc.
Julie M. Van Cleave (37), Vice President-Investments
720 East Wisconsin Avenue
Milwaukee, Wisconsin 53202
Director of Common Stocks of Northwestern Mutual Life since 1993;
Associate Director of Common Stocks from 1992 to 1993; prior thereto,
Investment Officer; Vice President-Common Stocks of Northwestern
Mutual Investment Services, Inc. since 1993
Steven P. Swanson (42), Vice President-Investments
720 East Wisconsin Avenue
Milwaukee, Wisconsin 53202
Vice President-Securities of Northwestern Mutual Life since 1994;
prior thereto, Director-Securities; Vice President of Northwestern
Mutual Investment Services, Inc. since 1994
Jefferson V. DeAngelis (38), Vice President-Investments
720 East Wisconsin Avenue
Milwaukee, WI 53202
Vice President - Fixed Income Securities of Northwestern Mutual Life
since 1993; prior thereto, Director - Public Fixed Income; Vice
President-Fixed Income Securities of Northwestern Mutual Investment
Services, Inc. since 1993
B-21
<PAGE>
Ronald C. Alberts (33), Vice President-Investments
720 East Wisconsin Avenue
Milwaukee, WI 53202
Investment Officer of Northwestern Mutual Life
Merrill C. Lundberg (56), Secretary
720 East Wisconsin Avenue
Milwaukee, WI 53202
Assistant General Counsel of Northwestern Mutual Life; Secretary of
Northwestern Mutual Investment Services, Inc.
Barbara E. Courtney (39), Controller
720 East Wisconsin Avenue
Milwaukee, WI 53202
Associate Director of Mutual Fund Accounting of Northwestern Mutual
Life since 1996; prior thereto, Assistant Director of Investment
Accounting; Assistant Treasurer of Northwestern Mutual Investment
Services, Inc.
* Directors identified with an asterisk are "interested persons" as defined
in Section 2(a)(19) of the Investment Company Act of 1940.
Each of the Directors has served as a Director of MSF since October 24, 1996.
An Audit Committee and Nominating Committee have been established for MSF.
Each Committee is made up of those Directors who are not "interested persons" of
MSF within the meaning of the Investment Company Act.
All Board members and officers of the Fund, except Meridee J. Maynard and
Ronald C. Alberts, are also board members or officers of Northwestern Mutual
Series Fund, Inc. (the "Series Fund"), a registered investment company. Shares
of the Series Fund are offered to and may only be purchased by Northwestern
Mutual Life in connection with variable annuity and variable life insurance
contracts issued by Northwestern Mutual Life. Each of the Directors and
principal officers of MSF who is also an affiliated person of Northwestern
Mutual Investment Services, Inc. ("NMIS") or Northwestern Mutual Life is named
above, together with the capacity in which such person is affiliated with NMIS
or Northwestern Mutual Life.
COMPENSATION OF OFFICERS AND DIRECTORS. MSF pays no salaries or compensation to
any of its officers or Directors employed by Northwestern Mutual Life. MSF pays
other Directors fees totaling $9,000 per year, consisting of a $5,000 retainer
paid in April and $1,000 per meeting of the Board of Directors of MSF attended.
MSF neither pays nor accrues any pension or retirement benefits to any of the
Directors. Northwestern Mutual Investment Services, Inc., the investment
advisor to Northwestern Mutual Series Fund, Inc., pays each of the directors of
the Series Fund a total of up to $15,000 per year, consisting of a $5,000
retainer paid in January and $2,500 per meeting of the board of the Series Fund
attended.
OTHER INFORMATION ABOUT MSF
MSF was incorporated in Maryland on August 30, 1996. The authorized capital
stock of MSF consists of 2,700,000,000 shares of common stock, par value $.001
B-22
<PAGE>
per share (Common Stock). The shares of Common Stock are divided into nine
series, each with 300 million authorized shares in the series: Aggressive Growth
Stock Fund; International Equity Fund; Growth Stock Fund; Growth and Income
Stock Fund; Index 500 Stock Fund; Asset Allocation Fund; High Yield Bond Fund;
Municipal Bond Fund; and Select Bond Fund. The Board of Directors may
reclassify authorized shares to increase or decrease the allocation of shares
among the series described above or to add any new series to MSF. Each series
of Common Stock has two classes of shares, designated Class A and Class B. The
Board of Directors is authorized, from time to time and without further
shareholder approval, to authorize additional shares and to classify and
reclassify existing and new series into one or more classes.
As of ______, 1997, no person owns of record or beneficially 5% or more of
the shares outstanding of MSF or any Fund, except Northwestern Mutual Life,
which owned 100% of the Funds' outstanding shares as of the date of this
prospectus.
The shares of the Funds are entitled to vote separately to approve
investment advisory agreements or changes in investment restrictions, but
shareholders of all series vote together in the election and selection of
directors and accountants. Shares of a Fund vote together as a class on matters
that affect the Fund in substantially the same manner. Matters pertaining only
to one or more Funds will be voted upon only by those Funds. As to matters
affecting a single class, shares of such class will vote separately. Shares of
the Funds do not have cumulative voting rights. MSF and the Funds do not intend
to hold annual meetings of shareholders unless required to do so by the 1940 Act
or the Maryland statutes under which MSF is organized. Although Directors are
not elected annually by the shareholders, shareholders have under certain
circumstances the right to remove one or more Directors. If required by
applicable law, a meeting will be held to vote on the removal of a Director or
Directors of MSF if requested in writing by the holders of not less than 10% of
MSF's outstanding shares. Each Fund's shares are fully paid, and nonassessable,
and, when issued, have no preference, preemptive, conversion or similar rights
and are freely transferable.
MSF's By-Laws provide that MSF shall indemnify each of its Directors,
officers and employees against liabilities and expenses reasonably incurred by
them, in connection with the defense of any action, suit or proceeding or threat
thereof, by reason of being or having been a director, officer or employee of
MSF. MSF provides no indemnification in relation to such matters as to which
such person is adjudged in such action, suit or proceeding to be liable for
willful misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of his office.
INVESTMENT ADVISORY SERVICES
The Funds' investment adviser, Northwestern Mutual Investment
Services, Inc. ("NMIS"), is a wholly-owned subsidiary of Northwestern Mutual
Life. The adviser provides investment advice and recommendations regarding the
purchase and sale of securities for the Funds and the selection of brokers
pursuant to an Investment Advisory Agreement (the "Agreement").
For acting as investment adviser and for providing such services and
paying such expenses the adviser is paid a monthly fee at the annual rates set
forth in the prospectus for MSF. The Fund also pays all interest charges,
brokerage commissions, taxes and extraordinary expenses incurred in connection
B-23
<PAGE>
with the operation of the Fund. Expenses paid by MSF are charged to the Funds
to which the expenses relate.
Because MSF commenced operations in ______, 1997, no Fund has paid any
advisory fees to date.
Northwestern Mutual Life employs a full staff of investment personnel to
manage its investment assets. Northwestern Mutual Life's personnel and related
facilities are utilized by NMIS in performing its obligations under the
Investment Advisory Agreement.
"Northwestern Mutual Life" is the name and service mark of The Northwestern
Mutual Life Insurance Company and the right of MSF to use the name and mark is
subject to the consent of Northwestern Mutual Life. Under the Agreement
providing such consent, MSF recognizes the prior rights of Northwestern Mutual
Life in the name and mark, agrees that use of the name and mark by MSF will
inure to the benefit of Northwestern Mutual Life and agrees that its right to
use the name and mark can be terminated by Northwestern Mutual Life and will
automatically be terminated if at any time NMIS ceases to be the investment
adviser to the Funds or if NMIS ceases to be a subsidiary of Northwestern Mutual
Life.
Templeton Investment Counsel, Inc. ("Templeton Counsel"), a Florida
corporation with principal offices at 500 East Broward Boulevard, Ft.
Lauderdale, Florida 33394 has been retained under an investment sub-advisory
agreement to provide investment advice and, in general, to conduct the
management investment program of the International Equity Fund, subject to the
general control of the Board of Directors of MSF. Templeton Counsel is a
wholly-owned indirect subsidiary of Franklin Resources, Inc. Certain clients of
Templeton Counsel may have investment objectives and policies similar to those
of the International Equity Fund. Templeton Counsel may, from time to time,
make recommendations which result in the purchase or sale of a particular
security by its other clients simultaneously with the International Equity Fund.
If transactions on behalf of more than one client during the same period
increase the demand for securities being purchased or the supply of securities
being sold, there may be an adverse effect on price. It is the policy of
Templeton Counsel to allocate advisory recommendations and the placing of orders
in a manner which is deemed equitable by Templeton Counsel to the accounts
involved, including the International Equity Fund. When two or more of the
clients of Templeton Counsel (including the International Equity Fund) are
purchasing the same security on a given day from the same broker-dealer, such
transactions may be averaged as to price. For its services pursuant to the sub-
advisory agreement, Templeton Counsel is paid, by NMIS, compensation at the
annual rate of .50% of the average net assets of the International Equity Fund,
reduced to .40% on assets in excess of $100 million. The $100 million break
point for fees paid to Templeton Counsel is based on the aggregate assets of
the International Equity Fund and the International Equity Portfolio of the
Series Fund.
J.P. Morgan Investment Management Inc. ("J.P. Morgan Investment"), 522
Fifth Avenue, New York, New York 10036, provides investment advisory services to
the Growth and Income Stock Fund, pursuant to an investment sub-advisory
agreement. For the services provided, NMIS pays J.P. Morgan Investment a fee at
the annual rate of .45% on the first $100 million of the Fund's assets, .40% on
the next $100 million, .35% on the next $200 million and .30% on assets in
excess of $400 million. The break points for fees paid to J.P. Morgan
Investment are based on the aggregate assets of the Growth and Income Stock Fund
and the Growth and Income Stock Portfolio of the Series Fund.
B-24
<PAGE>
J.P. Morgan Investment is an investment manager for corporate, public, and
union employee benefit funds, foundations, endowments, insurance companies,
government agencies and the accounts of other institutional investors. A wholly
owned subsidiary of J.P. Morgan & Co. Inc., J.P. Morgan Investment was
incorporated in the state of Delaware on February 7, 1984 and commenced
operations on July 2, 1984. It was formed from the Institutional Investment
Group of Morgan Guaranty Trust Company of New York, also a subsidiary of J.P.
Morgan & Co. Inc.
Morgan acquired its first tax-exempt client in 1913 and its first pension
account in 1940. Assets under management have grown to over $180 billion. With
offices in London and Singapore, J.P. Morgan Investment draws from a worldwide
resources base to provide comprehensive service to an international group of
clients. Investment management activities in Japan, Australia, and Germany are
carried out by affiliates, Morgan Trust Bank in Tokyo, J.P. Morgan Investment
Management Australia Limited in Melbourne, and J.P. Morgan Investment GmbH in
Frankfurt.
J.P. Morgan Investment currently provides investment advisory services to
the following investment companies: the Growth and Income Portfolio of the
Series Fund, Global Money Fund, International Growth Fund, and Growth and Income
Fund of Sierra Trust Funds, Global Money Fund and International Growth Fund of
The Sierra Variable Trust, Frank Russell Equity Q Fund and Frank Russell
Quantitative Equity Fund of Frank Russell Investment Co., Preferred Fixed Income
Fund and Preferred Money Market Fund of Caterpillar Investment Management Ltd.,
AST Money Market Fund of American Skandia Life Investment Management Inc.,
Benham European Government Bond Fund, and Equity Income Series and Multi-
Strategy Series of Pacific Select Fund.
Northwestern Mutual Life is the licensee under a License Agreement with
Standard & Poor's Corporation, dated as of November 30, 1990, as amended,
relating to MSF as well as certain other mutual funds sponsored by Northwestern
Mutual Life. The following disclaimers and limitations are included in
accordance with the requirements of the License Agreement:
MSF is not sponsored, endorsed, sold or promoted by Standard & Poor's
("S&P"), a division of McGraw-Hill, Inc. Corporation, and none of the
Funds of MSF is so sponsored, endorsed, sold or promoted. S&P makes no
representation or warranty, express or implied, to the owners of MSF or any
of its Funds or any member of the public regarding the advisability of
investing in securities generally or in MSF or any of its Funds
particularly or the ability of the S&P 500 Index to track general stock
market performance. S&P's only relationship to the Licensee is the
licensing of certain trademarks and trade names of S&P and of the S&P 500
Index which is determined, composed and calculated by S&P without regard to
the Licensee or MSF. S&P has no obligation to take the needs of the
Licensee or the owners of MSF or any of its Funds into consideration in
determining, composing or calculating the S&P 500 Index. S&P is not
responsible for and has not participated in the determination of the timing
of, prices of, or quantities of securities of MSF or any of its Funds to
be issued or in the determination or calculation of the equation by which
MSF or any of its Funds is to be converted into cash. S&P has no
obligation or liability in connection with the administration, marketing or
trading of MSF.
S&P DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF THE S&P
500 INDEX OR ANY DATA INCLUDED THEREIN AND S&P SHALL HAVE NO
B-25
<PAGE>
LIABILITY FOR ANY ERRORS, OMISSIONS, OR INTERRUPTIONS THEREIN. S&P MAKES
NO WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY LICENSEE,
OWNERS OF MSF, OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE S&P 500
INDEX OR ANY DATA INCLUDED THEREIN. S&P MAKES NO EXPRESS OR IMPLIED
WARRANTIES, AND HEREBY EXPRESSLY DISCLAIMS ALL WARRANTIES OR
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE WITH RESPECT TO
THE S&P 500 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.
FUND EXPENSES
EXPENSES OF THE FUNDS. Each Fund pays its own expenses including, without
limitation: (i) expenses of maintaining the Fund and continuing its existence,
(ii) registration of the Fund under the Investment Company Act, (iii) auditing
and outside professional expenses, (iv) taxes and interest, (v) governmental
fees, (vi) expenses of issue, sale, repurchase and redemption of Fund shares,
(vii) expenses of registering and qualifying the Fund and its shares under
federal and state securities laws and of preparing and printing prospectuses for
such purposes and for distributing the same to shareholders and investors,
(viii) expenses of reports and notices to shareholders and of meetings of
shareholders and proxy solicitations therefor (ix) expenses of reports to
governmental officers and commissions, (x) insurance expenses, (xi)
association membership dues, (xii) fees, expenses and disbursements of
custodians for all services to the Fund, (xiii) expenses for servicing
shareholder accounts, including transfer agent fees (xiv) fees paid to pricing
services for the pricing of Fund securities, (xv) fees paid to the Funds'
administrator under an administrative services agreement, (xvi) fees paid for
accounting services, (xvii) fees paid to S&P under the License Agreement,
(xviii) fees paid to the directors of MSF for their services to MSF and the
Funds, (xix) broker's commissions and issue and transfer taxes chargeable to the
Fund in connection with securities transactions to which the Fund is a party,
(xx) organizational expenses of MSF and the Funds, (xxi) any direct charges to
shareholders approved by the Directors of MSF who are not "interested persons"
of MSF, and (xxii) such nonrecurring items as may arise, including expenses
incurred in connection with litigation, proceedings and claims and the
obligation of MSF to indemnify its Directors and officers with respect thereto.
DISTRIBUTION ARRANGEMENTS
Robert W. Baird & Co., Inc. ("RWB") serves as the principal underwriter for
each Fund pursuant to an Underwriting Agreement initially approved by the
Board of Directors of MSF. RWB is a registered broker-dealer, a member of
the National Association of Securities Dealers, Inc. (NASD) and a member of
the New York Stock Exchange and other principal stock exchanges. Shares of
each Fund will be continuously offered and will be sold by registered
representatives of RWB. RWB receives sales charges and distribution plan
fees of each Fund under the Underwriting Agreement. RWB bears all the
expenses of providing services pursuant to the Underwriting Agreement
including the payment of the expenses relating to the distribution of
Prospectuses for sales purposes as well as any advertising or sales
literature. The Fund bears the expenses of registering its shares with the
SEC and paying the fees required to be paid by state regulatory authorities.
The Underwriting Agreement continues in effect for two years from initial
approval and for successive one-year periods thereafter, provided that each
such continuance is specifically approved (i) by vote of a majority of the
Directors of MSF, including a majority of the
B-26
<PAGE>
Directors who are not parties to the Underwriting Agreement or interested
persons of any such party, (as the term interested person is defined in the 1940
Act); or (ii) by the vote of a majority of the outstanding voting securities of
a Fund. RWB Is not obligated to sell any specific amount of shares of any Fund.
Because MSF commenced operations in ______, 1997, no compensation has been
paid to RWB to date in connection with the Funds.
RWB's principal business address and mailing address is at 777 East
Wisconsin Avenue, Milwaukee, Wisconsin 53202. RWB was organized as a Wisconsin
corporation on December 27, 1919, and is an indirect majority-owned subsidiary
of The Northwestern Mutual Life Insurance Company.
DISTRIBUTION FINANCING PLANS AND SHAREHOLDER SERVICES AGREEMENT
MSF has adopted separate distribution plans (the "Plans") for Class A and
Class B shares of each Fund pursuant to appropriate resolutions of MSF's Board
of Directors in accordance with the requirements of Rule 12b-1 under the 1940
Act and the requirements of the applicable rule of the NASD regarding asset
based sales charges. MSF has also entered into a shareholder services agreement
with RWB for both Class A and Class B shares of each Fund.
CLASS A PLAN AND AGREEMENT
Pursuant to the Class A Plan, a Fund may compensate RWB for its
expenditures in financing any activity primarily intended to result in the sale
of Fund shares. The expenses of a Fund pursuant to the Class A Plan are accrued
on a fiscal year basis and may not exceed, with respect to the Class A shares of
each Fund, the annual rate of 0.10% of the Fund's average daily net assets
attributable to Class A shares. All or any portion of this fee may be remitted
to brokers who provide distribution services.
The Funds will also compensate RWB under the Shareholder Services Agreement
for maintenance and personal service provided to existing Class A shareholders.
The expenses of a Fund under the Shareholder Services Agreement are accrued on a
fiscal year basis and will equal 0.25% of the Fund's average daily net assets
attributable. All or any portion of this fee may be remitted to brokers who
provide shareholder account services.
CLASS B PLAN AND AGREEMENT
Pursuant to the Class B Plan, a Fund may pay RWB a fee of up to 0.75% of
the average daily net assets attributable to Class B shares for distribution
financing activities. All or any portion of such fees may be remitted to
brokers who assist in the distribution of Class B shares.
The purpose of the 0.75% fee representing distribution payments to RWB
under the Class B Plan is to compensate RWB for its distribution services to the
Funds. RWB pays commissions to registered representatives as well as
reimbursement of expenses of printing prospectuses and reports used for sales
purposes, expenses with respect to the preparation and printing of sales
literature and other distribution related expenses, including without
limitation, the cost necessary to provide distribution-related services, or
personnel, travel, office expenses and equipment.
B-27
<PAGE>
The Funds will compensate RWB under the Shareholder Services Agreement for
shareholder account services at the rate of .25% of the average daily net assets
of the Fund. All or any portion of such fees may be remitted to brokers who
provide maintenance and personal services to existing Class B shareholders.
GENERAL
In accordance with the terms of the Plans, RWB provides to each Fund, for
review by MSF's Board of Directors, a quarterly written report of the amounts
expended under the respective Plans and the purpose for which such expenditures
were made. In the Board of Directors' quarterly review of the Plans, they will
review the level of compensation the Plans provide in considering the continued
appropriateness of the Plans.
The Plans were adopted by a majority vote of the Board of Directors,
including at least a majority of Directors who are not, and were not at the time
they voted, interested persons of the Fund as defined in the 1940 Act and do not
and did not have any direct or indirect financial interest in the operation of
the Plans, cast in person at a meeting called for the purpose of voting on the
Plans. In approving the Plans, the Directors identified and considered a number
of potential benefits which the Plans may provide. The Board of Directors
believes that there is a reasonable likelihood that the Plans will benefit each
Fund and its current and future shareholders. Under their terms, the Plans
remain in effect from year to year provided such continuance is approved
annually by vote of the Directors in the manner described above. The Plans may
not be amended to increase materially the amount to be spent for distribution
without approval of the sharholders of the Fund affected thereby, and material
amendments to the Plans must also be approved by the Board of Directors in the
manner described above. A Plan may be terminated at any time, without payment
of any penalty, by vote of the majority of the Directors who are not interested
persons of the Fund and have no direct or indirect financial interst in the
operations of the Plan, or by a vote of a "majority of the outstanding voting
securities" ( as defined in the 1940 Act) of the Fund affected thereby. A Plan
will automatically terminate in the event of its assignment (as defined in the
1940 Act).
During the fiscal year ended March 31, 1997, neither the Class A Plan nor
the Class B Plans were in effect as neither Class had shares outstanding.
PORTFOLIO TRANSACTIONS AND BROKERAGE ALLOCATION AND OTHER PRACTICES
There is generally no stated commission in the case of fixed-income
securities, which are traded in the over-the-counter markets, but the price paid
by the Funds usually includes an undisclosed dealer commission or mark-up. In
underwritten offerings, the price paid by the Funds includes a disclosed, fixed
commission or discount retained by the underwriter or dealer. Transactions on
U.S. stock exchanges and other agency transactions involve the payment by the
Funds of negotiated brokerage commissions. Such commissions vary among
different brokers. Also, a particular broker may charge different commissions
according to such factors as the difficulty and size of the transaction. In the
case of securities traded on some foreign stock exchanges, brokerage commissions
may be fixed and the investment adviser or sub-adviser may be unable to
negotiate commission rates for these transactions.
B-28
<PAGE>
The investment adviser, or sub-adviser in the case of the Growth and Income
Stock and International Equity Funds, places all orders for the purchase and
sale of Fund securities, options, and futures contracts for each Fund through a
substantial number of brokers and dealers or futures commission merchants. In
executing transactions, the investment adviser or sub-adviser will attempt to
obtain the best net results for the Funds, taking into account such factors as
price (including the applicable brokerage commission or dollar spread), size of
order, the nature of the market for the security, the timing of the transaction,
the reputation, experience and financial stability of the broker-dealer
involved, the quality of the service, the difficulty of execution and
operational facilities of the firms involved, and the firm's risk in positioning
a block of securities. In transactions on stock exchanges in the United States,
payments of brokerage commissions are negotiated. In effecting purchases and
sales of portfolio securities in transactions on United States stock exchanges
for the account of the Funds, the investment adviser or sub-adviser may pay
higher commission rates than the lowest available when the investment adviser or
sub-adviser believes it is reasonable to do so in light of the value of the
brokerage and research services provided by the broker effecting the
transaction, as described below. In the case of securities traded on some
foreign stock exchanges, brokerage commissions may be fixed and the investment
adviser or sub-adviser may be unable to negotiate commission rates for these
transactions. In the case of securities traded on the over-the-counter markets,
there is generally no stated commission, but the price includes an undisclosed
commission or markup.
Some securities considered for investment by the Funds may also be
appropriate for other clients served by the investment adviser or sub-adviser.
If a purchase or sale of securities consistent with the investment policies of a
Fund and one or more of these clients served by the investment adviser or sub-
adviser is considered at or about the same time, transactions in such securities
will be allocated among the Funds and clients in a manner deemed fair and
reasonable by the investment adviser or sub-adviser. Although there is no
specified formula for allocating such transactions, the various allocation
methods used by the investment adviser or sub-adviser, and the results of such
allocations, are subject to periodic review by the Funds' investment adviser and
directors.
It has for many years been a common practice in the investment advisory
business for advisers of investment companies and other institutional investors
to receive research services from broker-dealers which execute transactions for
the clients of such advisers. Consistent with this practice, the investment
adviser or sub-adviser may receive research services from many broker-dealers
with which the investment adviser or sub-adviser places Fund transactions.
These services, which in some cases may also be purchased for cash, include such
matters as general economic and security market reviews, industry and company
reviews, evaluations of securities and recommendations as to the purchase and
sale of securities. Some of these services may be of value to the investment
adviser or sub-adviser in advising its various clients (including the Funds),
although not all of these services are necessarily useful and of value in
managing a Fund.
As permitted by Section 28(e) of the Securities Exchange Act of 1934, the
investment adviser or sub-adviser may cause a Fund to pay a broker-dealer, which
provides "brokerage and research services" (as defined in the Act) to the
investment adviser or sub-adviser, an amount of disclosed commission for
effecting a securities transaction for the Fund in excess of the commission
which another broker-dealer would have charged for effecting that transaction.
B-29
<PAGE>
There are no arrangements whatsoever, written or oral, relating to the
allocation to specific brokers of orders for Fund transactions. Consideration
is given to those firms providing statistical and research services to the
investment adviser or sub-adviser. Statistical and research services furnished
by brokers typically include: analysts' reports on companies and industries,
market forecasts, economic analyses and the like. Such services may tend to
reduce the expenses of the adviser or sub-adviser and this has been considered
in setting the advisory fee paid by each Fund.
Because MSF commenced operations in 1997, no brokerage commissions were
paid over the last three fiscal years.
DETERMINATION OF NET ASSET VALUE
Shares of each Fund are offered and redeemed at their net asset value as
next determined following receipt of a purchase order or tender for redemption.
The redemption price may be more or less than the shareholder's cost. The net
asset value of the shares of each Fund, except the International Equity Fund, is
determined by The Northwestern Mutual Life Insurance Company ("NML"), the Funds'
Administrator, in the manner described in the Funds' Prospectus. The net asset
value of the shares of the International Equity Fund is determined by Brown
Brothers Harriman & Co., the Fund's custodian. The Funds will be closed for
business and will not price their shares on the following business holidays:
New Year's Day, Presidents' Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving Day and Christmas Day.
The net asset value of each share of each Fund is the net asset value of
the entire Fund divided by the number of shares of the Fund outstanding. The
net asset value of an entire Fund is determined by computing the value of all
assets of the Fund and deducting all liabilities, including reserves and accrued
liabilities of the Fund. Fund securities for which market quotations are
readily available are valued at current market value.
Equity securities listed on a stock exchange and all call options are
valued at the closing sale price on the stock or options exchange or, if there
has been no such sale, at the closing bid price; stock index futures contracts
and interest rate futures contracts are valued at the closing settlement price
on the commodities exchange; unlisted equity securities are valued at the
closing bid price on the over-the-counter market.
Debt securities with maturities generally exceeding one year, other than
municipal obligations, are valued on the basis of valuations furnished by
Interactive Data Corporation, a facility which utilizes electronic data
processing techniques to report valuations for normal institutional size trading
units of debt securities, without regard to exchange or over-the-counter prices,
unless the Directors of MSF determine that in the case of a particular security
some other value is fair. Mueller Data furnishes the valuations for the
municipal obligations held by the Municipal Bond Fund.
Money market instruments and debt securities with maturities exceeding
sixty days but generally not exceeding one year are valued by marking to market.
Marking to market is based on valuations furnished by a pricing service. The
marking to market method takes into account unrealized appreciation or
depreciation due to changes in interest rates or other factors which would
influence the current fair values of such securities.
B-30
<PAGE>
Securities with remaining maturities of sixty days or less are valued on an
amortized cost basis or, if the current market value differs substantially from
the amortized cost, by marking to market. Under the amortized cost method of
valuation, the security will initially be valued at the cost on the date of
purchase (or, in the case of securities purchased with more than 60 days
remaining to maturity the market value on the 61st day prior to maturity); and
thereafter the Fund will assume a constant proportionate amortization in value
until maturity of any discount or premium.
The value of a foreign security held by a Fund is determined in its
national currency as of the close of trading on the foreign exchange on which it
is traded, or as of 4:00 p.m., New York time, if that is earlier, and that value
is then converted into its U.S. dollar equivalent at foreign exchange rates in
effect at noon, New York time, on the day the value of the foreign security is
determined. If no sale is reported at that time, the mean between the current
bid and asked price is used. Occasionally, events which affect the values of
such securities and such exchange rates may occur between the times at which
they are determined and the close of the New York Stock Exchange, and will
therefore not be reflected in the computation of the Fund's net asset value. If
events materially affecting the value of such securities occur during such
period, then these securities will be valued at fair value as determined by the
management and approved in good faith by the Directors of MSF. Trading in
securities on European and Far Eastern securities exchanges and over-the-counter
markets is normally completed well before the close of business in New York on
each day on which the New York Stock Exchange is open. Trading in European or
Far Eastern securities generally, or in a particular country or countries, may
not take place on every New York business day. Furthermore, trading takes place
in various foreign markets on days which are not business days in New york and
on which the Fund's net asset value is not calculated. Each Fund calculates net
asset value per share, and therefore effects sales and redemptions of its
shares, as of the close of the New York Stock Exchange once on each day on which
that Exchange is open. Such calculation does not take place contemporaneously
with the determination of the prices of many of the Fund securities used in such
calculation and if events occur which materially affect the value of these
foreign securities, they will be valued at fair market value as determined by
the management and approved in good faith by the Directors of MSF.
All other assets, including any securities for which market quotations are
not readily available, will be valued at their fair value as determined in good
faith by the Directors of MSF or under procedures or guidelines established by
the Directors of MSF. The net asset value is determined as of the close of
trading on the New York Stock Exchange on each day during which the Exchange is
open for trading. In accordance with the requirements of the Investment Company
Act of 1940 the Funds will also determine the net asset value of their shares on
any other day on which there is sufficient trading to materially affect the
value of their securities.
A Fund's maximum offering price per Class A share is determined by adding
the maximum sales charge to the net asset value per share. Class B shares are
offered at net asset value without the imposition of an initial sales charge.
Payment for the shares redeemed must be made within seven days after the
evidence of ownership of such shares is tendered to MSF; however, the right to
redeem Fund shares may be suspended, or payment of the redemption value
postponed, during any period in which the New York Stock Exchange is closed or
B-31
<PAGE>
trading thereon is restricted, or any period during which an emergency exists,
or as otherwise permitted by the Investment Company Act of 1940.
PURCHASE AND REDEMPTION OF SHARES
For information regarding the purchase of Fund shares, see "Shareholders
Guide--How to Buy Shares" in the Funds' Prospectus.
For a description of how a shareholder may have a Fund redeem his/her
shares, or how he/she may sell shares, see "Shareholders Guide--How to Sell
Shares" in the Funds' Prospectus.
CUMULATIVE DISCOUNT. Each Fund offers to all qualifying investors a cumulative
discount under which investors are permitted to purchase Class A shares of
any Fund of MSF at the price applicable to the total of (a) the dollar
amount then being purchased plus (b) an amount equal to the then current net
asset value of the purchaser's holdings of shares of any Funds of MSF and the
SSGA Money Market Fund. Acceptance of the purchase order is subject to
confirmation of qualification. The cumulative discount may be amended or
terminated at any time as to subsequent purchases.
LETTER OF INTENT. Any person may qualify for a reduced sales charge on
purchases of Class A shares made within a thirteen-month period pursuant to a
Letter of Intent (LOI). Class A shares acquired through the reinvestment of
distributions do not constitute purchases for purposes of the LOI. A Class A
shareholder may include, as an accumulation credit towards the completion of
such LOI, the value of all Class A shares of all Funds of MSF owned by the
shareholder. Such value is determined based on the public offering price on the
date of the LOI. During the term of an LOI, National Financial Data Services,
Inc. ("NFDS"), MSF's transfer agent, will hold shares in escrow to secure
payment of the higher sales charge applicable for shares actually purchased if
the indicated amount on the LOI is not purchased. Dividends and capital gains
will be paid on all escrowed shares and these shares will be released when the
amount indicated on the LOI has been purchased. An LOI does not obligate the
investor to buy or the Fund to sell the indicated amount in the LOI. If a Class
A shareholder exceeds the specified amount of the LOI and reaches an amount
which would qualify for a further quantity discount, a retroactive price
adjustment will be made at the time of the expiration of the LOI. The
resulting difference in offering price will purchase additional Class A shares
for the shareholder's account at the applicable offering price. If the
specified amount of the LOI is not purchased, the shareholder shall remit to
NFDS an amount equal to the difference between the sales charge paid and the
sales charge that would have been paid had the aggregate purchases been made at
a single time. If the Class A shareholder does not within twenty days after a
written request by NFDS pay such difference in sales charge, NFDS will redeem an
appropriate number of escrowed shares in order to realize such difference.
Additional information about the terms of the Letter of Intent are available
from your registered representative or from NFDS at 1-800- ____-_____.
SYSTEMATIC WITHDRAWAL PLAN. The Systematic Withdrawal Plan ("SWP") is
designed to provide a convenient method of receiving fixed payments at regular
intervals from shares deposited by the applicant under the SWP. The applicant
must deposit or purchase for deposit shares of the Fund having a total value of
not less than $10,000. Periodic checks of $100 or more will be sent to the
applicant, or any person designated by him, monthly or quarterly. SWP's
B-32
<PAGE>
without a surrender charge for Class B shares of a Fund are permitted only for
redemptions limited to no more than 10% of the original value of the account per
year.
Any income dividends or capital gains distributions on shares under the SWP
will be credited to the SWP account on the payment date in full and fractional
shares at the net asset value per share in effect on the record date.
SWP payments are made from the proceeds of the redemption of shares
deposited in a SWP account. Redemptions are potentially taxable transactions to
shareholders. To the extent that such redemptions for periodic withdrawals
exceed dividend income reinvested in the SWP account, such redemptions will
reduce and may ultimately exhaust the number of shares deposited in the SWP
account. In addition, the amounts received by a shareholder cannot be
considered as an actual yield or income on his or her investment because part of
such payments may be a return of his or her capital.
The SWP may be terminated at any time (1) by written notice to the Fund or
from the Fund to the shareholder; (2) upon receipt by the Fund of appropriate
evidence of the shareholder's death; or (3) when all shares under the SWP have
been redeemed. The fees of the Fund for maintaining SWPs are paid by the Fund.
SPECIAL REDEMPTIONS. Although it would not normally do so, each Fund has the
right to pay the redemption price of shares of the Fund in whole or in part in
portfolio securities as prescribed by the Directors. When the shareholder sells
portfolio securities received in this fashion, he would incur a brokerage
charge. Any such securities would be valued for the purposes of making such
payment at the same value as used in determining net asset value. The Funds
have elected to be governed by Rule 18f-1 under the 1940 Act, pursuant to which
each Fund is obligated to redeem shares solely in cash up to the lesser of
$250,000 or 1% of the net asset value of the applicable Fund during any 90 day
period for any one account.
SUSPENSION OF REDEMPTIONS. A Fund may not suspend a shareholder's right of
redemption, or postpone payment for a redemption for more than seven days,
unless the New York Stock Exchange (NYSE) is closed for other than customary
weekends or holidays, or trading on the NYSE is restricted, or for any period
during which an emergency exists as a result of which (1) disposal by a Fund of
securities owned by it is not reasonably practicable, or (2) it is not
reasonably practicable for a Fund to fairly determine the value of its assets,
or for such other periods as the Securities and Exchange Commission may permit
for the protection of investors.
INVESTMENT PERFORMANCE
STANDARDIZED AVERAGE ANNUAL TOTAL RETURN QUOTATIONS. Average annual total
return quotations for Class A and Class B shares are computed by finding the
average annual compounded rates of return that would cause a hypothetical
investment made on the first day of a designated period to equal the ending
redeemable value of such hypothetical investment on the last day of the
designated period in accordance with the following formula:
n
P(1+T) = ERV
Where: P = a hypothetical initial payment of $1,000, less the
B-33
<PAGE>
maximum sales load applicable to a Fund
T = average annual total return
n = number of years
ERV = ending redeemable value of the hypothetical $1,000 initial
payment made at the beginning of the designated period (or
fractional portion thereof)
The computation above assumes that all dividends and distributions made by a
Fund are reinvested at net asset value during the designated period. The
average annual total return quotation is determined to the nearest 1/100 of 1%.
One of the primary methods used to measure performance is "total return."
"Total return" will normally represent the percentage change in value of a class
of a Fund, or of a hypothetical investment in a class of a Fund, over any period
up to the lifetime of the class. Unless otherwise indicated, total return
calculations will assume the deduction of the maximum sales charge and usually
assume the reinvestment of all dividends and capital gains distributions and
will be expressed as a percentage increase or decrease from an initial value,
for the entire period or for one or more specified periods within the entire
period. Total return calculations that do not reflect the deduction of sales
charges will be higher than those that do reflect such charges.
Total return percentages for periods longer than one year will usually be
accompanied by total return percentages for each year within the period and/or
by the average annual compounded total return for the period. The income and
capital components of a given return may be separated and portrayed in a variety
of ways in order to illustrate their relative significance. Performance may
also be portrayed in terms of cash or investment values, without percentages.
Past performance cannot guarantee any particular future result. In determining
the average annual total return (calculated as provided above), recurring fees,
if any, that are charged to all shareholder accounts are taken into
consideration. For any account fees that vary with the size of the account, the
account fee used for purposes of the above computation is assumed to be the fee
that would be charged to the mean account size of a class of the Fund.
Each Fund's average annual total return quotations and yield quotations as
they may appear in the Prospectus, this SAI or in advertising are calculated by
standard methods prescribed by the SEC.
Each Fund may also publish its distribution rate and/or its effective
distribution rate. A Fund's distribution rate is computed by dividing the most
recent monthly distribution per share annualized, by the current net asset value
per share. A Fund's effective distribution rate is computed by dividing the
distribution rate by the ratio used to annualize the most recent monthly
distribution and reinvesting the resulting amount for a full year on the basis
of such ratio. The effective distribution rate will be higher than the
distribution rate because of the compounding effect of the assumed reinvestment.
A Fund's yield is calculated using a standardized formula, the income component
of which is computed from the yields to maturity of all debt obligations held by
the Fund based on prescribed methods (with all purchases and sales of securities
during such period included in the income calculation
B-34
<PAGE>
on a settlement date basis), whereas the distribution rate is based on a Fund's
last monthly distribution.
Other data that may be advertised or published about each Fund include the
average portfolio quality, the average portfolio maturity and the average
portfolio duration.
STANDARDIZED YIELD QUOTATIONS. The yield of a class is computed by
dividing the class's net investment income per share during a base period of 30
days, or one month, by the maximum offering price per share of the class on the
last day of such base period in accordance with the following formula:
6
2[(a-b +1) -1]
---
(cd)
Where: a = net investment income earned during the period
attributable to the subject class
b = net expenses accrued for the period attributable to the
subject class
c = the average daily number of shares of the subject class
outstanding during the period that were entitled to receive
dividends
d = the maximum offering price per share of the subject class
Net investment income will be determined in accordance with rules established by
the SEC. The price per share of Class A shares will include the maximum sales
charge imposed on purchases of Class A shares which decreases with the amount of
shares purchased.
NON-STANDARDIZED PERFORMANCE. In addition, in order to more completely
represent a Fund's performance or more accurately compare such performance to
other measures of investment return, a Fund also may include in advertisements,
sales literature and shareholder reports other total return performance data
("Non-Standardized Return"). Non-Standardized Return may be quoted for the same
or different periods as those for which Standardized Return is quoted; it may
consist of an aggregate or average annual percentage rate of return, actual
year-by-year rates or any combination thereof. Non-Standardized Return may or
may not take sales charges into account; performance data calculated without
taking the effect of sales charges into account will be higher than data
including the effect of such charges. All non-standardized performance will be
advertised only if the standard performance data for the same period, as well as
for the required periods, is also presented.
GENERAL INFORMATION. From time to time, the Funds may advertise their
performance compared to similar funds using certain unmanaged indices, reporting
services and publications. Descriptions of some of the indices which may be
used are listed below.
The Standard & Poor's 500 Composite Stock Price Index is a well diversified list
of 500 companies representing the U.S. Stock Market.
B-35
<PAGE>
The Standard and Poor's Small Cap 600 index is designed to represent price
movements in the small cap U.S. equity market. It contains companies chosen by
the Standard & Poor's Index Committee for their size, industry characteristics,
and liquidity. None of the companies in the S&P 600 overlap with the S&P 500 or
the S&P 400 (MidCap Index). The S&P 600 is weighted by market capitalization.
REITs are not eligible for inclusion.
The NASDAQ Composite OTC Price Index is a market value-weighted and unmanaged
index showing the changes in the aggregate market value of approximately 3,500
stocks.
The Wilshire Next 1750 is an unmanaged, equally weighted index. Included in
this index are those stocks which are ranked 750 to 2500 by market
capitalization in the Wilshire 5000.
The Wilshire Small Cap Index is a subset of the Wilshire Next 1750 and includes
250 stocks chosen based upon their size, sector and liquidity characteristics.
Each stock is equally weighted in this unmanaged index.
The Merrill Lynch Domestic Master Index is an unmanaged market value weighted
index comprised of U.S. Government, mortgage and investment-grade corporate
bonds. The index measures the income provided by, and the price changes of, the
underlying securities.
The Lehman Government Bond Index is a measure of the market value of all public
obligations of the U.S. Treasury; all publicly issued debt of all agencies of
the U.S. Government and all quasi-federal corporations; and all corporate debt
guaranteed by the U.S. Government. Mortgage backed securities, bonds and
foreign targeted issues are not included in the Lehman Government Index.
The Lehman Government/Corporate Bond Index is a measure of the market value of
approximately 5,300 bonds with a face value currently in excess of $1.3
trillion. To be included in the Lehman Government/Corporate Index, an issue
must have amounts outstanding in excess of $1 million, have at least one year to
maturity and be rated "Baa" or higher ("investment grade") by a nationally
recognized rating agency.
The Russell 2000 Index represents the bottom two thirds of the largest 3000
publicly traded companies domiciled in the U.S. Russell uses total market
capitalization to sort its universe to determine the companies that are included
in the Index. Only common stocks are included in the Index. REITs are eligible
for inclusion.
The Russell 2500 Index is a market value-weighted, unmanaged index showing total
return (i.e., principal changes with income) in the aggregate market value of
2,500 stocks of publicly traded companies domiciled in the United States. The
Index includes stocks traded on the New York Stock Exchange and the American
Stock Exchange as well as in the over-the-counter market.
The Morgan Stanley Capital International EAFE Index (the "EAFE Index") is an
unmanaged index, which includes over 1,000 companies representing the stock
markets of Europe, Australia, New Zealand and the Far East. The EAFE Index is
typically shown weighted by market capitalization. However, EAFE is also
available weighted by Gross Domestic Product (GDP). These weights are modified
on July lst of each year to reflect the prior year's GDP. Indices with
dividends reinvested constitute an estimate of total return arrived at by
reinvesting one twelfth of the month-end yield at every month end. The series
B-36
<PAGE>
with net dividends reinvested take into account those dividends net of
withholding taxes retained at the source of payment.
The Salomon Brothers High Yield Market Index includes cash-pay and
deferred-interest corporate bonds with remaining maturities of at least one
year. All bonds in the index are publicly placed, have a fixed coupon and are
non-convertible. The index is an unmanaged market value weighted index and
measures the income provided by, and the price changes of, the underlying
securities.
The Lehman Brothers High Yield Intermediate Market Index is made up of
dollar denominated, nonconvertible, SEC publicly registered fixed rate
noninvestment grade issues. The bonds have remaining maturities of between one
and ten years and have an outstanding par value of at least $100 million. The
index is an unmanaged market value weighted index and measures the income
provided by, and the price changes of, the underlying securities.
The Lehman Brothers Municipal Bond Index includes municipal bonds that
have: a minimum credit rating of Baa; been issued as part of an issuance of at
least $50 million; a maturity value of at least $3 million; a maturity of at
least 1 year; and been issued after December 31, 1990. Recently the index
included 31,098 issues totaling $440 billion par amount. The index represents
approximately 30% of the municipal bond market capitalization.
Each Fund's investment performance may be advertised in various
financial publications, newspapers and magazines.
From time to time MSF may publish the sales of shares of one or more of the
Funds on a gross or net basis and for various periods of time, and compare such
sales with sales similarly reported by other investment companies.
TAXES
Each Fund is treated as a separate entity for accounting and tax purposes.
Each Fund has qualified and elected or intends to qualify and elect to be
treated as a "regulated investment company" under Subchapter M of the Internal
Revenue Code of 1986, as amended (the "Code"), and intends to continue to so
qualify in the future. As such and by complying with the applicable provisions
of the Code regarding the sources of its income, the timing of its
distributions, and the diversification of its assets, each Fund will not be
subject to federal income tax on taxable income (including net short-term and
long-term capital gains) which is distributed to shareholders at least annually
in accordance with the timing requirements of the Code.
Each Fund will be subject to a 4% non-deductible federal excise tax on
certain amounts not distributed (and not treated as having been distributed) on
a timely basis in accordance with annual minimum distribution requirements. The
Funds intend under normal circumstances to avoid liability for such tax by
satisfying such distribution requirements.
If a Fund acquires stock in certain non-U.S. corporations that receive at
least 75% of their annual gross income from passive sources (such as interest,
dividends, rents, royalties or capital gain) or hold at least 50% of their
assets in investments producing such passive income ("passive foreign investment
companies"), that Fund could be subject to federal income tax and additional
interest charges on "excess distributions" received from such companies or gain
from the sale of stock in such companies, even if all income
B-37
<PAGE>
or gain actually received by the Fund is timely distributed to its shareholders.
The Fund would not be able to pass through to its shareholders any credit or
deduction for such a tax. Certain elections may, if available, ameliorate these
adverse tax consequences, but any such election would require the applicable
Fund to recognize taxable income or gain without the concurrent receipt of cash.
Any Fund that is permitted to acquire stock in foreign corporations may limit
and/or manage its holdings in passive foreign investment companies to minimize
its tax liability or maximize its return from these investments.
Foreign exchange gains and losses realized by a Fund in connection with
certain transactions involving foreign currency-denominated debt securities,
certain foreign currency futures and options, foreign currency forward
contracts, foreign currencies, or payables or receivables denominated in a
foreign currency are subject to Section 988 of the Code, which generally causes
such gains and losses to be treated as ordinary income and losses and may affect
the amount, timing and character of distributions to shareholders. Any such
transactions that are not directly related to a Fund's investment in stock or
securities, possibly including speculative currency positions or currency
derivatives not used for hedging purposes, may increase the amount of gain it is
deemed to recognize from the sale of certain investments held for less than
three months, which gain is limited under the Code to less than 30% of its
annual gross income, and could under future Treasury regulations produce income
not among the types of "qualifying income" from which the Fund must derive at
least 90% of its annual gross income.
Some Funds may be subject to withholding and other taxes imposed by
foreign countries with respect to their investments in foreign securities. Tax
conventions between certain countries and the U.S. may reduce or eliminate such
taxes. The Funds, other than the International Equity Fund, anticipate that
they generally will not qualify to pass such foreign taxes and any associated
tax deductions or credits through to their shareholders, who therefore generally
will not report such amounts on their tax returns.
For Federal income tax purposes, each Fund is permitted to carry forward a
net capital loss in any year to offset its own capital gains, if any, during the
eight years following the year of the loss. To the extent subsequent capital
gains are offset by such losses, they would not result in federal income tax
liability to the applicable Fund and would not be distributed as such to
shareholders.
Each Fund that invests in certain PIKs, zero coupon securities or certain
deferred interest securities (and, in general, any other securities with
original issue discount or with market discount if the Fund elects to include
market discount in income currently) must accrue income on such investments
prior to the receipt of the corresponding cash payments. However each Fund must
distribute, at least annually, all or substantially all of its net income,
including such accrued income, to shareholders to qualify as a regulated
investment company under the Code and avoid federal income and excise taxes.
Therefore, a Fund may have to dispose of its portfolio securities under
disadvantageous circumstances to generate cash, or may have to leverage itself
by borrowing the cash, to satisfy distribution requirements.
Investment in debt obligations that are at risk of or in default presents
special tax issues for any Fund that may hold such obligations. Tax rules are
not entirely clear about issues such as when the Fund may cease to accrue
interest, original issue discount, or market discount, when and to what extent
B-38
<PAGE>
deductions may be taken for bad debts or worthless securities, how payments
received on obligations in default should be allocated between principal and
income, and whether exchanges of debt obligations in a workout context are
taxable. These and other issues will be addressed by any Fund that may hold
such obligations in order to reduce the risk of distributing insufficient income
to preserve its status as a regulated investment company and seek to avoid
becoming subject to federal income or excise tax.
Limitations imposed by the Code on regulated investment companies like the
Funds may restrict a Fund's ability to enter into futures, options, and forward
transactions.
Certain options, futures and forward foreign currency transactions
undertaken by a Fund may cause the Fund to recognize gains or losses from
marking to market even though its positions have not been sold or terminated and
affect the character as long-term or short-term (or, in the case of certain
currency forwards, options and futures, as ordinary income or loss) and timing
of some capital gains and losses realized by the Fund. Also, certain of a
Fund's losses on its transactions involving options, futures or forward
contracts and/or offsetting portfolio positions may be deferred rather than
being taken into account currently in calculating the Fund's taxable income.
Certain of the applicable tax rules may be modified if a Fund is eligible and
chooses to make one or more of certain tax elections that may be available.
These transactions may therefore affect the amount, timing and character of a
Fund's distributions to shareholders. The Funds will take into account the
special tax rules (including consideration of available elections) applicable to
options, futures or forward contracts in order to minimize any potential adverse
tax consequences.
The federal income tax rules applicable to interest rate swaps, caps and
floors are unclear in certain respects, and a Fund may be required to account
for these transactions in a manner that, in certain circumstances, may limit the
degree to which it may utilize these transactions.
Distributions from a Fund's current or accumulated earnings and profits
("E&P"), as computed for federal income tax purposes, will be taxable as
described in the Funds' prospectus whether taken in shares or in cash.
Distributions, if any, in excess of E&P will constitute a return of capital,
which will first reduce an investor's tax basis in a Fund's shares and
thereafter (after such basis is reduced to zero) will generally give rise to
capital gains. Shareholders electing to receive distributions in the form of
additional shares will have a cost basis for federal income tax purposes in each
share so received equal to the amount of cash they would have received had they
elected to receive the distributions in cash, divided by the number of shares
received.
At the time of an investor's purchase of shares of a Fund, a portion of the
purchase price is often attributable to realized or unrealized appreciation in
the Fund's portfolio or undistributed taxable income of the Fund. Consequently,
subsequent distributions from such appreciation or income may be taxable to such
investor even if the net asset value of the investor's shares is, as a result of
the distributions, reduced below the investor's cost for such shares, and the
distributions in reality represent a return of a portion of the purchase price.
Upon a redemption of shares of a Fund, (including by exercise of the
exchange privilege) a shareholder may realize a taxable gain or loss depending
upon his basis in his shares. Such gain or loss will be treated as capital
B-39
<PAGE>
gain or loss if the shares are capital assets in the shareholder's hands and
will be long-term or short-term, depending upon shareholder's tax holding period
for the shares. A sales charge paid in purchasing shares of a Fund cannot be
taken into account for purposes of determining gain or loss on the redemption or
exchange of such shares within 90 days after their purchase to the extent shares
of the Fund are subsequently acquired without payment of a sales charge pursuant
to the reinvestment or exchange privilege. Such disregarded load will result in
an increase in the shareholder's tax basis in the shares subsequently acquired.
Also, any loss realized on a redemption or exchange will be disallowed to the
extent the shares disposed of are replaced with shares of the same Fund within a
period of 61 days beginning 30 days before and ending 30 days after the shares
are disposed of, such as pursuant to an election to reinvest dividends or
capital gain distributions automatically. In such a case, the basis of the
shares acquired will be adjusted to reflect the disallowed loss. Any loss
realized upon redemption of shares with a tax holding period of six months or
less will be treated as a long-term capital loss to the extent of any amounts
treated as distributions of long-term capital gain with respect to such shares.
For purposes of the dividends received deduction available to corporations,
dividends received by a Fund, if any, from U.S. domestic corporations in respect
of the stock of such corporations held by the-Fund, for federal income tax
purposes, for at least 46 days (91 days in the case of certain preferred stock)
and distributed and designated by the Fund may be treated as qualifying
dividends. Corporate shareholders must meet the minimum holding period
requirement stated above (46 or 91 days) with respect to their shares of the
applicable Fund in order to qualify for the deduction and, if they borrow to
acquire such shares, may be denied a portion of the dividends received
deduction. The entire qualifying dividend, including the otherwise deductible
amount, will be included in determining the excess (if any) of a corporate
shareholder's adjusted current earnings over its alternative minimum taxable
income, which may increase its alternative minimum tax liability. Additionally,
any corporate shareholder should consult its tax adviser regarding the
possibility that its basis in its shares may be reduced, for federal income tax
purposes, by reason of "extraordinary dividends" received with respect to the
shares, for the purpose of computing its gain or loss on redemption or other
disposition of the shares.
For the International Equity Fund, if more than 50% of the Fund's assets at
year-end consists of the debt and equity securities of foreign corporations, the
Fund may elect to permit shareholders to claim a credit or deduction on their
income tax returns for their pro rata portion of qualified taxes paid by the
Fund to foreign countries. In such a case, shareholders will include in gross
income from foreign sources their pro rata shares of such taxes. A
shareholder's ability to claim a foreign tax credit or deduction in respect of
foreign taxes paid by the Fund may be subject to certain limitations imposed by
the Code, as a result of which a shareholder may not get a full credit or
deduction for the amount of such taxes. Shareholders who do not itemize on
their federal income tax returns may claim a credit (but no deduction) for such
foreign taxes.
Different tax treatment, including penalties on certain excess
contributions and deferrals, certain pre-retirement and post-retirement
distributions and certain prohibited transactions, is accorded to shareholder
accounts maintained as qualified retirement plans. Shareholders should consult
their tax advisers for more information.
B-40
<PAGE>
The foregoing discussion relates solely to U.S. Federal income tax law as
applicable to U.S. persons (i.e., U.S. citizens or residents and U.S. domestic
corporations, partnerships, trusts or estates) subject to tax under such law.
The discussion does not address special tax rules applicable to certain classes
of investors, such as tax-exempt entities, insurance companies, and financial
institutions. Dividends, capital gain distributions, and ownership of or gains
realized on the redemption (including an exchange) of the shares of a Fund may
also be subject to state and local taxes. Shareholders should consult their own
tax advisers as to the federal, state or local tax consequences of ownership of
shares of, and receipt of distributions from, the Funds in their particular
circumstances.
Non-U.S. investors not engaged in a U.S. trade or business with which their
investment in a Fund is effectively connected will be subject to U.S. Federal
income tax treatment that is different from that described above. These
investors may be subject to non-resident alien withholding tax at the rate of
30% (or a lower rate under an applicable tax treaty) on amounts treated as
ordinary dividends from a Fund and, unless an effective IRS Form W-8 or
authorized substitute is on file, to 31% backup withholding on certain other
payments from the Fund. Non-U.S. investors should consult their tax advisers
regarding such treatment and the application of foreign taxes to an investment
in any Fund.
MUNICIPAL BOND FUND. The Municipal Bond Fund will be qualified to pay
exempt-interest dividends to its shareholders only if, at the close of each
quarter of the Fund's taxable year, at least 50% of the total value of the
Fund's assets consists of obligations the interest on which is exempt from
federal income tax. Distributions that the Fund properly designates as exempt-
interest dividends are treated by shareholders as interest excludable from their
gross income for federal income tax purposes but may be taxable for federal
alternative minimum tax purposes and for state and local purposes. Because the
Fund intends to be qualified to pay exempt-interest dividends, the Fund may be
limited in its ability to enter into taxable transactions involving forward
commitments, repurchase agreements, financial futures, and options contracts on
financial futures, tax-exempt bond indices, and other assets.
Part or all of the interest on indebtedness, if any, incurred or continued
by a shareholder to purchase or carry shares of the Municipal Bond Fund is not
deductible. The portion of interest that is not deductible is equal to the
total interest paid or accrued on the indebtedness, multiplied by the percentage
of the Fund's total distributions (not including distributions from net long-
term capital gains) paid to the shareholder that are exempt-interest dividends.
Under rules used by the Internal Revenue Service for determining when borrowed
funds are considered used for the purpose of purchasing or carrying particular
assets, the purchase of shares may be considered to have been made with borrowed
funds even though such funds are not directly traceable to the purchase of the
shares.
In general, exempt-interest dividends, if any, attributable to interest
received on certain private activity obligations and certain industrial
development bonds will not be tax-exempt to any shareholders who are
"substantial users" of the facilities financed by such obligations or bonds or
who are "related persons" of such substantial users.
If a shareholder sells shares at a loss within six months of purchase, any
loss will be disallowed for Federal income tax purposes to the extent of any
exempt-interest dividends received on such shares.
B-41
<PAGE>
STATE AND LOCAL. Each Fund may be subject to state or local taxes in
jurisdictions in which such Fund may be deemed to be doing business. In
addition, in those states or localities which have income tax laws, the
treatment of such Fund and its shareholders under such laws may differ from
their treatment under federal income tax laws, and investment in such Fund may
have different tax consequences for shareholders than would direct investment in
such Fund's portfolio securities. Shareholders should consult their own tax
advisers concerning these matters.
CUSTODIANS
Portfolio securities of each Fund are held pursuant to a Custodian
Agreement between MSF and the Fund's custodian. The custodian for the domestic
securities of the Growth and Income Stock Fund, High Yield Bond Fund and
Municipal Bond Fund is Bankers Trust Company, 16 Wall Street, New York, New York
10015. The custodian for the domestic securities of the Aggressive Growth Stock
Fund, the Growth Stock Fund, the Index 500 Stock Fund, the Asset Allocation Fund
and the Select Bond Fund is the Chase Manhattan Bank, N.A., One Chase Manhattan
Plaza, New York, New York 10081. The custodian for the International Equity
Fund and any foreign assets of the Asset Allocation Fund, High Yield Bond Fund,
Select Bond Fund, Aggressive Growth Stock Fund and Growth Stock Fund is Brown
Brothers Harriman & Co., 40 Water Street, Boston, Massachusetts 02109. The
custodians maintain custody of securities and other assets of the respective
Funds and perform certain services in connection with the purchase, sale,
exchange and pledge of securities of the Funds.
TRANSFER AGENT SERVICES
National Financial Data Services, ________________________, Kansas City,
Missouri _____, is the transfer agent for each Fund.
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Price Waterhouse LLP, 100 East Wisconsin Avenue, Suite 1500,
Milwaukee, Wisconsin 53202, is the independent public accountant of MSF and
performs auditing services for MSF.
FINANCIAL STATEMENTS
MSF's and each Fund's audited financial statements as of _______________,
1997, together with the notes thereto and the report of Price Waterhouse LLP,
are attached to this SAI.
B-42
<PAGE>
APPENDIX A
Description of Ratings as Provided by the Rating Services
CORPORATE BONDS
MOODY'S INVESTORS SERVICE, INC.
Aaa--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 fundamentally strong position of such issues.
Aa--Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they compromise 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.
A--Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving security
to principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa--Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba--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 other good and bad times over the future. Uncertainty of position
characterizes bonds in this series.
B--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 security over any long period of time may be small.
Caa--Bonds which are rated Caa are of poor standing. Such securities may
be in default or there may be present elements of danger with respect to
principal or interest.
Ca--Bonds which are rated Ca represent obligations which are speculative in
a high degree. Such issues are often in default or have other marked
shortcomings.
B-43
<PAGE>
C--Bonds which are rated C are the lowest rated series of bonds and are
regarded as having extremely poor prospects of ever attaining any real
investment standing.
Absence of Rating: Where no rating has been assigned or where a rating has
been suspended or withdrawn, it may be for reasons unrelated to the quality of
the issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities that are not
rated as a matter of policy.
3. There is a lack of essential data pertaining to the issue or issuer.
4. The issue was privately placed, in which case the rating is not
published in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise,
the effects of which preclude satisfactory analysis; if there is no longer
available reasonable up-to-date data to permit a judgment to be formed; if a
bond is called for redemption; or for other reasons.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic
ratings classification from Aa through B in its corporate bond rating system.
The modifier 1 indicates that the security ranks in the higher end of its
generic rating category; the modifier 2 indicates a mid-range ranking; and the
modifier 3 indicates that the issue ranks in the lower end of its generic rating
category.
STANDARD & POOR'S CORPORATION
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, B, CCC, CC, C--Debt is regarded as having predominantly speculative
characteristics with respect to capacity to pay interest and repay principal in
accordance with the terms of this obligation. "BB" indicates the least degree
of speculation and "C" the highest degree of speculation. While such debt will
likely have some quality and protective characteristics, these are
B-44
<PAGE>
outweighed by large uncertainties or major risk exposures to adverse conditions.
BB--Debt rated "BB" has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure
to adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The "BB"
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "BBB-" rating.
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.
CCC--Debt rated "CCC" has a currently indefinable vulnerability to default,
and is dependent upon favorable business, financial and economic conditions to
meet timely payment of interest and repayment of principal. In the event of
adverse business, financial or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The "CCC" rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied "B" or "B-" rating.
CC--The rating "CC" is typically applied to debt subordinated to senior
debt that is assigned an actual or implied "CCC" rating.
C--The rating "C" is typically applied to debt subordinated to senior debt
which is assigned an actual or implied "CCC-" debt rating. The "C" rating may
be used to cover a situation where a bankruptcy petition has been filed, but
debt service payments are continued.
CI--The rating "CI" is reserved for income bonds on which no interest is
being paid.
D--Debt rated "D" is in payment default. The "D" rating is used when
interest payments or principal are not made on the date due even if the
applicable grace period has not expired, unless S&P believe that such payments
will be made during such grace period. The "D" rating also will be used upon
the filing of a bankruptcy petition if debt service payments are jeopardized.
Plus (+) or Minus (-)--The ratings from "AA" to "CCC" may be modified by
the addition of a plus or minus sign to show relative standing within the major
rating categories.
NR--Not rated.
PREFERRED STOCKS
MOODY'S INVESTORS SERVICE, INC.
aaa--considered to be a top-quality preferred stock. This rating indicates
good asset protection and the least risk of dividend impairment within the
universe of preferred stocks.
B-45
<PAGE>
aa--considered a high-grade preferred stock. This rating indicates that
there is a reasonable assurance that earnings and asset protection will remain
relatively well maintained in the foreseeable future.
a--considered to be an upper-medium-grade preferred stock. While risks are
judged to be somewhat greater than in the aaa and aa classifications, earnings
and asset protection are, nevertheless, expected to be maintained at adequate
levels.
baa--considered to be medium-grade, neither highly protected nor poorly
secured. Earnings and asset protection appear adequate at present but may be
questionable over any great length of time.
ba--considered to have speculative elements and its future cannot be
considered well assured. Earnings and asset protection may be very moderate and
not well safeguarded during adverse periods. Uncertainty of position
characterizes preferred stocks in this series.
b--generally lacks the characteristics of a desirable investment.
Assurance of dividend payments and maintenance of other terms of the issue over
any long period of time may be small.
caa--likely to be in arrears on dividend payments. This rating designation
does not purport to indicate the future status of payments.
ca--speculative in a high degree and is likely to be in arrears on
dividends with little likelihood of eventual payments.
c--lowest rated series of preferred or preference stock. Issues so rated
can be regarded as having extremely poor prospects of ever attaining any real
investment standing.
Moody's applies numerical modifiers 1, 2 and 3 in each rating
classification: the modifier 1 indicates that the security ranks in the higher
end of its generic rating category; the modifier 2 indicates a mid-range
ranking; and the modifier 3 indicates that the issue ranks in the lower end of
its generic rating category.
STANDARD & POOR'S CORPORATION
"AAA"--This is the highest rating that may be assigned by S&P to a
preferred stock issue and indicates an extremely strong capacity to pay the
preferred stock obligations.
"AA"--A preferred stock issue rated "AA" also qualifies as a high-quality
fixed-income security. The capacity to pay preferred stock obligations is very
strong, although not as overwhelming as for issues rated "AAA".
"A"--An issued rated "A" is backed by a sound capacity to pay the preferred
stock obligations, although it is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions.
"BBB"--An issue rated "BBB" is regarded as backed by an adequate capacity
to pay the preferred stock obligations. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to make payments for preferred stock
in this category than for issues in the "A" category.
B-46
<PAGE>
"BB", "B", "CCC"--Preferred stock rated "BB", "B", and "CCC" are regarded,
on balance, as predominantly speculative with respect to the issuer's capacity
to pay preferred stock obligations. "BB" indicates the lowest degree of
speculation and "CCC" the highest degree of speculation. While such issues will
likely have some quality and protective characteristics, these are outweighed by
large uncertainties or major risk exposures to adverse conditions.
"CC"--The rating "CC" is reserved for a preferred stock issue in arrears on
dividends or sinking fund payments but that is currently paying.
"C"--The preferred stock rated "C" is a non-paying issue.
"D"--A preferred stock rated "D" is a non-paying issue with the issuer in
default on debt instruments.
NR indicates that no rating has been requested, that there is insufficient
information on which to base a rating, or that S&P does not rate a particular
type of obligation as a matter of policy.
Plus(+) or Minus(-)--To provide more detailed indications of preferred
stock quality, the ratings from "AA" to "CCC" may be modified by the addition of
a plus or minus sign to show relative standing within the major rating
categories.
COMMERCIAL PAPER
MOODY'S INVESTORS SERVICE
The term "commercial paper" as used by Moody's means promissory obligations
not having an original maturity in excess of one year.
Moody's employs the following three designations, all judged to be
investment grade, to indicate the relative repayment capacity of rated issuers:
Issuers rated PRIME-1 (or supporting institutions) have a superior ability
for repayment of senior short-term debt obligations. PRIME-1 repayment ability
will often be evidenced by the following characteristics:
-- Leading market positions in well-established industries.
-- High rates of return on funds employed.
-- Conservative capitalization structures with moderate reliance on debt
and ample asset protection.
-- Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
-- Well-established access to a range of financial markets and assured
sources of alternate liquidity.
Issuers rated PRIME-2 (or supporting institutions) have a strong ability
for repayment of senior short-term debt obligations. This will normally be
evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
B-47
<PAGE>
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
Issuers rated PRIME-3 (or supporting institutions) have an acceptable
ability for repayment of senior short-term debt obligations. The effect of
industry characteristics and market composition may be more pronounced.
Variability in earnings and profitability may result in changes in the level of
debt protection measurements and the requirement for relatively high financial
leverage. Adequate alternate liquidity is maintained.
Issuers rated NOT PRIME do not fall within any of the Prime rating
categories.
STANDARD & POOR'S CORPORATION
S&P commercial paper rating is a current assessment of the likelihood of
timely payment of debt having an original maturity of no more than 365 days.
Ratings are graded into several categories ranging from "A-1" for the highest
quality obligations to "D" for the lowest. These categories are as follows:
A-1 Commercial paper rated "A-1" is regarded as having a very strong
degree of safety regarding timely payment. A "+" designation is
applied to those issues which possess extremely strong safety
characteristics.
A-2 Commercial paper rated "A-2" is regarded as having a satisfactory
capacity for timely payment. However, the relative degree of safety
is not as high as for issues designated "A-1"
A-3 Commercial paper rated "A-3" is regarded as having an adequate
capacity for timely payment. They are, however, more vulnerable to
the adverse effects of changes in circumstances than obligations
carrying the higher designations.
B Commercial paper rated "B" is regarded as having only speculative
capacity for timely payment.
C Commercial paper rated "C" is regarded as having a doubtful capacity
for repayment.
D Commercial paper rated "D" is in payment default. The "D" rating is
used when interest payments or principal payments are not made on the
date due even if the applicable grace period has not expired, unless
S&P believes that such payments will be made during such grace period.
MUNICIPAL OBLIGATIONS
MOODY'S INVESTORS SERVICE MUNICIPAL BOND RATINGS
Aaa--judged to be of the "best quality" and are referred to as "gilt edge";
interest payments are protected by a large or by an exceptionally stable margin
and principal is secure
Aa--judged to be of "high quality by all standards" but as to which
margins of protection or other elements make long-term risks appear somewhat
B-48
<PAGE>
larger than Aaa-rated municipal bonds; together with Aaa group they comprise
what are generally known as "high grade bonds"
A--possess many favorable investment attributes and are considered "upper
medium grade obligations." Factors giving security to principal and interest of
A-rated municipal bonds are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future
Baa--considered as medium grade obligations; i.e., they are neither highly
protected nor poorly secured; interest payments and principal security appear
adequate for the present but certain protective elements may be lacking or may
be characteristically unreliable over any great length of time
Ba--protection of principal and interest payments may be very moderate;
judged to have speculative elements; their future cannot be considered as well-
assured
B--lack characteristics of a desirable investment; assurance of interest
and principal payments over any long period of time may be small
Caa--poor standing; may be in default or there may be present elements of
danger with respect to principal and interest
Ca--speculative in a high degree; often in default
C--lowest rated class of bonds; issues so rated can be regarded as having
extremely poor prospects for ever attaining any real investment standing.
MOODY'S RATINGS OF STATE AND MUNICIPAL NOTES:
Moody's ratings for state and municipal notes and other short-term
obligations are designated Moody's Investment Grade ("MIG"). Symbols used will
be as follows:
MIG-1--Best quality, enjoying strong protection from established cash flows
of funds for their servicing or from established and broad-based access to the
market for refinancing, or both;
MIG-2--High quality with margins of protection ample although not so large
as in the preceding group.
DESCRIPTION OF MOODY'S HIGHEST COMMERCIAL PAPER RATING:
Prime-1 ("P-1")--Judged to be of the best quality. Their short-term debt
obligations carry the smallest degree of investment risk.
STANDARD & POOR'S CORPORATION'S MUNICIPAL BOND RATINGS
AAA--has the highest rating assigned by S&P; extremely strong capacity to
pay principal and interest
AA--has a very strong capacity to pay interest and repay principal and
differs from the higher rated issues only in a small degree
A--has a strong capacity to pay principal and interest, although somewhat
more susceptible to the adverse changes in circumstances and economic conditions
B-49
<PAGE>
BBB--regarded as having an adequate capacity to pay principal and interest;
normally exhibit adequate protection parameters but adverse economic conditions
or changing circumstances are more likely to lead to a weakened capacity to pay
principal and interest than for bonds in A category
BB--B--CCC--CC--predominantly speculative with respect to capacity to pay
interest and repay principal in accordance with terms of obligations; BB is
being paid
D--in default, and payment of principal and/or interest is in arrears.
The ratings from "AA" to "B" may be modified by the addition of a plus or
minus sign to show relative standing within the major rating categories.
STANDARD & POOR'S CORPORATION'S RATINGS OF MUNICIPAL NOTES:
SP-1 + --very strong capacity to pay principal and interest
SP-1--strong capacity to pay principal and interest.
DESCRIPTIONS OF S&P'S HIGHEST COMMERCIAL PAPER RATINGS:
A-1+ -- This designation indicates the degree of safety regarding timely
payment is overwhelming
A-1 -- This designation indicates the degree of safety regarding timely
payment is very strong
B-50
<PAGE>
APPENDIX B
Glossary of Terms
CERTIFICATE OF DEPOSIT
A certificate of deposit is a short term obligation of a commercial bank.
EURODOLLAR CERTIFICATE OF DEPOSIT
A Eurodollar certificate of deposit is a short term obligation of a foreign
subsidiary of a U.S. bank payable in U.S. dollars.
TIME DEPOSIT
A time deposit is a deposit in a commercial bank for a specified period of
time at a fixed interest rate for which a negotiable certificate is not
received.
BANKERS' ACCEPTANCE
A bankers' acceptance is a time draft drawn on a commercial bank by a
borrower, usually in connection with international commercial transactions.
VARIABLE AMOUNT MASTER NOTE
A variable amount master note is a note which fixes a minimum and maximum
amount of credit and provides for lending and repayment within those limits at
the discretion of the lender.
COMMERCIAL PAPER
Commercial paper is a short term promissory note issued by a corporation
primarily to finance short term credit needs.
B-51
<PAGE>
Pages B-__ through B-__ are
reserved for the Financial Statements
of
Mason Street Funds, Inc.
B-52
<PAGE>
PART C
OTHER INFORMATION
Item 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements
Registrant is a newly organized corporation and has no assets or
liabilities. A Statement of Assets and Liabilities and a Report
of Independent Accountants will be filed by amendment.
(b) Exhibits
EX-99.B1 Articles of Incorporation of Mason Street Funds, Inc.
EX-99.B2 By-Laws of Mason Street Funds, Inc.
(3) Not Applicable
EX-99.B4 Rights of Stockholders are described in Article FOURTH
and Article SIXTH of the Articles of Incorporation of
Mason Street Funds, Inc., referenced herein as EX-99.B1
EX-99.B5(a) Form of Investment Advisory Agreement between Mason
Street Funds, Inc. and Northwestern Mutual Investment
Services, Inc.
EX-99.B5(b) Form of Investment Sub-Advisory Agreement between Mason
Street Funds, Inc. (on behalf of the Growth and Income
Stock Fund), Northwestern Mutual Investment Services,
Inc. and J.P. Morgan Investment Management, Inc.*
EX-99.B5(c) Form of Investment Sub-Advisory Agreement between
Northwestern Mutual Investment Services, Inc.,
(Investment Adviser to the International Equity Fund)
and Templeton Investment Counsel, Inc.*
EX-99.B6 Form of Principal Underwriting Agreement*
(7) Not Applicable
EX-99.B8(a) Form of Custodian Agreement With Chase Manhattan Bank*
EX-99.B8(b) Form of Custodian Agreement With Bankers Trust Co.*
EX-99.B8(c) Form of Custodian Agreement With Brown Brothers
Harriman & Co. *
EX-99.B9(a) Form of Transfer Agency and Service Agreement*
EX-99.B9(b) Form of Shareholder Services Agreement With Robert W.
Baird & Co.*
EX-99.B9(c) Form of Administration Agreement with The Northwestern
Mutual Life Insurance Company*
C-1
<PAGE>
EX-99.B10 Opinion and Consent of Counsel*
EX-99.B11 Consent of Independent Public Accountants*
(12) Not Applicable
EX-99.B13 Form of Subscription Agreement
(14) Not Applicable
EX-99.B15(a) Form of Rule 12b-1 Distribution Plan for Class A
Shares*
EX-99.B15(b) Form of Rule 12b-1 Distribution plan for Class B
Shares*
(16) Not Applicable
(17) Not Applicable
EX-99.B18 Form of Rule 18f-3 Plan
* To be filed by amendment
Item 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Shares of the Registrant have been offered and sold only to The
Northwestern Mutual Life Insurance Company ("Northwestern Mutual
Life"), a mutual insurance company organized by a special act of the
Wisconsin Legislature. Northwestern Mutual Life directly controls the
Registrant. Subsidiaries of Northwestern Mutual Life when considered
in the aggregate as a single subsidiary would not constitute a
significant subsidiary.
Item 26. NUMBER OF HOLDERS OF SECURITIES
All of the outstanding shares of the Registrant are owned by
Northwestern Mutual Life.
Item 27. INDEMNIFICATION
Reference is made to Article IX of Registrant's By-laws filed herein
as Exhibit 99.B2. The By-laws of Northwestern Mutual Life permit
indemnification by Northwestern Mutual Life of persons who are serving
as directors of another corporation at the request of Northwestern
Mutual Life. Pursuant to the By-law provision, the Trustees of
Northwestern Mutual Life have adopted a resolution extending to all of
the directors of the Registrant the benefits of the indemnification
arrangements for employees, officers and Trustees of Northwestern
Mutual Life. Directors' and officers' liability insurance which
covers the directors and officers of the Registrant as well as
Trustees and officers of Northwestern Mutual Life is also in force.
The amount of coverage is $30 million. There is no deductible, except
that the deductible amount is $1,000,000 ($1 million) for claims
covered by corporate indemnification. The cost of this insurance is
allocated among Northwestern Mutual Life and its subsidiaries and no
part of the premium has been paid by the Registrant.
C-2
<PAGE>
Item 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
In addition to its investment advisory function, Northwestern Mutual
Investment Services, Inc. ("NMIS"), the Registrant's investment
adviser, is responsible for the selection, training and supervision of
life insurance agents of Northwestern Mutual Life who engage in the
distribution of variable annuities and variable life insurance issued
by Northwestern Mutual Life. The directors and officers of NMIS also
serve as officers of Northwestern Mutual Life.
Item 29. PRINCIPAL UNDERWRITER
Robert W. Baird & Co., Inc. ("RWB") serves as the principal
underwriter for each Fund. RWB is an indirect majority-owned
subsidiary of Northwestern Mutual Life. RWB also serves as the
principal underwriter for the Baird Adjustable Rate Income Fund,
a portfolio of The Baird Funds, Inc.
The directors and principal officers of RWB are as follows:
G. Frederick Kasten, Jr. President and CEO
James D. Bell Managing Director
Bryce P. Edwards Managing Director
Glen F. Hackmann Managing Director and Sec'y.
Steven P. Kent Managing Director
Keith A. Kolb Managing Director
Ronald J. Kruszewski Managing Director
Patrick S. Lawton Managing Director
William W. Mahler Managing Director
Terry Maxwell Managing Director
John Mayer Managing Director
Scott B. McCuaig Managing Director
Paul E. Purcell Managing Director
Paul S. Shain Managing Director
J. Camp Van Dyke Managing Director
Officer but not Director:
James M. Zemlyak Chief Financial Officer
All of the above are located at 777 East Wisconsin Avenue,
Milwaukee, WI 53202.
None of the above has a position with Registrant.
Item 30. LOCATION OF ACCOUNTS AND RECORDS
Books and other documents required to be maintained by the Registrant
by section 31(a) of the Investment Company Act of 1940 and the Rules
promulgated thereunder are maintained by the Registrant's transfer
agent, National Financial Data Services, _____________, Kansas City,
Missouri _____ and the Funds' custodians as follows: the custodian for
the domestic securities of the Growth and Income Stock Fund, High
Yield Bond Fund and Municipal Bond Fund is Bankers Trust Company, 16
Wall Street, New
C-3
<PAGE>
York, New York 10015. The custodian for the domestic securities of
the Aggressive Growth Stock Fund, the Growth Stock Fund, the Index 500
Stock Fund, the Asset Allocation Fund and the Select Bond Fund is the
Chase Manhattan Bank, N.A., One Chase Manhattan Plaza, New York, New
York 10081. The custodian for the International Equity Fund and any
foreign assets of the Asset Allocation Fund, High Yield Bond Fund,
Select Bond Fund, Aggressive Growth Stock Fund and Growth Stock Fund
is Brown Brothers Harriman & Co., 40 Water Street, Boston,
Massachusetts 02109. Registrant's financial ledgers and other
corporate records are maintained at its offices at The Northwestern
Mutual Life Insurance Company, 720 East Wisconsin Avenue, Milwaukee,
Wisconsin 53202.
Item 31. MANAGEMENT SERVICES
Not applicable.
Item 32. UNDERTAKINGS
(a) Not applicable
(b) The Registrant undertakes to file a post-effective amendment to
the Registration Statement within four to six months from the
effective date of this Registration Statement.
(c) MSF will furnish each person to whom a prospectus is delivered
with a copy of MSF's latest annual report to shareholders, upon
request and without charge.
C-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it has duly caused
this Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Milwaukee, and State of Wisconsin, on
the 5th day of December, 1996.
MASON STREET FUNDS, INC.
(Registrant)
By: JAMES D. ERICSON
---------------------------
James D. Ericson, President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
Signature Title
--------- -----
JAMES D. ERICSON President, Director
- ---------------------------- and Principal Execu-
James D. Ericson tive Officer
MARK G. DOLL Vice President,
- ---------------------------- Treasurer and Principal
Mark G. Doll Financial Officer
BARBARA E. COURTNEY Controller and
- ---------------------------- Principal Accounting
Barbara E. Courtney Officer Dated
December 5,
1996
WILLIAM J. BLAKE* Director
- ----------------------------
William J. Blake
STEPHEN N. GRAFF* Director
- ----------------------------
Stephen N. Graff
MARTIN F. STEIN* Director
- ----------------------------
Martin F. Stein
JOHN K. MACIVER* Director
- ----------------------------
John K. MacIver*
* By JAMES D. ERICSON
----------------------
James D. Ericson, Attorney
in fact, pursuant to the Power
of Attorney attached hereto
C-5
<PAGE>
POWER OF ATTORNEY
The undersigned Directors of Mason Street Funds, Inc. (the "Company"),
hereby constitute and appoint James D. Ericson and Edward J. Zore, or either of
them, their true and lawful attorneys and agents, to sign the names of the
undersigned Directors to any instruments or documents filed as part of or in
connection with or in any way related to the registration statement or
statements and any and all amendments thereto, to be filed under the Securities
Act of 1933 and the Investment Company Act of 1940 in connection with shares of
the common stock of the Company offered to the public; and each of the
undersigned hereby ratifies and confirms all that said attorneys and agents
shall do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, each of the undersigned has subscribed these presents,
as indicated, November 7, 1996.
STEPHEN N. GRAFF Director
------------------
Stephen N. Graff
WILLIAM J. BLAKE Director
------------------
William J. Blake
JOHN K. MACIVER Director
------------------
John K. MacIver
MARTIN F. STEIN Director
------------------
Martin F. Stein
JAMES D. ERICSON Director
------------------
James D. Ericson
C-6
<PAGE>
EXHIBIT INDEX
EXHIBITS FILED WITH FORM N-1A
REGISTRATION STATEMENT UNDER SECTION 6 OF
THE SECURITIES ACT OF 1933
AND SECTION 8(b) OF THE INVESTMENT COMPANY ACT OF 1940
FOR
MASON STREET FUNDS, INC.
Exhibit Number Exhibit Name
- -------------- ------------
EX-99.B1 Articles of Incorporation of Mason Street Funds, Inc.
EX-99.B2 By-Laws of Mason Street Funds, Inc.
EX-99.B4 Rights of Stockholders are described in Article FOURTH and
Article SIXTH of the Articles of Incorporation for Mason
Street Funds, Inc., referenced herein as EX-99.B1.
EX-99.B5(a) Form of Investment Advisory Agreement between Mason Street
Funds, Inc. (on behalf of the Index 500 Stock Fund) and
Northwestern Mutual Investment Services, Inc.
*EX-99.B5(b) Form of Investment Sub-Advisory Agreement between Mason
Street Funds, Inc. (on behalf of the Growth and Income Stock
Fund), Northwestern Mutual Investment Services, Inc. and
J.P. Morgan Investment Management, Inc.
*EX-99.B5(c) Form of Investment Sub-Advisory Agreement between
Northwestern Mutual Investment Services, Inc., (Investment
Adviser to the International Equity Fund) and Templeton
Investment Counsel, Inc.
*EX-99.B6 Form of Principal Underwriting Agreement.
(7) Not Applicable.
<PAGE>
*EX-99.B8(a) Form of Custodian Agreement with Chase Manhattan Bank.
*EX-99.B8(b) Form of Custodian Agreement with Bankers Trust Co.
*EX-99.B8(c) Form of Custodian Agreement With Brown Brothers Harriman &
Co.
*EX-99.B9(a) Form of Transfer Agency and Service Agreement.
*EX-99.B9(b) Form of Shareholder Servicing Agreement With Robert W. Baird
& Co.
*EX-99.B9(c) Form of Administration Agreement with The Northwestern
Mutual Life Insurance Company.
*EX-99.B10 Opinion and Consent of Counsel.
*EX-99.B11 Consent of Price Waterhouse LLP.
(12) Not Applicable.
EX-99.B13 Form of Subscription Agreement.
(14) Not Applicable.
*EX-99.B15(a) Form of Rule 12b-1 Distribution Plan for Class A Shares.
*EX-99.B15(b) Form of Rule 12b-1 Distribution plan for Class B Shares.
(16) Not Applicable.
(17) Not Applicable.
EX-99.B18 Form of Rule 18f-3 Plan.
*To be filed by amendment
<PAGE>
EX-99.B1
ARTICLES OF INCORPORATION
OF
MASON STREET FUNDS, INC.
* * * * *
I, THE UNDERSIGNED, whose post-office address is 720 East Wisconsin Avenue,
Milwaukee, Wisconsin 53202, being at least eighteen years of age, do hereby act
as incorporator with the intention of forming a corporation, under and by virtue
of the General Laws of the State of Maryland authorizing the formation of
corporations.
FIRST: The name of the corporation is Mason Street Funds, Inc.
SECOND: The purposes for which the corporation is formed are:
To engage in any or all lawful business for which corporations may be
organized under the Maryland General Corporation Law, including, without
limitation, to conduct and carry on the business of an investment company of the
management type and to invest and reinvest the property and assets of the
corporation in securities, including, without limitation, commercial paper,
certificates of deposit, bankers' acceptances, bonds, notes, debentures, stocks
and certificates of interest or participation and in other property without
limitation or restriction.
The corporation shall be authorized to exercise and enjoy all of the
powers, rights and privileges granted to, or conferred upon, corporations of a
similar character by the General Laws of the State of Maryland now or hereafter
in force, and enumeration of the foregoing shall not be deemed to exclude any
powers, rights or privileges so granted or conferred.
THIRD: The post-office address of the principal office of the corporation
in this State is c/o The Corporation Trust Incorporated, 32 South Street,
Baltimore, Maryland 21202. The name of the resident agent of the corporation
in this State is The Corporation Trust Incorporated, a corporation of this
State, and the post-office address of the resident agent is 32 South Street,
Baltimore, Maryland 21202.
FOURTH:
(a) The total number of shares of stock of all classes and series which
the corporation initially has the authority to issue is Two Billion Seven
Hundred Million (2,700,000,000) shares of capital stock (par value $0.001 per
share), amounting in aggregate par value to $2,700,000. All of such shares are
initially classified as "Common Stock." The Board of Directors may classify or
reclassify any unissued
-1-
<PAGE>
shares of capital stock (whether or not such shares have been previously
classified or reclassified) from time to time by setting or changing in any one
or more respects the preferences, conversion or other rights, voting powers,
restrictions, limitations as to dividends, qualifications, or terms or
conditions of redemption of such shares of stock.
(b) Unless otherwise prohibited by law, so long as the corporation is
registered as an open-end company under the Investment Company Act, the Board of
Directors shall have the power and authority, without the approval of the
holders of any outstanding shares, to increase or decrease the number of shares
of capital stock or the number of shares of capital stock of any class or series
that the corporation has authority to issue.
(c) The authorized shares of Common Stock shall be classified into the
following nine series of Common Stock, each series comprising the number of
shares indicated, subject to the authority of the Board of Directors to classify
or reclassify any unissued shares of capital stock and to the authority of the
Board of Directors to increase or decrease the number of shares of capital stock
or the number of shares of capital stock of any class or series that the
corporation has the authority to issue:
SERIES NUMBER OF SHARES IN SERIES
------ --------------------------
Aggressive Growth Stock Fund 300,000,000
International Equity Fund 300,000,000
Growth Stock Fund 300,000,000
Growth and Income Stock Fund 300,000,000
Index 500 Stock Fund 300,000,000
Asset Allocation Fund 300,000,000
High Yield Bond Fund 300,000,000
Select Bond Fund 300,000,000
Municipal Bond Fund 300,000,000
Any series of Common Stock shall be referred to herein individually as a
"Series" and collectively, together with any further series from time to time
established, as the "Series".
(d) The following is a description of the preferences, conversion and
other rights, voting powers, restrictions, limitations as to dividends,
qualifications, and terms and conditions of redemption of the shares of Common
Stock classified into the Series listed above and any additional Series of
Common Stock of the corporation (unless provided otherwise by the Board of
Directors with respect to any such additional Series at the time it is
established and designated):
(1) FULLY PAID AND NONASSESSABLE. The shares of each Series, when
issued, will be fully paid and nonassessable, have no preference or
preemptive rights, except as set forth herein, and will be freely
transferable.
-2-
<PAGE>
(2) ASSETS BELONGING TO SERIES. All consideration received by the
corporation from the issue or sale of shares of a particular Series,
together with all assets in which such consideration is invested or
reinvested, all income, earnings, profits and proceeds thereof, including
any proceeds derived from the sale, exchange or liquidation of such assets,
and any funds or payments derived from any investment or reinvestment of
such proceeds in whatever form the same may be, shall irrevocably belong to
that Series for all purposes, subject only to the rights of creditors, and
shall be so recorded upon the books of account of the corporation. Such
consideration, assets, income, earnings, profits and proceeds, together
with any General Items (as defined below) allocated to that Series as
provided in the following sentence, are herein referred to collectively as
"assets belonging to" that Series. In the event that there are any assets,
income, earnings, profits, or proceeds which are not readily identifiable
as belonging to any particular Series (collectively, "General Items"), such
General Items shall be allocated by or under the supervision of the Board
of Directors to and among any one or more of the Series established and
designated from time to time in such manner and on such basis as the Board
of Directors in its sole discretion deems fair and equitable; and any
General Items so allocated to a particular Series shall belong to that
Series. Each such allocation by the Board of Directors shall be conclusive
and binding for all purposes.
(3) LIABILITIES OF SERIES. The assets belonging to each particular
Series shall be charged with the liabilities of the corporation in respect
of that Series and all expenses, costs, charges and reserves attributable
to that Series, and any general liabilities, expenses, costs, charges or
reserves of the corporation which are not readily identifiable as
pertaining to any particular Series, shall be allocated and charged by or
under the supervision of the Board of Directors to and among any one or
more of the Series established and designated from time to time in such
manner and on such basis as the Board of Directors, in its sole discretion,
deems fair and equitable. The liabilities, expenses, costs, charges and
reserves allocated and so charged to a Series are herein referred to
collectively as "liabilities of" that Series. Each allocation of
liabilities, expenses, costs, charges and reserves by or under the
supervision of the Board of Directors shall be conclusive and binding for
all purposes.
(4) DIVIDENDS AND DISTRIBUTIONS. Dividends and capital gains
distributions on shares of a particular Series may be paid with such
frequency, in such form and in such amount as the Board of Directors may
determine by resolution adopted from time to time, or pursuant to a
standing resolution or resolutions adopted only once or with such frequency
as the Board of Directors may determine, after providing for actual and
accrued liabilities of that Series. All dividends on shares of a
particular Series shall be paid only out of the income belonging to that
Series and all capital gains distributions on shares of a particular Series
shall be paid only out of the capital gains belonging to that
-3-
<PAGE>
Series. Except as otherwise provided in the Articles of Incorporation of
the corporation, all dividends and distributions on shares of a particular
Series shall be distributed pro rata to the holders of that Series in
proportion to the number of shares of that Series held by such holders at
the date and time of record established for the payment of such dividends
or distributions, provided that in connection with any dividend or
distribution program or procedure, the Board of Directors may determine
that no dividend or distribution shall be payable on shares as to which the
stockholder's purchase order and/or payment have not been received by the
time or times established by the Board of Directors under such program or
procedure.
Dividends and distributions may be paid in cash, property or
additional shares of the same or another Series, or a combination thereof,
as determined by the Board of Directors or pursuant to any program that the
Board of Directors may have in effect at the time for the election by
stockholders of the form in which dividends or distributions are to be
paid. Any such dividend or distribution paid in shares shall be paid at
the current net asset value thereof.
(5) VOTING. On each matter submitted to a vote of the stockholders,
each holder of shares shall be entitled to one vote for each share
outstanding in his name on the books of the corporation, irrespective of
the Series thereof, and all shares of all Series shall vote as a single
class ("Single Class Voting"); provided, however, that (i) as to any matter
with respect to which a separate vote of any Series is required by the
Investment Company Act or by the Maryland General Corporation Law, such
requirement as to a separate vote by that Series shall apply in lieu of
Single Class Voting, and (ii) as to any matter which does not affect the
interest of a particular Series, including liquidation of another Series as
described in subsection (7) below, only the holders of shares of the one or
more affected Series will be entitled to vote.
(6) REDEMPTION BY CORPORATION. The Board of Directors may cause the
corporation to redeem at their net asset value the shares of any Series
held in an account (i) if the redemption is, in the opinion of the Board of
Directors of the corporation, desirable in order to prevent the corporation
from being deemed a "personal holding company" within the meaning of the
Internal Revenue Code of 1986, as from time to time amended, (ii) if the
value of an account maintained by the corporation or its transfer agent for
any stockholder is less than a specified amount determined by the Board of
Directors of the corporation, from time to time, and the stockholder has
been given at least thirty (30) days' written notice of the redemption and
has failed to make additional purchases of shares in an amount sufficient
to bring the value of the account up to the specified account value before
the redemption is effected by the corporation or (iii) if the stockholder
has failed to furnish a correct certified social security or tax
identification number required by the corporation to be obtained.
-4-
<PAGE>
(7) LIQUIDATION. In the event of the liquidation of a particular
Series, the stockholders of the Series that is being liquidated shall be
entitled to receive, as a class, when and as declared by the Board of
Directors, the excess of the assets belonging to that Series over the
liabilities of that Series. The holders of shares of any particular Series
shall not be entitled thereby to any distribution upon liquidation of any
other Series. The assets so distributable to the stockholders of any
particular Series shall be distributed among such stockholders in
proportion to the number of shares of that Series held by them and recorded
on the books of the corporation. The liquidation of any particular Series
in which there are shares then outstanding may be authorized by vote of a
majority of the Board of Directors then in office, and, if required under
Maryland or other applicable law, subject to the approval of a majority of
the outstanding voting securities of that Series, as defined in the
applicable law, and without the vote of the holders of shares of any other
Series. The liquidation of a particular Series may be accomplished, in
whole or in part, by the transfer of assets of such Series to another
Series or by the exchange of shares of such Series for the shares of
another Series.
(8) NET ASSET VALUE PER SHARE. The net asset value per share of any
Series shall be the quotient obtained by dividing the value of the net
assets of that Series (being the value of the assets belonging to that
Series less the liabilities of that Series) by the total number of shares
of that Series outstanding, all as determined by or under the direction of
the Board of Directors in accordance with generally accepted accounting
principles and the Investment Company Act. Subject to the applicable
provisions of the Investment Company Act, the Board of Directors, in its
sole discretion, may prescribe and shall set forth in the By-Laws of the
corporation or in a duly adopted resolution of the Board of Directors such
bases and times for determining the value of the assets belonging to, and
the net asset value per share of outstanding shares of, each Series, or the
net income attributable to such shares, as the Board of Directors deems
necessary or desirable. The Board of Directors shall have full discretion,
to the extent not inconsistent with the Maryland General Corporation Law
and the Investment Company Act, to determine which items shall be treated
as income and which items as capital and whether any item of expense shall
be charged to income or capital. Each such determination and allocation
shall be conclusive and binding for all purposes.
The Board of Directors may determine to maintain the net asset value
per share of any Series at a designated constant dollar amount and in
connection therewith may adopt procedures not inconsistent with the
Investment Company Act for the continuing declaration of income
attributable to that Series as dividends and for the handling of any losses
attributable to that Series. Such procedures may provide that in the event
of any loss, each stockholder shall be deemed to have contributed to the
capital of the corporation attributable to that
-5-
<PAGE>
Series his pro rata portion of the total number of shares required to be
canceled in order to permit the net asset value per share of that Series to
be maintained, after reflecting such loss, at the designated constant
dollar amount. Each stockholder of the corporation shall be deemed to have
agreed, by his investment in any Series with respect to which the Board of
Directors shall have adopted any such procedure, to make the contribution
referred to in the preceding sentence in the event of any such loss.
(9) CONVERSION OR EXCHANGE RIGHTS. Subject to compliance with the
requirements of the Investment Company Act, the Board of Directors shall
have the authority to provide that holders of shares of any Series shall
have the right to convert or exchange said shares into shares of one or
more other Series in accordance with such requirements and procedures as
may be established by the Board of Directors.
(e) The Series identified in Paragraph (c) of this Article FOURTH and any
additional Series of Common Stock (unless otherwise specified in the articles
supplementary designating such Series) shall each initially have two classes of
shares, which shall be designated Class A and Class B. Any class of a Series of
Common Stock shall be referred to herein individually as a "Class" and
collectively, together with any further class or classes of such Series from
time to time established, as the "Classes." For each of the Series listed
above, all of the shares of such Series that are not classified otherwise shall
be referred to as Class A shares.
(f) All Classes of a particular Series of Common Stock of the corporation
shall represent the same interest in the corporation and have identical voting,
dividend, liquidation, and other rights with any other shares of Common Stock of
that Series; provided, however, that notwithstanding anything in the Articles of
Incorporation of the corporation to the contrary:
(1) The Class A shares shall be subject to such front-end sales loads
and fees and expenses under a Rule 12b-1 plan, as may be established by the
Board of Directors. The Class A shares shall also be subject to such
contingent deferred sales charges as may be established by the Board of
Directors.
(2) The Class B Shares shall be subject to such fees and expenses
under a Rule 12b-1 plan as may be established for the Class B Shares from
time to time by the Board of Directors and such contingent deferred sales
charges as may be established from time to time by the Board of Directors.
(3) Class A Shares may be exchanged only for Class A Shares of
another Series and Class B Shares may be exchanged only for Class B Shares
of another Series, with such exceptions and subject to such terms and
conditions as may be set by the Board of Directors.
-6-
<PAGE>
(4) Expenses related solely to a particular Class of a Series
(including, without limitation, distribution expenses under a Rule 12b-1
plan) shall be borne by that Class and shall be appropriately reflected (in
the manner determined by the Board of Directors) in the net asset value,
dividends, distribution and liquidation rights of the shares of that Class.
(5) At such time as may be determined by the Board of Directors in
accordance with the Investment Company Act and applicable rules and
regulations of the National Association of Securities Dealers, Inc. and
reflected in the current registration statement relating to a Series,
shares of a particular Class of a Series may be automatically converted
into shares of another Class.
(6) As to any matter with respect to which a separate vote of any
Class of a Series is required by the Investment Company Act or by the
Maryland General Corporation Law, such requirement as to a separate vote by
that Class shall apply in lieu of Single Class Voting, and if permitted by
the Investment Company Act and the Maryland General Corporation Law, the
Classes of more than one Series shall vote together as a single class on
any such matter which shall have the same effect on each such Class. As to
any matter which does not affect the interest of a particular Class of a
Series, only the holders of shares of the affected Classes of that Series
shall be entitled to vote.
(g) The corporation may issue and sell fractions of shares of capital
stock having pro rata all the rights of full shares, including, without
limitation, the right to vote and to receive dividends, and wherever the words
"share" or "shares" are used in the Articles of Incorporation or By-Laws of the
corporation, they shall be deemed to include fractions of shares where the
context does not clearly indicate that only full shares are intended.
(h) The corporation shall not be obligated to issue certificates
representing shares of any Class or Series of capital stock. At the time of
issue or transfer of shares without certificates, the corporation shall provide
the stockholder with such information as may be required under the Maryland
General Corporation Law.
FIFTH: The number of directors of the corporation shall be three (3),
which number may be increased pursuant to the By-Laws of the corporation, but
shall never be less than three (3), and the names of the directors who shall act
until the first annual meeting or until their successors are duly chosen and
qualified are John M. Bremer, Merrill C. Lundberg and James R. Eben.
SIXTH: The following provisions are hereby adopted for the purpose of
defining, limiting and regulating the powers of the corporation and of the
directors and stockholders:
-7-
<PAGE>
(1) No holder of shares of stock of any Series or Class shall be entitled
as a matter of right to subscribe for or purchase or receive any part of any
treasury shares held by the corporation, or of any new or additional issues of
shares of stock of any Series or Class or of securities convertible into shares
of stock of any Series or Class of the corporation, whether now or hereafter
authorized or whether issued for money, for a consideration other than money, or
by way of dividend.
(2) Each holder of shares of capital stock of the corporation shall be
entitled to require the corporation to redeem all or any part of the shares of
capital stock of the corporation standing in the name of such holder on the
books of the corporation, and the corporation shall redeem all shares of such
capital stock tendered to it for redemption at the redemption price of such
shares as in effect from time to time as may be determined by the Board of
Directors of the corporation in accordance with the provisions hereof, subject
to the right of the Board of Directors of the corporation to suspend the right
of redemption of shares of capital stock of the corporation or postpone the date
of payment of such redemption price in accordance with provisions of the
applicable law. The redemption price of shares of capital stock of the
corporation shall be the net asset value thereof as determined by the Board of
Directors of the corporation from time to time in accordance with the provisions
of applicable law, less such redemption fee or other charge, if any, as may be
fixed by resolution of the Board of Directors of the corporation. Payment of
the redemption price shall be made in cash by the corporation at such time and
in such manner as may be determined from time to time by the Board of Directors
of the corporation, except that capital stock of any Series or Class may be
redeemed in kind with the assets of the Series to which the Class relates if the
Board of Directors deems such action desirable.
(3) Assets of this corporation may be held or deposited with a bank or
trust company or any other organization as custodian, and the corporation may
employ any agency or instrumentality, incorporated or unincorporated, to render
management services of any nature with respect to the conduct of the business of
the corporation, and to manage and direct the business and activities of the
corporation to such extent as the Board of Directors may determine from time to
time, whether or not the procedure involves delegation of functions usually or
customarily performed by the Board of Directors or officers of the corporation.
(4) The original By-Laws of the corporation shall be adopted by the
initial directors named herein. Thereafter the Board of Directors shall have
the power to make, alter or repeal By-Laws, subject, however, to the power
vested in and reserved to the stockholders to modify or rescind any such action
by affirmative vote of the holders of a majority of the outstanding stock of the
corporation.
(5) The corporation reserves the right from time to time to make any
amendment of its Articles of Incorporation, now or hereafter authorized by law,
including any amendment which alters the contract rights, as expressly set forth
in its Articles of Incorporation, of any outstanding stock.
-8-
<PAGE>
SEVENTH: The duration of the corporation shall be perpetual.
IN WITNESS WHEREOF, the undersigned incorporator of Mason Street Funds,
Inc. has executed the foregoing Articles of Incorporation and hereby
acknowledges the same to be his act and further acknowledges that, to the best
of his knowledge the matters and facts set forth therein are true in all
material respects under the penalties of perjury.
Dated the 28th day of August, 1996.
JAMES R. EBEN
--------------------------------------------------
James R. Eben
Incorporator
STATE OF WISCONSIN )
) SS
COUNTY OF MILWAUKEE )
I hereby certify that on August 28, 1996, before me, the subscriber, a
notary public of the State of Wisconsin in and for the County of Milwaukee,
personally appeared James R. Eben and acknowledged the foregoing Articles of
Incorporation to be his act.
Witness my hand and seal, the day and year last above written.
SARA HOLM
----------------------------------------
Notary Public
My commission expires: 1/10/99
-9-
<PAGE>
EX-99.B2
1
BY-LAWS
OF
MASON STREET FUNDS, INC.
ARTICLE I: STOCKHOLDERS.
1.01. PLACE OF MEETINGS.
All meetings of the stockholders shall be held at such place, either within
or without the State of Maryland, as is fixed by the Board of Directors and
stated in the notice of meeting.
1.02. STOCKHOLDERS MEETINGS.
Meetings of the stockholders, for any purpose or purposes, unless otherwise
prescribed by statute may be called by the President or the Board of Directors
or by the Secretary on the written request of the holders of not less than 25%
of all shares of the corporation entitled to vote at the meeting.
1.03. NOTICE OF THE STOCKHOLDERS MEETINGS.
Notice of each stockholders meeting stating the time and place of the
meeting and the purpose or purposes for which the meeting is called shall be
given in the form and manner required or permitted by law to each stockholder of
record not less than 10 nor more than 90 days prior to the date of the meeting.
1.04. QUORUM.
Except as otherwise expressly required by law or the Articles of
Incorporation, at any meeting of the stockholders, the presence in person or by
proxy of stockholders entitled to cast a majority of all the votes entitled to
be cast thereat shall constitute a quorum, but a lesser interest may adjourn any
meeting from time to time and the meeting may be held as adjourned without
further notice. When a quorum is present at any meeting a majority of the votes
cast thereat shall decide any question brought before such meeting unless the
question is one upon which by express provision of law or the Articles of
Incorporation a larger or different vote is required, in which case such express
provision shall govern.
1.05. PROXIES AND VOTING.
Stockholders of record may vote at any meeting either in person or by proxy
in writing dated not more than eleven months before the date of exercise, which
shall be filed with the secretary of the meeting before being voted. Each
stockholder shall be entitled to one vote for each share of stock held, and to a
fraction of a vote equal to any fractional share held, by him. The Board of
Directors shall have
<PAGE>
-2-
the power and authority to make rules establishing presumptions as to the
validity and sufficiency of proxies.
ARTICLE II: BOARD OF DIRECTORS.
2.01. GENERAL POWERS AND NUMBER.
The business and affairs of the corporation shall be managed by its Board
of Directors. The number of directors of the corporation shall be five.
2.02. TENURE AND QUALIFICATIONS.
Each director shall hold office until the next meeting of stockholders and
until his successor shall have been elected and qualified or until his prior
death, resignation or removal. A director may be removed from office with or
without cause by affirmative vote of a majority of the outstanding shares
entitled to vote for the election of such director, taken at a meeting of
stockholders called for that purpose. A director may resign at any time by
filing a written resignation with the Secretary of the corporation. Directors
need not be residents of the State of Maryland or stockholders of the
corporation.
2.03. RETIREMENT POLICY.
A director who has attained age 70 on or before the second Wednesday in
March shall be ineligible to be a candidate for another term. The foregoing
eligibility requirement shall also be applicable in the case of a candidate who
has not previously served as a director.
2.04. REGULAR MEETINGS.
A regular meeting of the Board of Directors shall be held without other
notice than this By-law at 2:00 p.m. on the second Wednesday in June each year.
The place of such regular meeting shall be the same as the place of the last
previous regular meeting of the Board of Directors or such other suitable place
as may be announced at such preceding regular meeting of the Board of Directors.
The Board of Directors may provide, by resolution, the time and place either
within or without the State of Maryland for the holding of additional regular
meetings without other notice than such resolution.
2.05. SPECIAL MEETINGS.
Special meetings of the Board of Directors may be called by or at the
request of the President or a majority of the members of the Board of Directors
of the corporation upon 48 hours written notice. The
<PAGE>
-3-
call for such special meeting may fix any place, either within or without the
State of Maryland, as the place for holding any special meeting of the Board of
Directors.
2.06. VACANCIES.
Any vacancies occurring in the Board of Directors, including a vacancy
created by an increase in the number of directors, may be filled until the next
succeeding stockholders' election by the affirmative vote of a majority of the
directors then in office, whether or not sufficient to constitute a quorum of
the Board of Directors; provided, that in the case of a vacancy created by a
removal of a director by vote of the stockholders, the stockholders shall have
the right to fill such vacancy at the same meeting or any adjournment thereof.
2.07. QUORUM.
A majority of the members of the Board of Directors shall constitute a
quorum for the transaction of business, PROVIDED, HOWEVER, that where the
Investment Company Act of 1940 requires a different quorum to transact business
of a specific nature, the number of directors so required shall constitute a
quorum for the transaction of such business. A lesser number may adjourn a
meeting from time to time and the meeting may be held without further notice.
When a quorum is present at any meeting a majority of the members present
thereat shall decide any question brought before such meeting except as
otherwise expressly required by law, the Articles of Incorporation or these
By-laws.
ARTICLE III: WAIVER OF NOTICE AND UNANIMOUS CONSENT WITHOUT MEETING.
3.01. WAIVER OF NOTICE.
Whenever any notice is required to be given to any stockholder or director
of the corporation under the Articles of Incorporation or By-laws or any
provision of law, a waiver thereof in writing, signed at any time, whether
before or after the time of meeting, by the stockholder or director entitled to
such notice, shall be deemed equivalent to the giving of such notice.
3.02. UNANIMOUS CONSENT WITHOUT MEETING.
Any action required or permitted by the Articles of Incorporation or
By-laws or any provision of law, to be taken at a meeting of the stockholders or
at a meeting of the Board of Directors, may be taken without a meeting if a
consent in writing, setting forth the action so taken, shall be signed by all of
<PAGE>
-4-
the stockholders, or all of the directors, as the case may be, entitled to vote
with respect to the subject matter thereof. The consent may be signed in
several counterparts.
ARTICLE IV: OFFICERS.
4.01. PRINCIPAL OFFICERS OF THE CORPORATION.
The principal officers of the corporation shall be a President, one or more
Vice Presidents as may be designated by the Board of Directors, a Secretary, a
Treasurer and a Controller, each of whom shall be elected by the Board of
Directors. Such other officers and assistant officers as may be deemed
necessary may be elected or appointed by the Board of Directors. Any two or
more offices may be held by the same person, except the offices of President and
Secretary, and the offices of President and Vice President.
4.02. TERM OF OFFICE.
Upon election, each officer shall hold office until his successor shall
have been duly elected or until his prior death, resignation or removal. Any
officer may be removed by the affirmative vote of the majority of the Board of
Directors.
4.03. VACANCIES.
A vacancy in any principal office shall be filled by the Board of Directors
for the unexpired portion of the term.
4.04. DUTIES.
The duties of the respective officers shall be such as usually pertain to
their offices and such other duties as may be prescribed by the Board of
Directors. In addition, the President, when present, shall preside at all
meetings of the stockholders and Board of Directors. In the absence of the
President, or inability to act, the Vice President (or in the event that there
be more than one Vice President, the Vice President designated by the President
or the Board of Directors) shall perform the duties of the President. In the
absence of the Secretary or Treasurer, or the inability of such officers to act,
such Assistant Secretaries or Assistant Treasurers, as the Board of Directors
may, from time to time, appoint, may perform the duties of the Secretary or
Treasurer, respectively.
<PAGE>
-5-
4.05. POWER TO ACT.
The Board of Directors may authorize any officer or officers, agent or
agents, to enter into any contract or execute or deliver any instrument in the
name of and on behalf of the corporation, and such authorization may be general
or confined to specific instances. All contracts, documents, deeds, mortgages
and instruments of assignment or pledge made by the corporation, other than such
as are authorized as permitted by the first sentence of this Section 4.05, shall
be executed in the name of the corporation by the President or one of the Vice
Presidents and by the Secretary or an Assistant Secretary; the Secretary or an
Assistant Secretary, when necessary or required, shall affix the corporate seal
thereto; and when so executed no other party to such instrument or any third
party shall be required to make any inquiry into the authority of the signing
officer or officers. Unless otherwise ordered by the Board of Directors, the
President or any Vice President, the Treasurer or any Assistant Treasurer, shall
have full power and authority to attend and act and vote at any meeting of
stockholders of any corporation in which the corporation may hold stock, and at
such meeting may exercise any and all the rights and powers incident to the
ownership of such stock. The President or any Vice President of the corporation
may execute proxies to vote shares of stock of other corporations standing in
the name of the corporation.
4.06. SIGNATURES FOR NEGOTIABLE INSTRUMENTS.
Checks, drafts, and other negotiable instruments for the disbursement of
corporation funds may be signed by the President, a Vice President elected by
the Board, the Controller or an Assistant Controller and by the Treasurer or an
Assistant Treasurer. In addition to the foregoing, other persons may sign
instruments for the disbursement of corporation funds under written
authorization signed by the President or a Vice President elected by the Board,
and by the Treasurer or an Assistant Treasurer. The signature of one of the
persons signing checks, drafts and negotiable instruments may be by facsimile,
with such facsimile signature continuing valid and effective even though such
person, by death, resignation, change of office or otherwise, no longer has
authority to sign such instruments.
ARTICLE V: CERTIFICATES FOR SHARES AND THEIR TRANSFER.
5.01. CERTIFICATES FOR SHARES.
The corporation shall issue a certificate or certificates evidencing the
capital stock of the corporation, in such form as shall, in conformity to law,
be prescribed from time to time by the Board of
<PAGE>
-6-
Directors. Such certificates shall be signed by the President, or a Vice
President and by the Treasurer or an Assistant Treasurer or the Secretary or an
Assistant Secretary.
5.02. FACSIMILE SIGNATURES AND SEAL.
The seal of the corporation on any certificate for shares may be a
facsimile. If such certificates are countersigned by a transfer agent or
registrar other than the corporation or an employee of the corporation, the
signatures of the aforementioned officers upon such certificates may be
facsimile.
5.03. SIGNATURE BY FORMER OFFICER.
In case any officer who has signed, or whose facsimile signature has been
used on, any such certificate shall cease to be such officer of the corporation,
before such certificate has been delivered by the corporation, such certificate
shall nevertheless be valid and may be issued and delivered as though the person
who signed such certificate or whose facsimile signature has been used thereon
had not ceased to be such officer of the corporation.
5.04. LOST, DESTROYED OR STOLEN CERTIFICATES.
The Board of Directors may direct a new certificate or certificates to be
issued in place of any certificate or certificates theretofore issued by the
corporation alleged to have been lost or destroyed upon such terms and
conditions as the Board of Directors may prescribe.
5.05. OPEN ACCOUNTS IN LIEU OF CERTIFICATES.
The corporation shall, for each holder of stock, maintain or cause to be
maintained a stockholder open account in which shall be recorded such
stockholder's ownership of stock and all changes therein, and certificates need
not be issued for shares so recorded in a stockholder open account.
5.06. TRANSFER OF STOCK.
Transfers of stock for which certificates have been issued will be made
only upon surrender to the corporation or the transfer agent of the corporation
of a certificate for shares duly endorsed or accompanied by proper evidence of
succession, assignment or authority to transfer, whereupon the corporation will
issue a new certificate to the person entitled thereto, cancel the old
certificate and record the transaction on its books. Transfers of stock
evidenced by open account authorized by Section 5.05 will be made upon delivery
to the corporation or the transfer agent of the corporation of instructions for
<PAGE>
-7-
transfer or evidence of assignment or succession, in each case executed in such
manner and with such supporting evidence as the corporation or transfer agent
may reasonably require.
5.07. RECORD DATES.
The Board of Directors may fix in advance a date, not less than 10 nor more
than 90 days preceding the date of any meeting of stockholders, or the date for
the payment of any dividend, or the date for the allotment of rights, or the
date when they are entitled to exercise any rights with respect to any change or
conversion or exchange of capital stock or a date in connection with obtaining
any consent or for any other lawful purpose, as a record date for the
determination of the stockholders entitled to notice of, and to vote at, any
such meeting, and any adjournment thereof, or entitled to receive payment of any
such dividend, or to any such allotment of rights, or to exercise the rights in
respect of any such change, conversion or exchange of capital stock, or to give
such consent, and in such case such stockholders and only such stockholders as
shall be stockholders of record as of the close of business on the date so fixed
shall be entitled to such notice of, and to vote at, such meeting, and any
adjournment thereof, or to receive payment of such dividend, or to receive such
allotment of rights, or to exercise such rights, or to give such consent, as the
case may be, notwithstanding any transfer of any stock on the books of the
corporation after any such record date fixed as aforesaid.
5.08. REGISTERED OWNERSHIP.
The corporation shall be entitled to recognize the exclusive right of a
person registered on its books as the owner of shares to receive dividends, and
to vote as the stockholder of record and shall not be bound to recognize any
equitable or other claim to or interest in such share or shares on the part of
any other person, whether or not it shall have express or other notice thereof,
except as otherwise provided by the laws of Maryland. The original or duplicate
stock ledger shall be maintained at 720 East Wisconsin Avenue, Milwaukee,
Wisconsin.
5.09. STOCK REGULATIONS.
The Board of Directors shall have the authority to make rules and
regulations concerning the issue, transfer and registration of certificates
representing shares of the corporation.
<PAGE>
-8-
5.10. FRACTIONAL SHARES.
Holders of fractional shares shall, except as may otherwise be provided
herein or as may otherwise be provided by the Board of Directors from time to
time, have proportional stockholder rights, including the right to vote, receive
dividends and participate in any of the assets of the corporation in the event
of liquidation.
ARTICLE VI. PURCHASES AND REDEMPTION OF SHARES.
6.01. PURCHASE BY AGREEMENT.
The corporation may at any time purchase shares of its capital stock in the
open market or at private sale, or otherwise, at any price not exceeding the net
asset value (as defined in Section 7.01) last determined preceding the time when
the purchase or contract to purchase is made.
6.02. REDEMPTION.
Except as provided in Section 6.03, the corporation shall redeem such
shares as are offered by any stockholder for redemption, upon the presentation
of a written request therefor, duly executed by the record owner, to the office
or agency designated by the corporation. If the stockholder has received stock
certificates, the request must be accompanied by the certificates, duly endorsed
for transfer, in acceptable form; and the corporation will pay therefor the net
asset value of the shares next computed after the request, in acceptable form,
is so presented. Except as provided in Section 6.03, the redemption price shall
ordinarily be paid in cash or by check on current funds and shall be paid on or
before the seventh day following the day on which the shares are properly
tendered for redemption.
6.03. SUSPENSION OR POSTPONEMENT.
The right to redeem such shares may be suspended, or payment of the
redemption value postponed, until seven days after the end of any period during
which the New York Stock Exchange is closed or trading thereon is restricted,
or any period during which an emergency exists, or as otherwise permitted by the
Investment Company Act of 1940.
6.04 AVAILABLE FUNDS.
Redemption is conditional upon the corporation having funds or property
legally available therefor.
<PAGE>
-9-
6.05. STATUS OF SELLING STOCKHOLDER.
From and after the close of business on the day when the shares are
properly tendered for redemption the owner shall, with respect to such shares,
cease to be a stockholder of the corporation and shall have only the right to
receive the redemption price, in accordance with the provisions hereof.
ARTICLE VII. NET ASSET VALUE
7.01. DETERMINATION.
The net asset value of the corporation shall be determined in the following
manner:
(a) Portfolio securities shall be valued pursuant to Section 7.02. Assets
of each Series or class thereof (referred to herein as a "Series") of the
corporation other than securities, including cash, interest income, prepaid and
accrued items and dividends receivable, shall be appraised or estimated to the
date of calculation in such manner as shall be deemed by the Board of Directors
to reflect their fair value.
(b) From the total value of the assets of a Series of the corporation as
so determined shall be deducted any liabilities of the Series to the date of
calculation, including taxes, investment advisory fees, distribution fees,
service fees, administration fees, brokerage fees, and such other expenses,
liabilities and proper reserves, if any, of the Series as may be determined in
good faith by the Board of Directors to be properly accrued, including reserves
for contingencies and taxes on unrealized appreciation of the corporation's
assets.
(c) The resulting amount shall represent the net asset value of the
Series' assets and shall be divided by the number of shares of the Series then
outstanding (whether or not certificates therefor have been issued), exclusive
of any shares of the Series held in its treasury, and adjusted to the nearest
$.01 to determine the net asset value per share. The net asset value of each
Series' assets and shares as so determined shall be final and conclusive.
(d) Changes in holdings of each Series' securities shall be reflected no
later than in the first calculation on the first business day following the
trade date. Changes in the number of outstanding shares of each Series
resulting from distributions, repurchases, and redemptions shall be reflected no
later than in the first calculation on the first business day following such
change.
<PAGE>
-10-
(e) Notwithstanding anything in the foregoing to the contrary, in
calculating net asset value, expenses (including investment advisory fees) and
interest income and other income need not be reflected if cumulatively, when
netted, they do not amount to as much as $.01 per outstanding share.
(f) Notwithstanding anything in the foregoing to the contrary, any interim
determination of net asset value between calculations made as of the close of
the New York Stock Exchange on the preceding business day and the current
business day may be estimated so as to reflect any change in current net asset
value since the closing calculation on the preceding business day.
7.02. VALUATION OF ASSETS.
Portfolio securities shall be valued in the following manner:
(a) Portfolio securities for which market quotations are readily available
will be valued at current market value. Equity securities listed on a stock
exchange and all call options will be valued at the closing sales price on the
stock or options exchange or, if there has been no such sale, at the closing bid
price; stock index futures contracts and interest rate futures contracts will be
valued at the closing settlement price on the commodities exchange; unlisted
equity securities will be valued at the closing bid price on the
over-the-counter market.
(b) Debt securities with maturities generally exceeding one year will be
valued on the basis of valuation for normal institutional size trading units for
debt securities, without regard to exchange or over-the-counter prices, unless
the Board of Directors determines that in the case of a particular security some
other value is fair.
(c) Unlisted debt securities with maturities exceeding sixty days but
generally not exceeding one year will be valued by marking to market.
(d) Securities with a remaining maturity of 60 days or less will be valued
on an amortized cost basis, or if the current market value differs substantially
from the amortized cost, by marking to market.
(e) All other assets, including any securities for which market quotations
are not readily available, will be valued at their fair value as determined in
good faith by the Board of Directors or under procedures established by the
Board of Directors.
<PAGE>
-11-
(f) In case such valuation shall be determined as of a time other than the
close of unrestricted trading on a stock exchange, the value of listed
securities may be computed by applying to the net asset value as at the close of
the exchange on the preceding day, computed as provided above, such adjustments
as are authorized by or pursuant to the direction of the Board of Directors and
designed reasonably to reflect any material changes in the market value of
securities owned by and any other material changes in the assets or liabilities
of the Series or in the number of its outstanding shares which shall have taken
place since the close of business on such preceding business day.
7.03. TIME OF VALUATIONS.
Valuation of each Series' assets for the purpose of determining the net
asset value shall be as of the time of close of trading on the New York Stock
Exchange. The net asset value applicable to sales and redemption of each
Series' shares shall be the net asset value next computed after receipt of an
order to purchase or tender for redemption, of each Series' shares.
ARTICLE VIII: INVESTMENT OBJECTIVES AND RESTRICTIONS.
8.01. OBJECTIVES OF THE INDEX 500 STOCK FUND.
The investment objective of the Index 500 Stock Fund shall be to achieve
long-term appreciation of capital by selecting investments which can reasonably
be expected to share in the growth of the Nation's economy over an extended
period. The assets of the Fund will be invested primarily in common stocks and
other equity securities such as preferred stocks and debt securities with
conversion privileges or warrants. From time to time assets may be invested in
investment grade debt securities and short-term commercial paper and United
States Treasury obligations or temporarily held uninvested for such periods as
may appear to be prudent.
8.02. OBJECTIVES OF THE SELECT BOND FUND.
The primary investment objective of the Select Bond Fund shall be to
realize as high a level of long-term total rate of return as is consistent with
prudent investment risk. The total rate of return consists of current income
including interest and discount accruals and capital appreciation. An
additional objective shall be to seek preservation of stockholders' capital.
The assets of the Fund shall be invested in bonds and other debt securities with
maturities generally exceeding one year including:
<PAGE>
-12-
(a) publicly offered straight debt securities having a rating within the
four highest grades as determined by Moody's Investors Service, Inc. (Aaa, Aa, A
or Baa) or Standard & Poor's Corporation (AAA, AA, A or BBB);
(b) obligations of or guaranteed by the United States Government or its
agencies;
(c) obligations (payable in U.S. dollars) of or guaranteed by the
Government of Canada or of a Province of Canada or any instrumentality or
political subdivision thereof, provided such obligations have a rating within
the three highest grades as determined by Moody's Investors Service, Inc. or
Standard & Poor's Corporation and do not exceed 10% of the Fund's total assets;
(d) publicly offered straight debt securities issued or guaranteed by a
national or state bank or bank holding company (as defined in the Federal Bank
Holding Company Act, as amended) having a rating within the two highest grades
as determined by Fitch's Investor's Service, Inc. (AAA or AA), and certificates
of deposit of such banks;
(e) commercial paper having a rating within the two highest investment
grades, as determined by Moody's Investors Service, Inc. (P-1 or P-2) or
Standard & Poor's Corporation (A-1 or A-2);
(f) straight debt securities acquired directly from the issuers in private
placement transactions, which securities in the judgment of the Board of
Directors, are of investment quality comparable to publicly offered straight
debt securities rated Baa by Moody's Investors Service, Inc. or BBB by Standard
& Poor's Corporation or better;
(g) cash or cash equivalents; and
(h) debt securities not described above, including securities acquired
directly from issuers in private placement transactions.
The Select Bond Fund may invest up to 15% of its total net assets in high
yield bonds and up to 15% of its total net assets in foreign securities,
consistent with its investment objective.
8.03. OBJECTIVES OF THE ASSET ALLOCATION FUND.
The investment objective of the Asset Allocation Fund is to achieve as high
a level of total return, including current income and capital appreciation, as
is consistent with reasonable investment risk. The Fund seeks to achieve its
objective through a flexible policy of allocating assets among diversified
portfolios of common stocks, fixed income securities, and cash.
<PAGE>
-13-
The Fund's assets will be actively managed, maintaining a balance over time
between investment opportunities and their associated potential risks. In
response to changing market and economic conditions, the Fund's net assets may
be reallocated among the asset categories.
Equity securities in which the Fund may invest include common stocks,
preferred stocks, and securities that are convertible into common stocks, such
as warrants and convertible bonds. Bonds purchased by the Fund will be
primarily investment-grade debt obligations, although the Fund may also invest
in non-investment-grade debt obligations. The cash portion of the Fund may
include, but is not limited to, debt securities issued or guaranteed by the U.S.
Government or its agencies or instrumentalities, commercial paper, banker's
acceptances, certificates of deposit and time deposits. The Fund may invest in
obligations of domestic and foreign banks and their subsidiaries and branches.
The Fund also has the flexibility to take advantage of investment
opportunities around the world by investing in foreign securities. The Fund may
invest in foreign securities, including both direct investments and investments
made through depository receipts. The Fund will normally invest 20-25% of its
equity investments in foreign equities.
The Fund's investments will be allocated among countries (including
developing countries), geographic regions, and currencies in response to
changing market and economic trends.
The Fund may invest in any of the securities in which the Growth and Income
Stock Fund, Growth Stock Fund, Aggressive Growth Stock Fund, International
Equity Fund, High Yield Bond Fund or Select Bond Fund may invest. The Fund may
invest in or write option contracts, stock index futures contracts, including
indexes on specific industries, interest rate futures contracts, foreign
currency futures and forward contracts, repurchase agreements and warrants.
8.04. OBJECTIVES OF THE AGGRESSIVE GROWTH STOCK FUND
The investment objective of the Aggressive Growth Stock Fund shall be to
achieve long-term appreciation of capital primarily by investing in the common
stocks of companies which can reasonably be expected to increase their sales and
earnings at a pace which will exceed the growth rate of the nation's economy
over an extended period. The assets of the Fund will be invested primarily in
common stocks and other equity securities such as preferred stocks and debt
securities with conversion privileges or warrants. From time to time assets may
be invested in investment grade debt securities and short-term
<PAGE>
-14-
commercial paper and United States Treasury obligations or temporarily held
uninvested for such periods as may appear to be prudent. The Fund may also
invest in futures and options contracts.
8.05. OBJECTIVES OF THE INTERNATIONAL EQUITY FUND
The investment objective of the International Equity Fund shall be to
achieve long-term capital growth through a flexible policy of investing in
stocks and debt obligations of companies and governments outside the United
States. At least 65% of the assets of the Fund will be invested in securities
of issuers in at least three countries outside the United States. Any income
realized will be incidental. Although the Fund will generally invest in common
stocks, it may also invest in preferred stocks and certain debt securities such
as convertible bonds which are rated in any category by Moody's Investors
Service, Inc. or Standard & Poor's Corporation or which are unrated by any
rating agency. For temporary defensive purposes, the Fund may invest without
limit in commercial paper, certificates of deposit, bank time deposits in the
currency of any nation, bankers acceptances, U.S. Government securities,
corporate debt obligations, and repurchase agreements with respect to these
securities. The Fund may purchase and sell financial futures contracts, stock
index futures contracts, and foreign currency futures contracts for hedging
purposes only and not for speculation. It may engage in such transactions only
if the total contract value of the futures contracts does not exceed 20% of the
Fund's total assets.
8.06. OBJECTIVES OF THE HIGH YIELD BOND FUND
The investment objective of the High Yield Bond Fund shall be to achieve
high current income and capital appreciation primarily by investing in a
diversified selection of fixed income securities rated Ba1 or lower by Moody's
Investors Service, Inc. or BB+ or lower by Standard and Poor's Corporation. The
Fund may also invest in unrated securities. In addition to notes and bonds, the
Fund may invest in preferred stocks and convertible securities, including
warrants or other equity securities issued as part of a fixed income offering.
The Fund may purchase put and call options, on individual securities as well as
indexes, and may write covered call and secured put options. The Fund may
invest available temporary cash in short-term obligations. The Fund may invest
more substantially in such short-term obligations or in investment grade
securities for such periods as may appear to be prudent. The Fund may invest in
foreign securities consistent with its investment objective. Such investments
may be in United States
<PAGE>
-15-
currency denominated debt issues or in debt securities denominated in the
currency of other nations. The Fund may attempt to hedge its foreign exchange
exposure by engaging in foreign currency futures contracts.
8.07. OBJECTIVES OF THE GROWTH STOCK FUND
The investment objective of the Growth Stock Fund shall be to achieve
long-term growth of capital. The Fund shall seek to achieve this objective by
investing in companies which have above average earnings growth potential. The
Growth Stock Fund shall invest primarily in common stocks of well-established
companies. The Growth Stock Fund may also invest in any of the securities in
which the Growth and Income Stock Fund or the Aggressive Growth Stock Fund may
invest, including, but not limited to, preferred stock, convertible bonds,
short-term commercial paper and covered call options.
8.08. OBJECTIVES OF THE GROWTH AND INCOME STOCK FUND
The investment objectives of the Growth and Income Stock Fund shall be
long-term growth of capital and income, consistent with reasonable investment
risk. The Fund may invest in dividend-paying common stock as well as other
equity securities, consisting of, among other things, nondividend-paying common
stock, preferred stock, and securities convertible into common stock, such as
convertible preferred stock and convertible bonds, and warrants. The Fund may
also invest in American Depository Receipts (ADRs). The Fund may also enter
into firm commitment agreements, purchase securities on a "when-issued" basis,
and invest in foreign securities if they are U.S. exchange-listed. The Fund may
also invest in money market instruments, including U.S. Government securities,
short term bank obligations that are rated in the highest two rating categories
by Moody's Investors Service, Inc. or Standard & Poor's Corporation, or, if
unrated, are determined to be of equal quality by the manager of the Fund,
certificates of deposit, time deposits and banker's acceptances issued by U.S.
and foreign banks and savings and loan institutions with assets of at least $500
million as of the end of their most recent fiscal year; and commercial paper and
corporate obligations, including variable rate demand notes, that are issued by
U.S. and foreign issuers and that are rated in the highest two rating categories
by Moody's Investors Service, Inc. or Standard & Poor's Corporation, or if
unrated, are determined to be of equal quality by the manager of the Fund. The
Fund shall invest in such money market instruments only to invest temporary cash
balances, to maintain liquidity to meet redemptions or expenses or as a
temporary defensive measure.
<PAGE>
-16-
Convertible bonds and other fixed income securities (other than money market
instruments) in which the Fund may invest shall, at the time of investment, be
rated Baa or better by Moody's Investors Service, Inc. or BBB or better by
Standard & Poor's Corporation or, if not so rated, shall be of comparable
quality as determined by the manager of the Fund. In pursuing its investment
objective, the Fund may also engage in the purchase and writing of put and call
options on securities and stock indexes and may purchase or sell stock index
futures contracts and options thereon.
8.09. OBJECTIVES OF THE MUNICIPAL BOND FUND.
The investment objective of the Municipal Bond Fund shall be to provide
shareholders with as high a level of total return, with federally tax-exempt
current income, as is consistent with preservation of capital. The assets of
the Fund will be invested primarily in a diversified portfolio of investment-
grade municipal obligations.
Municipal obligations are debt obligations issued by states, territories,
and possessions of the United States and the District of Columbia and their
political subdivisions, agencies and instrumentalities, or multi-state agencies
or authorities, the interest from which is, in the opinion of bond counsel to
the issuer, exempt from federal income tax. Municipal obligations generally
include debt obligations issued to obtain funds for various public purposes as
well as certain industrial development bonds issued by or on behalf of public
authorities.
The Fund may also invest in taxable debt securities and tax-exempt "private
activity" bonds issued after August 7, 1986, whose proceeds are directed at
least in part to a private, for-profit organization (alternative minimum tax
bonds). The Fund may lend securities. The Fund may also invest in options and
futures contracts and repurchase agreements. The Fund may also invest in any of
the securities in which the Select Bond Fund may invest, including, but not
limited to, commercial paper, U.S. Treasury Bills and other obligations of or
guaranteed by the U.S. government or its agencies, cash and cash equivalents.
8.10. RESTRICTIONS.
Each Fund shall not:
(a) Acquire more than 25% of any class of equity securities of any one
issuer or, with respect to at least 75% of the value of the total assets of the
Fund, invest more than 5% of the value of such
<PAGE>
-17-
assets in the securities of any one issuer (except securities issued or
guaranteed by the U.S. Government or its agencies), or invest in more than 10%
of the outstanding voting securities of any one issuer.
(b) Invest for the purpose of influencing management or exercising
control, but freedom of action is reserved with respect to exercise of voting
rights in respect of securities in the Fund.
(c) Purchase any security on margin, but each Fund may obtain such
short-term credits as are necessary for the clearance of purchases and sales of
securities.
(d) Make short sales of securities.
(e) Purchase the securities of any other investment company, except in
open-market transactions involving no commission or profit to a dealer (other
than the customary broker's commission) or in connection with mergers,
consolidations or acquisitions of assets, in amounts not exceeding 10% of the
total assets of the Fund.
(f) Act as a securities underwriter for other issuers, but the Fund may
purchase securities under circumstances where, if the securities are later
publicly offered or sold by the corporation, it might be deemed to be an
underwriter for purposes of the Securities Act of 1933.
(g) Purchase or sell real estate. However, the Fund may invest in
securities issued by companies, including real estate investment trusts, which
invest in real estate or interests therein.
(h) Invest in commodities or commodity contracts, except stock index
futures contracts, including indexes on specific industries, interest rate
futures contracts, and foreign currency futures contracts as provided for in
paragraph (k).
(i) Invest more than 15% of the value of the total assets of the Fund in
securities which are restricted as to disposition under federal securities laws
and in other illiquid assets.
(j) Invest more than 25% of the value of the total assets of the Fund in
any one industry, except for investments of the Fund in U.S. Treasury Bills,
other obligations of or guaranteed by the U.S. Government or its agencies,
certificates of deposit or bankers' acceptances.
(k) Issue senior securities or borrow money except for short-term credits
as may be necessary for the clearing of transactions and except for temporary
purposes to the extent of 5% of the total assets of a Fund. A Fund may enter
into reverse repurchase agreements. Amounts borrowed for temporary purposes and
amounts subject to reverse repurchase agreements are subject to a 300% asset
<PAGE>
-18-
coverage requirement. If such amounts in the aggregate exceed this asset
coverage requirement, a Fund shall be required within three days to reduce such
amounts to meet the requirement. Each of the Funds (except the Select Bond
Fund, Municipal Bond Fund, and High Yield Bond Fund) may enter into stock index
futures contracts, including indexes on specific industries. The Select Bond,
International Equity, Asset Allocation, High Yield Bond and Municipal Bond Funds
may enter into interest rate futures contracts. The International Equity Fund,
Asset Allocation Fund, Select Bond Fund and High Yield Bond Fund may also buy
and sell foreign currency futures contracts. In all cases, the futures
contracts must be purchased or sold solely as a hedge against changes in the
values of securities held in or to be purchased for the Fund. Immediately after
entering into any futures contract, the sum of the initial margin deposits on
all open futures positions (other than an offsetting transaction) shall not
exceed 5% of the value of the Fund's total assets.
(l) Make loans aggregating more than 10% of the total assets of the Fund
at any one time, provided that neither the purchase of a portion of an issue of
publicly distributed bonds, debentures, or other debt securities, nor the
purchase of short-term debt securities, is to be considered as a loan.
(m) Make loans to persons who intend to use the proceeds for non-business
purposes or to companies which (including predecessors) have been in business
for less than three years. However, a Fund may invest in securities which are
subject to agreement by the seller to repurchase the securities within a period
of not more than thirty days. Securities in this category shall be limited to
obligations of or guaranteed by the U.S. Government or its agencies or by the
Government of Canada or of a Province of Canada or any instrumentality or
political subdivision thereof, certificates of deposit of banks or commercial
paper which meets the criteria for other commercial paper in which the Fund may
invest. No more than 10% of a Fund's total assets shall be invested in
repurchase agreements which have maturities of more than seven days.
(n) In the case of the International Equity Fund, invest more than 15% of
its total assets in securities of foreign issuers which are not listed on a
recognized United States or foreign securities exchange.
ARTICLE IX: INDEMNIFICATION.
9.01. SCOPE OF INDEMNIFICATION.
<PAGE>
-19-
Any person (and his heirs, executors, and administrators) who is serving or
has served as a director or officer of the corporation, or at its request, as a
director, officer or employee of another corporation in which it owns shares of
capital stock or of which it is a creditor shall be indemnified by the
corporation against expenses (including counsel fees and disbursements, and
where the action, suit or proceeding is not brought by or on behalf of the
corporation, amounts of any judgment, fine or penalty and reasonable amounts
paid in settlement) actually and reasonably incurred by him in connection with
the defense of any action, suit or proceeding (or in connection with any
reasonable apprehension or threat of such action, suit or proceeding) civil,
criminal or administrative, in which he is made a party (or involved in) by
reason of being or having been a director, officer or employee of the
corporation, or of such other corporation. No indemnification shall be provided
hereunder in relation to such matters as to which such person is adjudged in
such action, suit or proceeding to be liable for (i) negligence or misconduct in
the performance of duty to the corporation, except to the extent permitted by
law, if he acted in good faith and in a manner he reasonably believed to be in
or not opposed to the best interests of the corporation, and, with respect to
any criminal act or proceeding, had no reasonable cause to believe his conduct
was unlawful or (ii) willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of his office.
9.02. PAYMENT.
A claim for indemnification shall be paid by the corporation upon a final
decision on the merits by a court or other body before whom the action, suit or
proceeding was brought, or, in the absence of such a decision, a reasonable
determination, based upon a review of the facts, by the vote of the majority of
a quorum of disinterested, non-party directors or an independent legal counsel
in a written opinion, that such person (i) was not negligent or engaged in
misconduct in the performance of a duty to the corporation or, to the extent
permitted by law, if negligent or so engaged, such person acted in good faith
and in a manner he reasonably believed to be in and not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, such person had no reasonable cause to believe his conduct was
unlawful, and (ii) has no liability by reason of willful misfeasance, bad faith,
gross negligence or reckless disregard of the duties involved in the conduct of
his office. Advances against expenses may be made by the corporation on terms
fixed by the Board of Directors upon receipt of an undertaking by or on behalf
of
<PAGE>
-20-
the recipient to repay the advance unless it is ultimately determined that he is
entitled to indemnification, provided (i) the recipient provides security for
his undertaking, or (ii) the corporation is insured against losses arising by
reason of any lawful advances or (iii) a majority of a quorum of the
disinterested, non-party directors of the corporation, or an independent legal
counsel in a written opinion, determines, based upon a review of readily
available facts (as opposed to a full trial-type inquiry), that there is reason
to believe that the recipient ultimately will be found entitled to
indemnification.
ARTICLE X: AMENDMENTS.
10.01. BY BOARD OF DIRECTORS.
As provided in the Articles of Incorporation, the Board of Directors shall
have the power to make, alter or repeal By-laws of the corporation.
10.02. BY STOCKHOLDERS.
As provided in the Articles of Incorporation, the power of the Board of
Directors to make, alter or repeal By-laws is subject to the power vested in and
reserved to the stockholders to modify or rescind any such action by affirmative
vote or written order, direction or consent of the holders of the majority of
the outstanding stock of the corporation. Any action to make, alter or repeal
the By-laws, or any of them, set forth in Article VIII or any other By-law which
affects a Fund (as defined in the Investment Company Act of 1940) may be
modified or rescinded with respect to that Fund by the holders of the majority
of the outstanding stock of the Fund.
<PAGE>
EX-99.B5(a)
INVESTMENT ADVISORY AGREEMENT
THIS AGREEMENT, entered into this ____ day of November, 1996 between Mason
Street Funds, Inc., a Maryland corporation ("MSF"), and Northwestern Mutual
Investment Services, Inc., a Wisconsin corporation ("NMIS") (NMIS being
hereinafter referred to as the "Manager").
WHEREAS, MSF is a series company as contemplated by the Investment Company
Act of 1940 and currently has nine series, each of which is represented by a
separate class of capital stock, and each of which is subject to this agreement:
Aggressive Growth Stock Fund, International Equity Fund, Growth Stock Fund,
Growth and Income Stock Fund, Index 500 Stock Fund, Asset Allocation Fund, High
Yield Bond Fund, Municipal Bond Fund, and Select Bond Fund (the "Funds"); and
WHEREAS, MSF and Manager wish to enter into an agreement setting forth the
terms on which the Manager will perform certain services for MSF and the Funds.
NOW, THEREFORE, it is mutually agreed as follows:
1. MSF hereby employs the Manager to manage the investment and
reinvestment of the assets of each Fund, to determine the composition of the
assets of each Fund, including the purchase, retention or sale of the securities
and cash contained in the
<PAGE>
Fund, subject to the supervision of the Board of Directors of MSF, for the
period and on the terms in this Agreement set forth. The Manager will perform
its duties in accordance with the investment objectives and policies of each
Fund as stated in MSF's Articles of Incorporation, By-laws and Registration
Statement and amendments thereto filed with the Securities and Exchange
Commission and in resolutions adopted by MSF's Board of Directors. The Manager
hereby accepts such employment and agrees during such period, at its own
expense, to render the services and to assume the obligations herein set forth,
for the compensation herein provided. The Manager shall for all purposes herein
be deemed to be an independent contractor and shall, unless otherwise expressly
provided or authorized, have no authority to act for or represent MSF in any way
or otherwise be deemed an agent of MSF.
2. The Manager assumes and shall pay for expenses not hereinafter assumed
by the Funds that are incurred by the Manager in connection with the management
of the investment and reinvestment of the assets of the Funds. Expenses to be
paid by the Funds include, but are not limited to, the following expenses
2
<PAGE>
relating to the establishment, operation and affairs of the Funds: (i) expenses
of maintaining the Fund and continuing its existence, (ii) registration of the
Fund under the Investment Company Act, (iii) auditing and outside professional
expenses, (iv) taxes and interest, (v) governmental fees, (vi) expenses
related to issue, sale, repurchase and redemption of Fund shares, (vii)
expenses of registering and qualifying the Fund and its shares under federal and
state securities laws and of preparing and printing prospectuses for such
purposes and for distributing the same to shareholders and investors, (viii)
expenses of reports and notices to shareholders and of meetings of shareholders
and proxy solicitations therefor (ix) expenses of reports to governmental
officers and commissions, (x) insurance expenses, (xi) association membership
dues, (xii) fees, expenses and disbursements of custodians for all services to
the Fund, (xiii) expenses for servicing shareholder accounts, including
transfer agent fees, (xiv) fees paid to pricing services for the pricing of Fund
securities, (xv) fees paid to the Funds' administrator under an administrative
services agreement, (xvi) fees paid for accounting services, (xvii) fees
3
<PAGE>
paid to Standard and Poor's Corporation for the use of trademarks by MSF and the
Funds, (xviii) fees paid to the directors of MSF for their services to MSF and
the Funds, (xix) broker's commissions and issue and transfer taxes, chargeable
to the Fund in connection with securities transactions to which the Fund is a
party, (xx) organizational expenses of MSF and the Funds, (xxi) any direct
charges to shareholders approved by the Directors of MSF who are not "interested
persons" of MSF, and (xxii) such nonrecurring items as may arise, including
expenses incurred in connection with litigation, proceedings and claims and the
obligation of MSF to indemnify its Directors and officers with respect thereto.
In connection with purchases or sales of portfolio securities for the
account of each Fund, neither the Manager nor any of its directors, officers or
employees will act as a principal or receive any commission as agent.
The services of the Manager to each Fund hereunder are not to be deemed
exclusive, and the Manager shall be free to render similar services to others so
long as its services hereunder are not impaired thereby.
4
<PAGE>
3. For the services to be rendered and the charges and expenses assumed
and to be paid by the Manager as provided in paragraph 2 hereof, each Fund shall
pay to the Manager compensation at the annual rate of the percentage of the
current value of the net assets of the Fund as set forth below:
Fund Fee
---- ---
Aggressive Growth Stock 0.75%
International Equity 0.85%
Growth Stock 0.75%
Growth and Income Stock 0.65%
Index 500 Stock 0.30%
Asset Allocation 0.70%
High Yield Bond 0.75%
Municipal Bond 0.30%
Select Bond 0.30%
Such compensation shall be payable at such intervals, not more frequently
than monthly and not less frequently than quarterly, as the Board of Directors
of MSF may from time to time determine and specify in writing to the Manager.
Such compensation shall be calculated on the basis of the aggregate of the
averages of all the valuations of the net assets of the Fund made as of the
close of business on each valuation day during the period for which such
compensation is paid.
5
<PAGE>
Such compensation shall be charged to the Fund on each valuation day. The
amount of the compensation will be deducted on each valuation day from the value
of the Fund prior to determining the Fund's net asset value for the day and
shall be transmitted or credited to the Manager.
4. MSF shall cause the books and accounts of each Fund to be audited at
least once each year by a reputable independent public accountant or
organization of public accountants who shall render a report to MSF.
5. Subject to the Articles of Incorporation of MSF and of the Manager
respectively, it is understood that directors, officers, employees, agents and
stockholders of MSF are or may be interested in the Manager (or any successor
thereof) as directors, officers, employees, agents, or stockholders, or
otherwise, that directors, officers, agents and stockholders of the Manager are
or may be interested in MSF as directors, officers, employees, agents or
stockholders or otherwise, that the Manager (or any successor) is or may be
interested in MSF as a stockholder or otherwise.
6
<PAGE>
6. This Agreement shall continue in effect so long as its continuance is
specifically approved at least annually by the vote of a majority of those
directors of MSF who are not parties to the Agreement or interested persons of
any such party cast in person at a meeting called for the purpose of voting on
such approval and by either a majority of the Board of Directors of MSF or a
majority of the outstanding voting securities of each Fund (as defined in the
Investment Company Act of 1940). Shareholder approval shall be effective with
respect to any Fund vote for the approval, notwithstanding that a majority of
the outstanding voting securities of MSF or of the other Funds have not voted
for approval.
This Agreement may at any time be terminated without the payment of any
penalty either by vote of the Board of Directors of MSF or by vote of the
majority of the voting securities of any Fund, on sixty days' written notice to
the Manager. This Agreement may also be terminated by the Manager on ninety
days' written notice to MSF. This Agreement shall immediately terminate in the
event of its assignment (as defined in the Investment Company Act of 1940). Any
notice under this Agreement
7
<PAGE>
shall be given in writing, addressed and delivered, or mailed postpaid, to the
other party at any office of such party.
7. Notwithstanding any other provision of this Agreement, MSF hereby
authorizes the Manager to employ investment sub-advisers for the purpose of
providing investment management services for the International Equity Fund and
the Growth and Income Stock Fund pursuant to this Agreement, PROVIDED, however,
that (1) the compensation to be paid to such investment sub-advisers shall be
the sole responsibility of the Manager, (2) the duties and responsibilities of
the investment sub-advisers shall be as set forth in sub-advisory agreements
including NMIS and the investment sub-adviser as parties, (3) such sub-advisory
agreements shall be adopted and approved in conformity with the applicable laws
and regulations, and (4) such sub-advisory agreements may be terminated at any
time by NMIS, the Board of Directors of MSF, or by a majority vote of the
relevant Fund's outstanding voting securities on not more than 60 days' written
notice to the sub-adviser.
8. This Agreement may be amended at any time by mutual consent of the
parties, provided that such consent on the part of
8
<PAGE>
MSF shall have been approved, with respect to any Fund, by vote of a majority of
the outstanding voting securities of the Fund (as defined in the Investment
Company Act of 1940) as provided in paragraph 6, if such vote is required by the
Investment Company Act of 1940.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the
day and year first above written.
Attest: MASON STREET FUNDS, INC.
By
- ------------------------------- ----------------------------
Merrill C. Lundberg, Secretary James D. Ericson, President
Attest: NORTHWESTERN MUTUAL INVESTMENT SERVICES, INC.
By
- ------------------------------- ----------------------------
Merrill C. Lundberg, Secretary Richard L. Hall, President
9
<PAGE>
EX-99.B13
SUBSCRIPTION AGREEMENT
The Northwestern Mutual Life Insurance Company (the "Company") hereby
subscribes for 10,800 shares of the capital stock of Mason Street Funds, Inc.
("MSF"), par value $.001 per share, consisting of 1,200 Class A shares of each
of the nine series of MSF: Aggressive Growth Stock Fund, International Equity
Fund, Growth Stock Fund, Growth and Income Stock Fund, Index 500 Stock Fund,
Asset Allocation Fund, High Yield Bond Fund, Municipal Bond Fund and Select Bond
Fund. The Company agrees to pay therefor, on the issuance of such stock, the
sum of $10.00 per share of capital stock, in the total amount of $108,000, at
such time as the President of MSF may, by notice, require but in no event later
than March 31, 1997.
The Company hereby represents that, subject to any requirement of law that
the disposition of its property shall at all times be within its control, such
shares of the capital stock of MSF are being acquired for investment and not
with a view to resell or otherwise distribute such shares.
The undersigned acknowledges and understands that shares of MSF will be
issued to the undersigned in a private placement and are not currently
registered under the Securities Act of 1933 or applicable state securities laws,
in reliance by MSF on the representations and warranties made by the undersigned
herein. The undersigned agrees not to sell or redeem any of the shares of MSF
issued pursuant hereto (the "initial shares") unless there is a registration
statement covering such shares then in effect or pursuant to an available
exemption from such registration supported by an
<PAGE>
opinion of counsel to such effect. In addition, the undersigned understands and
acknowledges that, if any of the initial shares are redeemed by the undersigned
before the deferred organizational expenses of MSF are completely amortized,
there shall be deducted from the redemption price payable to the undersigned the
pro rata unamortized portion of such expenses attributable to the redeemed
shares (based on the ratio that the number of redeemed shares bears to the
number of initial shares then outstanding).
THE NORTHWESTERN MUTUAL
LIFE INSURANCE COMPANY
ATTEST:
By:
- ------------------------ -----------------------------------
Assistant Secretary President and Chief Executive Officer
<PAGE>
EXHIBIT EX-99.B18
MASON STREET FUNDS, INC.
on behalf of
Aggressive Growth Stock Fund
International Equity Fund
Growth Stock Fund
Growth and Income Stock Fund
Index 500 Stock Fund
Asset Allocation Fund
High Yield Bond Fund
Municipal Bond Fund
Select Bond Fund
Multiple Class Plan Pursuant to Rule 18f-3
_____________, 1996
Each class of shares of the Aggressive Growth Stock Fund, International
Equity Fund, Growth Stock Fund, Growth and Income Stock Fund, Index 500 Stock
Fund, Asset Allocation Fund, High Yield Bond Fund, Municipal Bond Fund and
Select Bond Fund (the "Funds"), each a series of Mason Street Funds, Inc. (the
"Company"), will have the same relative rights and privileges and be subject to
the same sales charges, fees and expenses, except as set forth below. The Board
of Directors may determine in the future that other distribution arrangements,
allocations of expenses (whether ordinary or extraordinary) or services to be
provided to a class of shares are appropriate and amend this Plan accordingly
without the approval of shareholders of any class. Except as set forth in the
Company's prospectus, shares may be exchanged only for shares of the same class
of another Fund in the Company.
Article I. Class A Shares
Class A Shares are sold at net asset value and subject to the initial sales
charge schedule or contingent deferred sales charge and minimum purchase
requirements as set forth in the Company's prospectus. Class A Shares are
subject to distribution fees calculated as a stated percentage of the net assets
attributable to Class A shares under the Company's Class A Rule 12b-1
Distribution Plan as set forth in such Distribution
<PAGE>
Plan. Class A Shares are also subject to service fees calculated as a stated
percentage of the net assets attributable to Class A shares under the Company's
Shareholder Servicing Agreement as set forth in such Shareholder Servicing
Agreement. The Class A Shareholders of a Fund have exclusive voting rights, if
any, with respect to the Company's Class A Rule 12b-1 Distribution Plan as it
applies to each Fund. Transfer agency fees, expenses related to transfer agency
activities and state and federal registration fees applicable to Class A Shares
are allocated to Class A Shares. Class A Shares shall be entitled to the
shareholder services set forth from time to time in the Company's prospectus
and/or Statement of Additional Information with respect to Class A Shares.
Article II. Class B Shares
Class B Shares are sold at net asset value per share without the imposition
of an initial sales charge. However, Class B shares redeemed within a
specified number of years of purchase will be subject to a contingent deferred
sales charge as set forth in the Fund's prospectus, unless a waiver described in
the prospectus is applicable. Class B Shares are sold subject to the minimum
purchase requirements set forth in the Company's prospectus. Class B Shares are
sold subject to distribution fees calculated as a stated percentage of the net
assets attributable to the Company's Class B Shares under the Company's Class B
Rule l2b-1 Distribution Plan as set forth in such Distribution Plan. Class B
Shares are also subject to service fees calculated as a stated percentage of the
net assets attributable to Class B shares under the Company's Shareholder
Servicing Agreement as set forth in such Shareholder Servicing Agreement. The
Class B Shareholders of a Fund have exclusive voting rights, if any, with
respect to the Company's Class B Rule 12b-1 Distribution Plan as it applies to
each fund. Transfer agency fees, expenses related to transfer agency activities
and state and federal registration fees applicable to Class B Shares are
allocated to Class B Shares. Class B Shares shall be entitled to the
shareholder services set forth from time to time in the Company's prospectus
and/or Statement of Additional Information with respect to Class B Shares.
Redemption requests placed by shareholders who own both Class A and Class B
Shares of the Fund will be satisfied first by redeeming the shareholder's Class
A Shares, unless the shareholder has made a specific election to redeem Class B
Shares.
Class B Shares will automatically convert to Class A Shares of the
respective Fund at the end of a specified number of years after the initial
purchase date of Class B shares, except as provided in the Company's prospectus.
Such conversion will occur at the relative net asset value per share of each
class without the imposition of any sales charge, fee or other charge.
For purposes of converting Class B shares to Class A shares, the initial
purchase date for Class B Shares acquired through (i) reinvestment of dividends
on Class B
2
<PAGE>
Shares or (ii) exchange from another Fund in the Company will be deemed to be
the date on which the original Class B Shares were purchased.
Article III Allocation of Expenses
Expenses shall be allocated among classes in a manner that is fair and
equitable. Expenses relating to a Fund generally will be allocated among Class
A and Class B Shares based upon the relative net assets of each such Class.
Expenses relating only to a particular class shall be allocated to that class.
Article IV. Approval by Board of Directors
This Plan shall not take effect until it has been approved by the vote of a
majority (or whatever greater or lesser percentage may, from time to time, be
required under Rule 18f-3 under the Investment Company Act of 1940, as amended
(the "Act")) of (a) all of the Directors of the Company, on behalf of the Fund,
and (b) those of the Directors who are not "interested persons" of the Company,
as such term may be from time to time defined under the Act.
Article V. Severability
This Plan is severable as to each Fund. The Board of Directors may amend
this Plan on behalf of one or more funds, in which case a new Plan would be
adopted in respect of any such Fund. In such event, this Plan would remain in
full force and effect as to all other Funds.
Article VI. Amendments
No material amendment to the Plan shall be effective unless it is approved
by the Board of Directors in the same manner as is provided for approval of this
Plan in Article IV.
3
