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MASON STREET FUNDS
[LOGO]
PROSPECTUS
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MASON STREET FUNDS
P.O. Box 419419
Kansas City, MO 64141-6419
1-888-627-6678
Prospectus dated March 31, 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. ("Mason Street Funds" or "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 March 31,
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.
THE HIGH YIELD BOND FUND INVESTS PRIMARILY IN FIXED INCOME SECURITIES THAT ARE
RATED BELOW INVESTMENT GRADE BY THE MAJOR RATING AGENCIES. SUCH SECURITIES ARE
SOMETIMES REFERRED TO AS "JUNK BONDS" AND ARE CONSIDERED SPECULATIVE. INVESTORS
SHOULD CAREFULLY CONSIDER THE RISKS ASSOCIATED WITH SUCH INVESTMENTS, AS
DESCRIBED IN THIS PROSPECTUS, AND SHOULD UNDERSTAND THAT HIGH YIELD FIXED INCOME
SECURITIES ARE NOT APPROPRIATE FOR SHORT-TERM INVESTMENT PURPOSES.
CONTENTS
Page
- --------------------------------------------------------------------------------
SUMMARY 2
About the Advisors 2
Funds at a Glance 2
Risk Comparison 5
Description of Classes of Shares 5
Expense Information 5
PERFORMANCE 7
THE FUNDS IN DETAIL 10
Stock Funds 10
Multi-Asset Fund 14
Bond Funds 15
Other Fund Policies and Associated Risks 18
Investment Restrictions 20
MANAGEMENT OF THE FUNDS 21
BUYING AND SELLING FUND SHARES 25
Investment Minimums 25
Flexible Sales Charge Options 26
How Shares are Priced 30
SHAREHOLDERS GUIDE 31
How To Buy Shares 31
How To Exchange Shares 32
How To Sell Shares 33
Quick Address and Telephone Reference 34
DISTRIBUTIONS AND TAXES 35
OTHER INFORMATION 36
APPENDIX A 37
APPENDIX B 40
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<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 10) 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). Investment performance for each of these
Portfolios is shown at pp. 8-9. 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.
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
2
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GROWTH STOCK FUND
OBJECTIVE: To seek long-term growth of capital by investing in companies
believed to have above 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.
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
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 15.23%. 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. 18.
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.
MUNICIPAL BOND FUND
3
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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, with the ability to invest up to
20% of its assets in lower-rated securities.
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 capital appreciation, consistent with
preservation of capital.
4
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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.
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 10.
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 25 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.
5
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SHAREHOLDER TRANSACTION EXPENSES (ALL FUNDS):
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Class A Class B
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Maximum Sales Charge on purchases (as % of 4.75% 0.00%
Offering Price) (1)
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Maximum Contingent Deferred Sales Charge(2) 0.00% 5.00% first year
4.00% second year
3.00% third year
3.00% fourth year
2.00% fifth year
1.00% sixth year
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Redemption fee(3) None None
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Exchange fee None None
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(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 $50,000. Larger
purchases of Class B shares may be subject to a reduced CDSC. See
"Contingent Deferred Sales Charge" on page 28.
(3) A wire transfer fee (currently $15) may be imposed on a redemption when
you have the proceeds wire transferred.
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES:(1)
Aggressive Growth and
Growth International Growth Income Index 500
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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>
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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)
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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)
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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)
--------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<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 0.35% 1.00% 0.35% 1.00% 0.35% 1.00% 0.35% 1.00%
Distribution
and Service
Fees(2)
--------------------------------------------------------------------------------------------------------------------------------
Other Expenses 0.30% 0.30% 0.20% 0.20% 0.20% 0.20% 0.20% 0.20%
(after
reimbursement)(3)
--------------------------------------------------------------------------------------------------------------------------------
Total Operating 1.35% 2.00% 1.30% 1.95% 0.85% 1.50% 0.85% 1.50%
Expenses (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.
6
<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 and affiliates have agreed to waive their 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. In the absence of the waivers, the estimated
Other Expenses for the Class A and the Class B shares of each Fund for
the first year of operations would be: Aggressive Growth Stock Fund,
.43% and .43%; International Equity Fund, .71% and .71%; Growth Stock
Fund, .46% and .46%; Growth and Income Stock Fund, .55% and .55%, Index
500 Stock Fund, .54% and .54%; Asset Allocation Fund, .77% and .77%; High
Yield Bond Fund, .56% and .56%; Municipal Bond Fund, .57% and .57%; and
Select Bond Fund .53% and .53%, respectively, and the estimated Total
Operating Expenses of the Class A and Class B shares of the Funds would
be: Aggressive Growth Stock Fund, 1.53% and 2.18%; International Equity
Fund, 1.91% and 2.56%; Growth Stock Fund, 1.56% and 2.21%; Growth and
Income Stock Fund, 1.55% and 2.20%, Index 500 Stock Fund, 1.19% and
1.84%; Asset Allocation Fund, 1.82% and 2.47%; High Yield Bond Fund,
1.66% and 2.31%; Municipal Bond Fund, 1.22% and 1.87%; and Select Bond
Fund 1.18% and 1.83%, respectively.
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
7
<PAGE>
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 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.
The investment performance for certain Portfolios of Northwestern Mutual Series
Fund, Inc. is shown below based upon the average annual total return for the
one, three, five and ten year periods (or since inception) ending December 31,
1996, adjusted to reflect the expenses of the Funds, including sales charges
where indicated. 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. THE
PERFORMANCE DISCLOSED BELOW IS NOT THE PERFORMANCE OF THE FUNDS BUT RATHER OF
THE CORRESPONDING SERIES FUND PORTFOLIO. THE 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.
The table below sets forth each Fund, and its corresponding Series Fund
Portfolio, its inception date and asset size as of December 31, 1996:
ASSUMING CLASS A SHARE TOTAL FUND OPERATING EXPENSES AND THE MAXIMUM INITIAL
SALES CHARGE APPLICABLE TO CLASS A SHARES.
<TABLE>
<CAPTION>
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 11.27% 17.18% 14.93% 20.91%
Stock (November 30, 1990*) (November 30, 1990*)
$872 million
8
<PAGE>
International Equity International Equity International Equity 13.94% 8.68% NA 13.47%
(April 30, 1993*) (April 30, 1993*)
$505.2 million
Growth Stock Growth Stock Growth Stock 14.35% NA NA 16.52%
(May 3, 1994) (May 3, 1994)
$170.5 million
Growth and Income Growth and Income Stock Growth and Income Stock 13.66% NA NA 15.97%
Stock (May 3, 1994) (May 3, 1994)
$234.2 million
High Yield Bond High Yield Bond High Yield Bond 13.26% NA NA 11.90%
(May 3, 1994) (May 3, 1994)
$93.9 million
Select Bond Select Bond Select Bond -2.11% 4.03% 5.87% 7.21%
(June 26, 1984) (June 26, 1984)
$214.3 million
</TABLE>
<TABLE>
<CAPTION>
ASSUMING CLASS A SHARE TOTAL FUND OPERATING EXPENSES WITH NO INITIAL
SALES CHARGE.
<S> <C> <C> <C> <C> <C>
The following four tables show the average annualized total Aggressive Growth Stock 16.82% 19.09% 16.05% 21.88%
returns for the Series Fund Portfolios and predecessor (November 30, 1990*)
funds for the one, three, five and ten year (or life of the International Equity 19.62% 10.46% NA 14.98%
Portfolio, if shorter) periods ended December 31, 1996. (April 30, 1993*)
These figures are based on the actual gross investment Growth Stock 20.05% NA NA 18.66%
performance of the Portfolios. From the gross (May 3, 1994)
investment performance figures, the maximum Total Fund Growth and Income Stock 19.33% NA NA 18.11%
Operating Expenses reflected in the fee table on (May 3, 1994)
page __ are deducted to arrive at the net return. The first High Yield Bond 18.91% NA NA 13.97%
table for each Class shown reflects a deduction for the (May 3, 1994)
maximum applicable sales charge, while the second table for Select Bond 2.77% 5.73% 6.91% 7.73%
each Class shown reflects no deduction for sales (June 26, 1984)
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
</TABLE>
<TABLE>
<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 16.01% 18.37% 15.33% 21.10%
Stock 11.01% 17.65% 15.11% 21.10% November 30, 1990*
November 30, 1990*
International Equity 13.91% 8.94% NA 13.68% International Equity 18.91% 9.77% NA 14.26%
April 30, 1993* April 30, 1993*
Growth Stock 14.19% NA NA 17.04% Growth Stock 19.19% NA NA 17.90%
May 3, 1994 May 3, 1994
Growth and Income Growth and Income Stock 18.48% NA NA 17.29%
Stock 13.48% NA NA 16.42% May 3, 1994
May 3, 1994
High Yield Bond 13.20% NA NA 12.32% High Yield Bond 18.20% NA NA 13.25%
May 3, 1994 May 3, 1994
Select Bond -2.96% 4.16% 5.89% 7.03% Select Bond 2.04% 5.07% 6.21% 7.03%
June 26, 1984 June 26, 1984
</TABLE>
* Includes performance of predecessor fund that was merged into the Series Fund
on May 3, 1994
9
<PAGE>
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 18 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 Mason Street Fund'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 FUND CATEGORY
STOCK FUNDS PROFILE
Investment Objective: Who May Want to Invest: These Funds
may be appropriate for investors who
Aggressive Growth Growth of are willing to tolerate stock market
Stock Fund Capital fluctuations in return for potentially
International Equity high long-term returns. These Funds
Fund are designed for those looking for
Growth Stock Fund long-term growth potential.
Growth and Income Growth of The fundamental risk associated with
Stock Fund Capital any common stock fund is the risk that
and Income the value of the stocks it holds might
decrease. Stock values may fluctuate
Index 500 Stock Fund Approximate in response to the activities of an
the S&P 500 individual company or in response to
Stock Index general market and/or economic
Performance conditions. Historically, common
stocks have provided greater long-term
Primary Holdings Common Stocks returns and have entailed greater
short-term risks than other investment
Shareholder's Long Term choices. Smaller or newer issuers are
Investment Horizon more likely to realize more substantial
growth as well as suffer more
significant losses than larger or more
established issuers. Investments in
such companies can be both more
volatile and more speculative.
Investments in foreign securities may
involve additional risks not present
when investing in comparable domestic
securities.
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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. Under normal circumstances, the Fund
will invest at least 65% of its assets in stocks.
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 stocks 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. 18.
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. Under normal circumstances, the Fund will invest at
least 65% of its assets in stocks.
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. Under normal circumstances, the Fund
will invest at least 65% of its assets in stocks.
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 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.
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<PAGE>
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 Fund will not buy stocks that are not in the S&P 500 Index and
will seek to sell such stocks in an orderly manner in the event of changes
in the Index or spin-offs.
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 Mason Street Funds. 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. Stock Funds other than the
Index 500 Stock Fund may invest all or a larger portion of their assets in these
investments for temporary defensive purposes. The Stock Funds may also invest
in options contracts, stock index futures contracts, including indexes on
specific industries, foreign
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<PAGE>
currency futures and forward contracts and repurchase agreements. See
"Financial Futures Contracts," p. 19. 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. 18. 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. 19.
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.
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<PAGE>
MULTI-ASSET FUND CATEGORY
ASSET ALLOCATION FUND PROFILE
Investment Total Return Who May Want to Invest: This Fund may
Objective: be appropriate for investors who seek a
combination of growth of capital and
income, and are willing to ride out
stock market fluctuations in pursuit of
Primary Holdings Common Stocks potentially high long-term returns. The
and Fixed Asset Allocation Fund is designed for
Income investors who want their investments
Securities 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 Long-Term The value of the Fund's investments and
Investment income will vary from day to day, and
Horizon 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.
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. 18.
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.
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<PAGE>
Within the asset-allocation categories described above, NMIS will allocate
the Fund's investments among countries (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. 18.
BOND FUND CATEGORY
BOND FUNDS PROFILE
Investment Who May Want to Invest: Thee Funds are
Objective: designed for investors who primarily seek
current income.
High Yield Bond High Current
Fund Income and The High Yield Bond Fund is designed for
Capital investors who are willing to accept
Appreciation higher levels of credit and market risks
in return for potentially higher return.
Municipal Bond High Level of Because of these risks, this Fund is not
Fund current income appropriate for short-term investment
exempt from purposes.
federal income
taxes and The Municipal Bond Fund is designed for
preservation of investors who want income that is exempt
capital from regular federal income tax and are
willing to accept higher interest rate
Select Bond High Income and risk and moderate credit risks.
Fund Capital
Appreciation The Select Bond Fund is designed for
Consistent With investors who want moderate levels of
Preservation of interest rate and credit risks while
Capital seeking high current income.
Primary Holdings: A fundamental risk associated with any
fund investing in fixed income securities
High Yield Bond Corporate Bonds is that fixed income securities tend to
Fund - Non decline in value when interest rates
Investment Grade rise. This effect is generally greater
for longer-term bonds, but they generally
offer higher yields to compensate for
Municipal Bond Municipal these risks. In addition, securities
Fund Securities that permit prepayment have the risk that
they will be paid during periods when
Select Bond Corporate Bonds interest rates are falling, which
Fund - Investment generally results in the proceeds being
Grade invested at a lower rate of return.
Shareholder's Intermediate to
Investment Long-Term
Horizon:
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<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." Under normal circumstances,
the Fund will invest at least 65% of its assets in high yield 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, without limit, 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," p. 18.
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 temporary defensive purposes, with no maximum percentage. 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. 19. 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.
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<PAGE>
While the Fund has no security maturity restrictions, its average maturity
will normally be 10 years or longer.
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. 18 and "Options," p. 20.
The Fund may also invest in repurchase agreements, reverse repurchase
agreements or may purchase securities on a "when-issued" or forward commitment
basis.
The Fund may invest in municipal lease obligations. Such obligations do
not constitute general obligations of the municipality, but are ordinarily
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 payments in future years unless money is appropriated for
such purpose on a yearly basis. Such obligations are secured by the leased
property.
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 investment objective of the Select Bond Fund is as high a level of
income and capital appreciation 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
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<PAGE>
temporary defensive purposes the Fund may place all or 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 Mason Street Fund'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 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/high risk bonds and up to 15% of its total net assets in foreign
securities, consistent with its investment objective. See "Foreign Securities,"
pp. 18 and "High Yield/High Risk Securities," pp. 19. 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. 18.
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
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<PAGE>
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 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, Mason Street Funds 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 Mason
Street Fund'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
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<PAGE>
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 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
20
<PAGE>
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 net 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 Mason Street Funds 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 Mason Street Funds.
21
<PAGE>
INVESTMENT ADVISORS
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 Mason Street Funds.
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.
22
<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, Associate Director - Fixed Income 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 at 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 and affiliates have agreed to waive their fees 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. 6 in the first year of
operations.
23
<PAGE>
OTHER SERVICE PROVIDERS
The following parties provide the Funds with administrative and other
services:
TRANSFER AGENT
National Financial Data Services ("NFDS")
Post Office Box 419419
Kansas City, Missouri 64141-6419
CUSTODIAN
For the domestic assets For the domestic assets of
of Growth and Income Aggressive Growth Stock Fund,
Stock Fund, High Yield Growth Stock Fund, Index 500
Bond Fund and Municipal Stock Fund, Asset Allocation
Bond Fund: 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 accounting:
Life Insurance Company Brown Brothers Harriman & Co.
720 East Wisconsin Avenue 40 Water Street
Milwaukee, Wisconsin 53202 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.__)
24
<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%. Higher
portfolio turnover may result in additional brokerage costs and may result in
inceased taxable capital gains for shareholders. See "Taxes," p. 35.
BUYING AND SELLING FUND SHARES
<TABLE>
<CAPTION>
INVESTMENT MINIMUMS
TYPE OF ACCOUNT INVESTMENT MINIMUM
--------------- ------------------
<S> <C> <C> <C>
Shares of the Funds are
available through registered INITIAL SUBSEQUENT
representatives of Robert W. INVESTMENT INVESTMENT
---------- ----------
Baird & Co. Inc. ("Baird"),
including Northwestern Mutual Regular Account $1,000 $100
Life agents and Baird Investment
Officers or, in certain cases, Individual IRAs (regular or $ 500 $100
from the Fund itself. The spousal)
following table illustrates the
minimum investment requirements Other Tax Qualified $ 50 $ 50
for the initial and subsequent Retirement Plans
investments in each of the
Funds, which may be changed at Automatic Investment Plans $ 50 $ 50
any time at the sole discretion
of the Fund.
</TABLE>
25
<PAGE>
FLEXIBLE SALES CHARGE OPTIONS
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 3.75% 3.90% 3.00%
than 100,000
$100,000 but less 2.75% 2.83% 2.00%
than 250,000
$250,000 but less 2.00% 2.04% 1.50%
than 500,000
$500,000 but less 1.50% 1.52% 1.00%
than 1,000,000
$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. 30.
(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
26
<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. 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 Mason Street Funds,
Northwestern Mutual Life, NMIS, or the Distributor, or their spouses
or children under the age of 21 or trust or retirement plans for their
benefit. Such purchases may be made directly from Mason Street Funds
through the transfer agent.
- 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 the mutual fund charged an initial sales charge or
contingent deferred sales charge.
- 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
27
<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, and
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 Purchases" and
"Cumulative Discount," pp. 29-30.
28
<PAGE>
<TABLE>
<CAPTION>
Contingent Deferred Sales Charge Applicable in the Year of Redemption After Purchase(1)
----------------------------------------------------------------------------------------------------------------------------------
Amount of First Second Third Fourth Fifth Sixth Seventh Dealer
Purchases 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 4% 3% 3% 2% 1% 0% 0% 3.00%
than 100,000
$100,000 but less 3% 3% 2% 1% 0% 0% 2.00%
than 250,000
$250,000 but less 3% 2% 1% 0% 0% 1.50%
than 500,000
$500,000 but less 2% 1% 0% 0% 1.00%
than 1,000,000
$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 contingent 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.
29
<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. 28. 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 Mason Street Fund'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
30
<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 instructions
directly to your account. Before an initial wire transfer can be
[Bank] accepted, an account must be established for you. See your
registered representative or call 1-888-627-6678 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.
- 31 -
<PAGE>
By Telephone This service allows you to purchase additional shares quickly and
conveniently through an electronic transfer of money. When you
make a purchase by telephone, your predesignated bank account
[telephone will be debited for the desired amount. You can establish this
number] privilege when you open your account or, if your account is
already established, call 1-888-627-6678 to request the
appropriate form. This option will become effective 10 days
after the form is received.
AUTOMATIC INVESTMENT PROGRAMS
Automatic Money is automatically transferred from your bank account to your
Investing 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 If your employer can initiate an automatic payroll deduction, you
Deduction 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 1-888-627-6678.
Systematic In order to assist you in a dollar-cost averaging purchase
Exchange 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
1-888-627-6678.
HOW TO EXCHANGE SHARES
On any business day you may exchange your shares for shares of another Fund
of the same class.
By Mail
[Address] To exchange your shares, your written request should include
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 Accounts are automatically eligible for the telephone
[telephone number] 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
32
<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.
- - Because excessive trading can hurt Fund performance and shareholders, the
investment advisor may refuse any exchange purchase if (i) the advisor
believes the Fund would be harmed or unable to invest effectively, or (ii)
the Fund receives or anticipates simultaneous orders that may significantly
affect the Fund.
- - 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. 28.
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 $1,000 and may be
subject to limits on frequency and amount. A charge of $15
may be imposed for wire redemptions.
33
<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 (other than IRAs) 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
P.O. Box 419419 1004 Baltimore
Kansas City, MO 64141-6419 Kansas City, MO 64105
Toll-free Number
1-888-627-6678
34
<PAGE>
DISTRIBUTIONS AND TAXES
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 TO THE RIGHT.
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
35
<PAGE>
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 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
Mason Street Funds was incorporated in Maryland on August 30, 1996.
Mason Street Funds 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 Mason Street Funds 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.
36
<PAGE>
VOTING RIGHTS
Neither Mason Street Funds 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
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<PAGE>
may involve greater credit risk. See "Municipal securities" below.
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 at 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
38
<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 average 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.
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<PAGE>
APPENDIX B
BOND RATING EXPLANATION
================================================================================
STANDARD & POOR'S AAA Highest rating; extremely strong capacity to pay
CORPORATION 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 the
CCC, CC 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 investment
SERVICE, INC. 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.
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 March 31, 1997.
The date of this Statement of Additional Information is March 31, 1997.
B-1
<PAGE>
TABLE OF CONTENTS
CROSS-REFERENCE TO
PAGE PAGE IN PROSPECTUS
---- ------------------
Investment Policies B-4 __
Investment Restrictions B-4 20
Portolio Securities for the Municipal Bond Fund B-5 17
Repurchase Agreements B-7 20
Financial Futures Contracts B-8 19
Options - In General B-14 20
Future Developments B-15 -
Reverse Repurchase Agreements B-15 17
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 18
Portfolio Turnover B-19 25
Management of MSF B-20 21
Other Information About MSF B-22 36
Investment Advisory Services B-23 23
Fund Expenses B-26 5
Distribution Arrangements B-26 28
Distribution Financing Plans and
Shareholder Servicing Agreement B-27 28
Class A Plan and Agreement B-27 28
Class B Plan and Agreement B-27 28
General B-28
Portfolio Transactions and
Brokerage Allocation and Other Practices B-28 25
Determination of Net Asset Value B-30 30
Purchase and Redemption of Shares B-32 31
Cumulative Discount B-32 27
Letter of Intent B-32 27
Systematic Withdrawal Plan B-32 34
Special Redemptions B-33 30
B-2
<PAGE>
Suspension of Redemptions B-33
Investment Performance B-33 7
Standardized Average Annual Total
Return Quotations B-33 7
Standardized Yield Quotations B-35 7
Non-Standardized Performance B-35 __
General Information B-35 7
Taxes B-37 35
Municipal Bond Fund B-41 35
State and Local B-42 __
Custodians B-42 24
Transfer Agent Services B-42 24
Independent Certified Public Accountants B-42 __
Appendix A B-43 __
Appendix B B-51 __
Financial Statements B-52 __
Report of Independent Accountants B-63 __
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<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 or to meet redemption requests. 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.
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<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.
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<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.
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<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,
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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 Fund may enter into reverse repurchase agreements
with banks and broker-dealers. Such agreements involve the sale of money
market securities held by the 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.
The 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, the 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 the 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 net 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 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%.
Short-term debt securities are excluded in the calculation of portfolio
turnover rates. U.S. Government securities are included in the calculation of
portfolio turnover rates.
The annual portfolio 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
Associate Director - Fixed Income 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.
COMPENSATION TABLE
<TABLE>
<CAPTION>
(1) (2) (3) (4) (5)
Name of Aggregate Pension or Estimated Total
Person, Compensation Retirement Annual Compensation
Position From Benefits Benefits Upon From
Registrant* Accrued as Retirement Registrant and
Part of Fund Fund Complex
Expenses Paid to
Directors*
<S> <C> <C> <C> <C>
James D. None None None None
Ericson,
Director
William Blake, $9,000 None None $24,000
Director
Stephen N. $9,000 None None $24,000
Graff,
Director
John K. $9,000 None None None
MacIver,
Director
Martin F. $9,000 None None $24,000
Stein,
Director
</TABLE>
* Estimated compensation for the first fiscal year of operations of
Registrant, April 1, 1997 through March 31, 1998.
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
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<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 March 31, 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 on March 31, 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 on March 31, 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 to Class A shares. 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 attributable to Class B shares. 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 11:00 A.M., 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). A Class A shareholder may include, as an
accumulation credit towards the completion of such LOI, the value of all
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
1-888- 626-6678.
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
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<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
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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.
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<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
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<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
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<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
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<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
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<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.
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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.
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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, 1004 Baltimore, Kansas City,
Missouri 64105, 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 March 3,
1997, together with the notes thereto and the report of Price Waterhouse LLP,
are attached to this SAI.
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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.
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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
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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>
MASON STREET FUNDS, INC. - INDEX 500 STOCK FUND
STATEMENT OF ASSETS AND LIABILITIES
March 3, 1997
Assets
Cash $ 12,000
Prepaid initial registration expenses 26,851
Unamortized organizational costs 11,058
-----------
Total Assets $ 49,909
Liabilities
Payable to Advisor $ 37,909
-----------
Net Assets $ 12,000
-----------
-----------
Aggregate Paid In Capital
($0.001 par value; 300,000,000 shares authorized;
1,200 shares outstanding) $ 12,000
-----------
-----------
Per Share of Class A (based on 600 shares issued and outstanding):
Offering Price $ 10.50
-----------
-----------
Net Asset Value and Redemption Price $ 10.00
-----------
-----------
Per Share of Class B (based on 600 shares issued and outstanding):
Net Asset Value, Offering and Redemption Price $ 10.00
-----------
-----------
The Accompanying Notes are an Integral Part of the Financial Statements.
B-52
<PAGE>
MASON STREET FUNDS, INC. - AGGRESSIVE GROWTH STOCK FUND
STATEMENT OF ASSETS AND LIABILITIES
March 3, 1997
Assets
Cash $ 12,000
Prepaid initial registration expenses 26,851
Unamortized organizational costs 11,058
-----------
Total Assets $ 49,909
Liabilities
Payable to Advisor $ 37,909
-----------
Net Assets $ 12,000
-----------
-----------
Aggregate Paid In Capital
($0.001 par value; 300,000,000 shares authorized;
1,200 shares outstanding) $ 12,000
-----------
-----------
Per Share of Class A (based on 600 shares issued and outstanding):
Offering Price $ 10.50
-----------
-----------
Net Asset Value and Redemption Price $ 10.00
-----------
-----------
Per Share of Class B (based on 600 shares issued and outstanding):
Net Asset Value, Offering and Redemption Price $ 10.00
-----------
-----------
The Accompanying Notes are an Integral Part of the Financial Statements.
B-53
<PAGE>
MASON STREET FUNDS, INC. - INTERNATIONAL EQUITY FUND
STATEMENT OF ASSETS AND LIABILITIES
March 3, 1997
Assets
Cash $ 12,000
Prepaid initial registration expenses 26,851
Unamortized organizational costs 11,058
-----------
Total Assets $ 49,909
Liabilities
Payable to Advisor $ 37,909
-----------
Net Assets $ 12,000
-----------
-----------
Aggregate Paid In Capital
($0.001 par value; 300,000,000 shares authorized;
1,200 shares outstanding) $ 12,000
-----------
-----------
Per Share of Class A (based on 600 shares issued and outstanding):
Offering Price $ 10.50
-----------
-----------
Net Asset Value and Redemption Price $ 10.00
-----------
-----------
Per Share of Class B (based on 600 shares issued and outstanding):
Net Asset Value, Offering and Redemption Price $ 10.00
-----------
-----------
The Accompanying Notes are an Integral Part of the Financial Statements.
B-54
<PAGE>
MASON STREET FUNDS, INC. - GROWTH STOCK FUND
STATEMENT OF ASSETS AND LIABILITIES
March 3, 1997
Assets
Cash $ 12,000
Prepaid initial registration expenses 26,851
Unamortized organizational costs 11,058
-----------
Total Assets $ 49,909
Liabilities
Payable to Advisor $ 37,909
-----------
Net Assets $ 12,000
-----------
-----------
Aggregate Paid In Capital
($0.001 par value; 300,000,000 shares authorized;
1,200 shares outstanding) $ 12,000
-----------
-----------
Per Share of Class A (based on 600 shares issued and outstanding):
Offering Price $ 10.50
-----------
-----------
Net Asset Value and Redemption Price $ 10.00
-----------
-----------
Per Share of Class B (based on 600 shares issued and outstanding):
Net Asset Value, Offering and Redemption Price $ 10.00
-----------
-----------
The Accompanying Notes are an Integral Part of the Financial Statements.
B-55
<PAGE>
MASON STREET FUNDS, INC. - GROWTH AND INCOME STOCK FUND
STATEMENT OF ASSETS AND LIABILITIES
March 3, 1997
Assets
Cash $ 12,000
Prepaid initial registration expenses 26,851
Unamortized organizational costs 11,058
-----------
Total Assets $ 49,909
Liabilities
Payable to Advisor $ 37,909
-----------
Net Assets $ 12,000
-----------
-----------
Aggregate Paid In Capital
($0.001 par value; 300,000,000 shares authorized;
1,200 shares outstanding) $ 12,000
-----------
-----------
Per Share of Class A (based on 600 shares issued and outstanding):
Offering Price $ 10.50
-----------
-----------
Net Asset Value and Redemption Price $ 10.00
-----------
-----------
Per Share of Class B (based on 600 shares issued and outstanding):
Net Asset Value, Offering and Redemption Price $ 10.00
-----------
-----------
The Accompanying Notes are an Integral Part of the Financial Statements.
B-56
<PAGE>
MASON STREET FUNDS, INC. - ASSET ALLOCATION FUND
STATEMENT OF ASSETS AND LIABILITIES
March 3, 1997
Assets
Cash $ 12,000
Prepaid initial registration expenses 26,851
Unamortized organizational costs 11,058
-----------
Total Assets $ 49,909
Liabilities
Payable to Advisor $ 37,909
-----------
Net Assets $ 12,000
-----------
-----------
Aggregate Paid In Capital
($0.001 par value; 300,000,000 shares authorized;
1,200 shares outstanding) $ 12,000
-----------
-----------
Per Share of Class A (based on 600 shares issued and outstanding):
Offering Price $ 10.50
-----------
-----------
Net Asset Value and Redemption Price $ 10.00
-----------
-----------
Per Share of Class B (based on 600 shares issued and outstanding):
Net Asset Value, Offering and Redemption Price $ 10.00
-----------
-----------
The Accompanying Notes are an Integral Part of the Financial Statements.
B-57
<PAGE>
MASON STREET FUNDS, INC. - HIGH YIELD BOND FUND
STATEMENT OF ASSETS AND LIABILITIES
March 3, 1997
Assets
Cash $ 12,000
Prepaid initial registration expenses 26,851
Unamortized organizational costs 11,058
-----------
Total Assets $ 49,909
Liabilities
Payable to Advisor $ 37,909
-----------
Net Assets $ 12,000
-----------
-----------
Aggregate Paid In Capital
($0.001 par value; 300,000,000 shares authorized;
1,200 shares outstanding) $ 12,000
-----------
-----------
Per Share of Class A (based on 600 shares issued and outstanding):
Offering Price $ 10.50
-----------
-----------
Net Asset Value and Redemption Price $ 10.00
-----------
-----------
Per Share of Class B (based on 600 shares issued and outstanding):
Net Asset Value, Offering and Redemption Price $ 10.00
-----------
-----------
The Accompanying Notes are an Integral Part of the Financial Statements.
B-58
<PAGE>
MASON STREET FUNDS, INC. - MUNICIPAL BOND FUND
STATEMENT OF ASSETS AND LIABILITIES
March 3, 1997
Assets
Cash $ 12,000
Prepaid initial registration expenses 26,851
Unamortized organizational costs 11,058
-----------
Total Assets $ 49,909
Liabilities
Payable to Advisor $ 37,909
-----------
Net Assets $ 12,000
-----------
-----------
Aggregate Paid In Capital
($0.001 par value; 300,000,000 shares authorized;
1,200 shares outstanding) $ 12,000
-----------
-----------
Per Share of Class A (based on 600 shares issued and outstanding):
Offering Price $ 10.50
-----------
-----------
Net Asset Value and Redemption Price $ 10.00
-----------
-----------
Per Share of Class B (based on 600 shares issued and outstanding):
Net Asset Value, Offering and Redemption Price $ 10.00
-----------
-----------
The Accompanying Notes are an Integral Part of the Financial Statements.
B-59
<PAGE>
MASON STREET FUNDS, INC. - SELECT BOND FUND
STATEMENT OF ASSETS AND LIABILITIES
March 3, 1997
Assets
Cash $ 12,000
Prepaid initial registration expenses 26,851
Unamortized organizational costs 11,058
-----------
Total Assets $ 49,909
Liabilities
Payable to Advisor $ 37,909
-----------
Net Assets $ 12,000
-----------
-----------
Aggregate Paid In Capital
($0.001 par value; 300,000,000 shares authorized;
1,200 shares outstanding) $ 12,000
-----------
-----------
Per Share of Class A (based on 600 shares issued and outstanding):
Offering Price $ 10.50
-----------
-----------
Net Asset Value and Redemption Price $ 10.00
-----------
-----------
Per Share of Class B (based on 600 shares issued and outstanding):
Net Asset Value, Offering and Redemption Price $ 10.00
-----------
-----------
The Accompanying Notes are an Integral Part of the Financial Statements.
B-60
<PAGE>
NOTES TO FINANCIAL STATEMENTS
Note 1: The Mason Street Funds, Inc. ("MSF") was incorporated under the laws
of the state of Maryland on August 30, 1996 as an open-end investment
company. MSF consists of the Aggressive Growth 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, collectively known as "the Funds". The
Funds have had no operations other than those relating to
organizational matters and for the sale of 1,200 shares of Common
Stock in the Aggressive Growth Stock Fund, International Equity Fund,
Growth Stock Fund, Index 500 Fund, Asset Allocation Fund and Select
Bond Fund at $10.00 per share on February 28, 1997 to The Northwestern
Mutual Life Insurance Company and the sale of 1,200 shares of Common
Stock in the Growth and Income Stock Fund, High Yield Bond Fund and
Municipal Bond Fund at $10.00 per share on March 3, 1997 to The
Northwestern Mutual Life Insurance Company. Each Fund offers two
classes of shares: Class A shares with an initial sales charge up to
4.75% and Class B shares with a surrender charge of 0-5% over a period
of up to six years.
Note 2: Northwestern Mutual Investment Services, Inc, ("NMIS") serves as
investment advisor to each of the Funds, with certain of the Funds
also being served by a subadvisor. Each Fund pays NMIS an annual fee
for investment advisory services based on average daily net assets of
the Fund according to the following schedule:
Fund Fee
---- ---
Aggressive Growth Stock Fund 0.75%
International Equity Fund 0.85%
Growth Stock Fund 0.75%
Growth and Income Stock Fund 0.65%
Index 500 Stock Fund 0.30%
Asset Allocation Fund 0.70%
High Yield Bond Fund 0.75%
Municipal Bond Fund 0.30%
Select Bond Fund 0.30%
Of the amounts received from the Fund, NMIS pays the sub-advisor for
the Growth and Income Stock Fund at an 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 an annual rate
of .50% of assets, reduced to .40% on assets over $100 million.
Each Fund pays the Distributor certain fees for shareholder servicing
and distribution expenses, which vary based on the class of shares.
Each Fund also pays the administrator, Northwestern Mutual Life, a
monthly fee at an annual rate of .10% plus costs for pricing
securities. This administration fee is for services including
recordkeeping, preparation of reports, filing tax returns and for fund
accounting (for the International Equity Fund). For the International
Equity Fund, Northwestern Mutual Life wavies a portion of its fee
equal to the fund accounting fee paid to Brown Brothers Harriman & Co.
In addition, each Fund pays transfer agent and custodian fees, outside
professional and auditing fees, registration fees, trademark fees,
organizational costs, insurance premiums, Director's fees and
expenses, and the printing and mailing costs of sending reports and
other information to existing shareholders.
NMIS and affiliates have agreed to waive their 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
following amounts:
Fund Class A Class B
---- ------- -------
Aggressive Growth Stock Fund 1.30% 1.95%
International Equity Fund 1.65% 2.30%
Growth Stock Fund 1.30% 1.95%
Growth and Income Stock Fund 1.20% 1.85%
B-61
<PAGE>
Index 500 Stock Fund 0.85% 1.50%
Asset Allocation Fund 1.35% 2.00%
High Yield Bond Fund 1.30% 1.95%
Municipal Bond Fund 0.85% 1.50%
Select Bond Fund 0.85% 1.50%
Note 3: Organizational costs and initial registration expenses are being
deferred and amortized over the period of benefit, but not to exceed
sixty months from the Fund's commencement of operations. These costs
were advanced by the Advisor and will be reimbursed by the Funds.
Note 4: MSF intends to comply with the requirements of the Internal Revenue
Code necessary to qualify as a regulated investment company and to
make the requisite distributions of income and capital gains to their
shareholders sufficient to relieve it from all or substantially all
Federal income taxes.
B-62
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholder and Board
of Directors of Mason Street Funds, Inc.
In our opinion, the accompanying statements of assets and liabilities present
fairly, in all material respects, the financial position 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 and Select Bond Fund (constituting Mason Street Funds, Inc.,
hereafter referred to as the "Funds") at March 3, 1997, in conformity with
generally accepted accounting principles. We conducted our audits of these
financial statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinions expressed above.
Price Waterhouse LLP
Milwaukee, Wisconsin
March 4, 1997
B-63
<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
