<PAGE>
REGISTRATION NOs. 333-17361
811-07961
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
-----
PRE-EFFECTIVE AMENDMENT NO.
----- -----
POST-EFFECTIVE AMENDMENT NO. 3 X
----- -----
AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY
ACT OF 1940
-----
AMENDMENT NO. 5 X
----- -----
MASON STREET FUNDS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
720 EAST WISCONSIN AVENUE
MILWAUKEE, WISCONSIN 53202
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(414) 271-1444
(REGISTRANT'S TELEPHONE NUMBER)
MERRILL C. LUNDBERG
THE NORTHWESTERN MUTUAL LIFE INSURANCE COMPANY
LAW DEPARTMENT
720 EAST WISCONSIN AVENUE
MILWAUKEE, WISCONSIN 53202
(NAME AND ADDRESS OF AGENT FOR SERVICE)
IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE (CHECK APPROPRIATE BOX)
[ ] IMMEDIATELY UPON FILING PURSUANT TO PARAGRAPH (b)
[ ] ON (DATE) PURSUANT TO PARAGRAPH (b)
[ ] 60 DAYS AFTER FILING PURSUANT TO PARAGRAPH (a)(1)
[ ] ON (DATE) PURSUANT TO PARAGRAPH (a)(1)
[ X ] 75 DAYS AFTER FILING PURSUANT TO PARAGRAPH (a)(2)
[ ] ON (DATE) PURSUANT TO PARAGRAPH (a)(2) OF RULE 485
[ ] THIS POST-EFFECTIVE AMENDMENT DESIGNATES A NEW EFFECTIVE DATE FOR
A PREVIOUSLY FILED POST-EFFECTIVE AMENDMENT.
<PAGE>
MASON STREET FUNDS, INC.
CROSS REFERENCE SHEET
Cross reference sheet showing location in Prospectus of information
required by the Items in Part A of Form N-1A.
ITEM NUMBER HEADING IN PROSPECTUS
1 Cover Page
2 Summary
3 Expense Information
4 The Funds In Detail
5 *
6 About the Advisors, Management of the
Funds
7 Buying And Selling Fund Shares,
Shareholders Guide, Distributions and
Taxes
8 Buying And Selling Fund Shares,
Shareholders Guide
9 Financial Highlights
* Indicates inapplicable or negative
<PAGE>
BOND FUNDS MULTI - ASSET FUND STOCK FUNDS
[ LOGO ]
MASON STREET
FUNDS
P R O S P E C T U S
JULY 12 , 1 9 9 9
<PAGE>
MASON STREET FUNDS PROSPECTUS JULY 12, 1999
This Prospectus offers you eleven mutual funds presenting you with a wide choice
of investment objectives. Each Fund identified below is a series of Mason Street
Funds-Registered Trademark-, Inc.
- - Small Cap Growth Stock Fund
- - Aggressive Growth Stock Fund
- - International Equity Fund
- - Index 400 Stock 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
The Securities and Exchange Commission has not approved or disapproved these
securities or passed upon the adequacy of this prospectus. Any representation
to the contrary is a criminal offense.
1
<PAGE>
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.
C O N T E N T S
<TABLE>
<S> <C>
SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . __
Funds at a Glance . . . . . . . . . . . . . . . . . . . . . . . . . . __
Risk Comparison . . . . . . . . . . . . . . . . . . . . . . . . . . . __
Expense Information . . . . . . . . . . . . . . . . . . . . . . . . . __
PERFORMANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . __
THE FUNDS IN DETAIL . . . . . . . . . . . . . . . . . . . . . . . . . __
Stock Funds Category. . . . . . . . . . . . . . . . . . . . . . . . . __
Multi-Asset Fund Category . . . . . . . . . . . . . . . . . . . . . . __
Bond Funds Category . . . . . . . . . . . . . . . . . . . . . . . . . __
Other Fund Policies and Associated Risks. . . . . . . . . . . . . . . __
Investment Restrictions . . . . . . . . . . . . . . . . . . . . . . . __
MANAGEMENT OF THE FUNDS . . . . . . . . . . . . . . . . . . . . . . . __
BUYING AND SELLING FUND SHARES. . . . . . . . . . . . . . . . . . . . __
Investment Minimums . . . . . . . . . . . . . . . . . . . . . . . . . __
Flexible Sales Charge Options . . . . . . . . . . . . . . . . . . . . __
How Shares are Priced . . . . . . . . . . . . . . . . . . . . . . . . __
SHAREHOLDERS' GUIDE . . . . . . . . . . . . . . . . . . . . . . . . . __
How to Buy Shares . . . . . . . . . . . . . . . . . . . . . . . . . . __
How to Exchange Shares. . . . . . . . . . . . . . . . . . . . . . . . __
How to Sell Shares. . . . . . . . . . . . . . . . . . . . . . . . . . __
Quick Address and Telephone Reference . . . . . . . . . . . . . . . . __
DISTRIBUTIONS AND TAXES . . . . . . . . . . . . . . . . . . . . . . . __
OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . __
APPENDIX A - GLOSSARY . . . . . . . . . . . . . . . . . . . . . . . . __
APPENDIX B. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . __
</TABLE>
2
<PAGE>
S U M M A R Y
This section will give you a brief summary of the Funds and their investment
objectives, strategies, risks and performance. Please refer to the detailed
description of investment objectives and policies (beginning at p. __) for those
Funds you wish to purchase. A glossary of terms is included in Appendix A.
STOCK FUNDS
SMALL CAP GROWTH STOCK FUND
OBJECTIVE: To seek long term growth of capital primarily by investing in the
common stocks of companies which can be expected to increase sales and earnings
at a pace which will exceed the growth rate of the U.S. economy over an extended
period.
PORTFOLIO: Primarily common stocks of small capitalization companies.
STRATEGY: To identify and invest in companies with above-average potential for
growth.
AGGRESSIVE GROWTH STOCK FUND
OBJECTIVE: To seek long term growth of capital. This Fund also attempts to
achieve this goal primarily by investing in the common stocks of companies which
can be expected to increase sales and earnings at a pace which will exceed the
growth rate of the U.S. economy over an extended period.
PORTFOLIO: Primarily common stocks of medium- and small-sized companies.
STRATEGY: To identify and invest in companies with above-average potential for
growth.
INTERNATIONAL EQUITY FUND
OBJECTIVE: To seek long-term growth of capital by investing primarily in stocks
of companies outside the U.S.
PORTFOLIO: Primarily common stocks of companies in foreign countries.
STRATEGY: To identify and invest in the under-valued stocks of foreign
companies offering the greatest discounts to their long-term values.
INDEX 400 STOCK FUND
OBJECTIVE: To seek investment results that approximate the performance of the
S&P 400-Registered Trademark- Index, by investing in stocks included in the S&P
400-Registered Trademark- Index.
STRATEGY: To capture mid-cap market performance by investing in a portfolio
modeled after a mid-cap stock index.
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 and to select high-quality stocks from industries with
the best earnings 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 Standard & Poor's 500 Composite
Stock Price Index ("S&P 500-Registered Trademark- Index").
INDEX 500 STOCK FUND
OBJECTIVE: To seek investment results that approximate the performance of the
S&P 500-Registered Trademark- Index, by investing in stocks included in the S&P
500-Registered Trademark- Index.
STRATEGY: To capture broad market performance by investing in a portfolio
modeled after a broadly based stock index.
MULTI-ASSET FUND
ASSET ALLOCATION FUND
OBJECTIVE: To seek to realize as high a level of total return, including
current income and capital appreciation, as is consistent with reasonable
investment risk. The Fund will follow a flexible policy for allocating assets
among common stocks, bonds and cash.
PORTFOLIO: The normal range of investments is 50-70% stocks, 25-35% bonds and
0-15% cash. Up to 50% of its stock allocation may be invested in foreign stocks.
See "Foreign Securities," p. __.
STRATEGY: To adjust the mix between asset sectors to capitalize on the changing
financial markets and economic conditions.
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 and to generate superior performance by selecting
companies with stable or improving credit fundamentals.
MUNICIPAL BOND FUND
OBJECTIVE: To seek a high level of current income exempt from federal income
taxes, consistent with the preservation of capital, by investing primarily in
investment-grade municipal obligations.
3
<PAGE>
PORTFOLIO: Diversified investment-grade bonds, with the ability to invest up to
20% of its assets in lower-rated securities.
STRATEGY: To actively manage the portfolio to take advantage of changes in
interest rates, quality, sector and maturity of fixed income securities.
SELECT BOND FUND
OBJECTIVE: To seek high income and capital appreciation, consistent with
preservation of capital.
PORTFOLIO: Diversified investment-grade corporate, mortgage-backed, 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.
PRIMARY RISKS
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. Loss of money is a risk
of investing in any Fund.
RISKS FOR STOCKS Stock prices have historically outperformed other asset
classes over the long term, but stock prices tend to go up and down more
dramatically over the shorter term. These price movements may result from
factors affecting individual companies, industries, or the stock market as a
whole. Risks include adverse general economic conditions as well as adverse
financial experience of industries and companies. These risks apply primarily
for the Stock Funds and the Asset Allocation Fund.
GROWTH STOCKS are typically priced higher than other stocks, in relation to
earnings and other measures, because investors believe they have more growth
potential. This potential may or may not be realized and growth stock prices
tend to fluctuate more dramatically than the overall stock market. These risks
are presented primarily for the Small Cap Growth, Aggressive Growth and Growth
Stock Funds. These risks may also affect the performance of the other Stock
Funds and the Asset Allocation Fund.
VALUE STOCKS are selected because they seem attractively priced. The main risks
are that the relatively low price for a stock may turn out to reflect low value
or low growth potential, or the market may not recognize the real value of the
stock for a long time. These risks are presented primarily for the Growth and
Income Stock and International Equity Funds. These risks may also affect the
performance of the other Stock Funds and the Asset Allocation Fund.
SMALL CAP STOCKS may involve greater risks because smaller companies often have
a limited track record, narrower markets and more limited managerial and
financial resources than larger, more established companies. The prices of these
stocks tend to be more volatile and the issuers face greater risk of business
failure. These risks are presented primarily for the Small Cap Growth and
Aggressive Growth Stock Funds.
RISKS FOR FIXED INCOME SECURITIES
INTEREST RATE RISK Bond prices rise and fall in response to changes in market
interest rates. When interest rates rise, bond prices fall. This effect is
greater for longer term bonds, and relatively minor for short-term cash
instruments that are about to mature. Interest rate risk is presented primarily
for the High Yield, Municipal and Select Bond Funds and the Asset Allocation
Fund.
CREDIT RISK Bond prices reflect the risk of default. The credit rating assigned
to a fixed income issue generally reflects the credit risk. High yield fixed
income securities present more credit risk than investment grade issues. Credit
risk is presented primarily for the High Yield Bond Fund, the Select Bond Fund
and the Asset Allocation Fund.
RISKS FOR INTERNATIONAL SECURITIES Foreign securities present the investment
risks that are inherent in all investments in securities as well as an array of
special risk considerations, including currency risks. Some of these risks are
described in this prospectus. A longer description is included in the Statement
of Additional Information. The risks associated with foreign securities are
presented primarily for the International Equity, Asset Allocation, Select Bond
and High Yield Bond Funds. Other Funds may also invest a portion of their
assets in foreign securities and, to that extent, the performance of those Funds
may be affected by the associated risks.
RISKS FOR FINANCIAL FUTURES CONTRACTS All of the Funds may use financial
futures contracts in pursuit of their investment objectives. These instruments
are used as a hedge against changes in the market value of common stocks or
changes in prevailing levels of interest rates. Successful use of these
instruments requires special skills, knowledge and techniques. Gains or losses
from positions in financial futures contracts may be much greater than the
amounts invested.
ASSET ALLOCATION RISK In addition to the risks involved with each kind of
securities there is the risk that an investor will hold the wrong mix of
securities at any point in time. This risk is especially important for the
Asset Allocation Fund, but it is a consideration for all of the Funds. It is
also likely to be the most important consideration for you as an individual
investor.
RISKS FOR ALL SECURITIES The value of a security on a given date depends
entirely on its market price. Investors necessarily rely on the integrity of
the marketplace. There is no guarantee that the securities markets will
function in an orderly manner. Illiquidity may make it difficult for a Fund to
buy or sell a security or to price the security fairly.
4
<PAGE>
PERFORMANCE
The following bar charts illustrate the risks of investing in the Funds by
showing how the performance of each Fund has varied. Performance of Class A
shares is shown. No shares of the Small Cap Growth Stock and Index 400 Stock
Funds were outstanding during the periods shown.
AGGRESSIVE GROWTH STOCK FUND
ANNUAL TOTAL RETURNS
[CHART]
<TABLE>
<CAPTION>
1997 1998
- ---- ----
<S> <C>
34.85%* 13.98%
</TABLE>
THE TOTAL RETURN FOR THE PERIOD 1/1/99 - 3/31/99 WAS -5.11%
Best Quarter: 4th-1998 29.21% Worst Quarter: 3rd-1998 -20.86%
GROWTH STOCK FUND
ANNUAL TOTAL RETURNS
[CHART]
<TABLE>
<CAPTION>
1997 1998
- ---- ----
<S> <C>
28.52%* 27.47%
</TABLE>
THE TOTAL RETURN FOR THE PERIOD 1/1/99 - 3/31/99 WAS 4.82%
Best Quarter: 4th-1998 22.09% Worst Quarter: 3rd-1998 -11.89%
INDEX 500 STOCK FUND
ANNUAL TOTAL RETURNS
[CHART]
<TABLE>
<CAPTION>
1997 1998
- ---- ----
<S> <C>
28.80%* 27.71%
</TABLE>
THE TOTAL RETURN FOR THE PERIOD 1/1/99 - 3/31/99 WAS 4.87%
Best Quarter: 4th-1998 21.13% Worst Quarter: 3rd-1998 -10.01%
INTERNATIONAL EQUITY
ANNUAL TOTAL RETURNS
[CHART]
<TABLE>
<CAPTION>
1997 1998
- ---- ----
<S> <C>
- -1.63%* -1.08%
</TABLE>
THE TOTAL RETURN FOR THE PERIOD 1/1/99 - 3/31/99 WAS 1.34%
Best Quarter: 4th-1998 14.11% Worst Quarter: 3rd-1998 -17.34%
GROWTH AND INCOME STOCK FUND
ANNUAL TOTAL RETURNS
[CHART]
<TABLE>
<CAPTION>
1997 1998
- ---- ----
<S> <C>
27.07%* 22.08%
</TABLE>
THE TOTAL RETURN FOR THE PERIOD 1/1/99 - 3/31/99 WAS 1.61%
Best Quarter: 4th-1998 21.43% Worst Quarter: 3rd-1998 -11.11%
ASSET ALLOCATION FUND
ANNUAL TOTAL RETURNS
[CHART]
<TABLE>
<CAPTION>
1997 1998
- ---- ----
<S> <C>
18.60%* 14.10%
</TABLE>
THE TOTAL RETURN FOR THE PERIOD 1/1/99 - 3/31/99 WAS 1.05%
Best Quarter: 4th-1998 13.50% Worst Quarter: 3rd-1998 -9.00%
5
<PAGE>
HIGH YIELD BOND FUND
ANNUAL TOTAL RETURNS
[CHART]
<TABLE>
<CAPTION>
1997 1998
- ---- ----
<S> <C>
17.79%* -1.90%
</TABLE>
THE TOTAL RETURN FOR THE PERIOD 1/1/99 - 3/31/99 WAS -1.97%
Best Quarter: 2nd-1997 8.96% Worst Quarter: 3rd-1998 -10.57%
MUNICIPAL BOND FUND
ANNUAL TOTAL RETURNS
[CHART]
<TABLE>
<CAPTION>
1997 1998
- ---- ----
<S> <C>
10.47%* 6.65%
</TABLE>
THE TOTAL RETURN FOR THE PERIOD 1/1/99 - 3/31/99 WAS 0.92%
Best Quarter: 2nd-1997 4.14% Worst Quarter: 4th-1998 0.92%
SELECT BOND FUND
ANNUAL TOTAL RETURNS
[CHART]
<TABLE>
<CAPTION>
1997 1998
- ---- ----
<S> <C>
10.74%* 5.68%
</TABLE>
THE TOTAL RETURN FOR THE PERIOD 1/1/99 - 3/31/99 WAS 0.20%
Best Quarter: 2nd-1997 4.48% Worst Quarter: 3rd-1998 -0.80%
*Total return is not annualized.
Sales loads are not reflected in the bar chart. Returns would be less than those
shown if sales loads were reflected.
How a Fund has performed in the past is not necessarily an indication of how the
Fund will perform in the future.
6
<PAGE>
The following table further illustrates the risks of investing in the Funds by
showing how each Fund's average annual returns for the periods shown ending
December 31, 1998, compare with the returns of certain indexes that measure
broad market performance. This table assumes that the maximum initial sales
charge was paid for Class A shares and that the shares were redeemed at the end
of the applicable period and the maximum contingent deferred sales charge was
paid for Class B shares. No shares of the Small Cap Growth Stock and Index 400
Stock Funds were outstanding during the periods shown.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Since Inception
1 Year (annualized)*
------ ---------------
<S> <C> <C>
AGGRESSIVE GROWTH STOCK FUND - CLASS A 8.60% 24.28%
AGGRESSIVE GROWTH STOCK FUND - CLASS B 9.25% 25.05%
Wilshire Small Cap Index(1). . . . . . . . . . -0.36% 14.95%
Wilshire Next 1750 Index(2). . . . . . . . . . 0.83% 16.79%
INTERNATIONAL EQUITY FUND - CLASS A -5.78% -4.24%
INTERNATIONAL EQUITY FUND - CLASS B -5.41% -4.25%
Morgan Stanley Capital International 20.33% 13.41%
EAFE (Europe-Australasia-Far East) Index
GROWTH STOCK FUND - CLASS A 21.44% 28.88%
GROWTH STOCK FUND - CLASS B 22.79% 29.82%
S&P 500 Index . . . . . . . . . . . . . . . . 28.50% 33.86%
GROWTH AND INCOME STOCK FUND - CLASS A 16.24% 24.93%
GROWTH AND INCOME STOCK FUND - CLASS B 17.38% 25.73%
S&P 500 Index . . . . . . . . . . . . . . . . 28.50% 33.86%
INDEX 500 STOCK FUND - CLASS A 21.68% 29.18%
INDEX 500 STOCK FUND - CLASS B 22.93% 30.16%
S&P 500 Index . . . . . . . . . . . . . . . . 28.50% 33.86%
ASSET ALLOCATION FUND - CLASS A 8.65% 15.57%
ASSET ALLOCATION FUND - CLASS B 9.33% 16.07%
Merrill Lynch Domestic Master Index(3) . . . . 8.87% 10.98%
S&P 500 Index(4) . . . . . . . . . . . . . . . 28.50% 33.86%
Merrill Lynch 91-Day T-Bill(5) . . . . . . . . 5.23% 5.29%
HIGH YIELD BOND FUND - CLASS A -6.59% 5.62%
HIGH YIELD BOND FUND - CLASS B -6.04% 5.79%
Lehman Brothers High Yield Intermediate
Market Index . . . . . . . . . . . . . . . . . 1.49% 6.83%
MUNICIPAL BOND FUND - CLASS A 1.55% 6.79%
MUNICIPAL BOND FUND - CLASS B 1.95% 6.89%
Lehman Brothers Municipal Bond Index . . . . . 6.48% 9.12%
Merrill Lynch Domestic Master Index . . . . . 8.87% 10.98%
- -------------------------------------------------------------------------------
</TABLE>
*The Funds commenced operations on March 31, 1997.
(1)The Wilshire Next 1750 is an unmanaged, equally weighed index. Included
in this index are those stocks which are ranked 750 to 2500 by market
capitalization in the Wilshire 5000. The largest sectors represented in this
index are technology, financial services and consumer services. Market
capitalization ranges from $1.8 billon to $244 million.
(2)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 weighed in this unmanaged index. The
average market capitalization is approximately $930 million. The largest sector
weightings include technology, financial services, and consumer services.
(3)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.
7
<PAGE>
(4) The Standard & Poor's 500 Composite Stock Price Index is an unmanaged
index of 500 selected common stocks, most of which are listed on the New York
Stock Exchange. The index is heavily weighted toward stocks with large market
capitalizations and represents approximately two-thirds of the total market
value of all domestic common stocks.
(5)The Merrill Lynch 91-Day T-Bill Index is comprised of a single issue
purchased at the beginning of each month and held for a full month. The issue
selected at each month-end rebalancing is the outstanding Treasury Bill that
matures closest to, but not beyond, three months from the rebalancing date.
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.
SHAREHOLDER TRANSACTION EXPENSES (ALL FUNDS)
<TABLE>
<CAPTION>
Class A Class B
<S> <C> <C>
Maximum Sales Charge
on Purchases (as % of
Offering Price)(1) 4.75% 0.00%
- -----------------------------------------------------------------
Maximum Contingent
Deferred Sales Charge(2) 0.00% 5.00%
- -----------------------------------------------------------------
Redemption fee(3) None None
- -----------------------------------------------------------------
Exchange fee None None
- -----------------------------------------------------------------
</TABLE>
(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 LESSER OF THE VALUE OF THE
SHARES YOU REDEEM OR THE COST OF THE SHARES. THE MAXIMUM CDSC ONLY APPLIES
IF YOU SELL YOUR SHARES DURING THE FIRST YEAR AFTER THE PURCHASE OF LESS
THAN $50,000. THE SCHEDULE IS AS FOLLOWS:
5.00% first year
4.00% second year
3.00% third year
3.00% fourth year
2.00% fifth year
1.00% sixth year
LARGER PURCHASES OF CLASS B SHARES MAY BE SUBJECT TO A REDUCED CDSC. SEE
"CONTINGENT DEFERRED SALES CHARGE" AT P. __.
(3) A WIRE TRANSFER FEE (CURRENTLY $15) MAY BE IMPOSED ON A REDEMPTION WHEN YOU
HAVE THE PROCEEDS WIRE TRANSFERRED.
ANNUAL FUND OPERATING EXPENSES(1)
<TABLE>
<CAPTION>
Small Cap Growth Aggressive Growth International
Class A Class B Class A Class B Class A Class B
M____(2) -- MAGAX(2) MAGHX(2) MEQAX(2) --
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Management Fees 0.85% 0.85% 0.75% 0.75% 0.85% 0.85%
- ----------------------------------------------------------------------------------------
12b-1 Distribution
and Service Fees(3) 0.35% 1.00% 0.35% 1.00% 0.35% 1.00%
- ----------------------------------------------------------------------------------------
Other Expenses
(before waiver)(4) ___% ___% ___% ___% ___% ___%
- ----------------------------------------------------------------------------------------
Total Operating Expenses
(before waiver)(4) ___% ___% ___% ___% ___% ___%
- ----------------------------------------------------------------------------------------
Fee Waiver(4)
- ----------------------------------------------------------------------------------------
Net Total
Operating Expenses(4)
- ----------------------------------------------------------------------------------------
Index 400 Growth Growth and Income
Class A Class B Class A Class B Class A Class B
M____(2) -- MGSAX(2) MGSBX(2) MSKAX(2) --
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Management Fees 0.40% 0.40% 0.75% 0.75% 0.65% 0.65%
- ----------------------------------------------------------------------------------------
12b-1 Distribution
and Service Fees(3) 0.35% 1.00% 0.35% 1.00% 0.35% 1.00%
- ----------------------------------------------------------------------------------------
Other Expenses
(before waiver)(4) ___% ___% ___% ___% ___% ___%
- ----------------------------------------------------------------------------------------
Total Operating Expenses
(before waiver)(4) ___% ___% ___% ___% ___% ___%
- ----------------------------------------------------------------------------------------
Fee Waiver(4)
- ----------------------------------------------------------------------------------------
Net Total
Operating Expenses(4)
- ----------------------------------------------------------------------------------------
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
Index 500 Asset Allocation High Yield Bond Municipal Bond Select Bond
Class A Class B Class A Class B Class A Class B Class A Class B Class A Class B
MISAX(2) MISBX(2) MASSX(2) -- MHYAX(2) -- MMBAX(2) -- MBDAX(2) --
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Management Fees 0.30% 0.30% 0.70% 0.70% 0.75% 0.75% 0.30% 0.30% 0.30% 0.30%
- ---------------------------------------------------------------------------------------------------------------------------------
12b-1 Distribution
and Service Fees(3) 0.35% 1.00% 0.35% 1.00% 0.35% 1.00% 0.35% 1.00% 0.35% 1.00%
- ---------------------------------------------------------------------------------------------------------------------------------
Other Expenses
(before waiver)(4) ___% ___% ___% ___% ___% ___% ___% ___% ___% ___%
- ---------------------------------------------------------------------------------------------------------------------------------
Total Operating Expenses
(before waiver)(4) ___% ___% ___% ___% ___% ___% ___% ___% ___% ___%
- ---------------------------------------------------------------------------------------------------------------------------------
Fee Waiver(4)
- ---------------------------------------------------------------------------------------------------------------------------------
Net Total
Operating Expenses(4)
- ---------------------------------------------------------------------------------------------------------------------------------
</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.
(2) NASDAQ SYMBOLS. A NASDAQ SYMBOL IS NOT AVAILABLE FOR CLASS B SHARES OF
SOME FUNDS.
(3) 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.
(4) NMIS AND ITS AFFILIATES HAVE AGREED TO WAIVE THEIR FEES AND ABSORB CERTAIN
OTHER OPERATING EXPENSES, UNTIL AT LEAST MARCH 31, 2000, TO THE EXTENT
NECESSARY SO THAT NET TOTAL OPERATING EXPENSES WILL NOT EXCEED THE AMOUNT
SHOWN FOR EACH FUND. AFTER MARCH 31, 2000, NMIS EXPECTS THE FUNDS' NET
TOTAL OPERATING EXPENSES, AFTER WAIVER, NOT TO EXCEED THE AMOUNTS SHOWN.
THE SMALL CAP GROWTH STOCK AND INDEX 400 STOCK FUNDS' "OTHER EXPENSES" ARE
BASED ON ESTIMATED AMOUNTS FOR THE CURRENT FISCAL YEAR.
9
<PAGE>
EXPENSE EXAMPLES
These Examples are intended to help you compare the cost of investing in a Fund
with the cost of investing in other mutual funds. The Examples assume that you
invest $10,000 in the Fund for the time periods indicated and then redeem all of
your shares at the end of those periods. The Examples also assume that your
investment has a 5% return each year and that the Funds' operating expenses
remain the same. The examples assume you pay the maximum sales charges.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
<TABLE>
<CAPTION>
Fund 1 Year 3 Years 5 Years 10 Years
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>
Small Cap Growth Stock Fund $611 $709 $901 $ 948 $1,214 $1,319 $2,121 $2,272
- -------------------------------------------------------------------------------------------------------------
Aggressive Growth Stock Fund $601 $698 $868 $ 912 $1,154 $1,252 $1,968 $2,107
- -------------------------------------------------------------------------------------------------------------
International Equity Fund $635 $733 $971 $1,018 $1,329 $1,430 $2,337 $2,473
- -------------------------------------------------------------------------------------------------------------
Index 400 Stock Fund $567 $663 $764 $ 806 $ 977 $1,073 $1,592 $1,734
- -------------------------------------------------------------------------------------------------------------
Growth Stock Fund $601 $698 $868 $ 912 $1,154 $1,252 $1,968 $2,107
- -------------------------------------------------------------------------------------------------------------
Growth and Income Stock Fund $591 $688 $838 $ 882 $1,103 $1,201 $1,860 $1,999
- -------------------------------------------------------------------------------------------------------------
Index 500 Stock Fund $558 $653 $733 $ 774 $ 924 $1,018 $1,474 $1,615
- -------------------------------------------------------------------------------------------------------------
Asset Allocation Fund $606 $703 $882 $ 927 $1,179 $1,278 $2,022 $2,160
- -------------------------------------------------------------------------------------------------------------
High Yield Bond Fund $601 $698 $868 $ 912 $1,154 $1,252 $1,968 $2,107
- -------------------------------------------------------------------------------------------------------------
Municipal Bond Fund $558 $653 $733 $ 774 $ 924 $1,018 $1,474 $1,615
- -------------------------------------------------------------------------------------------------------------
Select Bond Fund $558 $653 $733 $ 774 $ 924 $1,018 $1,474 $1,615
</TABLE>
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:
<TABLE>
<CAPTION>
Fund 1 Year 3 Years 5 Years 10 Years
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>
Small Cap Growth Stock Fund $611 $209 $901 $648 $1,214 $1,119 $2,121 $2,272
- -------------------------------------------------------------------------------------------------------------
Aggressive Growth Stock Fund $601 $198 $868 $612 $1,154 $1,052 $1,968 $2,107
- -------------------------------------------------------------------------------------------------------------
International Equity Fund $635 $233 $971 $718 $1,329 $1,230 $2,387 $2,473
- -------------------------------------------------------------------------------------------------------------
Index 400 Stock Fund $567 $163 $764 $506 $ 977 $ 873 $1,592 $1,734
- -------------------------------------------------------------------------------------------------------------
Growth Stock Fund $601 $198 $868 $612 $1,154 $1,052 $1,968 $2,107
- -------------------------------------------------------------------------------------------------------------
Growth and Income Stock Fund $591 $188 $838 $582 $1,103 $1,001 $1,860 $1,999
- -------------------------------------------------------------------------------------------------------------
Index 500 Stock Fund $558 $153 $733 $474 $ 924 $ 818 $1,474 $1,615
- -------------------------------------------------------------------------------------------------------------
Asset Allocation Fund $606 $203 $882 $627 $1,179 $1,078 $2,022 $2,160
- -------------------------------------------------------------------------------------------------------------
High Yield Bond Fund $601 $198 $868 $612 $1,154 $1,052 $1,968 $2,107
- -------------------------------------------------------------------------------------------------------------
Municipal Bond Fund $558 $153 $733 $474 $ 924 $ 818 $1,474 $1,615
- -------------------------------------------------------------------------------------------------------------
Select Bond Fund $558 $153 $733 $474 $ 924 $ 818 $1,474 $1,615
</TABLE>
10
<PAGE>
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.
ABOUT THE ADVISORS
Northwestern Mutual Investment Services, LLC ("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 fifth largest life insurance
company in the U.S., with more than $80 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 142 years. In
addition to the Funds, NMIS has been responsible for directing the investments
of 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.
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 pp.__ for a
description of the specific sales charges or contingent deferred sales charges
which might apply to your purchase.
11
<PAGE>
P E R F O R M A N C E
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.
MASON STREET FUND PERFORMANCE
The figures set forth below reflect each Fund's total return for the fiscal year
ended March 31, 1999, and the average annual total return for the two fiscal
years ended March 31, 1999 (since inception). These figures are based on the
actual performance of the Funds. The Funds' investment advisor and its
affiliates have voluntarily agreed to limit certain Fund expenses. Without this
agreement total return figures would have been lower. Past performance is not
necessarily indicative and is no guarantee of future performance of the Funds.
CLASS A SHARES
<TABLE>
<CAPTION>
WITH THE MAXIMUM WITH NO INITIAL
INITIAL SALES CHARGE SALES CHARGE(1)
Fund 1 Year Since Inception 1 Year Since Inception
(annualized) (annualized)
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AGGRESSIVE GROWTH STOCK FUND -8.33% 17.86% -3.78% 20.77%
- ---------------------------------------------------------------------------------------------------
INTERNATIONAL EQUITY FUND -13.20% -3.09% -8.85% -0.69%
- ---------------------------------------------------------------------------------------------------
GROWTH STOCK FUND 12.77% 27.89% 18.36% 31.04%
- ---------------------------------------------------------------------------------------------------
GROWTH AND INCOME STOCK FUND 5.82% 22.53% 11.09% 25.55%
- ---------------------------------------------------------------------------------------------------
INDEX 500 STOCK FUND 12.27% 28.18% 17.88% 31.34%
- ---------------------------------------------------------------------------------------------------
ASSET ALLOCATION FUND 1.39% 14.12% 6.41% 16.94%
- ---------------------------------------------------------------------------------------------------
HIGH YIELD BOND FUND -12.26% 3.87% -7.87% 6.43%
- ---------------------------------------------------------------------------------------------------
MUNICIPAL BOND FUND 1.33% 6.42% 6.42% 9.04%
- ---------------------------------------------------------------------------------------------------
SELECT BOND FUND -0.39% 5.68% 4.60% 8.29%
- ---------------------------------------------------------------------------------------------------
</TABLE>
(1) CERTAIN PERSONS MAY PURCHASE CLASS A SHARES THAT ARE NOT SUBJECT TO THE
CLASS A INITIAL SALES CHARGE AND CERTAIN OTHER PERSONS MAY PURCHASE CLASS A
SHARES SUBJECT TO LESS THAN THE MAXIMUM INITIAL SALES CHARGE (SEE "WHEN
WILL THE SALES CHARGE ON CLASS A SHARES BE REDUCED OR WAIVED?" AT P. __).
CLASS B SHARES
<TABLE>
<CAPTION>
WITH REDEMPTION WITH NO REDEMPTION
Fund 1 Year Since Inception 1 Year Since Inception
(annualized) (annualized)
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AGGRESSIVE GROWTH STOCK FUND -8.12% 18.76% -4.35% 20.02%
- ---------------------------------------------------------------------------------------------------
INTERNATIONAL EQUITY FUND -12.79% -2.68% -9.36% -1.30%
- ---------------------------------------------------------------------------------------------------
GROWTH STOCK FUND 13.66% 29.06% 17.66% 30.22%
- ---------------------------------------------------------------------------------------------------
GROWTH AND INCOME STOCK FUND 6.58% 23.54% 10.41% 24.75%
- ---------------------------------------------------------------------------------------------------
INDEX 500 STOCK FUND 13.17% 29.39% 17.17% 30.55%
- ---------------------------------------------------------------------------------------------------
ASSET ALLOCATION FUND 1.77% 14.92% 5.77% 16.21%
- ---------------------------------------------------------------------------------------------------
HIGH YIELD BOND FUND -11.73% 4.45% -8.48% 5.71%
- ---------------------------------------------------------------------------------------------------
MUNICIPAL BOND FUND 1.72% 6.90% 5.72% 8.29%
- ---------------------------------------------------------------------------------------------------
SELECT BOND FUND 0.03% 6.20% 3.91% 7.56%
- ---------------------------------------------------------------------------------------------------
</TABLE>
Further information about the performance of the Funds is contained in Mason
Street Funds' annual report to shareholders, which may be obtained without
charge from your registered representative or by writing or calling the address
or phone number listed on p. __.
12
<PAGE>
SERIES FUND PORTFOLIO PERFORMANCE
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 March 31,
1999, adjusted to reflect the expenses of the Funds, including sales charges
where indicated. The investment policies of each of the Series Fund Portfolios
are substantially similar to those of the respective Mason Street
Funds.-Registered Trademark- THE PERFORMANCE DISCLOSED BELOW IS NOT THE
PERFORMANCE OF THE FUNDS BUT RATHER OF THE CORRESPONDING SERIES FUND PORTFOLIOS.
Although the five comparable Funds have substantially similar investment
objectives and policies and the same portfolio managers as the corresponding
Series Fund Portfolios, you should not assume that the Funds offered by this
prospectus will have the same future performance as the corresponding
Portfolios. For example, any Fund's future performance may be greater or less
than the performance of the corresponding Portfolio due to, among other things,
differences in expenses, asset sizes and cash flows between a Fund and the
corresponding 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 March 31, 1999:
<TABLE>
<CAPTION>
Corresponding Portfolio
Fund (Inception Date and Asset Size)
<S> <C>
AGGRESSIVE GROWTH STOCK
Aggressive Growth Stock
(November 30, 1990*)
$1,014.2 million
- ------------------------------------------------
GROWTH STOCK Growth Stock
(May 3, 1994)
$493.5 million
- ------------------------------------------------
GROWTH AND INCOME STOCK
Growth and Income Stock
(May 3, 1994)
$603.0 million
- ------------------------------------------------
HIGH YIELD BOND High Yield Bond
(May 3, 1994)
$174.8 million
- ------------------------------------------------
SELECT BOND Select Bond
(June 26, 1984)
$297.8 million
- ------------------------------------------------
</TABLE>
* INCLUDES PERFORMANCE OF PREDECESSOR FUND THAT WAS MERGED INTO THE SERIES
FUND ON MAY 3, 1994.
SERIES FUND PORTFOLIO PERFORMANCE
The following four tables show the average annualized total returns for the
Series Fund Portfolios and predecessor fund for the one-, three-, five- and
ten-year (or life of the Portfolio, if shorter) periods ended March 31, 1999.
These figures are based on the actual gross investment performance of the
Portfolios. From the gross investment performance figures, the maximum Net Total
Fund Operating Expenses shown in the fee table on pp. __ are deducted to arrive
at the net return. The first table for each Class reflects a deduction for the
maximum applicable sales charge, while the second table for each Class reflects
no deduction for sales charges. Performance figures will be lower when sales
charges are taken into effect.
ASSUMING CLASS A SHARES NET TOTAL FUND OPERATING EXPENSES AND
THE MAXIMUM INITIAL SALES CHARGE APPLICABLE TO CLASS A SHARES
<TABLE>
<CAPTION>
10 Years or
Since
Portfolio (Inception Date) 1 Year 3 Years 5 Years Inception
<S> <C> <C> <C> <C>
AGGRESSIVE GROWTH STOCK (NOVEMBER 30, 1990*) -15.79% 4.91% 13.03% 16.58%
- -------------------------------------------------------------------------------------------------------------------
GROWTH STOCK (MAY 3, 1994) 11.43% 21.99% NA 20.96%
- -------------------------------------------------------------------------------------------------------------------
GROWTH AND INCOME STOCK (MAY 3, 1994) 5.80% 20.26% NA 19.31%
- -------------------------------------------------------------------------------------------------------------------
HIGH YIELD BOND (MAY 3, 1994) -13.13% 6.36% NA 8.19%
- -------------------------------------------------------------------------------------------------------------------
SELECT BOND (JUNE 26, 1984) -0.03% 8.98% 5.93% 8.01%
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
ASSUMING CLASS A SHARES NET TOTAL FUND OPERATING EXPENSES
WITH NO INITIAL SALES CHARGE(1)
<TABLE>
<CAPTION>
10 Years or
Since
Portfolio (Inception Date) 1 Year 3 Years 5 Years Inception
<S> <C> <C> <C> <C>
AGGRESSIVE GROWTH STOCK (NOVEMBER 30, 1990*) -11.59% 6.63% 14.14% 17.26%
- -------------------------------------------------------------------------------------------------------------------
GROWTH STOCK (MAY 3, 1994) 16.99% 23.98% NA 22.16%
- -------------------------------------------------------------------------------------------------------------------
13
<PAGE>
GROWTH AND INCOME STOCK (MAY 3, 1994) 11.07% 22..23% NA 20.50%
- -------------------------------------------------------------------------------------------------------------------
HIGH YIELD BOND (MAY 3, 1994) -8.80% 8.10% NA 9.27%
- -------------------------------------------------------------------------------------------------------------------
SELECT BOND (JUNE 26, 1984) 4.95% 10.76% 6.96% 8.53%
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) CERTAIN PERSONS MAY PURCHASE CLASS A SHARES THAT ARE NOT SUBJECT TO THE
CLASS A INITIAL SALES CHARGE AND CERTAIN OTHER PERSONS MAY PURCHASE CLASS A
SHARES SUBJECT TO LESS THAN THE MAXIMUM INITIAL SALES CHARGE (SEE "WHEN WILL THE
SALES CHARGE ON CLASS A SHARES BE REDUCED OR WAIVED?" ON P.__).
ASSUMING CLASS B SHARES NET TOTAL FUND OPERATING EXPENSES
AND REDEMPTION AT THE END OF THE APPLICABLE TIME PERIOD
<TABLE>
<CAPTION>
10 Years or
Since
Portfolio (Inception Date) 1 Year 3 Years 5 Years Inception
<S> <C> <C> <C> <C>
AGGRESSIVE GROWTH STOCK (NOVEMBER 30, 1990*) -16.28% 5.00% 13.26% 16.48%
- --------------------------------------------------------------------------------------------------------------------
GROWTH STOCK (MAY 3, 1994) 12.26% 22.52% NA 21.09%
- --------------------------------------------------------------------------------------------------------------------
GROWTH AND INCOME STOCK (MAY 3, 1994) 6.35% 20.77% NA 19.42%
- --------------------------------------------------------------------------------------------------------------------
HIGH YIELD BOND (MAY 3, 1994) -13.38% 6.54% NA 8.12%
- --------------------------------------------------------------------------------------------------------------------
SELECT BOND (JUNE 26, 1984) 0.97% 5.55% 6.40% 7.98%
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
ASSUMING CLASS B SHARES NET TOTAL FUND OPERATING EXPENSES
AND NO REDEMPTION AT THE END OF THE APPLICABLE TIME PERIOD
<TABLE>
<CAPTION>
10 Years or
Since
Portfolio (Inception Date) 1 Year 3 Years 5 Years Inception
<S> <C> <C> <C> <C>
AGGRESSIVE GROWTH STOCK (NOVEMBER 30, 1990*) -12.28% 5.90% 16.38 16.48%
- --------------------------------------------------------------------------------------------------------------------
GROWTH STOCK (MAY 3, 1994) 16.26% 23.19% NA 21.38%
- --------------------------------------------------------------------------------------------------------------------
GROWTH AND INCOME STOCK (MAY 3, 1994) 10.35% 21.45% NA 19.72%
- --------------------------------------------------------------------------------------------------------------------
HIGH YIELD BOND (MAY 3, 1994) -9.38% 7.41% NA 8.56%
- --------------------------------------------------------------------------------------------------------------------
SELECT BOND (JUNE 26, 1984) 4.97% 6.44% 6.56% 7.98%
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
*INCLUDES PERFORMANCE OF PREDECESSOR FUND THAT WAS MERGED INTO THE SERIES
FUND ON MAY 3, 1994.
T H E F U N D S I N D E T A I L
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 p. __ 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 Funds'-Registered Trademark- Board of Directors
without a vote of the shareholders. This allows for flexibility in the
management of the Funds, for example, to permit investments in new types of
instruments. You will be notified of any changes that are material.
The investment horizon is the amount of time you should plan to hold your
investment in a Fund to increase the likelihood of achieving the Fund's
objective. Descriptions of ratings are provided in Appendix B.
STOCK FUNDS CATEGORY
STOCK FUNDS PROFILE
INVESTMENT OBJECTIVE:
---------------------------------------------------------------------------
Small Cap Growth Stock Fund
---------------------------------------------------------------------------
Aggressive Growth Stock Fund
International Equity Fund -Growth of Capital
Growth Stock Fund
---------------------------------------------------------------------------
Growth and Income Stock Fund -Growth of
Capital
and Income
---------------------------------------------------------------------------
Approximate the
Index 500 Stock Fund- S&P 500-Registered Trademark- Index
Performance
---------------------------------------------------------------------------
Index 400 Stock Fund Approximate the S&P 400-Registered
Trademark- Index Performance
---------------------------------------------------------------------------
PRIMARY HOLDINGS: Common Stocks
SHAREHOLDER'S INVESTMENT HORIZON: Long Term
WHO MAY WANT TO INVEST: These Funds may be appropriate for investors who are
willing to tolerate stock market fluctuations in return for potentially high
long-term returns. These Funds are designed for those looking for long-term
growth potential.
The fundamental risk associated with any common stock fund is the risk that the
value of the stocks it holds might decrease. Stock values may fluctuate in
response to the activities of an individual company or in response to general
market and/or economic conditions. Historically, common stocks have provided
greater long-term returns and have entailed greater
14
<PAGE>
short-term risks than other investment choices. Smaller or newer issuers are
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.
SMALL CAP GROWTH STOCK FUND
The investment objective of the Small Cap Growth Stock Fund is to achieve
long-term appreciation of capital. The Fund will seek to achieve this objective
primarily by investing in the common stocks of companies which can reasonably be
expected to increase their sales and earnings at a pace which will exceed the
growth rate of the nation's economy over an extended period. These companies,
for the most part, are small capitalization companies whose stock may experience
substantial price volatility. Under normal circumstances, the Fund will invest
at least 80% of its assets in stocks.
Because the Small Cap Growth Stock Fund will be investing in stocks which may
experience substantial price volatility, an investment in the Small Cap Growth
Stock Fund will present more risk than an investment in any of the other Funds.
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 80% 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 U.S. The Fund will invest at least 65% of its
assets in stocks of issuers in a minimum of three countries outside the U.S.
Although the Fund generally invests in common stocks, it may also invest in
preferred stocks and certain debt securities such as convertible bonds.
The strategy for the Fund will reflect a bottom-up, value-oriented and long-term
investment philosophy. In choosing equity investments, the Fund's manager will
focus on the market price of a company's securities in relation to the company's
long-term earnings, asset value and cash flow potential. A company's historical
value measures, including price/earnings ratio, profit margins and liquidation
value, will also be considered.
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.__.
INDEX 400 STOCK FUND
The investment objective of the Index 400 Stock Fund is to achieve investment
results that approximate the performance of the S&P Mid Cap 400 Stock Price
Index ("S&P 400 Index"). The Fund will attempt to meet this objective by
investing in stocks included in the S&P 400 Index in proportion to their
weightings in the index.
The S&P 400 Index* is composed of 400 common stocks. The companies included in
the S&P 400 Index are generally smaller than those that comprise the S&P 500
Index. See the description of the Index 500 Stock Fund below. The S&P 400 does
not include the very large issues that account for most of the weighting in the
S&P 500 Index. Most of the companies in the S&P 400 Index have a market value
in the range of $750 million to $5 billion. A few are smaller and a few are
larger.
The Index 400 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 375 of the 400 issues that comprise the S&P 400
Index. The Fund will not buy stocks that are not in the S&P 400 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 400 Stock Fund's ability to match the performance of the S&P 400 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
MIDCAP 400 INDEX-Registered Trademark-" AND "STANDARD & POOR'S MID CAP 400
INDEX-Registered Trademark-" ARE TRADEMARKS OF THE MCGRAW-HILL COMPANIES, 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.
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
15
<PAGE>
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 medium- and large-sized companies.
GROWTH AND INCOME STOCK FUND
The investment objective of the Growth and Income Stock Fund is 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 medium- and large-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-Registered
Trademark- 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 moderately
under-weight or over-weight selected economic sectors against the sector
weightings of the S&P 500-Registered Trademark- Index to seek to enhance the
Fund's total return or reduce fluctuations in market value relative to the S&P
500-Registered Trademark- 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.
The Growth and Income Stock Fund may engage in active trading of portfolio
securities. This increases the portfolio turnover rate and may increase
brokerage commissions and other transaction costs and the realization of tax
gains and losses.
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-Registered Trademark- Index"). The Fund will attempt
to meet this objective by investing in stocks included in the S&P 500-Registered
Trademark- Index in proportion to their weightings in the index.
The S&P 500-Registered Trademark- Index* is composed of 500 common stocks
representing approximately two-thirds 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-Registered Trademark- Index. The Fund will not buy stocks that are not in
the S&P 500-Registered Trademark- 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-Registered Trademark- 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", "S&P", "S&P 500", "STANDARD & POOR'S 500", AND "500" ARE
TRADEMARKS OF THE MCGRAW-HILL COMPANIES, INC. AND HAVE BEEN LICENSED FOR USE BY
NORTHWESTERN MUTUAL LIFE AND MASON STREET FUNDS-Registered Trademark-. 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, banker's acceptances,
corporate debt obligations, commercial paper, short-term U.S. Treasury
obligations, or temporarily hold assets in cash. Stock Funds other than the
Index 400 and Index 500 Stock Funds may invest all or a larger portion of their
assets in these investments for temporary defensive purposes. When adverse
conditions exist a Stock Fund may be hindered in its pursuit of its investment
objective because it may not invest, or may invest less, in the common stocks in
which it ordinarily invests. The Stock Funds may also invest in options
contracts, stock index futures contracts, including indexes on specific
industries, foreign currency futures and forward contracts and repurchase
agreements. For a description of these instruments and their risks, see the
Statement of Additional Information. 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 Small Cap
Growth Stock, Aggressive Growth Stock and Growth Stock Funds have the authority
to invest up to 25% of their assets in ordinary shares of foreign securities.
These Funds will normally not invest in ordinary shares of foreign securities,
but may do so from time to time. See "Foreign Securities," p.__. The Funds may
enter into firm
16
<PAGE>
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" in the Statement of
Additional Information.
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.
MULTI-ASSET FUND CATEGORY
ASSET ALLOCATION FUND PROFILE
INVESTMENT OBJECTIVE: Total Return
PRIMARY HOLDINGS: Common Stocks and Fixed Income Securities
SHAREHOLDER'S INVESTMENT HORIZON: Long Term
WHO MAY WANT TO INVEST: This Fund may 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 potentially high long-term returns. The Asset
Allocation Fund is designed for investors who want their investments actively
managed among the major asset classes in pursuit of potentially high total
return. It is not designed for an investor who wishes to have a consistent level
of income.
The value of the Fund's investments and income will vary from day to day, and
generally reflect market conditions, interest rates, and other company,
political or economic news. In the short-term, stock prices can fluctuate
dramatically in response to these factors. Over time, however, stocks have shown
greater appreciation potential than other types of securities. The prices of
fixed income securities generally move in the opposite direction from interest
rates. Investments in foreign securities may involve additional risks not
present when investing in comparable domestic securities.
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 depositary receipts) but will not invest more than 50% of its
equity investments in foreign equities. Foreign investments involve risks not
normally found when investing in securities of U.S. issuers. See "Foreign
Securities," p. __.
The bond portion of the portfolio may be invested in any of the types of
securities eligible for the Select Bond Fund or the High Yield Bond Fund. The
Fund may purchase securities on a "when-issued" or forward commitment basis.
Bonds purchased by the Fund will be primarily investment-grade debt obligations,
although the Fund may invest up to 10% of its total assets in
noninvestment-grade debt obligations.
The cash portion of the Fund may include, but is not limited to, debt securities
issued or guaranteed by the U.S. government or its agencies or
instrumentalities, commercial paper, banker's acceptances, certificates of
deposit and time deposits. The Fund may invest in obligations of domestic and
foreign banks and their subsidiaries and branches.
Within the asset-allocation categories described above, NMIS will allocate the
Fund's investments among countries (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. For a description of these instruments and their risks, see the
Statement of Additional Information.
17
<PAGE>
BOND FUNDS CATEGORY
BOND FUNDS PROFILE
INVESTMENT OBJECTIVE:
- -------------------------------------------------------
High Current Income
High Yield Bond Fund -and Capital Appreciation
- -------------------------------------------------------
High Level of Current
Municipal Bond Fund -Income Exempt from
Federal Income Taxes
and Preservation of Capital
- --------------------------------------------------------
High Income and
Select Bond Fund -Capital Appreciation
Consistent with
Preservation of Capital
- --------------------------------------------------------
PRIMARY HOLDINGS:
- --------------------------------------------------------
Corporate Bonds -
High Yield Bond Fund -Noninvestment-Grade
- --------------------------------------------------------
Municipal Bond Fund -Municipal Securities
- --------------------------------------------------------
Corporate Bonds -
Select Bond Fund -Investment-Grade
- --------------------------------------------------------
SHAREHOLDER'S INVESTMENT HORIZON:
Intermediate to Long Term
WHO MAY WANT TO INVEST: The Funds are designed for investors who primarily seek
current income.
THE HIGH YIELD BOND FUND is designed for investors who are willing to accept
higher levels of credit and market risks in return for potentially higher
return. Because of these risks, this Fund is not appropriate for short-term
investment purposes.
THE MUNICIPAL BOND FUND is designed for investors who want income that is exempt
from regular federal income tax and are willing to accept higher interest rate
risk and moderate credit risks.
THE SELECT BOND FUND is designed for investors who want moderate levels of
interest rate and credit risks while seeking high current income.
A fundamental risk associated with any fund investing in fixed income securities
is that fixed income securities tend to decline in value when interest rates
rise. This effect is generally greater for longer-term bonds, but they generally
offer higher yields to compensate for these risks. In addition, securities that
permit prepayment have the risk that they will be paid during periods when
interest rates are falling, which generally results in the proceeds being
invested at a lower rate of return.
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 Investors Service, Inc. ("Moody's") or
Standard & Poor's-Registered Trademark-. 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
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 credit and market 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 also invest up to 5% of its assets in other equity
securities, rights, warrants, options and other derivatives. The Fund may also
invest in restricted securities (securities that must be registered under the
Securities Act of 1933 before they may be offered or sold to the public). 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-Registered Trademark-, without
limit, when market conditions warrant a more defensive investment posture. When
adverse conditions exist the High Yield Bond Fund may be hindered in its pursuit
of its investment objective because it may not invest, or may invest less, in
the high yield/high risk securities in which it ordinarily invests.
The High Yield Bond Fund may invest in foreign securities consistent with its
investment objective. Such investments may be in U.S. currency denominated debt
issues or in debt
18
<PAGE>
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" in the Statement of Additional
Information.
The High Yield Bond Fund may engage in active trading of portfolio securities.
This increases the portfolio turnover rate and may increase transaction costs
and the realization of tax gains and losses.
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 U.S. 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. When adverse
market conditions exist the Municipal Bond Fund may be hindered in its pursuit
of its investment objective because it may not invest, or may invest less, in
the municipal bonds in which it ordinarily invests. 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 or Standard & Poor's-Registered Trademark- Ratings
Group ("S&P-Registered Trademark-"), 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," p. __. The Fund also
may invest in securities which, while not rated, are determined by the advisor
to be of comparable quality to those rated securities in which the Fund may
invest. For purposes of the 80% requirement described in this paragraph, such
unrated securities shall be deemed to have the ratings so determined.
While the Fund has no security maturity restrictions, its average maturity will
normally be ten 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 enter into interest rate futures contracts. For a description of
futures contracts and their risks, see the Statement of Additional Information.
Use of futures contracts may give rise to taxable income.
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.
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
U.S. government or its agencies.
The Municipal Bond Fund may engage in active trading of portfolio securities.
This increases the portfolio turnover rate and may increase transaction costs
and the realization of tax gains and losses.
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-Registered Trademark-; mortgage-backed and
asset-backed fixed income securities; obligations of or guaranteed by the
U.S. 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-Registered Trademark-; and high-quality
debt securities issued or guaranteed by a national or state bank or bank
holding company.
At least 70% of the Select Bond Fund's total assets will normally be invested in
bonds and debentures which have maturities of at least one year. However, during
periods of particular volatility or when an unusual decline in the value of
long-term obligations is anticipated, for temporary defensive purposes the Fund
may place 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-Registered Trademark-; and cash or cash equivalents. When adverse market
conditions exist the Select Bond Fund may be hindered in its pursuit of its
investment objective because it may not invest, or may invest less, in the
longer-term bonds in which it ordinarily invests. In addition, the Fund may
invest in unrated privately placed corporate debt securities that in the
judgment of Mason Street Funds'-Registered Trademark- Board of Directors, are of
comparable quality to debt securities rated investment-grade or better by
Moody's or Standard & Poor's-Registered Trademark-; preferred stocks,
convertible securities; and securities carrying warrants to purchase equity
securities. The Fund may also invest in restricted securities (securities that
19
<PAGE>
must be registered under the Securities Act of 1933 before they may be offered
or sold to the public).
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,"
below and "High Yield/ High Risk Securities," p.__.
The Select Bond Fund may also invest in interest rate futures contracts and
repurchase agreements. For a description of these investments and their risks,
see the Statement of Additional Information.
The Select Bond Fund may purchase or sell securities on a "when-issued" or
forward commitment basis.
The Select Bond Fund may engage in active trading of portfolio securities. This
increases the portfolio turnover rate and may increase transaction costs and the
realization of tax gains and losses.
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 U.S.,
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 if the security has not decreased in value in its home
country.
POLITICAL AND ECONOMIC RISK Foreign investments can be subject to greater
political and economic risks. In some countries, there is the risk that the
government may take over assets or operation of the company or impose taxes or
place limits on the removal of assets that would adversely affect the value of
the security. The possibility of default in foreign government securities,
political or social instability or diplomatic developments generally are more of
a concern in developing countries, where the possibility of political
instability (including revolution) and dependence on foreign economic assistance
may be greater than in developed countries.
REGULATORY RISK In many countries there is less publicly available information
about issuers than is available for companies in the U.S. Foreign companies may
not be subject to uniform accounting, auditing and financial reporting
standards, and auditing practices and requirements may not be comparable to
those applicable to U.S. companies. 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 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 U.S., 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 credit worthiness 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
20
<PAGE>
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-Registered Trademark- 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
Funds'-Registered Trademark- 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.
YEAR 2000 RISKS
In providing services to the Funds, Northwestern Mutual Investment Services,
LLC, the Funds' investment adviser, and its corporate affiliates rely on both
internal software systems and external software systems purchased from vendors.
Many computer programs employed throughout the world use two digits rather than
four to identify the year. These programs must be adapted in preparation for
the year 2000.
Failure of computer software systems could affect securities trades of the
Funds, payments of interest and dividends and portfolio pricing. If trading
systems fail to function properly there may be settlement problems and liquidity
issues. Corporate and government data processing errors may result in various
problems for the companies in which the Funds invest and overall economic
uncertainties. In addition, it has been reported that foreign institutions have
made less progress than major U.S. entities in addressing the year 2000 computer
systems issues. This could adversely affect the investments of the Funds in
foreign securities.
NMIS and its affiliates are taking appropriate steps to prepare for the year
2000. However, there can be no assurance that these steps will be sufficient to
avoid any adverse impact on the Funds. Nor can there be assurance that the
computer issues associated with the turn of the century will not have adverse
effects on the investments of the Funds.
M A N A G E M E N T O F T H E F U N D S
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 or its predecessor 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 and its wholly-owned
subsidiary, Northwestern Investment Management Company, employ a full staff of
investment personnel. Northwestern Investment Management Company was formed in
1997. The personnel and related facilities of Northwestern Mutual Life and its
subsidiary 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-Registered Trademark-.
GROWTH AND INCOME STOCK FUND
J.P. Morgan Investment Management Inc. ("J.P. Morgan"), 522 Fifth Avenue, New
York, New York 10036, a wholly-owned subsidiary of J.P. Morgan & Co., is the
subadvisor for the Growth and Income Fund.
INTERNATIONAL EQUITY FUND
Templeton Investment Counsel, Inc. ("Templeton"), 500 East Broward Boulevard,
Fort Lauderdale, Florida 33394, a wholly-owned indirect subsidiary of Franklin
Resources, Inc., is the subadvisor for the International Equity Fund.
FUND MANAGERS
MARK G. DOLL, Vice President and Assistant Treasurer-Public Markets of
Northwestern Investment Management Company, and 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 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. VAN KAMPEN, Managing Director of Northwestern Investment Management
Company, 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 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, Managing Director of Northwestern Investment Management
Company, joined Northwestern Mutual Life in 1984. Prior to this, he worked for
the Chicago Board Options Exchange, the Milwaukee Company and Armco
21
<PAGE>
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 Small Cap Growth Stock Fund and the
Aggressive Growth Stock Fund. He also has primary responsibility for the Small
Cap Growth and Aggressive Growth Stock Portfolios of the Series Fund, as well as
the small company portfolio of Northwestern Mutual Life.
JULIE M. VAN CLEAVE, Managing Director of Northwestern Investment Management
Company, 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.
TIMOTHY S. COLLINS, Director of Northwestern Investment Management Company,
joined Northwestern Mutual Life in 1986, and manages the High Yield Bond Fund.
He is also responsible for the High Yield Bond Portfolio of the Series Fund. He
received a B.A. degree from St. Norbert College and an M.B.A. from the
University of Wisconsin-Madison. Mr. Collins is a Chartered Financial Analyst.
He also manages high yield fixed income securities of Northwestern Mutual Life.
VARUN MEHTA, Director of Northwestern Investment Management Company, manages the
Select Bond Fund and the fixed income securities in the Asset Allocation Fund.
He joined Northwestern Mutual Life in March, 1997. From 1993 through March,
1997, Mr. Mehta was with the Ameritech Investment Management Department serving
as Portfolio Manager - Fixed Income and, previously, as Portfolio Research
Manager - Fixed Income. Mr. Mehta has his undergraduate degree from the
University of Bombay. He received a Masters degree in Business Management from
the Indian Institute of Management and an M.B.A. from the University of Chicago
Graduate School of Business. Mr. Mehta is a Chartered Financial Analyst. 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 fixed income portfolios of Northwestern Mutual Life.
RONALD C. ALBERTS, Director of Northwestern Investment Management Company,
joined Northwestern Mutual Life in 1984. He received a B.A. degree from Carroll
College and an M.B.A. 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.
IGNATIUS L. SMETEK, Managing Director of Northwestern Investment Management
Company, joined Northwestern Mutual Life in 1986. He holds a B.A. degree from
the Universtiy of Wisconsin - Milwaukee and an M.S.B.A. from the University of
Wisconsin - Madison, and is a Certified Public Accountant and a Chartered
Financial Analyst. Mr. Smetek coordinates the team that is responsible for
management of the Asset Allocation Fund. He also manages the pension fund
portfolio of Northwestern Mutual life.
HENRY D. CAVANNA, Managing Director of J.P. Morgan Investment Management Inc.,
joined J.P. Morgan in 1971. Mr. Cavanna is a senior U.S. equity portfolio
manager in the U.S. Equity and Balanced Accounts Group. He received his B.A.
degree from Boston College and L.L.B. degree from the University of
Pennsylvania. Mr. Cavanna has primary responsibility for the Growth and Income
Stock Fund. He also has primary responsibility for the Growth and Income Stock
Portfolio of the Series Fund.
MICHAEL J. KELLY, Vice President of J.P. Morgan Investment Management Inc.,
joined J.P. Morgan in 1985. Mr. Kelly is an institutional portfolio manager
with responsibility for several employee benefit, foundation and endowment
clients of J.P. Morgan. Mr. Kelly has an undergraduate degree from Gettysburg
College and an M.B.A. from The Wharton School of the University of Pennsylvania.
Mr. Kelly is a Chartered Financial Analyst. Mr. Kelley shares responsibility
for the Growth and Income Stock Fund as well as the Growth and Income Stock
Portfolio of the Series Fund with Mr. Cavanna.
GARY R. CLEMONS, Senior Vice President, Portfolio Management/Research of
Templeton Investment Counsel, Inc., manages the International Equity Fund. Mr.
Clemons joined Templeton Investment Counsel in 1993. Prior to joining Templeton
Investment Counsel, Mr. Clemons worked as a portfolio manager/research analyst
for Templeton Quantitative Advisors in New York, a subsidiary of Templeton
International. Mr. Clemons holds an M.B.A. with emphasis in finance from the
University of Wisconsin-Madison and a B.S. degree from the University of
Nevada-Reno. He also has primary responsibility for the International Equity
Portfolio of the Series Fund.
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:
<TABLE>
<CAPTION>
FUND FEE
<S> <C>
Small Cap Growth Stock 0.85%
- ------------------------------------------------------------
Aggressive Growth Stock 0.75%
- ------------------------------------------------------------
International Equity 0.85%
- ------------------------------------------------------------
Index 400 Stock 0.40%
- ------------------------------------------------------------
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%
- ------------------------------------------------------------
</TABLE>
22
<PAGE>
Of the amounts received from the Fund, NMIS pays the subadvisor for the Growth
and Income Stock Fund at the annual rate of 0.45% on the first $100 million of
assets, 0.40% on the next $100 million, 0.35% on the next $200 million and 0.30%
on assets over $400 million. For the International Equity Fund, NMIS pays the
subadvisor at the annual rate of 0.50% of assets, reduced to 0.40% on assets
over $100 million. The breakpoints for the fees paid to the subadvisors are
based on the aggregate assets of the respective Fund and the corresponding
Portfolio of the Series Fund.
NMIS and its affiliates have agreed to waive their fees or reimburse each Fund
for expenses if the Total Operating Expenses of the Fund exceed the Net Total
Operating Expenses set forth in the table at pp. __ in the fiscal year ended
March 31, 2000.
OTHER SERVICE PROVIDERS
The following parties provide the Funds with administrative and other services:
TRANSFER AGENT
National Financial Data Services ("NFDS")
P.O. Box 419419
Kansas City, Missouri 64141-6419
CUSTODIAN
For the domestic assets of the Growth and Income Stock Fund, High Yield Bond
Fund and Municipal Bond Fund:
Bankers Trust Company
16 Wall Street
New York, New York 10015
For the domestic assets of the Small Cap Growth Stock Fund, Index 400 Stock
Fund, Aggressive Growth Stock Fund, Growth Stock Fund, Index 500 Stock Fund,
Asset Allocation Fund and Select Bond Fund:
The Chase Manhattan Bank, N.A.
One Chase Manhattan Plaza
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 Life Insurance Company
720 East Wisconsin Avenue
Milwaukee, Wisconsin 53202
International Equity Fund accounting:
Brown Brothers Harriman & Co.
40 Water Street
Boston, Massachusetts 02109
DISTRIBUTOR
Robert W. Baird & Co. Incorporated ("Baird")
777 East Wisconsin Avenue
Milwaukee, Wisconsin 53202
The Distributor is controlled by Northwestern Mutual Life and, therefore, an
affiliate of NMIS.
FUND EXPENSES
In addition to the investment advisory fee, each Fund pays fees to certain other
service providers, such as the transfer agent, custodian and administrator. Each
Fund also bears certain expenses, such as brokerage and other transaction costs,
outside professional and auditing fees, registration fees, association fees,
trademark fees, organizational costs, insurance premiums, printing and mailing
costs of sending reports and other information to existing shareholders, the
fees and expenses of the Directors who are not officers or employees of an
affiliated company of the advisor 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.__.
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.
23
<PAGE>
B U Y I N G A N D S E L L I N G F U N D
S H A R E S
INVESTMENT MINIMUMS
Shares of the Funds are available through Registered Representatives of Baird
including Northwestern Mutual Life agents and Baird Investment Officers or, in
certain cases, from the Fund itself. The following table illustrates the minimum
investment requirements for the initial and subsequent investments in each of
the Funds, which may be changed at any time at the sole discretion of the Fund.
<TABLE>
<CAPTION>
Investment Minimums
Initial Subsequent
Type of Account Investment Investment
<S> <C> <C>
Regular Account $1,000 $100
- ------------------------------------------------------------------
Individual IRAs
(regular or spousal) $500 $100
- ------------------------------------------------------------------
Other Tax Qualified
Retirement Plans $50 $50
- ------------------------------------------------------------------
Automatic
Investment Plans $50 $50
- ------------------------------------------------------------------
</TABLE>
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 charges 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:
<TABLE>
<CAPTION>
Sales Charge as a
Percentage of
Offering Net Amount
Amount of Purchase Price Invested
<S> <C> <C>
Less than $50,000 4.75% 4.99%
$50,000 but less than $100,000 3.75% 3.90%
$100,000 but less than $250,000 2.75% 2.83%
$250,000 but less than $500,000 2.00% 2.04%
$500,000 but less than $1,000,000 1.50% 1.52%
$1,000,000 or more None* None
</TABLE>
* 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.__.
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 a personal 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 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?
24
<PAGE>
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 are purchased without an initial sales charge in
the following situations.
- - Shares purchased by current or retired officers, directors, employees,
agents, employees of agents, and employees of agencies, and affiliates, of
Mason Street Funds-Registered Trademark-, Northwestern Mutual Life, NMIS,
Northwestern Investment Management Company, the Transfer Agent, the
Distributor or a subadvisor, 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-Registered Trademark- 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 shares were
at one time subject to 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.
- - Shares purchased by or in conjunction with a purchase by a trust or group
annuity separate account to fund employee benefit or retirement plans
pursuant to an agreement with the Distributor or NMIS.
- - Shares purchased for accounts as to which a broker, dealer or financial
intermediary charges an account management fee ("wrap accounts") under a
fee-based program offered by the Distributor.
- - Shares purchased by an endowment fund, foundation or other nonprofit or
charitable organization with total assets over $5 million, with an initial
investment exceeding $1 million.
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 lesser
of the value of the shares redeemed or the total cost of the shares.
- - any purchase of $1 million or more of the Funds' shares;
- - Purchases by qualified retirement plans, nonqualified deferred compensation
plans and Simple IRAs which meet at least one of the following four
criteria: (1) the plan has at least 50 eligible participants; (2) the plan
makes an initial investment of $250,000 or more; (3) the plan sponsor
demonstrates to the satisfaction of Mason Street Funds that the aggregate
purchases by the plan will be equal to at least $250,000 within a reasonable
period of time, as determined by Mason Street Funds in its sole discretion;
or (4) the sum of the current market value of the plan assets invested in
any of the Funds or the SSgA Money Market Fund and the current purchase
amount is at least $250,000; 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
25
<PAGE>
shareholders shall be subject to a distribution fee. Because these fees are
paid out of the Funds' assets on an on-going basis, over time these fees will
increase the cost of your investment and may cost you more than paying other
types of sales charges. 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, including
unreimbursed expenses incurred in prior years. These expenses include payments
to Registered Representatives, expenses of printing and distributing
Prospectuses to persons other than Fund shareholders, and expenses of preparing,
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," p. __. The contingent deferred sales charge is imposed
on the lesser of the value of the shares redeemed (exclusive of reinvested
dividends and capital gains distributions) or the cost of such shares.
Contingent Deferred Sales Charge Applicable in the Year of Redemption After
Purchase(1)
<TABLE>
<CAPTION>
Amount of Purchases First Second Third Fourth Fifth Sixth Seventh on
<S> <C> <C> <C> <C> <C> <C> <C>
Less than $50,000 5.00% 4.00% 3.00% 3.00% 2.00% 1.00% 0.00%
- ------------------------------------------------------------------------------------------------------------------------------
$50,000 but less than $100,000 4.00% 3.00% 3.00% 2.00% 1.00% 0.00% 0.00%
- ------------------------------------------------------------------------------------------------------------------------------
$100,000 but less than $250,000 3.00% 3.00% 2.00% 1.00% 0.00% 0.00%
- ------------------------------------------------------------------------------------------------------------------------------
$250,000 but less than $500,000 3.00% 2.00% 1.00% 0.00% 0.00%
- ------------------------------------------------------------------------------------------------------------------------------
$500,000 but less than $1,000,000 2.00% 1.00% 0.00% 0.00%
- ------------------------------------------------------------------------------------------------------------------------------
$1,000,000 or more NA(2)
- ------------------------------------------------------------------------------------------------------------------------------
</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) 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
26
<PAGE>
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.
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 Class B
shares for:
- - exchanges of Class A or Class B shares of one Fund for the same Class of
shares of another Fund;
- - redemptions from tax-deferred retirement plans and Individual Retirement
Accounts for required minimum distributions due to attainment of age 70 1/2;
- - redemptions from tax-deferred retirement plans for returns of excess
contributions to the plan, termination of employment, participant loans and
hardship withdrawals;
- - redemptions as a result of death of the registered shareholder or in the
case of joint accounts, of all registered shareholders;
- - redemptions as a result of the disability of the registered shareholder (as
determined in writing by the Social Security Administration) which occurs
after the account was established;
- - redemptions for failure to meet minimum account balances; and
- - systematic withdrawal amounts provided amounts withdrawn do not exceed on an
annual basis 10% of the account value at the time the transfer agent
receives the request.
DISTRIBUTION AND SHAREHOLDER SERVICING FEES
Class B shares are charged fees at an annual rate of 1.00% of the average daily
net assets of Class B shares to compensate the Distributor for certain
distribution and shareholder servicing expenses. These fees consist of a fee at
an annual rate of 0.75% for distribution expenses pursuant to a plan adopted
under Rule 12b-1 under the Investment Company Act of 1940 and a fee at an annual
rate of 0.25% for shareholder servicing expenses. See "Distribution and Service
Fees," p. __. Upon the conversion of Class B shares to Class A shares, those
fees are lowered from 1.00% to 0.35%.
HOW SHARES ARE PRICED
Shares are purchased at their public offering price, which is based upon a
Fund's net asset value per share, plus an initial sales charge on the Class A
shares. 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 Funds'-Registered Trademark- 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 exchange rate. Because the International
Equity Fund has portfolio securities that are listed on foreign exchanges that
trade on days when the Fund does not price its shares, the net asset value of
the Fund's shares may change on days when you will not be able to purchase or
redeem the shares. Specific information about how the Funds value certain
assets is set forth in the Statement of Additional Information.
S H A R E H O L D E R S' G U I D E
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 or 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-Registered Trademark-.
Personal third party checks will not be accepted.
27
<PAGE>
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-Registered Trademark-. Mail all subsequent investments to the following
address:
Mason Street Funds-Registered Trademark-
P.O. Box 419419
Kansas City, MO 64141-6419
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 accepted, an account must be established
for you. See your Registered Representative or call 1-888-MASONST
(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.
BY TELEPHONE OR INTERNET (www.masonstreetfunds.com) This service allows you
to purchase additional shares quickly and conveniently through an electronic
transfer of money. Your predesignated bank account will be debited for the
desired amount. You can establish this privilege when you open your account
or, if your account is already established, call 1-888-MASONST
(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 INVESTING Money is automatically transferred from your bank account
to your Fund account monthly or quarterly. The minimum amount per transfer is
$50 per Fund account. This privilege may be set up when your account is opened
or at any later date by completing the appropriate section of the Fund
application. You may discontinue your participation in this program at any time.
PAYROLL DEDUCTION If your employer can initiate an automatic payroll deduction,
you may make regular investments of $50 or more per Fund account up to once per
month from your paycheck. To obtain information on establishing this option call
1-888-MASONST (1-888-627-6678).
SYSTEMATIC EXCHANGE In order to assist you in a dollar-cost averaging purchase
program, you may designate the amount of money ($50 minimum per Fund account) to
be automatically exchanged from one Fund to another once per month. In order to
set up this option, you must have at least $5,000 in the Fund from which you are
exchanging. You may discontinue your participation in this program at any time.
For more information on how to establish this option, call 1-888-MASONST
(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 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 exchange
option unless this privilege was declined on the application or otherwise in
writing. Call 1-888-MASONST (1-888-627-6678) with the same information as noted
above.
BY INTERNET For accounts other than qualified plans, you are eligible to
quickly and conveniently exchange existing shares for shares of another Fund
of the same Class through the internet at www.masonstreetfunds.com. Just
click on "Your Account" on the home page and then follow the instructions to
establish access.
GENERAL EXCHANGE POLICIES
- - Except for Systematic Exchanges and qualified plans, the exchange minimum is
$1,000, or the total account value if less.
- - You may make 12 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 (1) the advisor
believes the Fund would be harmed or unable to invest effectively, or (2)
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
nontax-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.
28
<PAGE>
- - If you are exchanging Class B shares, no contingent deferred sales charge is
charged at the time of the exchange. See "Contingent Deferred Sales Charge,"
p. __.
HOW TO SELL SHARES
THROUGH YOUR REGISTERED REPRESENTATIVE
Contact your Representative directly for instructions.
THROUGH THE TRANSFER AGENT
BY MAIL Send a written request, signed by each owner (if joint account) to the
transfer agent at the following address:
Mason Street Funds-Registered Trademark-
P.O. Box 419419
Kansas City, MO 64141-6419
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.
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 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 1-888-MASONST (1-888-627-6678) before
4:00 p.m. Eastern time. Checks will be sent to the address of record.
BY INTERNET For accounts other than qualified plans, you are eligible to
redeem shares through the internet at www.masonstreetfunds.com. Just click
on "Your Account" on the home page and then follow the instructions to
establish access. You may redeem up to $50,000 daily from your account by
making the request 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 60 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: (1) an amount in excess
of $50,000; or (2) 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 Funds' books for 60 days.
- - You may obtain a signature guarantee from: (1) a bank which is a member of
the FDIC; (2) a trust company; (3) a member firm of a national securities
exchange; or (4) 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.
- - 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.
QUICK ADDRESS AND TELEPHONE REFERENCE
REGULAR MAIL
Mason Street Funds-Registered Trademark-
P.O. Box 419419
Kansas City, MO 64141-6419
EXPRESS OR CERTIFIED MAIL
Mason Street Funds-Registered Trademark-
330 West 9th Street
Kansas City, MO 64105
INTERNET
www.masonstreetfunds.com
TOLL-FREE NUMBER
1-888-MASONST (1-888-627-6678)
29
<PAGE>
D I S T R I B U T I O N S A N D T A X E S
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.
Each Fund intends to make distributions to shareholders that may be taxed as
ordinary income or capital gain. 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 Funds'
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
regular federal income tax. 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 may be a component for computing
any 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.
30
<PAGE>
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.
31
<PAGE>
FINANCIAL HIGHLIGHTS (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
The financial highlights table is intended to help you understand each Fund's
financial performance for the past two years. Certain information reflects
financial results for a single Fund share. The total returns in the table
represent the rate that an investor would have earned (or lost) on an investment
in the Fund (assuming reinvestment of all dividends and distributions). This
information has been audited by PricewaterhouseCoopers LLP, whose report, along
with the Funds' financial statements, is included in the Funds' Annual Report,
which is available upon request.
<TABLE>
<CAPTION>
AGGRESSIVE GROWTH STOCK FUND INTERNATIONAL EQUITY FUND
Class A Class B Class A Class B
--------------------- ------------------ -------------------- -------------------
1999(1) 1998(1) 1999(1) 1998(1) 1999(1) 1998(1) 1999(1) 1998(1)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SELECTED PER
SHARE DATA
Net Asset Value,
Beginning of
Period $ 14.50 $ 10.00 $ 14.43 $ 10.00 $ 10.58 $ 10.00 $ 10.53 $ 10.00
Income from Invest-
ment Operations:
Net Investment
Income (Loss)(2) (0.11) (0.12) (0.19) (0.21) 0.17 0.24 0.10 0.10
Net Realized and
Unrealized Gain
(Loss) on
Investments (0.43) 5.18 (0.43) 5.18 (1.23) 0.56 (1.20) 0.63
----------- ----------- ---------- ---------- ----------- ----------- ---------- ----------
TOTAL FROM INVEST-
MENT OPERATIONS (0.54) 5.06 (0.62) 4.97 (1.06) 0.80 (1.10) 0.73
----------- ----------- ---------- ---------- ----------- ----------- ---------- ----------
Less Distributions:
Distributions
from Net
Investment Income -- 0.00 -- 0.00 (0.17) (0.22) (0.13) (0.20)
Distributions
from
Realized Gains
on
Investments (0.23) (0.56) (0.23) (0.54) (0.38) 0.00 (0.38) 0.00
----------- ----------- ---------- ---------- ----------- ----------- ---------- ----------
----------- ----------- ---------- ---------- ----------- ----------- ---------- ----------
TOTAL
DISTRIBUTIONS (0.23) (0.56) (0.23) (0.54) (0.55) (0.22) (0.51) (0.20)
----------- ----------- ---------- ---------- ----------- ----------- ---------- ----------
----------- ----------- ---------- ---------- ----------- ----------- ---------- ----------
Net Asset Value
End of Period $ 13.73 $ 14.50 $ 13.58 $ 14.43 $ 8.97 $ 10.58 $ 8.92 $ 10.53
----------- ----------- ---------- ---------- ----------- ----------- ---------- ----------
----------- ----------- ---------- ---------- ----------- ----------- ---------- ----------
Total Return(3) -21.52% 51.57% -21.76% 50.59% -8.85% 8.19% -9.36% 7.49%
----------- ----------- ---------- ---------- ----------- ----------- ---------- ----------
----------- ----------- ---------- ---------- ----------- ----------- ---------- ----------
RATIOS AND
SUPPLEMENTAL DATA
Net Assets, End
of Period $43,840,289 $41,640,193 $4,695,396 $1,870,132 $28,493,542 $29,451,833 $2,717,319 $1,444,924
----------- ----------- ---------- ---------- ----------- ----------- ---------- ----------
----------- ----------- ---------- ---------- ----------- ----------- ---------- ----------
Ratio of Net
Expenses
to Average Net
Assets 1.30% 1.30% 1.95% 1.95% 1.65% 1.65% 2.30% 2.30%
----------- ----------- ---------- ---------- ----------- ----------- ---------- ----------
----------- ----------- ---------- ---------- ----------- ----------- ---------- ----------
Ratio of Gross
Expenses to
Average Net Assets 1.62% 1.64% 2.31% 2.29% 1.91% 2.13% 2.54% 2.78%
----------- ----------- ---------- ---------- ----------- ----------- ---------- ----------
----------- ----------- ---------- ---------- ----------- ----------- ---------- ----------
Ratio of Net
Investment
Income (Loss) to
Average Net Assets (0.80%) (0.96)% (1.50%) (1.61)% 2.34% 2.34% 1.69% 1.69%
----------- ----------- ---------- ---------- ----------- ----------- ---------- ----------
----------- ----------- ---------- ---------- ----------- ----------- ---------- ----------
Portfolio
Turnover
Rate 84.46% 64.91% 84.46% 64.91% 198.46% 10.07% 198.46% 10.07%
----------- ----------- ---------- ---------- ----------- ----------- ---------- ----------
----------- ----------- ---------- ---------- ----------- ----------- ---------- ----------
</TABLE>
(1) For the twelve months ended March 31.
(2) Calculated based on average shares outstanding.
(3) Total Return includes deductions for management and other fund expenses;
excludes deductions for sales loads and contingent deferred sales
charges. Returns include fee waivers in effect. In the absence of fee
waivers, total return would be reduced.
32
<PAGE>
FINANCIAL HIGHLIGHTS (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
<TABLE>
<CAPTION>
GROWTH STOCK FUND GROWTH AND INCOME STOCK FUND
Class A Class B Class A Class B
--------------------- ------------------ -------------------- -------------------
1999(1) 1998(1) 1999(1) 1998(1) 1999(1) 1998(1) 1999(1) 1998(1)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SELECTED PER
SHARE DATA
Net Asset Value,
Beginning of
Period $ 14.10 $ 10.00 $ 14.03 $ 10.00 $ 12.44 $ 10.00 $ 12.37 $ 10.00
Income from Invest-
ment Operations:
Net Investment
Income (Loss)(2) 0.06 0.04 (0.03) (0.05) 0.02 0.04 (0.06) (0.03)
Net Realized and
Unrealized Gain
(Loss) on
Investments 2.50 4.41 2.48 4.41 1.32 3.90 1.31 3.88
----------- ----------- ---------- -------- ----------- ----------- ---------- ----------
TOTAL FROM INVEST-
MENT OPERATIONS 2.56 4.45 2.45 4.36 1.34 3.94 1.25 3.85
----------- ----------- ---------- -------- ----------- ----------- ---------- ----------
Less Distributions:
Distributions
from Net
Investment Income (0.06) (0.05) (0.01) (0.03) (0.04) (0.06) (0.00) (0.04)
Distributions
from
Realized Gains
on Investments (0.74) (0.30) (0.74) (0.30) (1.78) (1.44) (1.77) (1.44)
----------- ----------- ---------- -------- ----------- ----------- ---------- ----------
----------- ----------- ---------- -------- ----------- ----------- ---------- ----------
TOTAL
DISTRIBUTIONS (0.80) (0.35) (0.75) (0.33) (1.82) (1.50) (1.77) (1.48)
----------- ----------- ---------- -------- ----------- ----------- ---------- ----------
Net Asset Value,
End of Period $ 15.86 $ 14.10 $ 15.73 $ 14.03 $ 11.96 $ 12.44 $ 11.85 $ 12.37
----------- ----------- ---------- -------- ----------- ----------- ---------- ----------
----------- ----------- ---------- -------- ----------- ----------- ---------- ----------
Total Return(3) 18.36% 45.08% 17.66% 44.12% 11.09% 41.90% 10.41% 40.96%
----------- ----------- ---------- -------- ----------- ----------- ---------- ----------
----------- ----------- ---------- -------- ----------- ----------- ---------- ----------
RATIOS AND
SUPPLEMENTAL DATA
Net Assets, End
of Period $49,045,112 $38,224,386 $3,516,193 $811,173 $45,619,789 $37,800,412 $4,314,429 $1,529,206
----------- ----------- ---------- -------- ----------- ----------- ---------- ----------
----------- ----------- ---------- -------- ----------- ----------- ---------- ----------
Ratio of Net
Expenses
to Average Net
Assets 1.30% 1.30% 1.95% 1.95% 1.20% 1.20% 1.85% 1.85%
----------- ----------- ---------- -------- ----------- ----------- ---------- ----------
----------- ----------- ---------- -------- ----------- ----------- ---------- ----------
Ratio of Gross
Expenses to
Average Net Assets 1.57% 1.63% 2.29% 2.28% 1.51% 1.57% 2.20% 2.22%
----------- ----------- ---------- -------- ----------- ----------- ---------- ----------
----------- ----------- ---------- -------- ----------- ----------- ---------- ----------
Ratio of Net
Investment
Income (Loss) to
Average Net Assets 0.42% 0.29% (0.23)% (0.36)% 0.20% 0.37% (0.46)% (0.28)%
----------- ----------- ---------- -------- ----------- ----------- ---------- ----------
----------- ----------- ---------- -------- ----------- ----------- ---------- ----------
Portfolio
Turnover
Rate 32.00% 37.52% 32.00% 37.52% 156.92% 140.29% 156.92% 140.29%
----------- ----------- ---------- -------- ----------- ----------- ---------- ----------
----------- ----------- ---------- -------- ----------- ----------- ---------- ----------
</TABLE>
(1) For the twelve months ended March 31.
(2) Calculated based on average shares outstanding.
(3) Total Return includes deductions for management and other fund expenses;
excludes deductions for sales loads and contingent deferred sales
charges. Returns include fee waivers in effect. In the absence of fee
waivers, total return would be reduced.
33
<PAGE>
FINANCIAL HIGHLIGHTS (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
<TABLE>
<CAPTION>
INDEX 500 STOCK FUND ASSET ALLOCATION FUND
Class A Class B Class A Class B
--------------------- ------------------ -------------------- -------------------
1999(1) 1998(1) 1999(1) 1998(1) 1999(1) 1998(1) 1999(1) 1998(1)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SELECTED PER
SHARE DATA
Net Asset Value,
Beginning of
Period $ 14.43 $ 10.00 $ 14.35 $ 10.00 $ 12.32 $ 10.00 $ 12.26 $ 10.00
----------- ----------- ---------- -------- ----------- ----------- ---------- ----------
Income from Invest-
ment Operations:
Net Investment
Income (Loss)(2) 0.13 0.13 0.03 0.05 0.35 0.31 0.27 0.23
----------- ----------- ---------- -------- ----------- ----------- ---------- ----------
Net Realized and
Unrealized Gain
(Loss) on
Investments 2.44 4.48 2.43 4.47 0.43 2.50 0.43 2.50
----------- ----------- ---------- -------- ----------- ----------- ---------- ----------
TOTAL FROM INVEST-
MENT OPERATIONS 2.57 4.61 2.46 4.52 0.78 2.81 0.70 2.73
----------- ----------- ---------- -------- ----------- ----------- ---------- ----------
Less Distributions:
Distributions
from Net
Investment Income (0.06) (0.11) (0.02) (0.10) (0.31) (0.24) (0.27) (0.22)
Distributions
from Realized
Gains on
Investments (0.14) (0.07) (0.14) (0.07) (0.30) (0.25) (0.30) (0.25)
----------- ----------- ---------- -------- ----------- ----------- ---------- ----------
TOTAL
DISTRIBUTIONS (0.20) (0.18) (0.16) (0.17) (0.61) (0.49) (0.57) (0.47)
----------- ----------- ---------- -------- ----------- ----------- ---------- ----------
Net Asset
Value, End of
Period $ 16.80 $ 14.43 $ 16.65 $ 14.35 $ 12.49 $ 12.32 $ 12.39 $ 12.26
----------- ----------- ---------- -------- ----------- ----------- ---------- ----------
----------- ----------- ---------- -------- ----------- ----------- ---------- ----------
Total Return(3) 17.88% 46.35% 17.17% 45.44% 6.41% 28.51% 5.77% 27.69%
----------- ----------- ---------- -------- ----------- ----------- ---------- ----------
----------- ----------- ---------- -------- ----------- ----------- ---------- ----------
RATIOS AND
SUPPLEMENTAL DATA
Net Assets, End
of Period $70,034,287 $43,567,584 $17,802,313 $4,246,552 $40,249,915 $34,564,169 $5,825,603 $1,569,081
----------- ----------- ---------- -------- ----------- ----------- ---------- ----------
----------- ----------- ---------- -------- ----------- ----------- ---------- ----------
Ratio of Net
Expenses to Average
Net Assets 0.85% 0.85% 1.50% 1.50% 1.35% 1.35% 2.00% 2.00%
----------- ----------- ---------- -------- ----------- ----------- ---------- ----------
----------- ----------- ---------- -------- ----------- ----------- ---------- ----------
Ratio of Gross
Expenses to
Average Net Assets 1.15% 1.30% 1.83% 1.95% 1.62% 1.67% 2.32% 2.32%
----------- ----------- ---------- -------- ----------- ----------- ---------- ----------
----------- ----------- ---------- -------- ----------- ----------- ---------- ----------
Ratio of Net
Investment Income
(Loss) to Average
Net Assets
Assets 0.88% 1.04% 0.23% 0.39% 2.89% 2.67% 2.24% 2.02%
----------- ----------- ---------- -------- ----------- ----------- ---------- ----------
----------- ----------- ---------- -------- ----------- ----------- ---------- ----------
Portfolio
Turnover
Rate 3.83% 2.47% 3.83% 2.47% 80.57% 65.67% 80.57% 65.67%
----------- ----------- ---------- -------- ----------- ----------- ---------- ----------
----------- ----------- ---------- -------- ----------- ----------- ---------- ----------
</TABLE>
(1) For the twelve months ended March 31.
(2) Calculated based on average shares outstanding.
(3) Total Return includes deductions for management and other fund expenses;
excludes deductions for sales loads and contingent deferred sales
charges. Returns include fee waivers in effect. In the absence of fee
waivers, total return would be reduced.
34
<PAGE>
FINANCIAL HIGHLIGHTS (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
<TABLE>
<CAPTION>
HIGH YIELD BOND FUND MUNICIPAL BOND FUND
Class A Class B Class A Class B
--------------------- ------------------ -------------------- -------------------
1999(1) 1998(1) 1999(1) 1998(1) 1999(1) 1998(1) 1999(1) 1998(1)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SELECTED PER
SHARE DATA
Net Asset Value,
Beginning of
Period $ 10.79 $ 10.00 $ 10.79 $ 10.00 $ 10.55 $ 10.00 $ 10.55 $ 10.00
----------- ----------- ---------- -------- ----------- ----------- ---------- ----------
Income from Invest-
ment Operations:
Net Investment
Income (Loss)(2) 1.02 1.01 0.94 0.93 0.44 0.46 0.37 0.38
Net Realized and
Unrealized Gain
(Loss) on
Investments (1.84) 1.19 (1.83) 1.20 0.23 0.69 0.22 0.70
----------- ----------- ---------- -------- ----------- ----------- ---------- ----------
TOTAL FROM INVEST-
MENT OPERATIONS (0.82) 2.20 (0.89) 2.13 0.67 1.15 0.59 1.08
----------- ----------- ---------- -------- ----------- ----------- ---------- ----------
Less Distributions:
Distributions
from Net
Investment Income (1.02) (1.00) (0.95) (0.93) (0.45) (0.47) (0.37) (0.40)
Distributions from
Realized Gains
on Investments (0.18) (0.41) (0.18) (0.41) (0.14) (0.13) (0.14) (0.13)
----------- ----------- ---------- -------- ----------- ----------- ---------- ----------
----------- ----------- ---------- -------- ----------- ----------- ---------- ----------
TOTAL
DISTRIBUTIONS (1.20) (1.41) (1.13) (1.34) (0.59) (0.60) (0.51) (0.53)
----------- ----------- ---------- -------- ----------- ----------- ---------- ----------
Net Asset
Value,
End of Period $ 8.77 $ 10.79 $ 8.77 $ 10.79 $ 10.63 $ 10.55 $ 10.63 $ 10.55
----------- ----------- ---------- -------- ----------- ----------- ---------- ----------
----------- ----------- ---------- -------- ----------- ----------- ---------- ----------
Total Return(3) -7.87% 22.95% -8.48% 22.09% 6.42% 11.73% 5.72% 10.93%
----------- ----------- ---------- -------- ----------- ----------- ---------- ----------
----------- ----------- ---------- -------- ----------- ----------- ---------- ----------
RATIOS AND
SUPPLEMENTAL DATA
Net Assets, End
of Period
Period $37,414,394 $32,811,316 $4,683,842 $1,360,925 $32,692,209 $28,172,205 $849,347 $472,387
----------- ----------- ---------- -------- ----------- ----------- ---------- ----------
----------- ----------- ---------- -------- ----------- ----------- ---------- ----------
Ratio of Net
Expenses to Average
Net Assets
Assets 1.30% 1.30% 1.95% 1.95% 0.85% 0.85% 1.50% 1.50%
----------- ----------- ---------- -------- ----------- ----------- ---------- ----------
----------- ----------- ---------- -------- ----------- ----------- ---------- ----------
Ratio of Gross
Expenses to
Average
Net Assets 1.64% 1.66% 2.33% 2.31% 1.17% 1.24% 1.82% 1.89%
----------- ----------- ---------- -------- ----------- ----------- ---------- ----------
----------- ----------- ---------- -------- ----------- ----------- ---------- ----------
Ratio of Net
Investment
Income (Loss) to
Average Net Assets 10.51% 9.30% 9.86% 8.65% 4.18% 4.38% 3.53% 3.73%
----------- ----------- ---------- -------- ----------- ----------- ---------- ----------
----------- ----------- ---------- -------- ----------- ----------- ---------- ----------
Portfolio
Turnover
Rate 178.63% 178.61% 178.63% 178.61% 344.11% 169.37% 344.11% 169.37%
----------- ----------- ---------- -------- ----------- ----------- ---------- ----------
----------- ----------- ---------- -------- ----------- ----------- ---------- ----------
</TABLE>
(1) For the twelve months ended March 31.
(2) Calculated based on average shares outstanding.
(3) Total Return includes deductions for management and other fund expenses;
excludes deductions for sales loads and contingent deferred sales
charges. Returns include fee waivers in effect. In the absence of fee
waivers, total return would be reduced.
35
<PAGE>
FINANCIAL HIGHLIGHTS (FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
<TABLE>
<CAPTION>
SELECT BOND FUND
Class A Class B
--------------------- ------------------
1999(1) 1998(1) 1999(1) 1998(1)
<S> <C> <C> <C> <C>
ELECTED PER
SHARE DATA
Net Asset Value,
Beginning of
Period $ 9.98 $ 10.00 $ 9.98 $ 10.00
Income from Invest-
ment Operations:
Net Investment
Income (Loss)(2) 0.69 0.71 0.61 0.66
Net Realized and
Unrealized Gain
(Loss) on
Investments (0.24) 0.46 (0.16) 0.44
----------- ----------- ---------- --------
TOTAL FROM INVEST-
MENT OPERATIONS 0.45 1.17 0.45 1.10
----------- ----------- ---------- --------
Less Distributions:
Distributions
from Net
Investment
Income (0.68) (0.71) (0.68) (0.64)
Distributions
from Realized
Gains on
Investments (0.09) (0.48) (0.09) (0.48)
----------- ----------- ---------- --------
TOTAL
DISTRIBUTIONS (0.77) (1.19) (0.77) (1.12)
----------- ----------- ---------- --------
Net Asset Value
End of Period $ 9.66 $ 9.98 $ 9.66 $ 9.98
----------- ----------- ---------- --------
----------- ----------- ---------- --------
Total Return(3) 4.60% 12.11% 3.91% 11.34%
----------- ----------- ---------- --------
----------- ----------- ---------- --------
RATIOS AND
SUPPLEMENTAL DATA
Net Assets, End
of Period $31,478,811 $28,617,421 $2,425,059 $643,332
----------- ----------- ---------- --------
----------- ----------- ---------- --------
Ratio of Net
Expenses
to Average Net
Assets 0.85% 0.85% 1.50% 1.50%
----------- ----------- ---------- --------
----------- ----------- ---------- --------
Ratio of Gross
Expenses to
Average
Net Assets 1.27% 1.29% 1.95% 1.94%
----------- ----------- ---------- --------
----------- ----------- ---------- --------
Ratio of Net
Investment
Income (Loss) to
Average Net Assets 7.03% 6.93% 6.38% 6.28%
----------- ----------- ---------- --------
----------- ----------- ---------- --------
Portfolio
Turnover
Rate 252.44% 362.32% 252.44% 362.32%
----------- ----------- ---------- --------
----------- ----------- ---------- --------
</TABLE>
(1) For the twelve months ended March 31.
(2) Calculated based on average shares outstanding.
(3) Total Return includes deductions for management and other fund expenses;
excludes deductions for sales loads and contingent deferred sales
charges. Returns include fee waivers in effect. In the absence of fee
waivers, total return would be reduced.
36
<PAGE>
A P P E N D I X A - G L O S S A R Y
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 DEPOSITARY 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-Registered Trademark- and Aa or better by Moody's.
HIGH-GRADE INSTRUMENTS are securities rated A or better by Standard &
Poor's-Registered Trademark- 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-Registered
Trademark- and Ba or lower by Moody's). Other terms commonly used to describe
such securities include "lower-rated bonds," "noninvestment-grade bonds" and
"junk bonds."
INDUSTRIAL DEVELOPMENT BONDS are revenue bonds that are issued by a public
authority but which may be backed only by the credit and security of a private
issuer and may involve greater credit risk. See "Municipal securities" below.
INVESTMENT-GRADE BONDS are securities rated BBB or higher by Standard &
Poor's-Registered Trademark- 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.
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 include 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,
37
<PAGE>
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 that 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 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 agreed 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 nondollar denominated securities or to reduce the impact of
currency appreciation on purchases of nondollar 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.
38
<PAGE>
A P P E N D I X B
STANDARD & POOR'S-Registered Trademark- CORPORATION
<TABLE>
<CAPTION>
Bond Rating Explanation
<S> <C>
AAA Highest rating; extremely strong capacity to pay
principal and interest.
- --------------------------------------------------------------------------------
AA High quality; very strong capacity to pay
principal and interest.
- --------------------------------------------------------------------------------
A Strong capacity to pay principal and interest;
somewhat more susceptible to the adverse effects
of changing circumstances and economic conditions.
- --------------------------------------------------------------------------------
BBB Adequate capacity to pay principal and interest;
normally exhibits adequate protection parameters,
but adverse economic conditions or changing
circumstances more likely to lead to a weakened
capacity to pay principal and interest than for
higher-rated bonds.
- --------------------------------------------------------------------------------
BB, B, CCC, CC Predominantly speculative with respect to the
issuer's capacity to meet required interest and
principal payments. BB -- lowest degree of
speculation; CC -- the highest degree of
speculation. Quality and protective
characteristics outweighed by large uncertainties
or major risk exposure to adverse conditions.
- --------------------------------------------------------------------------------
D In default.
- --------------------------------------------------------------------------------
</TABLE>
MOODY'S INVESTORS SERVICES, INC.
<TABLE>
<CAPTION>
Bond Rating Explanation
<S> <C>
Aaa Highest quality; smallest degree of investment
risk.
- --------------------------------------------------------------------------------
Aa High quality; together with Aaa bonds, they
compose the high-grade bond group.
- --------------------------------------------------------------------------------
A Upper-medium grade obligations; many favorable
investment attributes.
- --------------------------------------------------------------------------------
Baa Medium-grade obligations; neither highly protected
nor poorly secured. Interest and principal appear
adequate for the present but certain protective
elements may be lacking or may be unreliable over
any great length of time.
- --------------------------------------------------------------------------------
Ba More uncertain, with speculative elements.
Protection of interest and principal payments not
well safeguarded during good and bad times.
- --------------------------------------------------------------------------------
B Lack characteristics of desirable investment;
potentially low assurance of timely interest and
principal payments or maintenance of other
contract terms over time.
- --------------------------------------------------------------------------------
Caa Poor standing, may be in default; elements of
danger with respect to principal or interest
payments.
- --------------------------------------------------------------------------------
Ca Speculative in a high degree; could be in default
or have other marked shortcomings.
- --------------------------------------------------------------------------------
C Lowest rated; extremely poor prospects of ever
attaining investment standing.
- --------------------------------------------------------------------------------
</TABLE>
39
<PAGE>
AT MASON STREET FUNDS-Registered Trademark-, WE RECOGNIZE THAT PREPARING
FINANCIALLY FOR THE FUTURE IS AN ONGOING PROCESS. WE KNOW THAT OVER THE YEARS,
YOUR NEEDS AND LIFESTYLE WILL CHANGE. THAT IS WHY WE PLACE PARTICULAR
SIGNIFICANCE ON PROVIDING YOU WITH AN EXCEPTIONAL LEVEL OF SERVICE INTENDED TO
MAKE INVESTING AS FLEXIBLE AS POSSIBLE. WHILE EACH OF THE MASON STREET
FUNDS-Registered Trademark- IS DISTINCT IN OBJECTIVE AND STRATEGY, ALL OFFER THE
SAME CONVENIENT AND EASY-TO-USE FEATURES.
<TABLE>
<CAPTION>
TELEPHONE
YOUR REGISTERED 1-888-MASONST MAIL WIRE INTERNET
SERVICE REPRESENTATIVE (1-888-627-6678) (SEE PP. __-__) (SEE PP. __-__) www.masonstreetfunds.com
<S> <C> <C> <C> <C> <C>
OPEN A NEW ACCOUNT X
- --------------------------------------------------------------------------------------------------------------------------------
ADD TO EXISTING ACCOUNT X X X X X
- --------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUES (NAVs)
AND PERFORMANCE INFORMATION X X X
- --------------------------------------------------------------------------------------------------------------------------------
ACCOUNT AND SHARE X X X X
BALANCE INFORMATION (quarterly statements)
- --------------------------------------------------------------------------------------------------------------------------------
EXCHANGING SHARES
(UP TO 12 PER YEAR) X X X X
- --------------------------------------------------------------------------------------------------------------------------------
SELLING SHARES X X X X X
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
WHEN YOU INVEST IN MASON STREET FUNDS-Registered Trademark-, YOU HAVE THE
OPPORTUNITY TO BUILD A LONG-TERM RELATIONSHIP WITH A REGISTERED REPRESENTATIVE.
HE OR SHE CAN ANSWER ANY QUESTIONS YOU MAY HAVE ABOUT MASON STREET
FUNDS-Registered Trademark- AND IS THERE TO HELP YOU WORK TOWARD YOUR INVESTMENT
GOALS NOW...AND IN THE FUTURE.
<PAGE>
More information about Mason Street Funds is included in the Funds' Statement of
Additional Information (SAI), which is incorporated by reference in this
prospectus and which is available without charge.
Additional information about the Funds' investments is included in the Funds'
annual and semi-annual reports to shareholders. These reports discuss the
market conditions and investment strategies that significantly affected each
Fund's performance during the previous fiscal period.
To request a free copy of the Funds' SAI, or current annual or semi-annual
report, call us at 1-888-MASONST (1-888-627-6678). You may also call this
number to request other information about the Funds and to make shareholder
inquiries. Information about the Funds (including the SAI) can be reviewed and
copied at the Public Reference Room of the Securities and Exchange Commission
(SEC) in Washington, D.C. Information on the operation of the Public Reference
Room may be obtained by calling the SEC at 1-800-SEC-0330. Reports and other
information about the Funds are available on the SEC's Internet site at
http://www.sec.gov. Copies of this information may be obtained, upon payment of
a duplicating fee, by writing to the Public Reference Section of the SEC,
Washington, D.C. 20549-6009.
MASON STREET FUNDS-Registered Trademark-
P. O. BOX 419419
KANSAS CITY, MO 64141-6419
1-888-MASONST (1-888-627-6678)
WWW.MASONSTREETFUNDS.COM
Investment Company Act file no. 811-07961
<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.
<TABLE>
<CAPTION>
Heading in Statement
Item Number of Additional Information
- ----------- -------------------------
<S> <C>
10 Cover Page, Table of Contents
11 Not Applicable
12 Investment Policies
13 Management of MSF
14 Other Information About MSF, Management of MSF
15 Investment Advisory Services, Distribution Arrangements
16 Portfolio Transactions and
Brokerage Allocation and Other
Practices
17 Other Information About MSF
18 Determination of Net Asset Value, Purchase and
Redemption of Shares
19 Taxes
20 Distribution Arrangements
21 Investment Performance
22 Financial Statements
</TABLE>
<PAGE>
MASON STREET FUNDS, INC.
Consisting of
Small Cap Growth Stock Fund
Aggressive Growth Stock Fund
International Equity Fund
Index 400 Stock 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"). Portions of MSF's Annual Report are incorporated
herein. The Annual Report is supplied with this SAI. To obtain a free additional
copy of the Prospectus, or a copy of the Annual Report, please call MSF at
1-888-627-6678.
The date of the Prospectus to which this Statement of Additional
Information relates is July 12, 1999.
The date of this Statement of Additional Information is July 12, 1999.
B-1
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
CROSS-REFERENCE TO
PAGE PAGE IN PROSPECTUS
---- ------------------
<S> <C> <C>
Investment Policies ___ __
Investment Restrictions ___ __
Portolio Securities for the Municipal Bond Fund ___ __
Repurchase Agreements ___ __
Financial Futures Contracts ___ __
Options - In General ___ __
Future Developments ___ __
Reverse Repurchase Agreements ___ __
Warrants ___ __
Eurodollar Certificates of Deposit ___ __
Asset-Backed and Variable Rate Securities ___ __
Short-Term Trading ___ __
Firm Commitment Agreements and "When-Issued" ___ __
Securities
Private Placement Transactions ___ __
and Illiquid Assets
Risk Factors for the International
Equity Fund and International Investments
of the Other Funds ___ __
Portfolio Turnover ___ __
Management of MSF ___ __
Other Information About MSF ___ __
Investment Advisory Services ___ __
Fund Expenses ___ __
Distribution Arrangements ___ __
Distribution Financing Plans and
Shareholder Services Agreement ___ __
Class A Plan and Agreement ___ __
Class B Plan and Agreement ___ __
General ___ __
Portfolio Transactions and
Brokerage Allocation and Other Practices ___ __
Determination of Net Asset Value ___ __
Purchase and Redemption of Shares ___ __
Cumulative Discount ___ __
Letter of Intent ___ __
Systematic Withdrawal Plan ___ __
Special Redemptions ___ __
Suspension of Redemptions ___ __
Investment Performance ___ __
Standardized Average Annual Total Return
Quotations ___ __
Standardized Yield Quotations ___ __
B-2
<PAGE>
Non-Standardized Performance ___ __
General Information ___ __
Taxes ___ __
Municipal Bond Fund ___ __
State and Local ___ __
Custodians ___ __
Transfer Agent Services ___ __
Independent Certified Public Accountants ___ __
Appendix A ___ __
Appendix B ___ __
Report of Independent Accountants ___ __
Financial Statements ___ __
</TABLE>
B-3
<PAGE>
INVESTMENT POLICIES
The following information supplements and should be read in conjunction
with the sections in MSF's Prospectus entitled "The Funds in Detail."
INVESTMENT RESTRICTIONS
The investment restrictions of the Funds numbered 1-14 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. Acquire more than 25% of any class of equity securities of any one
issuer.
2. With respect to at least 75% of the value of the total assets of the
Fund, invest more than 5% of the value of such assets in the securities
of any one issuer (except securities issued or guaranteed by the U.S.
government or its agencies), or invest in more than 10% of the
outstanding voting securities of any one issuer.
3. Purchase the securities of any other investment company in amounts
exceeding 10% of the total assets of the Fund, except in connection
with mergers, consolidations or acquisitions of assets.
4. Invest more than 15% of the value of the 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.
7. 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.
8. 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.
9. Make short sales of securities.
10. 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.
11. 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.
12. 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,
Small Cap Growth Stock, Aggressive Growth Stock, Growth Stock and High
B-4
<PAGE>
Yield Bond Funds may invest in foreign currency futures and forward
contracts.
13. 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.
14. 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. 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
B-5
<PAGE>
security, such a guaranty would be considered a separate security and will be
treated as an issue of such government or other entity.
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.
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. 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. The Fund expects to be
able to value tender option bonds at par; however, the value of the instruments
will be monitored to assure that they are valued at fair value.
Ratings of Municipal Obligations. Subsequent to its purchase by the
Municipal Bond Fund, an issue of rated Municipal Obligations may cease to be
B-6
<PAGE>
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.
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.
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 also invest in repurchase agreements, reverse repurchase
agreements or may purchase securities on a "when-issued" or forward commitment
basis.
REPURCHASE AGREEMENTS
Certain securities of each Fund may be subject to 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
B-7
<PAGE>
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, as noted earlier, MSF has adopted
standards of creditworthiness for all broker-dealers with which MSF enters into
repurchase agreements and will review compliance by such broker-dealers
periodically.
FINANCIAL FUTURES AND FORWARD 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 rate
futures contracts as a hedge against changes in prevailing levels of interest
rates. The Select Bond Fund may also enter into forward sale contracts in an
amount not to exceed 5% of the assets of the Fund. In all cases, the purpose is
to establish more definitely the effective return on securities held or intended
to be acquired by the Funds. The Funds' hedging may include sales of futures as
an offset against the effect of expected decreases in stock values or increases
in interest rates, and purchases of futures as an offset against the effect of
expected increases in stock values or decreases in interest rates.
A Fund will not enter into a futures contract if, as a result thereof,
the sum of the initial margin deposits of all open futures positions (other than
an offsetting transaction) would be more than 5% of the Fund's total assets.
More than 5% of the Fund's total assets may be committed to the aggregate of
initial and variation margin payments however. Furthermore, in order to be
certain that the Fund has sufficient assets to satisfy its obligations under a
futures contract, the Fund deposits cash or cash equivalents equal in value to
the market value of the futures contract in a segregated account for the Fund
with the Fund's custodian.
Financial futures prices are volatile and difficult to forecast and the
correlation between changes in prices of futures contracts and the securities
being hedged can only be approximate. A decision of whether, when and how to
hedge involves the exercise of skill and judgment, and even a well-conceived
hedge may be unsuccessful to some degree because of market behavior or
unexpected stock market or interest rate trends.
Because of the low margin deposits required, futures trading involves
an extremely high degree of leverage. A relatively small price movement in a
futures contract may result in immediate and substantial loss, as well as gain,
to the investor. Thus, a purchase or sale of a futures contract may result in
losses in excess of the amount invested in the futures contract.
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
B-8
<PAGE>
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.
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
B-9
<PAGE>
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
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.
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.
B-11
<PAGE>
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
B-10
<PAGE>
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.
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, 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
B-12
<PAGE>
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
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.
OPTIONS - IN GENERAL
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. 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.
B-13
<PAGE>
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.
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
B-14
<PAGE>
Each of the Funds (except the Select Bond Fund) 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.)
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 U.S.
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 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.
B-15
<PAGE>
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 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, LLC, 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,
Small Cap Growth Stock 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.
FOREIGN SECURITIES. There may be less publicly available information
about foreign companies comparable to the reports and ratings published about
companies in the U.S. Foreign companies may not be subject to uniform accounting
or financial reporting standards, and auditing practices and requirements may
not be comparable to those applicable to U.S. companies. The Funds, therefore,
may encounter difficulty in obtaining market quotations for purposes of valuing
their assets and calculating their net asset value. Foreign markets have
substantially less volume than the New York Stock
B-16
<PAGE>
Exchange and securities of some foreign companies are less liquid and
more volatile than securities of comparable U.S. companies. Although the
International Equity Fund may invest up to 15% of its total assets in unlisted
foreign securities, including up to 10% of its total assets in securities with a
limited trading market, in the opinion of management such securities with a
limited trading market generally do not present a significant liquidity problem.
Commission rates in foreign countries, which are generally fixed rather than
subject to negotiation as in the U.S., 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 U.S.
EMERGING MARKETS. 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 each 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 legal structures governing
private or foreign investment or allowing for judicial redress for injury to
private property; (vi) the absence, until recently in many developing countries,
of a capital market structure or market-oriented economy; and (vii) the
possibility that recent favorable economic developments in some developing
countries may be slowed or reversed by unanticipated political or social events
in such countries.
In addition, many countries in which the Funds may invest have
experienced substantial, and in some periods extremely high, rates of inflation
for many years. Inflation and rapid fluctuations in inflation rates have had and
may continue to have negative effects on the economies and securities markets of
certain countries. Moreover, the economies of some developing countries may
differ favorably or unfavorably from the U.S. economy in such respects as growth
of gross domestic product, rate of inflation, currency depreciation, capital
reinvestment, resource self-sufficiency and balance of payments position.
Investments in developing countries may involve risks of
nationalization, expropriation and confiscatory taxation. For example, the
Communist governments of a number of Eastern European countries expropriated
large amounts of private property in the past, in many cases without adequate
compensation, and there can be no assurance that such expropriation will not
occur in the future. In the event of expropriation, each Fund could lose a
substantial portion of any investments it has made in the affected countries.
Further, no accounting standards exist in certain developing countries. Finally,
even though the currencies of some developing countries, such as certain Eastern
European countries, may be convertible into U.S. dollars, the conversion rates
may be artificial to the actual market values and may be adverse to the
shareholders of a Fund.
RUSSIAN SECURITIES. Investing in Russian companies involves a high
degree of risk and special considerations not typically associated with
investing in the U.S. securities markets, and should be considered highly
speculative. Such risks include, together with Russia's continuing political and
economic instability and the slow-paced development of its market economy, the
following: (a) delays in settling portfolio transactions and risk of loss
arising out of Russia's system of share registration and custody; (b) the risk
that it may be impossible or more difficult than in other countries to obtain
and/or enforce a judgment; (c) pervasiveness of corruption, insider-trading, and
crime in the Russian economic system; (d) currency exchange rate volatility and
the lack of available currency hedging instruments; (e) higher rates of
inflation (including the risk of social unrest associated with periods of
hyper-inflation); (f) controls on foreign investment and local practices
disfavoring foreign investors and limitations on repatriation of invested
capital, profits and dividends, and on a Fund's ability to exchange local
currencies for U.S. dollars; (g) the risk that the government of Russia or other
executive or legislative bodies may decide not to continue to support the
economic reform programs implemented since the dissolution of the Soviet Union
and could follow radically different political and/or economic policies
B-17
<PAGE>
to the detriment of investors, including non-market-oriented policies
such as the support of certain industries at the expense of other sectors or
investors, a return to the centrally planned economy that existed prior to the
dissolution of the Soviet Union, or the nationalization of privatized
enterprises; (h) the risks of investing in securities with substantially less
liquidity and in issuers having significantly smaller market capitalizations,
when compared to securities and issuers in more developed markets; (i) the
difficulties associated in obtaining accurate market valuations of many Russian
securities, based partly on the limited amount of publicly available
information; (j) the financial condition of Russian companies, including large
amounts of inter-company debt which may create a payments crisis on a national
scale; (k) dependency on exports and the corresponding importance of
international trade; (l) the risk that the Russian tax system will not be
reformed to prevent inconsistent, retroactive and/or exorbitant taxation or, in
the alternative, the risk that a reformed tax system may result in the
inconsistent and unpredictable enforcement of the new tax laws; (m) possible
difficulty in identifying a purchaser of securities held by the Funds due to the
underdeveloped nature of the securities markets; (n) the possibility that
pending legislation could restrict the levels of foreign investment in certain
industries, thereby limiting the number of investment opportunities in Russia;
(o) the risk that pending legislation would confer to Russian courts the
exclusive jurisdiction to resolve disputes between foreign investors and the
Russian government, instead of bringing such disputes before an
internationally-accepted third-country arbitrator; and (p) the difficulty in
obtaining information about the financial condition of Russian issuers, in light
of the different disclosure and accounting standards applicable to Russian
companies.
There is little long-term historical data on Russian securities markets
because they are relatively new and a substantial proportion of securities
transactions in Russia are privately negotiated outside of stock exchanges.
Because of the recent formation of the securities markets as well as the
underdeveloped state of the banking and telecommunications systems, settlement,
clearing and registration of securities transactions are subject to significant
risks. Ownership of shares (except where shares are held through depositories
that meet the requirements of the 1940 Act) is defined according to entries in
the company's share register and normally evidenced by extracts from the
register or by formal share certificates. However, there is no central
registration system for shareholders and these services are carried out by the
companies themselves or by registrars located throughout Russia. These
registrars are not necessarily subject to effective state supervision nor are
they licensed with any governmental entity and it is possible for the Funds to
lose their registration through fraud, negligence or even mere oversight. While
each will endeavor to ensure that its interest continues to be appropriately
recorded either itself or through a custodian or other agent inspecting the
share register and by obtaining extracts of share registers through regular
confirmations, these extracts have no legal enforceability and it is possible
that subsequent illegal amendment or other fraudulent act may deprive the Funds
of their ownership rights or improperly dilute their interests. In addition,
while applicable Russian regulations impose liability on registrars for losses
resulting from their errors, it may be difficult for the Funds to enforce any
rights they may have against the registrar or issuer of the securities in the
event of loss of share registration. Furthermore, although a Russian public
enterprise with more than 500 shareholders is required by law to contract out
the maintenance of its shareholder register to an independent entity that meets
certain criteria, in practice this regulation has not always been strictly
enforced. Because of this lack of independence, management of a company may be
able to exert considerable influence over who can purchase and sell the
company's shares by illegally instructing the registrar to refuse to record
transactions in the share register. In addition, so-called "financial-industrial
groups" have emerged in recent years that seek to deter outside investors from
interfering in the management of companies they control. These practices may
prevent the Funds from investing in the securities of certain Russian companies
deemed suitable by the manager. Further, this also could cause a delay in the
sale of Russian company securities by a Fund if a potential purchaser is deemed
unsuitable, which may expose the Fund to potential loss on the investment.
B-18
<PAGE>
CURRENCY. The Funds endeavor to buy and sell foreign currencies on as
favorable a basis as practicable. Some price spread on currency exchange (to
cover service charges) will be incurred, particularly when the Funds change
investments 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 Funds from
transferring cash out of the. There is the possibility of cessation of trading
on national exchanges, expropriation, nationalization or confiscatory taxation,
withholding or other foreign taxes on income or other amounts, 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 foreign nations.
The Funds 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. Further, certain currencies may not be
internationally traded. Some countries in which the Funds may invest may also
have fixed or managed currencies that are not free-floating against the U.S.
dollar.
Certain of these currencies have experienced a steady devaluation
relative to the U.S. dollar. Any devaluations in the currencies in which a
Fund's securities are denominated may have a detrimental impact on that Fund.
Through the International Equity 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.
EURO. On January 1, 1999, the European Monetary Union (EMU) introduced
a new single currency, the euro, which is replacing the national currency for
participating member countries. The transition and the elimination of currency
risk among EMU countries may change the economic environment and behavior of
investors, particularly in European markets.
Franklin Resources, Inc. has created an interdepartmental team to
handle all euro-related changes to enable the mutual funds managed by Templeton
Investment Counsel, Inc. to process transactions accurately and completely with
minimal disruption to business activities. While the implementation of the euro
could have a negative effect on the International Equity Fund, the Fund's
manager and its affiliated services providers are taking steps they believe are
reasonably designed to address the euro issue.
INTEREST RATES. To the extent each Fund invests in debt securities,
changes in interest rates in any country where the Fund is invested will affect
the value of its assets and, consequently, its share price. Rising interest
rates, which often occur during times of inflation or a growing economy, are
likely to cause the face value of a debt security to decrease, having a negative
effect on the value of the Fund's shares. Of course, interest rates have
increased and decreased, sometimes very dramatically, in the past. These changes
are likely to occur again in the future at unpredictable times.
CURRENCY CONTRACTS. The Funds 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
B-19
<PAGE>
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. 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.
For the years ended March 31, 1998 and March 31, 1999, the portfolio
turnover rates were:
<TABLE>
<CAPTION>
Portfolio Turnover Rate 1998 1999
----------------------- ---- ----
<C> <C> <C>
Aggressive Growth Stock Fund 64.91% 84.46%
International Equity Fund 10.07% 198.46%
Growth Stock Fund 37.52% 32.00%
Growth and Income Stock Fund 140.29% 156.92%
Index 500 Stock Fund 2.47% 3.83%
Asset Allocation fund 65.67% 80.57%
High Yield Bond Fund 178.61% 178.63%
Municipal Bond Fund 169.37% 344.11%
Select Bond Fund 362.32% 252.44%
</TABLE>
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.
For the fiscal year ended March 31, 1999, portfolio turnover for the
International Equity Fund increased significantly from the prior year. This
increase was due to the sales and purchases of portfolio securities necessary to
bring the Fund's portfolio holdings into line with those of the International
Equity Portfolio of Northwestern Mutual Series Fund. This was a one-time action.
Portfolio turnover also increased significantly for the Municipal Bond
Fund. The reason for this was that one of the key 1998 strategies used by the
advisor was to buy small underfollowed regional offerings and then sell them at
higher prices in the retail market. This resulted in heavy turnover in a small
portion of the portfolio.
Portfolio turnover decreased significantly for the Select Bond Fund.
This was because of high turnover in 1997 related to the start-up of the Fund.
B-20
<PAGE>
MANAGEMENT OF MSF
The Board of Directors of Mason Street FundsR 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 subadvisors where
applicable and the officers of Mason Street FundsR.
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 (63), President and Director*
720 East Wisconsin Avenue
Milwaukee, WI 53202
Trustee of Northwestern Mutual Life. President and Chief
Executive Officer of Northwestern Mutual Life.
Stephen N. Graff (64), Director*
805 Lone Tree Road
Elm Grove, WI 53122
Retired Partner, Arthur Andersen LLP (Public Accountants).
Trustee of Northwestern Mutual Life since 1996.
Martin F. Stein (62), Director
1800 East Capitol Drive
Milwaukee, WI 53211
Chairman of the Board of EyeCare One Corporation (retail sales
of eyewear).
John K. MacIver (68), Director
100 East Wisconsin Avenue
Milwaukee, WI 53202
Partner, Michael Best & Friedrich, Attorneys at Law.
William J. Blake (67), Director
731 North Jackson Street
Milwaukee, WI 53202
Chairman, Blake Investment Corp. (real estate investments and
venture capital).
William A. McIntosh (60), Director
525 Sheridan Road
Kenilworth, IL 60043
Retired Division Head, U.S. Fixed Income of Salomon Brothers
(investment securities) since 1995; prior thereto, Division
Head, U.S. Fixed Income.
Mark G. Doll (49), Vice President and Treasurer
720 East Wisconsin Avenue
Milwaukee, WI 53202
Vice President and Assistant Treasurer-Public Markets of
Northwestern Investment Management Company since 1998. 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,
LLC since 1996; prior thereto, President.
B-21
<PAGE>
Meridee J. Maynard (43), 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, Variable Annuity
Administration and Marketing of Northwestern Mutual Investment
Services, LLC since 1996. Vice President, Variable Annuity
Administration and Marketing of Northwestern Mutual Investment
Services, LLC since 1996; Superintendent-Sales
Standards/Compliance from 1994 to 1996;
Superintendent-Underwriting Standards and New Business from 1993
to 1994.
Patricia L. Van Kampen (47), Vice President-Investments
720 East Wisconsin Avenue
Milwaukee, WI 53202
Managing Director of Northwestern Investment Management Company
since 1998; prior thereto, Vice President-Common Stocks of
Northwestern Mutual Life. Vice President-Common Stocks of
Northwestern Mutual Investment Services, LLC.
William R. Walker (42), Vice President-Investments
720 East Wisconsin Avenue
Milwaukee, Wisconsin 53202
Managing Director of Northwestern Investment Management Company
since 1998; prior thereto, Director of Common Stocks of
Northwestern Mutual Life. Vice President of Northwestern Mutual
Investment Services, LLC.
Julie M. Van Cleave (40), Vice President-Investments
720 East Wisconsin Avenue
Milwaukee, Wisconsin 53202
Managing Director of Northwestern Investment Management Company
since 1998; prior thereto, Director of Common Stocks of
Northwestern Mutual Life. Vice President-Common Stocks of
Northwestern Mutual Investment Services, LLC.
Steven P. Swanson (45), Vice President-Investments
720 East Wisconsin Avenue
Milwaukee, Wisconsin 53202
Managing Director of Northwestern Investment Management Company
since 1998; Vice President-Securities of Northwestern Mutual
Life from 1994 to 1997; prior thereto, Director-Securities. Vice
President of Northwestern Mutual Investment Services, LLC.
Varun Mehta (31), Vice President-Investments
720 East Wisconsin Avenue
Milwaukee, WI 53202
Director of Northwestern Investment Management Company since
1998; Investment Officer-Public Fixed Income of Northwestern
Mutual Life from March of 1997 to December of 1997. Portfolio
Research Manager-Fixed Income and Portfolio Manager-Fixed Income
of the Ameritech Investment Management Department from 1993 to
March of 1997.
B-22
<PAGE>
Jefferson V. DeAngelis (41), Vice President-Investments
720 East Wisconsin Avenue
Milwaukee, WI 53202
Managing Director of Northwestern Investment Management Company
since 1998; prior thereto, Vice President-Fixed Income
Securities of Northwestern Mutual Life. Vice President-Fixed
Income Securities of Northwestern Mutual Investment Services,
LLC.
Timothy S. Collins (37), Vice President-Investments
720 East Wisconsin Avenue
Milwaukee, WI 53202
Director of Northwestern Investment Management Company since
1998; Director of Investments for Northwestern Mutual Life from
October of 1996 to December of 1997; Associate Director
Investments from 1993 to 1996; prior thereto, Investment
Officer.
Ronald C. Alberts (35), Vice President-Investments
720 East Wisconsin Avenue
Milwaukee, WI 53202
Director of Northwestern Investment Management Company since
1998; prior thereto, Associate Director - Fixed Income of
Northwestern Mutual Life.
Ignatius L. Smetek (38), Vice President-Investments
720 East Wisconsin Avenue
Milwaukee, WI 53202
Managing Director of Northwestern Investment Management Company
since 1998; Director of Common Stocks for Northwestern Mutual
Life from 1995 to December of 1997; prior thereto, Associate
Director - Common Stocks. Vice President - Common Stocks of
Northwestern Mutual Investment Services, LLC.
Merrill C. Lundberg (59), Secretary
720 East Wisconsin Avenue
Milwaukee, WI 53202
Assistant General Counsel of Northwestern Mutual Life. Secretary
of Northwestern Mutual Investment Services, LLC.
Barbara E. Courtney (41), 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, LLC.
* 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,
except for William A. McIntosh, who has served as a Director since May 8, 1997.
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,
Ronald C. Alberts and Ignatius L. Smetek, 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
B-23
<PAGE>
the Directors and principal officers of MSF who is also an affiliated person of
Northwestern Mutual Investment Services, LLC ("NMIS") or Northwestern Mutual
Life is named above, together with the capacity in which such person is
affiliated with NMIS or Northwestern Mutual Life.
On March 31, 1999, The Directors and officers of MSF as a group did not
own more than 1% of any class of shares of any Fund.
COMPENSATION OF OFFICERS AND DIRECTORS. MSF pays no salaries or compensation to
any of its officers or Directors employed by Northwestern Mutual Life. Effective
April 1, 1999, MSF pays other Directors fees totaling $13,000 per year,
consisting of a $5,000 retainer paid in April and $2,000 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, LLC, the investment advisor to Northwestern Mutual Series Fund, Inc.,
pays each of the directors of the Series Fund a total of up to $22,000 per year,
consisting of a $10,000 retainer paid in January and $3,000 per meeting of the
board of the Series Fund attended.
COMPENSATION TABLE
FISCAL YEAR ENDING MARCH 31, 1999
<TABLE>
<CAPTION>
(1) (2) (3) (4) (5)
Name of Person, Aggregate Pension or Estimated Annual Total Compensation
Position Compensation Retirement Benefits Upon From Registrant
From Registrant Benefits Accrued Retirement and Fund Complex
as Part of Fund Paid to Directors
Expenses
<S> <C> <C> <C> <C>
James D. Ericson Director None None None None
William Blake $9,000 None None $25,250
Director
Stephen N. Graff $9,000 None None $25,250
Director
John K. MacIver $9,000 None None $25,250
Director
Martin F. Stein $9,000 None None $25,250
Director
William A. McIntosh $9,000 None None $25,250
Director
</TABLE>
As stated in the Prospectus, directors and officers of MSF, as well as
employees and agents of Northwestern Mutual Life and its affiliates, may
purchase shares of MSF without payment of a sales load. The reason for this
policy is reduced sales and marketing costs associated with such direct sales
and to encourage an alignment of interests with and knowledge about MSF through
share ownership.
OTHER INFORMATION ABOUT MSF
ORGANIZATION
Mason Street Funds was incorporated in Maryland on August 30, 1996. MSF is an
open-end, management investment company. Each Fund is a diversified series of
MSF.
MSF issues a separate series of capital stock for each Fund. Each share of
capital stock issued with respect to a Fund has a pro rata interest in the
assets of that Fund and has no interest in the assets of any other Fund. Each
B-24
<PAGE>
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.
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. As of March 31, 1999, Northwestern
Mutual Life owned a majority of the Class A shares of each of the Funds, and
thus controlled the Funds. Shares of each Fund are fully paid and nonassessable
when issued, are transferable without restriction and have no preemptive or
conversion rights.
The authorized capital stock of MSF consists of 3,300,000,000 shares of common
stock, par value $.001 per share (Common Stock). The shares of Common Stock are
divided into eleven series, each with 300 million authorized shares in the
series: Small Cap Growth Stock Fund; Aggressive Growth Stock Fund; International
Equity Fund; Index 400 Stock 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.
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.
As of April 1, 1999, no person owns of record or beneficially 5% or
more of the shares outstanding of MSF or either Class of any Fund, except
Northwestern Mutual Life, a Wisconsin life insurance company, 720 East Wisconsin
Avenue, Milwaukee, WI 53202, which owned the following percentages of each
Fund's outstanding shares as of April 1, 1999: 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 __%. Northwestern
Mutual Life will initially own all of the shares of the Small Cap Growth Stock
Fund and Index 400 Stock Fund. Because of this stock ownership, Northwestern
Mutual Life is able to exercise voting control over each Fund.
INDEMNIFICATION
MSF's By-Laws provide that MSF shall indemnify each of its Directors,
officers and employees against liabilities and expenses reasonably incurred by
B-25
<PAGE>
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,
LLC ("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
with the operation of the Fund. Expenses paid by MSF are charged to the Funds to
which the expenses relate.
For the fiscal years ended March 31, 1998, and March 31, 1999, NMIS
received $697,488 and $1,409,515, respectively, for its services as investment
advisor to MSF. The amount of $697,488 is net of $940,770 of investment advisory
fees waived under the expense limitation agreement described in MSF's
prospectus. The amount of $1,409,515 is net of $498,706 of investment advisory
fees waived under the expense limitation agreement also described in the
prospectus. Because MSF commenced operations on March 31, 1997, no Fund paid any
advisory fees prior to that date.
Northwestern Mutual Life and its wholly-owned subsidiary, Northwestern
Investment Management Company, employ a full staff of investment personnel to
manage the investment assets of Northwestern Mutual Life. These 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
B-26
<PAGE>
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. NMIS accrued $10,732.30 of
investment advisory fees payable to Templeton Counsel with respect to the
International Equity Fund for the fiscal year ended March 31, 1999.
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. NMIS accrued $14,914.78 of
investment advisory fees payable to J.P. Morgan Investment with respect to the
Growth and Income Stock Fund for the fiscal year ended March 31, 1999.
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.
Northwestern Mutual Life is the licensee under three License Agreements
with Standard & Poor's, dated as of November 30, 1990, as amended, March 1,
1997, and June __, 1999, 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 or the S&P
MidCap 400 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 and the S&P MidCap 400
Index, both of which are 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
and the S&P MidCap 400 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.
B-27
<PAGE>
S&P DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF
THE S&P 500 INDEX OR THE S&P MIDCAP 400 INDEX OR ANY DATA INCLUDED
THEREIN AND S&P SHALL HAVE NO 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 THE S&P MIDCAP 400 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 AND THE S&P MIDCAP 400 INDEX OR ANY DATA INCLUDED
THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL S&P
HAVE ANY LIABILITY FOR ANY SPECIAL, PUNITIVE, INDIRECT, OR CONSEQUENTIAL
DAMAGES (INCLUDING LOST PROFITS), EVEN IF NOTIFIED OF THE POSSIBILITY OF
SUCH DAMAGES.
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 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.
B-28
<PAGE>
The dealer allowance paid to RWB in connection with sales of shares of
MSF is based on the following schedule:
<TABLE>
<CAPTION>
Dealer
Amount of Purchase Allowance(1)
<S> <C>
Less than $50,000 4.00%
$50,000 but less than $100,000 3.00%
$100,000 but less than $250,000 2.00%
$250,000 but less than $500,000 1.50%
$500,000 but less than $1,000,000 1.00%
$1,000,000 or more 1.00%(2)
</TABLE>
(1) Dealer allowance may be changed periodically.
(2) 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.
For fiscal year ended March 31, 1998, RWB received $464,560 for its
services as principal underwriter for the Fund. Of this amount, RWB retained
$167,079. Compensation on redemptions paid to RWB was $6,428. Brokerage
commissions paid to RWB by the Fund were $1,053. For fiscal year ended March 31,
1999, RWB received $______________ for its services as principal underwriter for
the Fund. Of this amount, RWB retained $___________. Compensation on redemptions
paid to RWB was $__________. Brokerage commissions paid to RWB by the Fund were
$__________. Because MSF commenced operations on March 31, 1997, no compensation
was paid to RWB prior to that 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
B-29
<PAGE>
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.
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.
As of March 31, 1999, unreimbursed distribution expenses were $________
for Class A shares and $_______ for Class B shares, which was .__% of Class A
assets and _____% of Class B assets on that date.
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 shareholders 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 interest 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).
The anticipated benefits to the Funds and their shareholders that may
result from the plans are as follows. First, the Plans allow more flexibility to
the prospective shareholder in choosing how to pay sales loads, either through
Class A or Class B shares. Second, they provides an attractive compensation
package for the sales force to sell the Funds which is necessary to attract
assets. Third, they provide an incentive for the sales force to provide a higher
level of service and compensate them accordingly. This in turn should lead to
improved retention and a higher amount of assets, which in turn will benefit all
shareholders by lowering costs per share in the future.
MSF paid distribution plan fees of $540,867 in its fiscal year ended
March 31, 1999. This amount was net of $16,312 of such fees waived under the
expense limitation agreement described in MSF's prospectus. The reimbursable
distribution expenses incurred in the fiscal year ended March 31, 1999 were as
follows: advertising in the amount of $__________; prospectuses to new
shareholders in the amount of $________; commissions in the amount of
$_____________; and marketing salaries in the amount of $____________.
B-30
<PAGE>
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.
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. The advisor and subadvisors 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. Higher portfolio turnover
may result in additional brokerage costs and may result in increased taxable
capital gains for shareholders.
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
B-31
<PAGE>
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.
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.
During the years ended March 31, 1998 and 1999, MFS paid brokerage
commissions of $386,043 and $________, respectively. Because MSF commenced
operations on March 31, 1997, no brokerage commissions were paid prior to that
date in connection with the Funds.
During the fiscal year ended March 31, 1998 the Fund paid $1,053 in
commissions to RWB. This represents .3% of aggregate brokerage commissions paid
during the fiscal year and .2% of aggregate Fund transactions. During the fiscal
year ended March 31, 1999, the Fund paid $4,014 in commissions to RWB. This
represents .___% of aggregate brokerage commissions paid during the fiscal year
and .___% of aggregate Fund transactions.
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
B-32
<PAGE>
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. JJ Kenny 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.
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-33
<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.
SPECIAL WAIVERS. Class A shares are purchased without a sales charge in
the situations specified in the Prospectus. No dealer allowance is paid on such
purchases. However, redemptions of such shares within 18 months of purchase are
subject to a contingent deferred sales charge of 1% of the 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.
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 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.
B-34
<PAGE>
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.
B-35
<PAGE>
The total offering price per share for each Fund is computed as follows:
SPECIMEN PRICE-MAKE-UP SHEET
(as of March 31, 1999)
<TABLE>
<CAPTION>
AGGRESSIVE
GROWTH STOCK INTERNATIONAL GROWTH STOCK GROWTH AND
FUND EQUITY FUND FUND INCOME STOCK FUND
(CLASS A) (CLASS A) (CLASS A) (CLASS A)
------- ------- ------- -------
<S> <C> <C> <C> <C>
NET ASSETS $43,840,289 $28,493,542 $49,045,112 $45,619,789
NUMBER OF SHARES
OUTSTANDING $ 3,192,576 $ 3,135,330 $ 3,093,172 $ 3,815,853
NET ASSET VALUE
PER SHARE
(NET ASSETS
DIVIDED BY
NUMBER OF SHARES
(OUTSTANDING) $13.73 $8.97 $15.86 $11.96
OFFERING PRICE
PER SHARE $14.41 $9.42 $16.65 $12.56
REDEMPTION PRICE
PER SHARE $13.73 $8.97 $15.86 $11.96
</TABLE>
<TABLE>
<CAPTION>
ASSET
INDEX 500 ALLOCATION HIGH YIELD MUNICIPAL
STOCK FUND FUND BOND FUND BOND FUND
(CLASS A) (CLASS A) (CLASS A) (CLASS A)
------- ------- ------- -------
<S> <C> <C> <C> <C>
NET ASSETS $70,034,287 $40,249,915 $37,414,394 $32,692,209
NUMBER OF SHARES
OUTSTANDING $ 4,168,765 $ 3,223,425 $ 4,268,613 $ 3,074,553
NET ASSET VALUE
PER SHARE
(NET ASSETS
DIVIDED BY
NUMBER OF SHARES
OUTSTANDING) $16.80 $12.49 $8.77 $10.63
OFFERING PRICE
PER SHARE $17.64 $13.11 $9.21 $11.16
REDEMPTION PRICE
PER SHARE $16.80 $12.49 $8.77 $10.63
</TABLE>
<TABLE>
<CAPTION>
SELECT BOND
FUND
(CLASS A)
------
<S> <C>
NET ASSETS $31,478,811
NUMBER OF SHARES
OUTSTANDING $ 3,260,345
NET ASSET VALUE
PER SHARE
(NET ASSETS
DIVIDED BY
NUMBER OF SHARES
OUTSTANDING) $9.66
OFFERING PRICE
PER SHARE $10.14
REDEMPTION PRICE
PER SHARE $9.66
</TABLE>
B-36
<PAGE>
<TABLE>
<CAPTION>
AGGRESSIVE GROWTH AND
GROWTH STOCK INTERNATIONAL GROWTH STOCK INCOME STOCK
FUND EQUITY FUND FUND FUND
(CLASS B) (CLASS B) (CLASS B) (CLASS B)
------- ------- ------- -------
<S> <C> <C> <C> <C>
NET ASSETS $4,695,396 $2,717,319 $3,516,193 $4,314,429
NUMBER OF SHARES
OUTSTANDING $ 345,795 $ 301,066 $ 223,597 $ 364,185
NET ASSET VALUE
PER SHARE
(NET ASSETS
DIVIDED BY
NUMBER OF SHARES
(OUTSTANDING) $13.58 $8.92 $15.73 $11.85
OFFERING AND
REDEMPTION
PRICE PER SHARE $13.58 $8.92 $15.73 $11.85
</TABLE>
<TABLE>
<CAPTION>
ASSET
INDEX 500 ALLOCATION HIGH YIELD MUNICIPAL
STOCK FUND FUND BOND FUND BOND FUND
(CLASS B) (CLASS B) (CLASS B) (CLASS B)
------- ------- ------- -------
<S> <C> <C> <C> <C>
NET ASSETS $17,802,313 $5,825,603 $4,683,842 $849,347
NUMBER OF SHARES
OUTSTANDING 1,069,488 470,364 534,729 79,881
NET ASSET VALUE
PER SHARE
(NET ASSETS
DIVIDED BY
NUMBER OF SHARES
OUTSTANDING) $16.65 $12.39 $8.76 $10.63
OFFERING AND
REDEMPTION PRICE
PER SHARE $16.65 $12.39 $8.76 $10.63
</TABLE>
<TABLE>
<CAPTION>
SELECT BOND
FUND
(CLASS B)
-------
<S> <C>
NET ASSETS $2,425,059
NUMBER OF SHARES
OUTSTANDING 251,171
NET ASSET VALUE
PER SHARE
(NET ASSETS
DIVIDED BY
NUMBER OF SHARES
OUTSTANDING) $9.66
OFFERING AND
REDEMPTION PRICE
PER SHARE $9.66
</TABLE>
B-37
<PAGE>
Payment for the shares redeemed must be made within seven days after the
evidence of ownership of such shares is tendered to the Fund; 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
trading thereon is restricted, or any period during which an emergency exists,
or as otherwise permitted by the Investment Company Act of 1940.
INVESTMENT PERFORMANCE
PERFORMANCE TERMS
CUMULATIVE TOTAL RETURN represents the actual return on an investment for a
specified period without any deduction of a sales charge. Cumulative total
return is generally quoted for more than one year (e.g., the life of the Fund).
A cumulative total return does not show interim fluctuations in the value of an
investment.
AVERAGE ANNUAL TOTAL RETURN represents the average annual percentage change
of an investment over a specified period, after the deduction of the maximum
applicable sales charge. It is calculated by taking the cumulative total return
for the stated period (less the sales charge) and determining what constant
annual return would have produced the same cumulative return. Average annual
returns for more than one year tend to smooth out variations in a Fund's return
and are not the same as actual annual results.
YIELD shows the rate of income a Fund earns on its investments as a
percentage of the Fund's share price. It is calculated by dividing 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 the Fund's tax-free yield by
the result of one minus a stated federal tax rate.
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
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)
B-38
<PAGE>
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 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 t
the subject class
B-39
<PAGE>
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.
The Bond Fund yields for the 30-day period ended March 31, 1999, were
as follows:
Municipal Bond Fund
Class A 3.76%
Class B 3.33%
Select Bond Fund
Class A 6.31%
Class B 5.99%
High Yield Bond Fund
Class A 11.45%
Class B 11.37%
The tax equivalent yield for the Municipal Bond Fund for the 30-day period ended
March 31, 1999, was 5.45% for Class A shares and 4.83% for Class B shares,
assuming a 31% income tax rate.
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.
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.
B-40
<PAGE>
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 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.
B-41
<PAGE>
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 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, 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
B-42
<PAGE>
such to shareholders. At the end of its last fiscal year, the High Yield
Bond Fund had an unused capital loss carryforward of $___________________.
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
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
B-43
<PAGE>
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 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.
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
B-44
<PAGE>
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.
The Fund uses the "average annual" method to determine the designated
percentage of dividends that qualifes as tax-exempt income. This designation is
made annually in January. The percentage of a particular dividend that is
designated as tax-exempt income may be substantially different from the
percentage of the Fund's income that was tax-exempt during the period from which
the distribution was made.
Exempt-interest dividends are exempt from regular federal income tax, but
they may affect the tax liabilities of taxpayers who are subject to the 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.
Part or all of the interest on indebtedness, if any, incurred or continued
by a shareholder to purchase or carry shares of the Municipal Bond Fund is not
deductible. The portion of interest that is not deductible is equal to the total
interest paid or accrued on the indebtedness, multiplied by the percentage of
the Fund's total distributions (not including distributions from net long-term
capital gains) paid to the shareholder that are exempt-interest dividends. Under
rules used by the Internal Revenue Service for determining when borrowed funds
are considered used for the purpose of purchasing or carrying particular assets,
the purchase of shares may be considered to have been made with borrowed funds
even though such funds are not directly traceable to the purchase of the shares.
In general, exempt-interest dividends, if any, attributable to interest
received on certain private activity obligations and certain industrial
development bonds will not be tax-exempt to any shareholders who are
"substantial users" of the facilities financed by such obligations or bonds or
who are "related persons" of such substantial users.
If a shareholder sells shares at a loss within six months of purchase, any
loss will be disallowed for Federal income tax purposes to the extent of any
exempt-interest dividends received on such shares.
B-45
<PAGE>
STATE AND LOCAL. Each Fund may be subject to state or local taxes in
jurisdictions in which such Fund may be deemed to be doing business. In
addition, in those states or localities which have income tax laws, the
treatment of such Fund and its shareholders under such laws may differ from
their treatment under federal income tax laws, and investment in such Fund may
have different tax consequences for shareholders than would direct investment in
such Fund's portfolio securities. Shareholders should consult their own tax
advisers concerning these matters.
CUSTODIANS
Portfolio securities of each Fund are held pursuant to a Custodian
Agreement between MSF and the Fund's custodian. The custodian for the domestic
securities of the Growth and Income Stock Fund, High Yield Bond Fund and
Municipal Bond Fund is Bankers Trust Company, 16 Wall Street, New York, New York
10015. The custodian for the domestic securities of the Small Cap Growth Stock
Fund, Index 400 Stock Fund, Aggressive Growth Stock Fund, Growth Stock Fund,
Index 500 Stock Fund, Asset Allocation Fund and 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 Small
Cap Growth Stock Fund, 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
PricewaterhouseCoopers 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 and for the fiscal
year ended March 31, 1999, together with the notes thereto, financial highlights
and the report of PricewaterhouseCoopers LLP, independent accountants, are
included in MSFs' Annual Report to Shareholders, and are incorporated by
reference in this Statement of Additional Information.
B-46
<PAGE>
APPENDIX A
Description of Ratings as Provided by the Rating Services
CORPORATE BONDS
MOODY'S INVESTORS SERVICE, INC.
Aaa--Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
fundamentally strong position of such issues.
Aa--Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they compromise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A--Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving security
to principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa--Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba--Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and, thereby, not well
safeguarded during other good and bad times over the future. Uncertainty of
position characterizes bonds in this series.
B--Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the security over any long period of time may be small.
Caa--Bonds which are rated Caa are of poor standing. Such securities may be
in default or there may be present elements of danger with respect to principal
or interest.
Ca--Bonds which are rated Ca represent obligations which are speculative in
a high degree. Such issues are often in default or have other marked
shortcomings.
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.
B-47
<PAGE>
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
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 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.
B-48
<PAGE>
CC--The rating "CC" is typically applied to debt that is currently highly
vulnerable to nonpayment.
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.
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.
B-49
<PAGE>
STANDARD & POOR'S
"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.
"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.
B-50
<PAGE>
-- 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
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
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 larger than
Aaa-rated municipal bonds; together with Aaa group they comprise what are
generally known as "high grade bonds"
B-51
<PAGE>
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'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
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.
B-52
<PAGE>
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'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-53
<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-54
<PAGE>
PART C
OTHER INFORMATION
Item 23. EXHIBITS
--------
Exhibit A (1)Articles of Incorporation of Mason Street Funds, Inc.
(Exhibit B(1))
(1)Rights of Stockholders are described in Article FOURTH and
Article SIXTH of the Articles of Incorporation for Mason Street
Funds, Inc., previously referenced as Exhibit B(1). (Exhibit
B(4))
Exhibit B Amendment to the By-Laws adopted by the Directors of Mason Street
Funds, Inc. on August 6, 1998.
(1)By-Laws of Mason Street Funds, Inc. (Exhibit B(2))
(4)Amendment to By-Laws of Mason Street Funds, Inc. (Exhibit
B(2)(a))
(5)Amendment to By-Laws of Mason Street Funds, Inc. (Exhibit
B(2)(b))
Exhibit D Form of Investment Advisory Agreement between Mason Street Funds,
Inc. (on behalf of the Small Cap Growth Stock Fund and the Index
400 Stock Fund), Northwestern Mutual Investment Services, LLC and
The Northwestern Mutual Life Insurance Company.
(1)Form of Investment Advisory Agreement between Mason Street
Funds, Inc. and Northwestern Mutual Investment Services, LLC.
(Exhibit B(5)(a))
(2)Form of Investment Sub-Advisory Agreement between Mason Street
Funds, Inc. (on behalf of the Growth and Income Stock Fund),
Northwestern Mutual Investment Services, LLC and J.P. Morgan
Investment Management, Inc. (Exhibit B(5)(b))
(2)Form of Investment Sub-Advisory Agreement between Northwestern
Mutual Investment Services, LLC, (Investment Adviser to the
International Equity Fund) and Templeton Investment Counsel, Inc.
(Exhibit B(5)(c))
Exhibit E (2)Form of Principal Underwriting Agreement. (Exhibit B(6))
Exhibit F Not Applicable.
Exhibit G Form of Custodian Agreement between Mason Street Funds, Inc. and
Chase Manhattan Bank for the Small Cap Growth and Index 400 Stock
Funds.
(3)Form of Custodian Agreement with Chase Manhattan Bank.
(Exhibit B(8)(a))
(3)Form of Custodian Agreement with Bankers Trust Co. (Exhibit
B(8)(b))
(3)Form of Custodian Agreement with Brown Brothers Harriman & Co.
(Exhibit B(8)(c))
Exhibit H(1) Form of License Agreement between Standard & Poor's Corporation
and Mason Street Funds, Inc. (on behalf of the Index 400 Stock
Fund).
Exhibit H(2) Fee Waiver Agreement with Robert W. Baird & Co.
Exhibit H(3) Form of Master Agreement/DST FAN Services - Mutual Funds.
C-1
<PAGE>
(2)Form of Transfer Agency and Service Agreement. (Exhibit
B(9)(a))
(2)Form of Shareholder Servicing Agreement with Robert W. Baird &
Co. (Exhibit B(9)(b)(1))
(2)Form of Administration Agreement with The Northwestern Mutual
Life Insurance Company. (Exhibit B(9)(c))
(3)Opinion and Consent of Counsel. (Exhibit B(10))
(5)Amended Shareholder Servicing Agreement with Robert W. Baird &
Co. (Exhibit B(9)(b)(2))
(5)Shareholder Account Services Agreement with Robert W. Baird &
Co. (Exhibit B(9)(e))
Exhibit J Consent of PricewaterhouseCoopers LLP. (to be filed by amendment)
Exhibit L Form of Subscription Agreement.
(2)Form of Subscription Agreement. (Exhibit B(13))
Exhibit M(1) (2)Form of Rule 12b-1 Distribution Plan for Class A Shares.
(Exhibit B(15)(a))
Exhibit M(2) (2)Form of Rule 12b-1 Distribution plan for Class B Shares.
(Exhibit B(15)(b))
Exhibit N Financial Data Schedule for period ended March 31, 1999 for each
Fund of Mason Street Funds, Inc. (to be filed by amendment)
Exhibit O (1)Form of Rule 18f-3 Plan. (Exhibit B(18))
(1)Exhibits previously filed with Form N-1A Registration Statement for Mason
Street Funds, Inc. on December 6, 1996, and incorporated herein by reference.
(2)Exhibits previously filed with Form N-1A Pre-Effective Amendment No. 1 for
Mason Street Funds, Inc. on February 7, 1997, and incorporated herein by
reference.
(3)Exhibits previously filed with Form N-1A Pre-Effective Amendment No. 2 for
Mason Street Funds, Inc. on March 5, 1997, and incorporated herein by reference.
(4)Exhibits previously filed with Form N-1A Post-Effective Amendment No. 1 for
Mason Street Funds, Inc. on September 16, 1997, and incorporated herein by
reference.
(5)Exhibits previously filed with Form N-1A Post-Effective Amendment No. 2 for
Mason Street Funds, Inc. on June 29, 1998, and incorporated herein by reference.
Item 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
As of March 31, 1999, ____% the shares of the Registrant were
owned by The Northwestern Mutual Life Insurance Company
("Northwestern Mutual Life"), a mutual insurance company
organized by a special act of the Wisconsin Legislature.
Northwestern Mutual Life directly controls the Registrant.
Subsidiaries of Northwestern Mutual Life when considered in the
aggregate as a single subsidiary would not constitute a
significant subsidiary.
C-2
<PAGE>
Item 25. INDEMNIFICATION
Article IX of Registrant's By-Laws is included as an Exhibit to
the Registration Statement under the Securities Act of 1933 and
the Investment Company Act of 1940. The By-laws of Northwestern
Mutual Life permit indemnification by Northwestern Mutual Life of
persons who are serving as directors of another corporation at
the request of Northwestern Mutual Life. Pursuant to the By-Law
provision, the Trustees of Northwestern Mutual Life have adopted
a resolution extending to all of the directors of the Registrant
the benefits of the indemnification arrangements for employees,
officers and Trustees of Northwestern Mutual Life. Directors'
and officers' liability insurance which covers the directors and
officers of the Registrant as well as Trustees and officers of
Northwestern Mutual Life is also in force. The amount of
coverage is $50 million. The deductible amount is $1,000,000 ($1
million) for claims covered by corporate indemnification. The
cost of this insurance is allocated among Northwestern Mutual
Life and its subsidiaries and no part of the premium has been
paid by the Registrant.
Item 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
In addition to its investment advisory function, Northwestern
Mutual Investment Services, LLC ("NMIS"), the Registrant's
investment adviser, is responsible for the selection, training
and supervision of life insurance agents of Northwestern Mutual
Life who engage in the distribution of variable annuities and
variable life insurance issued by Northwestern Mutual Life. The
directors and officers of NMIS also serve as officers of
Northwestern Mutual Life.
Item 27. PRINCIPAL UNDERWRITER
Robert W. Baird & Co., Inc. ("RWB") serves as the principal
underwriter for each Fund. RWB is an indirect majority-owned
subsidiary of Northwestern Mutual Life. RWB also serves as the
principal underwriter for the Baird Adjustable Rate Income Fund,
a portfolio of The Baird Funds, Inc.
The directors and principal officers of RWB are as follows:
G. Frederick Kasten, Jr. Chairman and CEO
Paul E. Purcell President and COO
James D. Bell Managing Director
Paul J. Carbone Managing Director
Bryce P. Edwards Managing Director
Glen F. Hackmann Managing Director and Sec'y.
Keith A. Kolb Managing Director
Patrick S. Lawton Managing Director
William W. Mahler Managing Director
Terrence P. Maxwell Managing Director
John R. Merrell Managing Director
Russell P. Schwei Managing Director
Paul S. Shain Managing Director
Dominick P. Zarcone Managing Director
All of the above are located at 777 East Wisconsin Avenue,
Milwaukee, WI 53202.
None of the above has a position with Registrant.
Item 28. LOCATION OF ACCOUNTS AND RECORDS
Books and other documents required to be maintained by the
Registrant by section 31(a) of the Investment Company Act of 1940
and the Rules promulgated thereunder are maintained by the
C-3
<PAGE>
Registrant's transfer agent, National Financial Data Services,
1004 Baltimore, Kansas City, Missouri 64105 and the Funds'
custodians as follows: the custodian for the domestic securities
of the Growth and Income Stock Fund, High Yield Bond Fund and
Municipal Bond Fund is Bankers Trust Company, 16 Wall Street, New
York, New York 10015. The custodian for the domestic securities
of the Small Cap Growth Stock Fund, Index 400 Stock Fund,
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 Small Cap
Growth Stock Fund, Asset Allocation Fund, High Yield Bond Fund,
Select Bond Fund, Aggressive Growth Stock Fund and Growth Stock
Fund is Brown Brothers Harriman & Co., 40 Water Street, Boston,
Massachusetts 02109. Registrant's financial ledgers and other
corporate records are maintained at its offices at The
Northwestern Mutual Life Insurance Company, 720 East Wisconsin
Avenue, Milwaukee, Wisconsin 53202.
Item 29. MANAGEMENT SERVICES
Not applicable
Item 30. UNDERTAKINGS
Not applicable
C-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this Amended
Registration Statement to be signed on its behalf by the undersigned, duly
authorized, in the City of Milwaukee, and State of Wisconsin, on the 28th day of
April, 1999.
MASON STREET FUNDS, INC.
(Registrant)
By: JAMES D. ERICSON
----------------------------------------
James D. Ericson, President
Pursuant to the requirements of the Securities Act of 1933, this Amended
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
Signature Title
--------- -----
JAMES D. ERICSON President, Director
- ------------------------------ and Principal Execu-
James D. Ericson tive Officer
MARK G. DOLL Vice President,
- ------------------------------ Treasurer and Principal
Mark G. Doll Financial Officer
BARBARA E. COURTNEY Controller and
- ------------------------------ Principal Accounting
Barbara E. Courtney Officer Dated
April 28,
1999
WILLIAM J. BLAKE* Director
- ------------------------------
William J. Blake
STEPHEN N. GRAFF* Director
- ------------------------------
Stephen N. Graff
MARTIN F. STEIN* Director
- ------------------------------
Martin F. Stein
JOHN K. MACIVER* Director
- ------------------------------
John K. MacIver
WILLIAM A. MCINTOSH* Director
- ------------------------------
William A. McIntosh
* By JAMES D. ERICSON
------------------------------
James D. Ericson, Attorney
in fact, pursuant to the Power
of Attorney attached hereto
C-5
<PAGE>
POWER OF ATTORNEY
The undersigned Directors of Mason Street Funds, Inc. (the "Company"),
hereby constitute and appoint James D. Ericson and Edward J. Zore, or either of
them, their true and lawful attorneys and agents, to sign the names of the
undersigned Directors to any instruments or documents filed as part of or in
connection with or in any way related to the registration statement or
statements and any and all amendments thereto, to be filed under the Securities
Act of 1933 and the Investment Company Act of 1940 in connection with shares of
the common stock of the Company offered to the public; and each of the
undersigned hereby ratifies and confirms all that said attorneys and agents
shall do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, each of the undersigned has subscribed these presents,
as indicated, February 4, 1999.
STEPHEN N. GRAFF Director
------------------------
Stephen N. Graff
WILLIAM J. BLAKE Director
------------------------
William J. Blake
JOHN K. MACIVER Director
------------------------
John K. MacIver
MARTIN F. STEIN Director
------------------------
Martin F. Stein
JAMES D. ERICSON Director
------------------------
James D. Ericson
WILLIAM A. MCINTOSH Director
------------------------
William A. McIntosh
C-6
<PAGE>
EXHIBIT INDEX
EXHIBITS FILED WITH FORM N-1A
POST-EFFECTIVE AMENDMENT NO. 3 TO
REGISTRATION STATEMENT UNDER SECTION 6 OF
THE SECURITIES ACT OF 1933
AND SECTION 8(b) OF THE INVESTMENT COMPANY ACT OF 1940
FOR
MASON STREET FUNDS, INC.
EXHIBIT NUMBER EXHIBIT NAME
- -------------- ------------
Exhibit B Amendment to the By-Laws adopted by the Directors of Mason Street
Funds, Inc. on August 6, 1998.
Exhibit D Form of Investment Advisory Agreement between Mason Street Funds,
Inc. (on behalf of the Small Cap Growth Stock Fund and the Index
400 Stock Fund), Northwestern Mutual Investment Services, LLC and
The Northwestern Mutual Life Insurance Company.
Exhibit G Form of Custodian Agreement between Mason Street Funds, Inc. and
Chase Manhattan Bank.
Exhibit H(1) Form of License Agreement between Standard & Poor's Corporation
and Mason Street Funds, Inc. (on behalf of the Index 400 Stock
Fund).
Exhibit H(2) Fee Waiver Agreement with Robert W. Baird & Co.
Exhibit H(3) Form of Master Agreement/DST FAN Services - Mutual Funds.
Exhibit J Consent of PricewaterhouseCoopers LLP. (to be filed by amendment)
Exhibit L Form of Subscription Agreement.
Exhibit N Financial Data Schedule for period ended March 31, 1999 for each
Fund of Mason Street Funds, Inc. (to be filed by amendment)
HOL03 117845
<PAGE>
Exhibit B
AMENDMENT TO THE BY-LAWS ADOPTED AT A MEETING OF THE DIRECTORS OF
MASON STREET FUNDS, INC. ON AUGUST 6, 1998
AMENDMENT: RESOLVED, that Section 8.06 of the By-laws of the corporation is
hereby amended by inserting the following sentence as the fifth sentence,
effective August 6, 1998:
"The Fund may also invest up to 5% of its assets in other equity securities,
rights, warrants, options and other derivatives."
<PAGE>
Exhibit D
INVESTMENT ADVISORY AGREEMENT
THIS AGREEMENT, entered into this ____ day of _______, 1999 between Mason
Street Funds, Inc., a Maryland corporation ("MSF"), and Northwestern Mutual
Investment Services, LLC, a Wisconsin limited liability company ("NMIS") (NMIS
being hereinafter referred to as the "Manager").
WHEREAS, MSF is a series company as contemplated by the Investment Company
Act of 1940 and currently has eleven series, each of which is represented by a
separate class of capital stock, and two of which are subject to this agreement:
Small Cap Growth Stock Fund and Index 400 Stock Fund (the "Funds"); and
WHEREAS, MSF and Manager wish to enter into an agreement setting forth the
terms on which the Manager will perform certain services for MSF and the Funds.
NOW, THEREFORE, it is mutually agreed as follows:
1. MSF hereby employs the Manager to manage the investment and
reinvestment of the assets of each Fund, to determine the composition of the
assets of each Fund, including the purchase, retention or sale of the securities
and cash contained in the Fund, subject to the supervision of the Board of
Directors of MSF, for the period and on the terms in this Agreement set forth.
The Manager will perform its duties in accordance with the investment objectives
and policies of each Fund as stated in MSF's Articles of Incorporation, By-laws
and Registration Statement and amendments thereto filed with the Securities and
Exchange Commission and in resolutions adopted by MSF's Board of Directors. The
Manager hereby accepts such employment and agrees during such period, at its own
expense, to render the services and to assume the obligations herein set forth,
for the compensation herein provided. The Manager shall for all purposes herein
be deemed to be an independent contractor and shall, unless
<PAGE>
otherwise expressly provided or authorized, have no authority to act for or
represent MSF in any way or otherwise be deemed an agent of MSF.
2. The Manager assumes and shall pay for expenses not hereinafter assumed
by the Funds that are incurred by the Manager in connection with the management
of the investment and reinvestment of the assets of the Funds. Expenses to be
paid by the Funds include, but are not limited to, the following expenses
relating to the establishment, operation and affairs of the Funds: (i) expenses
of maintaining the Fund and continuing its existence, (ii) registration of the
Fund under the Investment Company Act, (iii) auditing and outside professional
expenses, (iv) taxes and interest, (v) governmental fees, (vi) expenses
related to issue, sale, repurchase and redemption of Fund shares, (vii)
expenses of registering and qualifying the Fund and its shares under federal and
state securities laws and of preparing and printing prospectuses for such
purposes and for distributing the same to shareholders and investors, (viii)
expenses of reports and notices to shareholders and of meetings of shareholders
and proxy solicitations therefor (ix) expenses of reports to governmental
officers and commissions, (x) insurance expenses, (xi) association membership
dues, (xii) fees, expenses and disbursements of custodians for all services to
the Fund, (xiii) expenses for servicing shareholder accounts, including
transfer agent fees, (xiv) fees paid to pricing services for the pricing of
Fund securities, (xv) fees paid to the Funds' administrator under an
administrative services agreement, (xvi) fees paid for accounting services,
(xvii) fees paid to Standard and Poor's Corporation for the use of trademarks
by MSF and the Funds, (xviii) fees paid to the directors of MSF for their
services to MSF and the Funds, (xix) broker's commissions and issue and
transfer taxes, chargeable to the Fund in connection with securities
transactions to which the Fund is a party, (xx) organizational expenses of MSF
and the Funds, (xxi) any direct charges to shareholders approved by the
Directors of MSF who are not "interested persons" of MSF, and xxii) such
nonrecurring items as may arise, including expenses incurred in connection with
litigation, proceedings and claims and the obligation of MSF to indemnify its
Directors and officers with respect thereto.
-2-
<PAGE>
In connection with purchases or sales of portfolio securities for the
account of each Fund, neither the Manager nor any of its directors, officers or
employees will act as a principal or receive any commission as agent.
The services of the Manager to each Fund hereunder are not to be deemed
exclusive, and the Manager shall be free to render similar services to others so
long as its services hereunder are not impaired thereby.
3. For the services to be rendered and the charges and expenses assumed
and to be paid by the Manager as provided in paragraph 2 hereof, each Fund shall
pay to the Manager compensation at the annual rate of the percentage of the
current value of the net assets of the Fund as set forth below:
<TABLE>
<CAPTION>
Fund Fee
---- ---
<S> <C>
Small Cap Growth Stock 0.85%
Index 400 Stock 0.40%
</TABLE>
Such compensation shall be payable at such intervals, not more frequently
than monthly and not less frequently than quarterly, as the Board of Directors
of MSF may from time to time determine and specify in writing to the Manager.
Such compensation shall be calculated on the basis of the aggregate of the
averages of all the valuations of the net assets of the Fund made as of the
close of business on each valuation day during the period for which such
compensation is paid.
Such compensation shall be charged to the Fund on each valuation day. The
amount of the compensation will be deducted on each valuation day from the value
of the Fund prior to determining the Fund's net asset value for the day and
shall be transmitted or credited to the Manager.
4. MSF shall cause the books and accounts of each Fund to be audited at
least once each year by a reputable independent public accountant or
organization of public accountants who shall render a report to MSF.
-3-
<PAGE>
5. Subject to the Articles of Incorporation of MSF and of the Manager
respectively, it is understood that directors, officers, employees, agents and
stockholders of MSF are or may be interested in the Manager (or any successor
thereof) as directors, officers, employees, agents, or stockholders, or
otherwise, that directors, officers, agents and stockholders of the Manager are
or may be interested in MSF as directors officers, employees, agents or
stockholders or otherwise, that the Manager (or any successor) is or may be
interested in MSF as a stockholder or otherwise.
6. In the absence of willful misfeasance, bad faith, gross negligence, or
reckless disregard of obligations or duties hereunder on the part of the Manager
or its corporate affiliates, the Manager and its corporate affiliates shall not
be subject to liability to either Fund for any act or omission in the course of,
or connected with, rendering services hereunder or for any losses that may be
sustained in the purchase, holding, or sale of any security. No provision of
this Agreement shall be construed to protect the Manager and its corporate
affiliates from liability in violation of section 17(i) of the Investment
Company Act of 1940.
7. This Agreement shall continue in effect so long as its continuance is
specifically approved at least annually by the vote of a majority of those
directors of MSF who are not parties to the Agreement or interested persons of
any such party cast in person at a meeting called for the purpose of voting on
such approval and by either a majority of the Board of Directors of MSF or a
majority of the outstanding voting securities of each Fund (as defined in the
Investment Company Act of 1940). Shareholder approval shall be effective with
respect to any Fund vote for the approval, notwithstanding that a majority of
the outstanding voting securities of MSF or of the other Fund have not voted for
approval.
This Agreement may at any time be terminated without the payment of any
penalty either by vote of the Board of Directors of MSF or by vote of the
majority of the voting securities of either Fund, on sixty days' written notice
to the Manager. This Agreement may also be
-4-
<PAGE>
terminated by the Manager on ninety days' written notice to MSF. This Agreement
shall immediately terminate in the event of its assignment (as defined in the
Investment Company Act of 1940). Any notice under this Agreement shall be given
in writing, addressed and delivered, or mailed postpaid, to the other party at
any office of such party.
8. This Agreement may be amended at any time by mutual consent of the
parties, provided that such consent on the part of MSF shall have been approved,
with respect to any Fund, by vote of a majority of the outstanding voting
securities of the Fund (as defined in the Investment Company Act of 1940) as
provided in paragraph 7, if such vote is required by the Investment Company Act
of 1940.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the
day and year first above written.
Attest: MASON STREET FUNDS, INC.
By
- ----------------------------------- ------------------------------------
Merrill C. Lundberg, Secretary James D. Ericson, President
Attest: NORTHWESTERN MUTUAL INVESTMENT
SERVICES, INC.
By
- ----------------------------------- ------------------------------------
Merrill C. Lundberg, Secretary Richard L. Hall, President
Document #120226
-5-
<PAGE>
EXHIBIT G
DOMESTIC CUSTODY AGREEMENT
To: The Chase Manhattan Bank
Global Investor Services North America Insurance
3 Chase Metrotech Center
Brooklyn, N.Y. 11245
Gentlemen:
We are a company registered under the Investment Company Act of 1940,
as amended and hereby request you to open and to maintain on your records a
Custody Account in our name as Entitlement Holder and to credit to such account
Financial Assets as our Securities Intermediary, upon the following terms and
conditions. From time to time, we may instruct you to open additional Custody
Accounts for us. Unless we and you shall otherwise expressly agree in writing,
all such Custody Accounts shall be governed by the terms of this Agreement
Financial Assets credited to the Custody Account shall be segregated
at all times from your proprietary assets. Financial Assets credited to the
Custody Account shall be withdrawable or transferable upon our instructions as
hereinafter described, subject to the further terms and conditions herein.
DEFINITIONS. The capitalized terms used herein shall have the meanings
set forth below:
"Agreement" means this Domestic Custody Agreement.
"Cash Account" means a cash account in our name on your records,
designated by us to be credited and debited in respect of all transactions to
the Custody Account pursuant to this Agreement and in which cash shall not be
subject to withdrawal by check or draft.
"Custody Account" means each Securities custody account on your
records to which Financial Assets are or may be credited pursuant to this
Agreement.
"Depository" means a Federal Reserve Bank and any clearing corporation
as defined in the Uniform Commercial Code.
"Entitlement Holder" means the person on the records of a Securities
Intermediary as the person having a Securities Entitlement against the
Securities Intermediary.
"Financial Assets" means Securities. As the context requires a
Financial Asset means either the interest itself or the means by which a
person's
<PAGE>
claim to it is evidenced, including a certificated or uncertificated Security, a
Security certificate, or a Securities Entitlement.
"Securities" means stocks, bonds, rights, warrants and other
negotiable and non-negotiable paper issued in certificated form or in
uncertificated form and commonly traded or dealt in on securities exchanges or
financial markets, and other obligations of an issuer, or shares, participations
and interests in an issuer recognized in an area in which it is issued or dealt
in as a medium for investment and any other property as shall be acceptable to
you for the Custody Account.
"Securities Entitlement" means the rights and property interest of an
Entitlement Holder with respect to a Financial Asset as set forth in Part 5 of
the Uniform Commercial Code.
"Securities Intermediary" means you, a Depository, and any other
financial institution which in the ordinary course of its business maintains
Securities accounts for others and acts in that capacity.
"Uniform Commercial Code" means Article 8 of the New York Uniform
Commercial Code, as amended.
TRANSACTIONS. Unless you receive contrary written instructions from
us, and subject to the further provisions of this Agreement, you are authorized:
(a) to receive all interest and dividends payable on the Financial
Assets credited to the Custody Account and to credit such interest and dividends
to the Cash Account;
(b) to credit to the Cash Account all proceeds received from sales
and redemptions of Financial Assets for the Custody Account;
(c) to debit the Cash Account for the cost of acquiring Financial
Assets for the Custody Account;
(d) to present Financial Assets (including coupons) for payment upon
maturity, when called for redemption and when income payments are due;
(e) to exchange Financial Assets for other Financial Assets where the
exchange is purely ministerial as, for example, the exchange of Financial Assets
in temporary form for Financial Assets in definitive form or the mandatory
exchange of Financial Assets;
(f) to sell Financial Assets with fractional interests resulting from
a stock split or a stock dividend and to credit the Cash Account with the
proceeds thereof;
2
<PAGE>
(g) to execute in our name, whenever you deem it appropriate, such
ownership and other certificates as may be required to obtain payments with
respect to, or to effect the sale, transfer or other disposition of, Financial
Assets in the Custody Account and to guarantee as our signature the signature so
affixed; and
(h) to receive and hold in the Custody Account Financial Assets which
have transfer limitations imposed upon them by the Securities Act of 1933, as
amended.
INSTRUCTIONS. You are authorized to rely and act upon all further
written instructions given or purported to be given by one or more officers,
employees or agents of ours (i) authorized by or in accordance with a corporate
resolution of ours delivered to you or (ii) described as authorized in a
certificate delivered to you by our Secretary or an Assistant Secretary or
similar officer of ours (each such officer, employee or agent or combination of
officers, employees and agents authorized pursuant to clause (i) or described
pursuant to clause (ii) of this paragraph is hereinafter referred to as an
"Authorized Officer"). (The term "instructions" includes, without limitation,
instructions to sell, assign, transfer, deliver, purchase or receive for the
Custody Account, any and all stocks, bonds and other Financial Assets or to
transfer funds in the Cash Account.) You may also rely and act upon instructions
when bearing or purporting to bear the facsimile signature or signatures of any
of the individuals designated by an Authorized Officer regardless of by whom or
by what means the actual or purported facsimile signature or signatures thereon
may have been affixed thereto if such facsimile signature or signatures resemble
the facsimile specimen or specimens from time to time furnished to you by any of
such Authorized Officers, our Secretary or an Assistant Secretary or similar
officer of ours. In addition, you may rely and act upon instructions received
by telephone, telex, facsimile transmission, bank wire or other teleprocess or
electronic instruction or trade information system acceptable to you which you
believe in good faith to have been given by an Authorized Officer or which are
transmitted with proper testing or authentication pursuant to terms and
conditions which you may specify. You may also rely and act upon instructions
transmitted electronically through your TITAN Data Entry System or any similar
electronic instruction system acceptable to you. You shall incur no liability
to us or otherwise as a result of any at or omission by you in accordance with
instructions on which you are authorized to rely pursuant to the provisions of
this paragraph. Any instructions delivered to you by telephone shall promptly
thereafter be confirmed in writing by an Authorized Officer, but you shall incur
no liability for our failure to send such confirmation in writing, the failure
of any such written confirmation to conform to the telephone instructions which
you received, the failure of any such written confirmation to be signed or
properly signed, or your failure to produce such confirmation at any subsequent
time. You shall incur no liability for refraining from acting upon any
instructions which for any reason you, in good faith, are unable to verify to
your own satisfaction. With respect to instructions received hereunder to
transfer funds from the Cash Account to any other account or party, we agree to
implement any callback or other authentication
3
<PAGE>
method or procedure or security device required by you at any time or from time
to time. Unless otherwise expressly provided, all authorizations and
instructions shall continue in full force and effect until canceled or
superseded by subsequent authorizations or instructions received by your
safekeeping account administrator with reasonable opportunity to act thereon.
Your authorization to rely and act upon instructions pursuant to this paragraph
shall be in addition to, and shall not limit, any other authorization which we
may give you regarding our accounts with you.
We agree that, if you require test arrangements, authentication
methods or procedures or other security devices to be used with respect to
instructions which we may give hereunder, thereafter instructions given by us
shall be given and processed in accordance with terms and conditions for the use
of such arrangements, methods or procedures or devices as you may put into
effect and modify from time to time. We shall safeguard any testkeys,
identification codes or other security devices which you make available to us
and agree that we shall be responsible for any loss, liability or damage
incurred by you or by us as a result of your acting in accordance with
instructions from any unauthorized person using the proper security device,
unless such unauthorized use is the result of your negligence or willful
misconduct. You may electronically record any instructions given by telephone,
and any other telephone discussions with respect to the Custody Account or
transactions pursuant to this Agreement.
If you are instructed by us to purchase or sell Financial Assets for
the Custody Account you may enter purchase and sale orders and confirmations,
and perform any other acts incidental or necessary to the performance thereof
with brokers or dealers or similar agents selected by you, including any broker
or dealer or similar agent affiliated with you, for our account and risk in
accordance with accepted industry practices in the relevant market.
Except as may be provided otherwise in this Agreement, you are
authorized to execute our instructions and take other actions pursuant to this
Agreement in accordance with your customary processing practices for customers
similar to us and, in accordance with such practices, you may retain agents,
including subsidiaries or affiliates of yours, to perform any of your duties and
responsibilities under this Agreement.
In acting upon instructions to deliver Financial Assets against
payment, you are authorized, in accordance with customary securities processing
practices, to deliver such Financial Assets to the purchaser thereof or dealer
therefor (including to an agent for any such purchaser or dealer) against a
receipt, with the expectation of collecting payment from the purchaser, dealer
or agent to whom the Financial Assets were so delivered before the close of
business on the same day.
4
<PAGE>
PAYMENT ORDERS. Funds credited to the Cash Account shall be
transferred by us by means of instruction (a "payment order") to one of your
account administrators assigned by you for the Custody Account, which you will
identify to us. We agree that payment orders and communications seeking to
cancel or amend payment orders which are issued by telephone, telecopier or in
writing shall be subject to a mutually agreed security procedure and you may
execute or pay payment orders issued in our name when verified by you in
accordance with such procedure.
In executing or paying a payment order you may rely upon the
identifying number (e.g. Fedwire routing number or account) or any party as
instructed in the payment order. We assume full responsibility for any
inconsistency between the name and identifying number of any party in payment
orders issued to you in our name.
REGISTRATION. Unless you receive contrary instructions from us, you
are authorized to keep Financial Assets in your own vaults or in book entry form
registered in your name or in the name of your nominee or nominees or, where
Financial Assets are eligible for deposit in a Depository, such as The
Depository Trust Company or Participants Trust Company, you may use any such
Depository and permit the registration of registered Financial Assets in the
name of its nominee or nominees, and we agree to indemnify and hold you and the
nominees harmless from any liability as holders of record. We shall accept the
return or delivery of Financial Assets of the same class and denomination as
those deposited with you by us or otherwise received by you for the Custody
Account, and you need not retain the particular certificates so deposited or
received.
If any of our Financial Assets registered in your name or the name of
your nominee or held in a Depository and registered in the name of the
Depository's nominee are called for partial redemption by the issuer of such
Financial Assets, you are authorized to allot the called portion to the
respective beneficial holders of the Financial Assets in any manner deemed to be
fair and equitable by you in your sole discretion.
SEGREGATED ACCOUNT. Upon receipt of instructions from us you will
establish and maintain a segregated account or accounts on your records for and
on our behalf, in which may be credited cash and/or Financial Assets:
(a) in accordance with the provisions of an agreement among us and a
broker-dealer (registered under the Securities and Exchange Act of 1934
("Exchange Act") and a member of the National Association of Securities Dealers,
Inc. ("NASD"), or any futures commission merchant registered under the Commodity
Exchange Act, relating to compliance with the rules of the Options Clearing
Corporation and of any registered national securities exchange (or the
Commoditiy Futures Trading Commission or any registered contract market), or of
any similar organization, regarding escrow or other arrangements in connection
with the transactions by us;
(b) for the purpose of segregating cash or financial assets with
options purchased or sold by us; and
5
<PAGE>
(c) for other proper corporate purposes as per the instruction of an
Authorized Officer.
STATEMENTS. You shall notify us of each Financial Asset transaction
effected for the Custody Account and of income on and redemptions of the
Financial Assets in the Custody Account, as well as furnish us a listing of such
Financial Assets, at such times upon which you and we mutually agree. Periodic
statements shall be rendered to us as we may reasonably require, but not less
frequently than monthly. You shall at all times maintain proper books and
records that shall identify the Financial Assets as ours. Your books and
records relating to the Custody Account shall be available for inspection upon
reasonable notice to you during your regular business hours by duly authorized
officers, employees, or agents of ours, or by legally authorized regulatory
officials who are then in the process of reviewing our financial affairs upon
proof to you of such official status.
Unless we shall send to you a written exception or objection to any
statement of account within 60 days of our receipt of such statement from you,
we shall be deemed to have approved such statement. In such event, or where we
have otherwise approved such statement, you shall, to the extent permitted by
law, be released, relieved and discharged with respect to all matters set forth
in such statement or reasonably implied therefrom as though it had been settled
by the decree of a court of competent jurisdiction in an action where we and all
persons having or claiming an interest in the Custody Account or Cash Account
were parties.
CORPORATE ACTIONS. You shall send us such proxies (signed in blank,
if issued in your name or the name of your nominee or a nominee of a Depository)
and communications with respect to Financial Assets in the Custody Account as
call for voting or relate to legal proceedings within a reasonable time after
sufficient copies are received by you for forwarding to customers. In addition,
you shall follow coupon payments, redemptions, exchanges or similar matters with
respect to Financial Assets in the Custody Account and advise us of rights
issued, tender offers or any other discretionary rights with respect to such
Financial Assets, in each case, of which you receive notice at your central
corporate actions department from the issuer or from the Depository in which
such Financial Assets are maintained or notice published in publications and
reported in reporting services routinely used by you for this purpose.
CUSTODIAN RESPONSIBILITY. You shall exercise reasonable care in the
performance of your duties in accordance with the commercial standards and
market practices in the relevant market. In respect of all your duties and
obligations pursuant to the terms of this Agreement, you shall be liable to us
only to the extent of our general damages suffered or incurred as a result of
any act or omission of you or your officers, employees or agents which
constitutes negligence or willful misconduct. General damages shall mean only
those damages as directly and necessarily result from such act or omission
without reference to any special
6
<PAGE>
conditions or circumstances of ours or of any transaction, whether or not you
have been advised of any such special conditions or circumstances. Anything in
this Agreement to the contrary notwithstanding, in no event shall you be liable
to us under this Agreement for special, indirect or consequential loss or damage
of any kind whatsoever, whether or not you are advised as to the possibility of
such loss or damage and regardless of the form of action in which any such loss
or damage may be claimed.
You shall not be liable for the acts or omissions of (or the
bankruptcy or insolvency of) any Depository. If, however, as a result of any
act or omission of, or the bankruptcy or insolvency of, any Depository we suffer
any loss or liability, you will take such steps with respect thereto in order to
effect a recovery as you shall reasonably deem appropriate under the
circumstances (including the bringing and settling of legal proceedings),
provided that unless you shall be liable as set forth in the immediately
preceding paragraph of this Agreement, for such loss or liability by virtue of
the negligence or misconduct of you or your officers, employees or agents, the
amount of any cost or expense in effecting, or attempting to effect, such
recovery shall be for our account, and you shall have the right to charge such
cost or expense to the Cash Account. We further agree to be bound by the
Depository rules and procedures applicable to you as a participant in respect of
any Financial Assets held by you in your account with such Depository.
All collection and receipt of funds or Financial Assets and all
payment and delivery of funds or Financial Assets under this Agreement shall be
made by you as our agent, at our risk with respect to our actions or omissions
and those of persons other than you, including, without limitation, the risk
associated with the securities processing practice of delivering Financial
Assets against a receipt and the risk that the counterparty in any transaction
into which we enter will not transfer funds or Financial Assets or otherwise
perform in accordance with our expectation of its obligations thereunder
(including, without limitation, where, as a result of such nonperformance, a
Depository reverses, or requires repayment of, any credit given in connection
with the transfer of Financial Assets).
In no event shall you be responsible or liable for any loss due to
forces beyond your control, including, but not limited to, acts of God, flood,
fire, nuclear fusion, fission or radiation, war (declared or undeclared),
terrorism, insurrection, revolution, riot, strikes or work stoppages for any
reason, embargo, closure or disruption of any market, government action,
including any laws, ordinances, regulations or the like which restrict or
prohibit the providing of the services contemplated by this Agreement, inability
to obtain equipment or communications facilities, or the error in transmission
of information caused by any machines or systems or the failure of equipment or
interruption of communications facilities, and other causes whether or not of
the same class or kind as specifically named above. In the event that you are
unable substantially to perform for any of the reasons described in the
immediately preceding sentence, you shall so notify us as soon as reasonably
practicable.
7
<PAGE>
You shall be responsible for only those duties expressly stated in
this Agreement or expressly contained in instructions to perform the services
described herein given to you pursuant to the provisions of this Agreement and
accepted by you and, without limiting the foregoing, you shall have no duty or
responsibility:
a) to question instructions, to supervise the investment of, or make
recommendations with respect to the purchase, retention or sale of, Financial
Assets relating to the Custody Account, to review or reconcile trade
confirmations received from brokers, or to maintain for your benefit any
insurance on Financial Assets in the Custody Account;
(b) with regard to any Financial Asset in the Custody Account as to
which a default in the payment of principal or interest has occurred, (i) to
give notice of default or make demand for payment to the issuer, or (ii) to take
any other action with respect to such default, except, in each instance, where
you have been requested by us and you have agreed in writing to do so;
(c) except as otherwise specifically provided in this section under
the heading "Custodian Responsibility", for any act or omission, or for the
solvency or insolvency, or notice to us of the solvency or insolvency, of any
broker or agent which is selected by you with reasonable care or by us or any
other person to effect any transaction for the Custody Account or to perform any
service under this Agreement;
(d) to evaluate, or report to us regarding, the financial condition
of any person, firm or corporation to which you deliver Financial Assets or
funds pursuant to this Agreement;
(e) for any loss occasioned by delay in the actual receipt of notice
by you of any payment, redemption or other transaction in respect to which you
are authorized to take some action pursuant to this Agreement; or
(f) for any errors or omissions made by any pricing services used by
you to value Financial Assets credited to the Custody Account as part of any
service subscribed to by us from you.
SETTLEMENTS. We agree with you that all credits of Financial Assets
and proceeds by you to the Custody Account and the Cash Account, respectively,
on the settlement or payable date shall be provisional when made and you shall
be entitled to reverse any such credits subject to actual receipt or collection
of immediately available funds, and you shall have the right to reverse any such
provisional credits or erroneous entries to the Cash Account retroactively to
the date upon which the correct entry, or no entry, should have been made.
We shall have sufficient immediately available funds each day in the
Cash Account to pay for the settlement of all Financial Assets delivered against
payment to you and credited to the Custody Account. Should we fail to have
8
<PAGE>
sufficient immediately available funds in the Cash Account to settle these
deliveries of Financial Assets pursuant to the preceding sentence (a "Deficit"),
you, in your sole discretion, may elect (i) to reject the settlement of any or
all of the Financial Assets delivered to you that day to the Custody Account,
(ii) to settle the deliveries on our behalf and debit the Cash Account (A) for
the amount of such Deficit and (B) for the amount of the funding or other cost
or expense incurred or sustained by you for our failure to have sufficient
immediately available funds in the Cash Account by the applicable settlement
deadlines for you, or (iii) to reverse the posting of the Financial Assets
credited to the Custody Account.
The foregoing rights are in addition to and not in limitation of any
other rights or remedies available to you under this Agreement or otherwise.
Any advances made by you to us in connection with the purchase, sale,
redemption, transfer or other designation of Financial Assets or in connection
with disbursements of funds to any party, which create or result in an overdraft
in the Cash Account shall be deemed a loan by you to us, payable on demand, and
bear interest on the amount of the loan each day that the loan remains unpaid at
your prime rate in effect as announced by you from time to time (unless another
rate has been separately agreed upon, in writing, between you and us in respect
of such advances).
No prior action or course of dealing on your part with respect to the
settlement of Financial Asset transactions on our behalf shall be used by or
give rise to any claim or action by us against you for your refusal to pay or
settle for Financial Asset transactions we have not timely funded as required
herein.
RESPONSIBLE AS PRINCIPAL. We agree that we shall be responsible to
you as a principal for all of our obligations to you arising under or in
connection with this Agreement, notwithstanding that we may be acting on behalf
of other persons, and we warrant our authority to deposit in the Custody Account
and Cash Account, respectively, any Financial Assets and funds which you or your
agents receive therefor and to give instructions relative thereto. We further
agree that you shall not be subject to, nor shall your rights and obligations
with respect to this Agreement and the Custody Account or the Cash Account be
affected by, any agreement between us and any such person.
CREDITING AND DEBITING PROCEDURES. With respect to all transactions
for the Custody Account and the Cash Account, including, without limitation,
dividend and interest payments and sales and redemptions of Financial Assets,
availability of funds credited to the Custody Account and Cash Account shall be
based on the type of funds used in the trade settlement or payment, including,
but not limited to, same day availability for federal or same day funds and next
business day availability for clearing house or next day funds. Furthermore,
with respect to all purchases and sales of Financial Assets for the Custody
Account, the proceeds from the sale of Financial Assets shall be credited to the
Cash Account on the date proceeds are received by you and the cost of Financial
Assets purchased shall be debited to the Cash Account on the date Financial
Assets are received by you,
9
<PAGE>
unless we request your contractual settlement service for the Custody Account in
which case the following provisions shall apply with respect to the delivery and
receipt of Financial Assets for the Custody Account for those Financial Assets
and transactions as to which you customarily offer this service.
(a) When we instruct you to deliver or receive Financial Assets, on
the contractual settlement date you shall credit the Cash Account with the
expected proceeds of the transaction and debit the Custody Account for the
Financial Assets which we have instructed you to deliver, in the case of
deliveries, and debit the Cash Account for the cost of the Financial Assets
which we have instructed you to receive and credit the Custody Account with such
Financial Assets, in the case of receives. These credits and debits are
provisional accounting entries which you shall reverse on our instructions and
which you may reverse, even in the absence of instructions from us, if the
transaction with respect to which they were made fails to settle within a
reasonable period, determined by you in your discretion, after the contractual
settlement date, except that if you deliver Financial Assets which are returned
by the recipient thereof, you may reverse such credits and debits at any time.
You have no obligation to use this crediting and debiting procedure with respect
to a delivery of Financial Assets if we do not have actually in our account
sufficient Financial Assets to make the delivery.
(b) As with other transactions processed by you, your responsibility
with respect to transactions for which you use this crediting and debiting
procedure shall be governed by the provisions of this Custody Agreement,
including the Section headed "Custodian Responsibility". We agree that your
using this procedure is not an assurance by you that the transaction will
actually settle on the contractual settlement date and does not impose any
additional responsibility on you with respect to the transaction. Without
limiting your right to reverse credits and debits described above, the account
statements which you furnish to us shall reflect transactions as to which you
use this procedure as if they had actually settled on the contractual settlement
date, unless prior to the date to which the statement relates, you have reversed
such credits and debits.
(c) We agree that you may terminate this contractual settlement
service to us at any time and for any reason.
With respect to Financial Assets or transactions as to which you do
not customarily offer this service, you shall (i) in the case of deliveries of
Financial Assets, credit the proceeds of the transaction to the Cash Account on
the date they are received by you and debit the Financial Assets from the
Custody Account on the date they are delivered by you, and (ii) in the case of
Financial Assets received, debit the Cash Account for the cost of such Financial
Assets and credit the Custody Account with such Financial Assets on the date the
Financial Assets are received by you.
10
<PAGE>
TAXES. Unless we have already done so, we shall deliver promptly to
you with respect to each Custody Account established under this Agreement, two
duly completed and executed copies of the proper United States Internal Revenue
Service Form W-9, certifying our status as a United States person and that we
are entitled to receive United States source payments under or in connection
with this Agreement without deduction as withholding or at a reduced rate of
withholding for United States federal income taxes We agree to provide duly
executed and completed updates of such form (or successor applicable form), on
or before the date that such form expires or becomes obsolete or after the
occurrence of an event requiring a change in the most recent form previously
delivered by us to you. We shall be responsible for the payment of all taxes
relating to the Financial Assets in the Custody Account.
You are authorized to deduct from the cash received or credited to the
Cash Account any taxes or levies required by any revenue or governmental
authority for whatever reason in respect of the Custody Account.
We agree to pay, indemnify and hold you harmless from and against any
and all liabilities, penalties, interest or additions to tax with respect to, or
resulting from, any delay in, or failure by, you (i) to pay, withhold or report
any Federal, state, local or foreign taxes imposed on, or in respect of, the
property held in the Custody Account(s), or this Agreement, or (ii) to report
interest, dividend or other income paid or credited to the Cash Account, whether
such failure or delay by you to pay, withhold or report tax or income is a
result of (x) our failure to comply with the terms of this section, or (y) your
own acts or omissions; provided, however, we shall not be liable to you for any
penalty or additions to tax due as a result of your failure to pay or withhold
tax or to report to us interest, dividend or other income paid or credited to
the Cash Account solely as a result of your negligent acts or omissions.
FEES. We agree to pay you compensation for your services pursuant to
this Agreement at the fees of which you shall notify us from time to time.
INDEMNIFICATION. (a) We agree to indemnify and hold you and your
directors, officers, agents and employees (collectively the "Indemnitees")
harmless from and against any and all claims, liabilities, losses, damages,
fines, penalties, and expenses, including out-of-pocket and incidental expenses
and legal fees ("Losses") that may be imposed on, incurred by, or asserted
against, the Indemnitees or any of them for following any instructions or other
directions upon which you are authorized to rely pursuant to the terms of this
Agreement.
(b) In addition to and not in limitation of paragraph (a) immediately
above, we also agree to indemnify and hold the Indemnitees and each of them
harmless from and against any and all Losses that may be imposed on, incurred
by, or asserted against, the Indemnitees or any of them in connection with or
arising out of your performance under this Agreement, provided the Indemnitees
have not acted with negligence or engaged in willful misconduct.
11
<PAGE>
SECURITY INTEREST. We hereby pledge, assign and grant to you a
continuing security interest in the Financial Assets in the Custody Account and
any Financial Assets in your possession and under your control for credit to the
Custody Account, as security for any and all obligations, matured or unmatured,
direct or indirect, absolute or contingent, now due or hereafter to become due
from us to you pursuant to this Agreement.
SET-OFF. You may, without notice to us, set-off any sums held for us
or standing to the credit of any of our cash accounts with you in and toward the
satisfaction of any obligation of us to you under this Agreement, whether or not
any such sums or credits or obligations are matured or unmatured, direct or
indirect, absolute or contingent, and may do so notwithstanding that the
accounts may be maintained at different branches of yours and may not be
expressed in the same currency.
TERMINATION. Either party may terminate this Agreement at any time
upon thirty days written notice. Notice by us shall specify the names of the
persons to whom you shall deliver the securities in the Custody Account and to
whom the cash in the Cash Account shall be paid. If notice of termination is
given by you, we shall, within thirty (30) days following the giving of such
notice, deliver to you a written notice specifying the names of the persons to
whom you shall deliver the securities in the Custody Account and to whom the
Cash in the Cash Account shall be paid. In either case, you will deliver such
securities and cash to the persons so specified. You may in your discretion
withhold from such delivery such cash and securities as may be necessary to
settle transactions pending at the time of such delivery. If within thirty (30)
days following the giving of a notice of termination by you, you do not receive
from us a written notice specifying the names of the persons to whom you shall
deliver the securities in the Custody Account and to whom the cash in the Cash
Account shall be paid, you may, at your election, deliver such securities and
pay such cash to a bank or trust company doing business in the State of New York
to be held and disposed of pursuant to the provisions of this Agreement, or may
continue to hold such securities and cash until a written notice as aforesaid is
delivered to you, provided that your obligations shall be limited to
safekeeping. Our obligations pursuant to the paragraphs under the headings
"Registration", "Settlements", "Fees", "Indemnification," "Taxes" and "Security
Interest" shall survive the termination of this Agreement.
NOTICES. Notices with respect to termination, specification of
Authorized Officers and terms and conditions for instructions required hereunder
shall be in writing, and shall be deemed to have been duly given if delivered
personally, and when delivered by courier service or by mail, postage prepaid
when received, to the following addresses (or to such other address as either
party hereto may from time to time designate by notice duly given in accordance
with this paragraph):
To us at:
12
<PAGE>
Mason Street Funds, Inc.
c/o The Northwestern Mutual Life Insurance Company
ATTN: PUBLIC MARKETS/INVESTMENT OPERATIONS
720 East Wisconsin Avenue
Milwaukee, WI 53202
To you, to the attention of the individual designated by you as the
safekeeping account administrator for our account, at:
THE CHASE MANHATTAN BANK
Global Investor Services North America Insurance
3 Chase Metrotech Center
Brooklyn, N.Y. 11245
GOVERNING LAW, SUCCESSORS AND ASSIGNS, HEADINGS. This Agreement shall
be governed by and construed in accordance with the internal laws of the State
of New York, and shall be binding on our and your respective successors and
assigns. The headings of the paragraphs hereof are included for convenience of
reference only and do not form a part of this Agreement.
PRIOR PROPOSALS. This Agreement (including any Riders relating to
additional services in respect of the Custody Account we may request of you)
shall contain the complete agreement of the parties hereto with respect to the
Custody Account (except as may be expressly provided to the contrary herein)
and supersedes and replaces any previously made proposals, representations,
warranties or agreements with respect thereto by either or both of the parties
hereto. This Agreement shall become effective upon execution hereof by us and
acceptance by you.
SEPARABILITY. Any provisions of this Agreement which may be
determined by competent authority to be prohibited or unenforceable in any
jurisdiction shall, as to such jurisdiction, be ineffective to the extent of
such prohibition or unenforceability without invalidating the remaining
provisions hereof, and any such prohibition or unenforceability in any
jurisdiction shall not invalidate or render unenforceable such provision in any
other jurisdiction.
RESERVATION OF RIGHT. You shall have the right not to accept for
deposit to the Custody Account any Financial Assets which are in a form or
condition which you, in your sole discretion, determine not to be suitable for
the services you provide under this Agreement.
Your rights and remedies under this Agreement are in addition to, and
not in limitation of, any other rights and remedies you may have under
applicable law.
13
<PAGE>
ADDITIONAL DUTIES. If we shall ask you to perform duties or
responsibilities not specifically set forth in this Agreement and you choose to
perform such additional duties or responsibilities, you shall be held to the
same standard of care and you shall be entitled to all the protective provisions
(including but not limited to limitation of liability and indemnification) set
forth herein.
COUNTERPARTS. This Agreement may be executed in several counterparts
each of which shall be deemed to be an original and together shall constitute
one and the same agreement.
MERGERS. Any corporation or banking assciation into which you may be
merged or with which you may be consolidated, or any corporation or banking
association resulting from any merger or consolidation to which you shall be a
party, or any corporation or banking association succeeding to your corporate
custody business, shall succeed to all your rights, obligations and immunities
hereunder without the execution or filing of any paper or further act on the
part of any of the parties hereto, anything herein to the contrary
notwithstanding.
REPRESENTATION. You represent and warrant that you are qualified as a
custodian under Section 26(a) of the Investment Company Act of 1940 and warrant
that you will remain so qualified or upon ceasing to be so qualified shall
promptly notify us in writing.
MASON STREET FUNDS, INC._____
STOCK FUND
By:
-----------------------------------
Title:
-----------------------------------
Date:
-----------------------------------
Accepted by:
THE CHASE MANHATTAN BANK
By:
------------------------------
Title:
------------------------------
Date:
------------------------------
120248
14
<PAGE>
Exhibit H(1)
LICENSE AGREEMENT
LICENSE AGREEMENT, dated as of ____________ __, 1999 (the "Commencement
Date") by and between STANDARD & POOR'S, a division of The McGraw-Hill
Companies, Inc. ("S&P"), a New York corporation, having an office at 25
Broadway, New York, NY 10004, and MASON STREET FUNDS, INC. and THE NORTHWESTERN
MUTUAL LIFE INSURANCE COMPANY ("Licensee"), a Wisconsin corporation having an
office at 720 East Wisconsin Avenue, Milwaukee, Wisconsin 53202.
WHEREAS, S&P compiles, calculates, maintains and owns rights in and to the
S&P MidCap 400 Index and to the proprietary data therein contained (such rights
being hereinafter individually and collectively referred to as the "S&P MidCap
400 Index"); and
WHEREAS, S&P uses in commerce and has trade name and trademark rights to
the designations "Standard & Poor's-Registered Trademark-", "S&P-Registered
Trademark-", "S&P MidCap 400 Index" and "Standard & Poor's MidCap Index", in
connection with the S&P MidCap 400 Index (such rights being hereinafter
individually and collectively referred to as the "S&P Marks"); and
WHEREAS, Licensee wishes to use the S&P MidCap 400 Index, either (i)
directly or (ii) through a separate arrangement between Licensee and the issuer,
distributor, advisor and/or sponsor of an investment product, the returns of
which are based on the S&P MidCap 400 Index, as a component of the product or
products described in Exhibit A attached hereto and made a part hereof
(individually and collectively referred to as the "Product"); and
WHEREAS, Licensee wishes to use the S&P Marks in connection with the
issuance, marketing and/or promotion of the Product and in connection with
making disclosure about the Product under applicable law, rules and regulations
in order to indicate that S&P is the source of the S&P MidCap 400 Index; and
WHEREAS, Licensee wishes to obtain S&P's authorization to use the S&P
MidCap 400 Index and the S&P Marks in connection with the Product pursuant to
the terms and conditions hereinafter set forth.
NOW, THEREFORE, the parties hereto agree as follows:
<PAGE>
1. GRANT OF LICENSE.
(a) Subject to the terms and conditions of this Agreement, S&P hereby
grants to Licensee a non-transferable, non-exclusive license (i) to use the S&P
MidCap 400 Index as a component of the Product, either (A) directly or (B)
indirectly through an arrangement between Licensee and the issuer, distributor,
advisor and/or sponsor of an investment product, the returns of which are based
on the S&P MidCap 400 Index, to be marketed and/or promoted by Licensee and (ii)
to use and refer to the S&P Marks in connection with the distribution, marketing
and promotion of the Product (including in the name of the Product) and in
connection with making such disclosure about the Product as Licensee deems
necessary or desirable under any applicable law, rules, regulations or
provisions of this Agreement, but, in each case, only to the extent necessary to
indicate the source of the S&P MidCap 400 Index. It is expressly agreed and
understood by Licensee that no rights to use the S&P MidCap 400 Index and the
S&P Marks are granted hereunder other than those specifically described and
expressly granted herein.
(b) Licensee agrees and acknowledges that the license granted
pursuant to this Agreement is limited to the Product(s) identified and described
in Exhibit A and that if Licensee wishes to use the S&P MidCap 400 Index and/or
S&P Marks in connection with any additional Product(s), it shall first be
required to enter into a written amendment to this Agreement on terms mutually
acceptable to S&P and Licensee.
2. TERM.
The term of this Agreement shall commence on the Commencement Date and
shall continue in effect thereafter until it is terminated in accordance with
its terms.
3. LICENSE FEES.
(a) Licensee shall pay to S&P the license fees ("License Fees")
specified and provide the data called for in Exhibit B, attached hereto and made
a part hereof.
(b) During the term of this Agreement and for a period of one (1)
year after its termination, S&P shall have the right, during normal business
hours and upon reasonable notice to Licensee, to audit on a confidential basis
the relevant books and records of Licensee to determine that License Fees have
been accurately determined. The costs of such audit shall be borne by S&P
<PAGE>
unless it determines that it has been underpaid by five percent (5%) or more; in
such case, costs of the audit shall be paid by Licensee.
4. TERMINATION.
(a) At any time during the term of this Agreement, either party may
give the other party sixty (60) days prior written notice of termination if the
terminating party believes in good faith that material damage or harm is
occurring to the reputation or goodwill of that party by reason of its
continued performance hereunder, and such notice shall be effective on the date
specified therein of such termination, unless the other party shall correct the
condition causing such damage or harm within the notice period.
(b) In the case of breach of any of the material terms or conditions
of this Agreement by either party, the other party may terminate this Agreement
by giving sixty (60) days prior written notice of its intent to terminate, and
such notice shall be effective on the date specified therein for such
termination unless the breaching party shall correct such breach within the
notice period.
(c) S&P shall have the right, in its sole discretion, to cease
compilation and publication of the S&P MidCap 400 Index and, in such event, to
terminate this Agreement if S&P does not offer a replacement or substitute
index. In the event that S&P intends to discontinue the S&P MidCap 400 Index,
S&P shall give Licensee at least one (1) year's written notice prior to such
discontinuance, which notice shall specify whether a replacement or substitute
index will be made available.
Licensee shall have the option hereunder within sixty (60) days after
receiving such written notice from S&P to notify S&P in writing of its intent to
use the replacement or substitute index, if any, under the terms of this
Agreement. In the event that Licensee does not exercise such option or no
substitute or replacement index is made available, this Agreement shall be
terminated as of the date specified in the S&P notice and the License Fees to
the date of such termination shall be computed as provided in Subsection 4(f).
(d) Licensee may terminate this Agreement upon ninety (90) days prior
written notice to S&P if (i) Licensee is informed of the final adoption of any
legislation or regulation or the issuance of any interpretation that in
Licensee's reasonable judgment materially impairs Licensee's ability to market
and/or promote the Product; (ii) any material litigation or regulatory
<PAGE>
proceeding regarding the Product is threatened or commenced; or (iii) Licensee
elects to terminate the public offering or other distribution of the Product or
the investment objective of the Product is no longer to track the performance of
the S&P MidCap 400 Index, as may be applicable. In such event the License Fees
to the date of such termination shall be computed as provided in Subsection
4(f).
(e) S&P may terminate this Agreement upon ninety (90) days (or upon
such lesser period of time if required pursuant to a court order) prior written
notice to Licensee if (i) S&P is informed of the final adoption of any
legislation or regulation or the issuance of any interpretation that in S&P's
reasonable judgment materially impairs S&P's ability to license and provide the
S&P MidCap 400 Index and S&P Marks under this Agreement in connection with such
Product; or (ii) any litigation or proceeding is threatened or commenced and S&P
reasonably believes that such litigation or proceeding would have a material and
adverse effect upon the S&P Marks and/or the S&P MidCap 400 Index or upon the
ability of S&P to perform under this Agreement. In such event the License Fees
to the date of such termination shall be computed as provided in Subsection
4(f).
(f) In the event of termination of this Agreement as provided in
Subsections 4(a), (b), (c), (d) or (e), the License Fees to the date of such
termination shall be computed by prorating the amount of the applicable annual
License Fees shown in Exhibit B on the basis of the number of elapsed days in
the current term.
(g) Upon termination of this Agreement, Licensee shall cease to use
the S&P MidCap 400 Index and the S&P Marks in connection with the Product;
provided that Licensee may continue to utilize any previously printed materials
which contain the S&P Marks for a period of ninety (90) days following such
termination.
5. S&P'S OBLIGATIONS.
(a) It is the policy of S&P to prohibit its employees
who are directly responsible for changes in the components of the S&P MidCap 400
Index from purchasing or beneficially owning any interest in the Product and S&P
believes that its employees comply with such policy. Licensee shall have no
responsibility for ensuring that such S&P employees comply with such S&P policy
and shall have no duty to inquire whether any investors or sellers of the
Product are such S&P employees. S&P shall have no liability to the
<PAGE>
Licensee with respect to its employees' adherence or failure to adhere to such
policy.
(b) S&P shall not and is in no way obliged to engage in any marketing
or promotional activities in connection with the Product or in making any
representation or statement to investors or prospective investors in connection
with the promotion by Licensee of the Product.
(c) S&P agrees to provide reasonable support for Licensee's
development and educational efforts with respect to the Product as follows: (i)
S&P shall provide Licensee, upon request but subject to any agreements of
confidentiality with respect thereto, copies of the results of any marketing
research conducted by or on behalf of S&P with respect to the S&P MidCap 400
Index; and (ii) S&P shall respond in a timely fashion to any reasonable requests
for information by Licensee regarding the S&P MidCap 400 Index.
(d) S&P or its agent shall calculate and disseminate the S&P MidCap
400 Index at least once each fifteen (15) seconds in accordance with its current
procedures, which procedures may be modified by S&P.
(e) S&P shall promptly correct or instruct its agent to correct any
mathematical errors made in S&P's computations of the S&P MidCap 400 Index which
are brought to S&P's attention by Licensee, provided that nothing in this
Section 5 shall give Licensee the right to exercise any judgment or require any
changes with respect to S&P's method of composing, calculating or determining
the S&P MidCap 400 Index; and, provided further, that nothing herein shall be
deemed to modify the provisions of Section 9 of this Agreement.
6. INFORMATIONAL MATERIALS REVIEW.
Licensee shall use its best efforts to protect the goodwill and
reputation of S&P and of the S&P Marks in connection with its use of the S&P
Marks under this Agreement. Licensee shall submit to S&P for its review and
approval all informational materials pertaining to and to be used in connection
with the Product, including, where applicable, all prospectuses, plans,
registration statements, application forms, contracts, videos, advertisements,
brochures and promotional and any other similar informational materials
(including documents required to be filed with governmental or regulatory
<PAGE>
agencies) that in any way use or refer to S&P, the S&P MidCap 400 Index, or the
S&P Marks (the "Informational Materials"). S&P's approval shall be required with
respect to the use of and description of S&P, the S&P Marks and the S&P MidCap
400 Index and shall not be unreasonably withheld or delayed by S&P.
Specifically, S&P shall notify Licensee of its approval or disapproval of any
Informational Materials within forty-eight (48) hours (excluding Saturday,
Sunday and New York Stock Exchange Holidays) following receipt thereof from
Licensee. Any disapproval shall indicate S&P's reasons therefor. Any failure by
S&P to respond within such forty-eight (48) hour period shall be deemed to
constitute a waiver of S&P's right to review such Informational Materials.
Informational Materials shall be addressed to S&P, c/o Sandra Weinberger,
Specialist - Index Licensing/Marketing, Equity Index Services, at the address
specified in Subsection 12(d). Informational Materials may be submitted via
facsimile (to 212-208-8911 or 212-412-0429) if they are less than 20 pages and
legible after transmission. Once Informational Materials have been approved by
S&P, subsequent Informational Materials which do not alter the use or
description of S&P, the S&P Marks or the S&P MidCap 400 Index need not be
submitted for review and approval by S&P.
7. PROTECTION OF VALUE OF LICENSE.
(a) During the term of this Agreement, S&P shall use its best efforts
to maintain in full force and effect federal registrations for "Standard &
Poor's-Registered Trademark-" and "S&P-Registered Trademark-". S&P shall at
S&P's own expense and sole discretion exercise S&P's common law and statutory
rights against infringement of the S&P Marks, copyrights and other proprietary
rights.
(b) Licensee shall cooperate with S&P in the maintenance of such
rights and registrations and shall take such actions and execute such
instruments as S&P may from time to time reasonably request, and shall use the
following notice when referring to the S&P MidCap 400 Index or the S&P Marks in
any Informational Material:
"Standard & Poor's-Registered Trademark-", "S&P-Registered
Trademark-", "Standard & Poor's MidCap 400 Index", and "S&P MidCap 400
Index" are trademarks of The McGraw-Hill Companies, Inc. and have been
licensed for use by Mason Street
<PAGE>
Funds, Inc. and The Northwestern Mutual Life Insurance Company. The Product
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 Product. [Please see the Statement of Additional
Information which sets forth certain additional disclaimers and limitations
of liabilities on behalf of S&P.]
or such similar language as may be approved in advance by S&P, it being
understood that such notice need only refer to the specific S&P Marks referred
to in the Informational Material.
8. PROPRIETARY RIGHTS.
(a) Licensee acknowledges that the S&P MidCap 400 Index is selected,
coordinated, arranged and prepared by S&P through the application of methods and
standards of judgment used and developed through the expenditure of considerable
work, time and money by S&P. Licensee also acknowledges that the S&P MidCap 400
Index and the S&P Marks are the exclusive property of S&P, that S&P has and
retains all proprietary rights therein (including, but not limited to
trademarks and copyrights) and that the S&P MidCap 400 Index and its compilation
and composition and changes therein are in the control and discretion of S&P.
(b) S&P reserves all rights with respect to the S&P MidCap 400 Index
and the S&P Marks except those expressly licensed to Licensee hereunder.
(c) Each party shall treat as confidential and shall not disclose or
transmit to any third party any documentation or other written materials that
are marked as "Confidential and Proprietary" by the providing party
("Confidential Information"). Confidential Information shall not include (i) any
information that is available to the public or to the receiving party hereunder
from sources other than the providing party (provided that such source is not
subject to a confidentiality agreement with regard to such information) or (ii)
any information that is independently developed by the receiving party without
use of or reference to information from the providing party. Notwithstanding the
foregoing, either party may reveal Confidential Information to any regulatory
agency or court of competent jurisdiction if such information to be disclosed is
(a) approved in writing by the other party for disclosure or (b) required by
law, regulatory agency or court order to be disclosed by a party, provided, if
permitted by law, that prior written notice of such required disclosure is given
to the other party and provided further
<PAGE>
that the providing party shall cooperate with the other party to limit the
extent of such disclosure. The provisions of this Sub-section 8(c) shall survive
any termination of this Agreement for a period of five (5) years from disclosure
by either party to the other of the last item of such Confidential Information.
9. WARRANTIES; DISCLAIMERS.
(a) S&P represents and warrants that S&P has the right to grant the
rights granted to Licensee herein and that the license granted herein shall not
infringe any trademark, copyright or other proprietary right of any person not a
party to this Agreement.
(b) Licensee agrees expressly to be bound itself by and furthermore
to include all of the following disclaimers and limitations in each prospectus
or each Statement of Additional Information ("SAI") relating to the Product,
provided the SAI is incorporated by reference into the prospectus and the
prospectus contains disclosure regarding the S&P MidCap 400 Index that conforms
to the notice in Subsection 7(b), including a cross reference to the SAI
disclosure. Licensee shall furnish a copy of the prospectus and SAI thereof to
S&P:
The Product is not sponsored, endorsed, sold or promoted by Standard &
Poor's, a division of The McGraw-Hill Companies, Inc. ("S&P"). S&P makes no
representation or warranty, express or implied, to the owners of the Product or
any member of the public regarding the advisability of investing in securities
generally or in the Product particularly or the ability of the S&P MidCap 400
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 MidCap 400 Index which is determined, composed and calculated by S&P
without regard to the Licensee or the Product. S&P has no obligation to take the
needs of the Licensee or the owners of the Product into consideration in
determining, composing or calculating the S&P MidCap 400 Index. S&P is not
responsible for and has not participated in the determination of the prices and
amount of the Product or the timing of the issuance or sale of the Product or in
the determination or calculation of the equation by which the Product is to be
converted into cash. S&P has no obligation or liability in connection with the
administration, marketing or trading of the Product.
S&P DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF THE S&P
MIDCAP 400 INDEX OR ANY DATA INCLUDED THEREIN AND S&P SHALL HAVE NO LIABILITY
<PAGE>
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 THE
PRODUCT, OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE S&P MidCap 400 INDEX
OR ANY DATA INCLUDED THEREIN. S&P MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND
EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A
PARTICULAR PURPOSE OR USE WITH RESPECT TO THE S&P MIDCAP 400 INDEX OR ANY DATA
INCLUDED THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL S&P
HAVE ANY LIABILITY FOR ANY SPECIAL, PUNITIVE, INDIRECT, OR CONSEQUENTIAL DAMAGES
(INCLUDING LOST PROFITS), EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.
Any changes in the foregoing disclaimers and limitations must be
approved in advance in writing by an authorized officer of S&P.
(c) Each party represents and warrants to the other that it has the
authority to enter into this Agreement according to its terms and that its
performance does not violate any laws, regulations or agreements applicable to
it.
(d) Licensee represents and warrants to S&P that the Product shall at
all times comply with the description in Exhibit A.
(e) Licensee represents and warrants to S&P that the Product shall
not violate any applicable law, including but not limited to banking,
commodities and securities laws.
(f) Neither party shall have any liability for lost profits or
indirect, punitive, special, or consequential damages arising out of this
Agreement, even if notified of the possibility of such damages. Without
diminishing the disclaimers and limitations set forth in Subsection 9(b), in no
event shall the cumulative liability of S&P to Licensee exceed the average
annual License Fees actually paid to S&P hereunder.
(g) Use of any marks by Licensee in connection with its Product
(including in the name of such Product) which are not the S&P Marks is at
Licensee's sole risk.
(h) The provisions of this Section 9 shall survive any termination of
this Agreement.
<PAGE>
10. INDEMNIFICATION.
(a) Licensee shall indemnify and hold harmless S&P, its affiliates
and their officers, directors, employees and agents against any and all
judgments, damages, costs or losses of any kind (including reasonable attorneys'
and experts' fees) as a result of any claim, action, or proceeding that arises
out of or relates to (a) this Agreement, except insofar as it relates to a
breach by S&P of its representations or warranties hereunder, or (b) the
Product; provided, however, that S&P notifies Licensee promptly of any such
claim, action or proceeding. Licensee shall periodically reimburse S&P for its
reasonable expenses incurred under this Subsection 10(a). S&P shall have the
right, at its own expense, to participate in the defense of any claim, action or
proceeding against which it is indemnified hereunder; provided, however, it
shall have no right to control the defense, consent to judgment, or agree to
settle any such claim, action or proceeding without the written consent of
Licensee without waiving the indemnity hereunder. Licensee, in the defense of
any such claim, action or proceeding except with the written consent of S&P,
shall not consent to entry of any judgment or enter into any settlement which
either (a) does not include, as an unconditional term, the grant by the claimant
to S&P of a release of all liabilities in respect of such claims or (b)
otherwise adversely affects the rights of S&P. This provision shall survive the
termination or expiration of this Agreement.
(b) S&P shall indemnify and hold harmless Licensee, its affiliates
and their officers, directors, employees and agents against any and all
judgments, damages, costs or losses of any kind (including reasonable attorneys'
and experts' fees) as a result of any claim, action, or proceeding that arises
out of or relates to any breach by S&P of its representations or warranties
under this Agreement; provided, however, that (a) Licensee notifies S&P promptly
of any such claim, action or proceeding; (b) Licensee grants S&P control of its
defense and/or settlement; and (c) Licensee cooperates with S&P in the defense
thereof. S&P shall periodically reimburse Licensee for its reasonable expenses
incurred under this Subsection 10(b). Licensee shall have the right, at its own
expense, to participate in the defense of any claim, action or proceeding
against which it is indemnified hereunder; provided, however, it shall have no
right to control the defense, consent to judgment, or agree to settle any such
claim, action or proceeding without the written consent of S&P without waiving
the indemnity hereunder. S&P, in the defense of any such claim, action or
proceeding, except with the written consent of Licensee, shall not consent to
entry of any judgment or enter into any settlement which either (a) does not
include, as an unconditional term, the
<PAGE>
grant by the claimant to Licensee of a release of all liabilities in respect of
such claims or (b) otherwise adversely affects the rights of Licensee. This
provision shall survive the termination or expiration of this Agreement.
11. SUSPENSION OF PERFORMANCE.
Neither S&P nor Licensee shall bear responsibility or liability for
any losses arising out of any delay in or interruptions of their respective
performance of their obligations under this Agreement due to any act of God, act
of governmental authority, act of the public enemy or due to war, the outbreak
or escalation of hostilities, riot, fire, flood, civil commotion, insurrection,
labor difficulty (including, without limitation, any strike, or other work
stoppage or slow down), severe or adverse weather conditions, communications
line failure, or other similar cause beyond the reasonable control of the party
so affected.
12. OTHER MATTERS.
(a) This Agreement is solely and exclusively between the parties
hereto and shall not be assigned or transferred by either party, without prior
written consent of the other party, and any attempt to so assign or transfer
this Agreement without such written consent shall be null and void.
(b) This Agreement constitutes the entire agreement of the parties
hereto with respect to its subject matter and may be amended or modified only by
a writing signed by duly authorized officers of both parties. This Agreement
supersedes all previous agreements between the parties with respect to the
subject matter of this Agreement. There are no oral or written collateral
representations, agreements, or understandings except as provided herein.
(c) No breach, default, or threatened breach of this Agreement by
either party shall relieve the other party of its obligations or liabilities
under this Agreement with respect to the protection of the property or
proprietary nature of any property which is the subject of this Agreement.
(d) Except as set forth in Section 6 hereof with respect to
Informational Materials, all notices and other communications under this
Agreement shall be (i) in writing, (ii) delivered by hand, by registered or
certified mail, return receipt requested, or by facsimile transmission to the
address or facsimile number set forth below or such address or facsimile number
as either party shall specify by a written notice to the other and (iii) deemed
given upon receipt.
<PAGE>
NOTICE TO S&P: Standard & Poor's
25 Broadway
New York, NY 10004
Attn.: Robert Shakotko
Senior Vice President
Index Services
Fax #: (212) 208-8911
NOTICE TO LICENSEE: The Northwestern Mutual Life
Insurance Company
720 East Wisconsin Avenue
Milwaukee, Wisconsin 53202
Attn: Russell Augustin
Fax #: (414) 299 5718
(e) Licensee shall notify S&P in writing of the name of each and
every insurance company that utilizes the Product for purposes of such insurance
company's variable insurance contracts. Licensee shall update such notice from
time to time as necessary.
(f) This Agreement shall be interpreted, construed and enforced in
accordance with the laws of the State of New York.
(g) Each party agrees that in connection with any legal action or
proceeding arising with respect to this Agreement, they will bring such action
or proceeding only in the United States District Court for the Southern District
of New York or in the Supreme Court of the State of New York in and for the
First Judicial Department and each party agrees to submit to the jurisdiction of
such court and venue in such court and to waive any claim that such court is an
inconvenient forum.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
as of the date first set forth above.
THE NORTHWESTERN MUTUAL STANDARD & POOR'S
LIFE INSURANCE COMPANY a division of
The McGraw-Hill Companies, Inc.
BY: BY:
------------------------------ -----------------------------------
<PAGE>
- --------------------------------------------------------------------------------
(Print Name) (Print Name)
- --------------------------------------------------------------------------------
(Print Title) (Print Title)
MASON STREET FUNDS, INC.
BY:
------------------------------
- -----------------------------------
(name)
- -----------------------------------
(title)
<PAGE>
EXHIBIT A
PRODUCT DESCRIPTION
Product: Mason Street Funds, Inc. - Index 400 Stock Fund (the "Product") is an
investment vehicle, underlying one or more insurance products, which has an
investment objective of tracking the price and yield performance of
publicly-traded common stocks of companies as represented by the S&P MidCap 400
Index.
and
Product: Variable Annuity-Variable Life (the "Product") is any variable
insurance product(s), the underlying value of which is linked to the performance
of an investment vehicle whose investment objective is to track the price and
yield performance of publicly-traded common stocks of companies as represented
by the S&P MidCap 400 Index.
<PAGE>
EXHIBIT B
LICENSE FEES
Licensee shall pay S&P License Fees computed as follows:
The annual License Fees shall be the greater of $15,000 (the "Minimum Annual
Fee") or one basis point (.0001) of the average daily net assets of the Product
computed quarterly. The Minimum Annual Fee shall be payable on the Commencement
Date and each one-year anniversary thereof. Amounts in excess of the Minimum
Annual Fee shall be paid to S&P within thirty (30) days after the close of each
calendar quarter in which they are incurred; each such payment shall be
accompanied by a statement setting forth the basis for its calculation.
The parties agree that the terms upon which License Fees are calculated pursuant
to this Exhibit B shall be considered "Confidential Information" for purposes of
Subsection 8(c) of this Agreement.
120250
<PAGE>
Exhibit H(2)
MASON STREET FUNDS, INC.
April 1, 1999
Robert W. Baird & Co. Incorporated
777 East Wisconsin Avenue
Milwaukee, Wisconsin 53202
The Northwestern Mutual Life Insurance Company
720 East Wisconsin Avenue
Milwaukee, Wisconsin 53202
Northwestern Mutual Investment Services, Inc.
720 East Wisconsin Avenue
Milwaukee, Wisconsin 53202
RE: AGREEMENT TO WAIVE FEES CHARGED TO MASON STREET FUNDS, INC.
Gentlemen:
This letter constitutes an agreement between Robert W. Baird & Co.
Incorporated ("Baird"), The Northwestern Mutual Life Insurance Company ("NML"),
Northwestern Mutual Investment Services, Inc. ("NMIS") and Mason Street Funds,
Inc. ("MSF") by and between each of the parties hereto as follows:
For the fiscal year of MSF beginning April 1, 1999, and ending March 31,
2000, Baird, NML and NMIS agree to waive their fees to the extent necessary so
that Net Total Operating Expenses of each Class of each Fund of MSF, after the
waiver, do not exceed the amount indicated as the maximum Net Total Operating
Expenses (the "Expense Cap") in the then-effective prospectus for MSF (the
"Prospectus"). These fee waivers shall occur in the following order for each
Fund of MSF: first, NMIS shall waive its investment advisory fee, provided that
such waiver is allocated among the Classes of the Fund in proportion to the
relative net asset values of such Classes (a "Pro-Rata Waiver"). Second, NML
shall waive its Administration Agreement fee, provided that such waiver is
allocated among the Classes of the Fund in proportion to the relative net asset
values of such Classes. Third, Baird shall waive its Distribution Plan
(Rule 12b-1 Plan) fees. Fourth, Baird shall waive its Shareholder Services
Agreement fees. Finally, to the extent necessary to prevent the Net Total
Operating Expenses of any Class of any Fund from exceeding the Expense Cap for
such Class after each of the foregoing waivers, NMIS shall pay or reimburse
MSF's expenses.
To the extent that the Net Total Operating Expense ratios of the Classes of
a particular Fund cannot both be reduced simultaneously to the maximum Net Total
Operating Expense ratio set forth in the Prospectus through the use of a Pro-
Rata Waiver by NMIS and NML, then Baird agrees to waive its Distribution Plan
and Shareholder Servicing Agreement fees for the appropriate Class of such Fund
so as to reach the Expense Cap for that Class of such Fund. In such
circumstances, Baird shall first waive its Distribution Plan fees and then its
Shareholder
<PAGE>
Servicing Agreement fees, to the extent necessary for such Class to reach the
Expense Cap for the fiscal year ending March 31, 2000.
Notwithstanding any other provision herein, the fees waived by Baird
hereunder shall not exceed the amounts payable by Baird to NML under Section 3
of the Distribution and Marketing Agreement between NML, Baird and NMIS dated
March 31, 1997. NML agrees that it shall not be entitled to receive such
amounts from Baird as are waived by Baird under this Letter Agreement.
Very truly yours,
MASON STREET FUNDS, INC.
By: MARK G. DOLL
------------
Name: Mark G. Doll
Title: Vice President and Treasurer
Agreed to and accepted:
ROBERT W. BAIRD & CO. INCORPORATED
By: JOHN E. SUNDEEN
---------------
Name: John E. Sundeen
Title: Senior Vice President - Compliance Director
THE NORTHWESTERN MUTUAL LIFE
INSURANCE COMPANY
By: MARK G. DOLL
------------
Name: Mark G. Doll
Title: Senior Vice President
NORTHWESTERN MUTUAL INVESTMENT
SERVICES, INC.
By: MARK G. DOLL
------------
Name: Mark G. Doll
Title: Executive Vice President
118892
<PAGE>
Exhibit H(3)
MASTER AGREEMENT
DST FAN SERVICES - MUTUAL FUNDS
AGREEMENT made as of _______________, 1999 (the "Effective Date") by and
between DST Systems, Inc., a Delaware corporation ("DST") and
______________________, a _______________ corporation ("Customer"). DST and
Customer are together referred to herein as the "Parties" and individually as
the "Party".
WHEREAS, DST is a provider of transfer agency and shareholder record
keeping and accounting services to the mutual fund industry utilizing
proprietary computer software programs and systems developed by DST and
maintained on computers located at DST facilities, including the Financial
Access Network-TM-;
WHEREAS, Customer provides certain registered investment companies with
various services, including Customer's site on the World Wide Web, through
which visitors to such Web site may obtain information about the registered
investment companies serviced by Customer; and
WHEREAS, Customer desires to utilize its Web Site, the Internet and DST
FAN Web Services to provide shareholders of the registered investment
companies serviced by Customer with access to account information and certain
on-line transaction request capabilities in accordance with the terms of this
Agreement.
NOW, THEREFORE, in consideration of the foregoing premises, and for
other good and valuable consideration, the receipt and adequacy of which are
hereby acknowledged, the Parties hereby agree as follows.
ARTICLE I
DEFINITIONS
The following definitions shall apply to this Agreement. Additional
terms may be defined in the Agreement and in the exhibits which describe the
FAN Services to be provided by DST for the Customer.
- "Affiliate" shall mean, with respect to any Person, any other
Person directly or indirectly Controlling, Controlled by or under common
Control with such Person.
- "Control" over a Person shall mean (i) the possession, directly or
indirectly, of more than 50% of the voting power to elect directors, in the
case of a Person that is a corporation, or members of a comparable governing
body, in the case of a limited liability company, firm, joint-venture,
association or other entity, in each case whether through the ownership of
voting securities or interests, by contract or otherwise and (ii) with
respect to a partnership, a general partner thereof or a Person having
management rights comparable to those of a general partner shall be deemed to
control such Person. The terms "Controlling" and "Controlled" shall have
corollary meanings.
- "DST Web Site" shall mean the collection of electronic documents or
pages residing on the DST computer system, linked to the Internet and
accessible by hypertext link through the World Wide Web, where the
Transaction data fields and related screens provided by DST may be viewed by
Users who access such site.
- "FAN" shall mean the DST Financial Access Network, a DST computer
and software system which provides an interface between the Internet and
public data network service providers and the transfer agency systems of
Funds for the purposes of communicating Fund data and information and
Transaction requests.
- "FAN Options" shall mean the series of edits and instructions
provided by Customer to DST in writing and which reside on a DST computer,
through which Customer specifies its instructions for Transactions which may
be requested through the use of various FAN Services, e.g., minimum and
maximum purchase, redemption and exchange amounts.
<PAGE>
- "FAN Services" shall mean the services provided by DST utilizing
FAN(R), the DST Web Site, the Internet, and other software, equipment and
systems provided by DST and telecommunications carriers and firewall
providers, whereby Transactions may be requested in each Fund by Users
accessing the DST Web Site via the Internet.
- "Fund(s)" shall mean the various registered investment companies
(mutual funds) for which Customer provides various services and which
Customer has designated to participate in FAN Services. Customer has provided
DST with a list of the Funds on or prior to the Effective Date.
- "Person" shall mean an individual, corporation, partnership,
association, trust or other entity or organization, including a government or
political subdivision or an agency or instrumentality thereof.
- "Security Procedures" shall mean the procedures, including the use
of encryption technology, implemented for purposes of protecting the
integrity, confidentiality or secrecy of, and the unauthorized interception,
corruption, use of, or access to, any data or information transmitted via FAN
Services.
- "Transactions" shall mean account inquiries, purchases, redemptions
through Automated Clearing House, fed wire, or check to the address of record
for the Fund account, exchanges and other transactions offered through FAN
Services.
- "User(s)" shall mean record owners or authorized agents of record
owners of shares of a Fund, including brokers, investment advisors and other
financial intermediaries.
ARTICLE II
USE OF FAN SERVICES BY CUSTOMER
Section 2.1 SELECTION OF FAN SERVICES. DST will perform, and Customer
has selected, the FAN Services described on the Services Exhibits attached to
this Agreement. New Services Exhibits describing additional FAN Services may
be added to this Agreement from time to time by mutual written agreement of
DST and Customer, and such additional FAN Services shall be subject to the
terms of this Agreement.
Section 2.2 DST RESPONSIBILITIES. During the Term and subject to the
provisions of this Agreement, DST shall, at its expense (unless otherwise
provided for herein): (i) provide, or hire other Persons to provide, all
computers, telecommunications equipment and other equipment and software
reasonably necessary to develop and maintain the DST Web Site; and (ii)
deliver a monthly billing report to Customer, which shall include a report of
Transactions, by type, processed through FAN Services.
Section 2.3 CUSTOMER RESPONSIBILITIES. During the Term and subject to
the provisions of this Agreement, Customer shall at its expense (unless
otherwise provided for herein) fulfill the Customer obligations, if any, set
forth in each Service Exhibit to this Agreement.
Section 2.4 CHANGE IN DESIGNATED FUNDS. Upon thirty (30) days prior
notice to DST, Customer may change the Funds designated to participate in FAN
Services by delivering to DST, in writing, a revised list of participating
Funds.
Section 2.5 SCOPE OF DST OBLIGATIONS. DST shall at all times use
reasonable care in performing FAN Services under this Agreement. In the
absence of willful misconduct, knowing violations of applicable law, reckless
disregard of its duties under this Agreement, or negligence on its part in
the performance of FAN Services, DST shall not be liable for any action
taken, suffered, or omitted by it or for any error made by it in the
performance of its services under this Agreement. With respect to those
actions or services delineated in FAN Options and all other instructions
given to DST by Customer, DST shall be presumed to have exercised reasonable
care if it has acted in accordance with the FAN Options and other
instructions provided by Customer. With respect to any claims for losses,
damages, costs or expenses which may arise directly or indirectly from
Security Procedures which DST has implemented or omitted, DST shall be
presumed to have used reasonable care if it has followed, in all material
respects, at least
<PAGE>
those Security Procedures described in the Security Procedures attachment to
each Service Exhibit to this Agreement. DST may, but shall not be required
to, modify such Security Procedures from time to time to the extent it
believes, in good faith, that such modifications will enhance the security of
FAN. All data and information transmissions via FAN Services are for
informational purposes only, and are not intended to satisfy regulatory
requirements or comply with any laws, rules, requirements or standards of any
federal, state or local governmental authority, agency or industry regulatory
body, including the securities industry, which compliance is the sole
responsibility of Customer and each Fund. Customer acknowledges and agrees
that its Users are responsible for verifying the accuracy and receipt of all
data or information transmitted via FAN Services. Customer is responsible for
advising its Users of their responsibility for promptly notifying the Fund's
transfer agent of any errors or inaccuracies relating to shareholder data or
information transmitted via FAN Services.
Section 2.6 YEAR 2000. Notwithstanding anything in this Agreement to
the contrary, DST's only warranty with respect to year 2000 compliance is
that FAN will be year 2000 compliant during the term set forth in Section 5.1
of this Agreement. As used in this Agreement "year 2000 compliant" shall mean
that FAN will perform in accordance with the terms of this Agreement
regardless of the century with respect to which date data is encountered by
FAN; provided, that (i) all date data received by DST for use by FAN is
accurate and in formats specified by DST from time to time, (ii) all date
data generated by FAN is accepted by Customer in formats provided by DST from
time to time, and (iii) DST shall not be obligated to provide date data for
interface functions such as screens, reports or data transmission files in
any format other than that specified by DST from time to time.
Notwithstanding the foregoing, DST makes no representation or warranty as to
the ability of any hardware, firmware, software, products or services
provided to DST by any other party to manipulate or process date data, or as
to the functionality of any DST software, including FAN, in circumstances
where data received from any Customer system or any other system is invalid,
incorrect or otherwise corrupt.
ARTICLE III
FEES
As consideration for the performance by DST of the FAN Services,
Customer will pay DST the fees relating to each such service as set forth in
each Service Exhibit attached to this Agreement.
ARTICLE IV
PROPRIETARY RIGHTS
Customer acknowledges and agrees that it obtains no rights in or to any
of the software, hardware, processes, trade secrets, proprietary information
or distribution and communication networks of DST. Any software DST provides
to Customer pursuant to this Agreement shall be used by Customer only during
the term of this Agreement and only in accordance with the provisions of this
Agreement to provide connectivity to and through DST, and shall not be used
by Customer to provide connectivity to or through any other system or Person.
Any interfaces and software developed by DST shall not be used to connect
Customer to any transfer agency system or any other Person without DST's
prior written approval. Customer shall not copy, decompile or reverse
engineer any software provided to Customer by DST. Customer also agrees not
to take any action which would mask, delete or otherwise alter any DST
on-screen disclaimers and copyright, trademark and service mark notifications
provided by DST from time to time, or any "point and click" features relating
to User acknowledgment and acceptance of such disclaimers and notifications.
ARTICLE V
TERM AND TERMINATION
Section 5.1 TERM. This Agreement shall be effective as of the
Effective Date and shall continue in force and effect for twelve (12) months
following the Effective Date (the "Initial Term"). This Agreement shall
automatically renew at the end of the Initial Term for additional, successive
twelve (12)-month terms (each, a "Renewal Term") unless terminated by either
party
<PAGE>
by written notice to the other at least sixty (60) days prior to the end of
the initial term or any renewal term, in which case the effective date of
such termination notice shall be the end of the relevant initial term or
renewal term. The Initial Term and any Renewal Term(s) are referred to herein
as the Term.
Section 5.2 TERMINATION. Throughout the Term, either Party shall have
the right to terminate this Agreement on written notice to the other Party of
the other Party's material breach of this Agreement and such Party's failure
to cure such breach within thirty (30) days.
Section 5.3 EFFECT OF TERMINATION. In the event of a termination
under the provisions of this Article V, the Parties will have no continuing
obligations to one another other than the obligation to return to one another
the confidential or proprietary materials of the other in their possession.
ARTICLE VI
INDEMNIFICATION; LIABILITY LIMITATIONS
SECTION 6.1 NO OTHER WARRANTIES. EXCEPT AS OTHERWISE EXPRESSLY STATED
IN SECTIONS 2.5 AND 2.6 OF THIS AGREEMENT, THE FAN SERVICES AND ALL SOFTWARE
AND SYSTEMS DESCRIBED IN THIS AGREEMENT AND ITS EXHIBITS ARE PROVIDED
"AS-IS," ON AN "AS AVAILABLE" BASIS, AND DST HEREBY SPECIFICALLY DISCLAIMS
ANY AND ALL REPRESENTATIONS OR WARRANTIES, EXPRESS OR IMPLIED, REGARDING
SERVICES PROVIDED BY DST HEREUNDER, INCLUDING ANY IMPLIED WARRANTY OF
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE AND IMPLIED WARRANTIES
ARISING FROM COURSE OF DEALING OR COURSE OF PERFORMANCE.
Section 6.2 LIMITATION OF LIABILITY. Under no circumstances shall DST
be liable for indirect, incidental, consequential, special, exemplary or
punitive damages (even if DST has been advised of or has foreseen the
possibility of such damages), arising from the use or inability to use the
FAN Services, the DST Web Site or FAN, or under any provision of this
Agreement, such as, but not limited to, loss of revenue or anticipated
profits or lost business. Without limiting any of the foregoing terms of this
Section, in no event shall DST be liable under this Agreement in tort or
otherwise for an amount exceeding the aggregate fees actually received by DST
pursuant to Article III during the most recent Term of this Agreement.
Section 6.3 INDEMNITY. Customer hereby indemnifies and holds DST
harmless from, and shall defend it against any and all claims, demands,
costs, expenses and other liabilities, including reasonable attorneys' fees,
arising in connection with the use of, or inability to use, the FAN Services
by any User, except to the extent such liabilities result directly from the
negligence or intentional misconduct of DST in the performance of FAN
Services.
ARTICLE VII
CONFIDENTIALITY
Section 7.1 CONFIDENTIAL INFORMATION. Each of the Parties hereby
acknowledges that in the course of performing its obligations hereunder, the
other may disclose to it certain information and know-how of a technical,
financial, operational or other sort, that is nonpublic and otherwise
confidential or proprietary to the disclosing Party. This Agreement, and in
particular, all DST Security Procedures and fee schedules, shall be
considered confidential and proprietary. Each Party acknowledges that any
such proprietary or confidential information disclosed to it is of
considerable commercial value and that the disclosing Party would likely be
economically or otherwise disadvantaged or harmed by the direct or indirect
use or disclosure thereof, except as specifically authorized by the
disclosing Party. Each Party therefore agrees to keep in strict confidence
all such information that may from time to time be disclosed to it, and
agrees not to use such information except as expressly permitted hereby or to
disclose such information to any third Party for any purpose without the
prior consent of the other. The provisions of this Section 7.1 shall not
apply to versions of this Agreement which contain no references to Customer
and which are used by DST with other entities, or to any information if and
to the extent it was (i) independently developed by the receiving Party as
evidenced by documentation in such Party's
<PAGE>
possession, (ii) lawfully received by it free of restrictions from another
source having the right to furnish the same, (iii) generally known or
available to the public without breach of this Agreement by the receiving
Party or (iv) known to the receiving Party free of restriction at the time of
such disclosure. The Parties agree that immediately upon termination of this
Agreement, without regard to the reason for such termination, the Parties
shall forthwith return to one another all written materials and computer
software which are the property of the other Party.
Section 7.2 SPECIFIC PERFORMANCE. Each of the Parties agrees that the
nonbreaching Party would not have an adequate remedy at law in the event of
the other Party's breach or threatened breach of its obligations under
Section 7.1, and that the nonbreaching Party would suffer irreparable injury
and damage as a result of any such breach. Accordingly, in the event either
Party breaches or threatens to breach the obligations set forth in Section
7.1, in addition to and not in lieu of any legal or other remedies such Party
may pursue hereunder or under applicable law, each Party hereby consents to
the granting of equitable relief (including the issuance of a temporary
restraining order, preliminary injunction or permanent injunction) against it
by a court of competent jurisdiction, without the necessity of providing
actual damages or posting any bond or other security therefor, prohibiting
any such breach or threatened breach. In any proceeding upon a motion for
such equitable relief, a Party's ability to answer in damages shall not be
interposed as a defense to the granting of such equitable relief.
ARTICLE VIII
FORCE MAJEURE
Customer acknowledges that the Internet is an unsecure, unstable,
unregulated, unorganized and unreliable environment, and that the ability of
DST to deliver FAN Services is dependent upon the Internet and equipment,
software, systems, data and services provided by various telecommunications
carriers, equipment manufacturers, firewall providers and encryption system
developers and other vendors and third parties. DST shall not be liable for
any delays or failures to perform any of its obligations hereunder to the
extent that such delays or failures are due to circumstances beyond its
reasonable control, including acts of God, strikes, riots, acts of war, power
failures, functions or malfunctions of the Internet, telecommunications
services, firewalls, encryption systems and security devices, or governmental
regulations imposed after the date of this Agreement.
ARTICLE IX
MISCELLANEOUS
Section 9.1 GOVERNING LAW; JURISDICTION. This Agreement shall be
interpreted, construed and enforced in all respects in accordance with the
laws of the state of Missouri, without reference to the conflict of laws
provisions thereof.
Section 9.2 CAPTIONS. Captions used herein are for convenience of
reference only, and shall not be used in the construction or interpretation
hereof.
Section 9.3 COUNTERPARTS. This Agreement may be executed in
counterparts, all of which together shall be deemed one and the same
Agreement.
Section 9.4 PARTIES' INDEPENDENT CONTRACTORS. The Parties to this
Agreement are and shall remain independent contractors, and nothing herein
shall be construed to create a partnership or joint venture between them, and
none of them shall have the power of authority to bind or obligate the others
in any manner not expressly set forth herein.
Section 9.5 SEVERABILITY. If any provision or provisions of this
Agreement shall be held to be invalid, illegal or unenforceable, the
validity, legality, and enforceability of the remaining provisions shall not
in any way be affected or impaired thereby unless either of the Parties
shall, in its reasonable determination, conclude that it shall be materially
prejudiced by such holding of invalidity, illegality or unenforceability, in
which case such Party may terminate this Agreement by thirty (30) days
written notice to the other.
<PAGE>
Section 9.6 NO WAIVER. No term or provision hereof shall be deemed
waived and no breach excused unless such waiver or consent shall be in
writing and signed by the Party claimed to have waived or consented. Any
consent by any Party to, or waiver of, a breach by the other, whether express
or implied, shall not constitute a consent to, waiver of, or excuse for any
other different or subsequent breach.
Section 9.7 ASSIGNMENT. Neither this Agreement nor all or any of the
rights and obligations of either Party hereunder shall be assigned, whether
by agreement or by operation of law to any Person other than an Affiliate of
the assigning Party, without the prior written consent of the other Party,
and any attempt to do so shall be void. No such permitted assignment shall
relieve the assigning Party of its obligations under this Agreement. This
Agreement shall be binding upon and inure to the benefit of the respective
successors, permitted assigns and legal representatives of the Parties hereto.
Section 9.8 NOTICES. All notices, requests or communications required
hereunder shall be in writing and shall be deemed to have been duly given (i)
upon delivery, if delivered personally against written receipt, (ii) three
(3) days after posting by certified mail, postage prepaid, return receipt
requested, (iii) upon confirmed receipt, if delivered by telecopier or (iv)
the next day if delivered by a recognized overnight commercial courier, such
as Federal Express or DHL, addressed in each instance to the Parties at the
addresses set forth below the signatures of the parties at the end of this
Agreement (or at such other addresses as shall be given by either of the
Parties to the other in accordance with this Section 9.8).
Section 9.9 NON-SOLICITATION. Each of the Parties agrees that it will
not, during the Term, solicit or encourage to leave the employ or service of
the other, any employee employed by or consultant serving with the other
during such time, without the other's prior written consent. Such obligation
will continue with respect to any person leaving the employ or service of the
other Party for six (6) months after his or her departure.
Section 9.10 ENTIRE AGREEMENT. This Agreement and its Exhibits
together constitute the complete understanding and agreement of the Parties
with respect to the subject matter hereof, and supersede all prior
communications with respect thereto. They may not be modified, amended or in
any way altered, except in a writing signed by both Parties. No agent of any
Party hereto is authorized to make any representation, promise or warranty
inconsistent with the terms hereof.
IN WITNESS WHEREOF, the Parties hereto have set their hands by their
authorized representatives as of the year and date first hereinabove
indicated.
DST SYSTEMS, INC.
By By
----------------------------------- -------------------------------------
Name: Name:
------------------------------ ----------------------------------
Title: Title:
----------------------------- ---------------------------------
Address: 1055 Broadway, Ninth Floor
--------------------------- Kansas City, Missouri 64105-1594
Tel: Tel: (816) 435-6568
------------------------------- FAX: (816) 435-8630
FAX:
-------------------------------
<PAGE>
SERVICE EXHIBIT
WEB SERVICES
1. WEB SERVICES. Customer has requested, and DST will provide Web Services
as one of the FAN Services provided pursuant to the terms of the DST
FAN Services Agreement (the "Agreement") between Customer and DST.
Through Web Services, Shareholders may submit Transaction requests
directly to the Fund's transfer agent via the Internet as described
further in this Service Exhibit.
2. DEFINITIONS. For purposes of this Exhibit, the following additional
definitions shall apply (in addition to all other defined terms in the
Agreement):
- "Customer Web Site" shall mean the collection of electronic
documents or pages residing on the computer system of Customer
(or an Internet Service Provider ("ISP") hired by Customer)
connected to the Internet and accessible by hypertext link
through the World Wide Web, where Shareholders may view
information about the Funds and access the various Transaction
screens provided by Customer.
- "Shareholder" shall mean the record owner or authorized agent
of the owner of shares of a Fund.
3. DST RESPONSIBILITIES. In connection with its performance of Web
Services, DST shall:
(a) receive Transaction requests electronically transmitted
to the DST Web Site via the Internet following execution
of a link from the Customer Web Site to the DST Web Site
and route Transaction requests through FAN to the
Customer's transfer agency system;
(b) for each Transaction request received, route
Transaction information from the Customer's transfer
agency system through FAN to the Internet to be
viewed by Users;
(c) deliver to Customer a DST FAN Options User Guide and FAN
Options instruction form; and update FAN Options as
necessary when provided written instructions from the
Customer, and
(d) perform all other DST obligations as set forth in the
Agreement.
4. CUSTOMER RESPONSIBILITIES. In connection with its use of Web Services,
Customer shall:
(a) provide all computers, telecommunications equipment
and other equipment and software reasonably necessary
to develop and maintain the Customer Web Site;
(b) design and develop the Customer Web Site
functionality necessary to facilitate and maintain
the hypertext links to the DST Web Site and the
various Transaction Web pages and otherwise make the
Customer Web Site available to Shareholders;
(c) provide the FAN Options to DST for each Fund in
writing on forms provided by DST and update the FAN
Options in writing as required by Customer from time
to time;
(d) provide DST with such other written instructions as
it may request from time to time relating to the
performance of DST's obligations hereunder; and
(e) perform all other Customer obligations as set forth in
the Agreement.
5. PACKAGE SELECTION. Web Services is offered in a Basic Package and an
Advance Package. Customer has selected the |_| Basic |_| Advanced
Package.
<PAGE>
If Customer initially selects the Basic Package, upon thirty
(30) days prior notice to DST, Customer may elect to upgrade from the
Basic Package to the Advanced Package by signing two copies of the
Upgrade Request Form attached to this Service Exhibit and delivering
such form to DST along with payment of the Upgrade Fee in the current
amount then charged by DST.
6. FEES. The fees payable to DST by Customer for Web Services are set
forth on the Fee Schedule attached to this Service Exhibit.
<PAGE>
FAN WEB SERVICES - TA2000 CLIENT
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
FEE TYPE CHARGE
- -----------------------------------------------------------------------------
<S> <C>
BASE FEE
- -----------------------------------------------------------------------------
Basic Package(1) $ 10,000.00
- -----------------------------------------------------------------------------
Advanced Package(2) $ 15,000.00
- -----------------------------------------------------------------------------
FAN Set-up Fee $ 5,000.00
- -----------------------------------------------------------------------------
TRANSACTION FEES
- -----------------------------------------------------------------------------
Account Inquiry (Position) $ .05
- -----------------------------------------------------------------------------
Account Inquiry (History) $ .05
- -----------------------------------------------------------------------------
Portfolio Inquiry (Position) $ .05
- -----------------------------------------------------------------------------
Transactions(3) $ .50
- -----------------------------------------------------------------------------
Monthly Minimum Transaction Fees $ 2,000
The monthly minimum fees for the initial FAN Services $500.00/added
product is $2,000. Each additional FAN Services product product
increases the monthly minimum fee by $500. (Vision(TM)
Product not included)
- -----------------------------------------------------------------------------
OTHER FEES
- -----------------------------------------------------------------------------
Fund-Specific Enhancements/Consulting $ 150/hour
- -----------------------------------------------------------------------------
Tutorial Web Site (Optional) $ 5,000
- -----------------------------------------------------------------------------
Additional Product Offerings (Optional) Billed By Product
- -----------------------------------------------------------------------------
FAN LITERATURE FEES(4)
- -----------------------------------------------------------------------------
Existing DST Literature client set-up fee $ 500.00
- -----------------------------------------------------------------------------
Non DST Literature client set-up fee $ 5000.00
- -----------------------------------------------------------------------------
Literature transaction charge per Literature
request $ .50
- -----------------------------------------------------------------------------
</TABLE>
NOTES:
- - These fees apply only to cases where the fund provides a link from their
web site to the DST transaction web site.
- - The FAN set-up fee is a one-time charge. The fund company will only incur
this charge once, regardless of the number of FAN services in which the
fund participates.
- - Other transactions may be supported in the future, the fees for which will
be determined at that time. The fund will not be obligated to offer new
transaction types.
- - If a fund company upgrades from the "Basic" package to the "Advanced"
package, the fund will pay the additional $5,000 fee for the upgrade.
- - Monthly transaction fees combine all Product Offerings supported by the
FAN interface.
SECURITY PROCEDURES - WEB SERVICES
1. ID / PASSWORD REQUIREMENTS
- -----------------------------
(1) Includes 10 hours of consulting. Additional hours will be billed at
$150/hour.
(2) Includes 20 hours of consulting. Additional hours will be billed at
$150/hour.
(3) Transactions include ACH purchase to new or existing accounts, exchange to
new or existing accounts, redemption via ACH, wire, or check, ordering of
duplicate tax-forms or duplicate statements, checkbook re-orders, fulfillment
requests, and PIN changes. Other transactions may be supported in the future,
the fees for which will be determined at that time. The fund will not be
obligated to offer new transaction types. The Actual Transaction Fees from all
FAN Services products are aggregated each month to determine the monthly
transaction fees charged. The monthly amount charged the Customer is the
greater of the Monthly Minimum Transaction Fee or the total Actual Transaction
Fees.
(4) Optional additional fees/products available. All monthly fees are added
together.
<PAGE>
Authentication of a Shareholder in FAN is based on account number, password,
and optionally social security number.
Required - Account number is used as the identification (ID) of the
Shareholder.
Required - Password is used as the access to the entered account. This is the
Shareholder's personal identification number (PIN).
Optional - Social Security Number is an optional entry requirement controlled
by the Customer to add another level of authentication to access the entered
account number.
2. ENCRYPTION
The DST Web server runs Secure Sockets Layer ("SSL"). The purpose of using
SSL is to encrypt data transmissions through the DST Web Site and block
communications through the DST Web Site from Internet browsers which do not
support SSL data encryption. The standard level of encryption supported by
the DST Web Site is 40-bit encryption. Enhanced encryption (up to 128 bit) is
available on an individual customer-by-customer basis.
3. NETWORK ACCESS CONTROL
A computer referred to as a "router" is located between the Internet backbone
connection and the DST Web server. The purpose of the router is to control
the connectivity to the DST Web server at the port level. This equipment is
located at DST's Winchester data center, but it is administered and
maintained by an independent fire wall provider. Changes to the systems
residing on this computer are submitted to the fire wall provider for remote
administration. DST is advised by its current fire wall provider that this
equipment will not interrogate data, and that its only function is to limit
the type of traffic accessing the DST Web server to the suite of Hyper-Text
Transfer Protocols ("HTTP") transmissions. Ports on the router are configured
to be consistent with ports on the DST Web server. DST is advised by its
current fire wall provider that all other ports on the router other than
those configured for the DST Web server are not accessible from the Internet.
The DST Web server utilizes a UNIX operating system. All services and
functions within the DST Web server operating system are deactivated with the
exception of services and functions which support HTTP. This is the required
service for HTML content which is what the FAN Transactions are based upon.
The general purpose of this feature is to prevent external users from
entering UNIX commands or running UNIX based processes on the DST Web server.
All ports on the DST Web server, except those required by FAN (the ports
accessed through the fire wall provider's router), are disabled. All
"listeners" are deactivated. Directory structures are "hidden" from the user.
Services which provide directory information are also deactivated.
DST administrators gain access to the DST Web server through the physical
console connected to the DST Web server, or through the internal network via
DST Secure ID.
FAN also incorporates a computer system referred to as the "FAN Switch". The
function of the FAN Switch is to perform data packaging, security
interrogation, and protocol conversion. Data received by the FAN Switch from
the DST Web server is interrogated for authenticity, repackaged for the DST
TA/2000 mainframe system, and protocols are converted for communication.
The FAN Switch is programmed to terminate the session/Transaction between the
Shareholder and FAN if data authentication fails. Alerts are provided to
system administrators upon termination.
4. LIMITATION OF USERS
Access of DST personnel to the DST Web server is restricted within DST to a
limited number of users based upon DST system administration requirements, as
determined by appropriate DST systems managers from time to time.
<PAGE>
5. INDEPENDENCE OF EACH CUSTOMER'S LOCATION ON THE WEB SERVER
Independence of customer presence on the DST Web server is accomplished by
establishing individual data set partitions on the DST Web server that are
designed to be separate from other partitions. Each customer's presence
resides within a separate data and directory structure on the DST Web server.
The base transaction code required by FAN is, however, shared by all data set
partitions.
Each customer URL on the DST Web server will identify a separate customer
presence. The customer URL is designed to omit distinguishing characteristics
of the URL which could identify the customer or DST to the Shareholder, and
each customer will have a unique URL. The URL is in the following format :
https://www.financialtrans.com/ft/disclaim?cz=123456789
where the data following the `cz=' will be unique to the Customer. The
Customer URL is not advertised by DST. Initial access to the Customer
presence on the DST Web server will be through the Customer Web Site.
Book marking of HTML pages within the Customer's site on the DST Web server
is not allowed with the exception of a legal terms page which is the initial
page presented to the Shareholder upon entry to the DST Web server.
6. RIGHT TO AUDIT
Customers are allowed to audit, at their expense, the DST Web Site once in
each 12 month period and any associated systems or networks within FAN, after
providing reasonable notice to DST. The audit may include review of
configurations, audit trails, and maintenance of systems and software within
FAN associated with the DST Web Site. Tools which may be used for the audit
may include network security tools; provided, that DST may specify the time
at which any tool is used, if DST reasonably believes that such tool may
affect system performance. The audit will be coordinated through the DST
Internal Audit Office and DST will be entitled to observe all audit activity.
Customers will not perform any action that may interfere with the uptime or
stability of DST's systems or networks. Subject to the foregoing, the
Customer may perform any audit activity which is technically possible for a
user of the public Internet. In particular, the Customer and its review team
will be considered authorized users and DST will not seek prosecution under
any computer crime or other applicable statutes for such activity.
120285
<PAGE>
EXHIBIT L
SUBSCRIPTION AGREEMENT
The Northwestern Mutual Life Insurance Company (the "Company") hereby
subscribes for 2,000 shares of the capital stock of Mason Street Funds, Inc.
("MSF"), par value $.001 per share, consisting of 500 Class A and 500 Class B
shares of each of two series of MSF: Small Cap Growth Stock Fund and Index 400
Stock Fund. The Company agrees to pay therefor, on the issuance of such stock,
the sum of $10.00 per share of capital stock, in the total amount of $20,000, at
such time as the President of MSF may, by notice, require but in no event later
than July 12, 1999.
The Company hereby represents that, subject to any requirement of law that
the disposition of its property shall at all times be within its control, such
shares of the capital stock of MSF are being acquired for investment and not
with a view to resell or otherwise distribute such shares.
The undersigned acknowledges and understands that shares of MSF will be
issued to the undersigned in a private placement and are not currently
registered under the Securities Act of 1933 or applicable state securities laws,
in reliance by MSF on the representations and warranties made by the undersigned
herein. The undersigned agrees not to sell or redeem any of the shares of MSF
issued pursuant hereto (the "initial shares") unless there is a registration
statement covering such shares then in effect or pursuant to an available
exemption from registration supported by an opinion of counsel to such effect.
In addition, the undersigned understands and acknowledges that, if any of the
initial shares are redeemed by the undersigned before the deferred
<PAGE>
organizational expenses of MSF are completely amortized, there shall be deducted
from the redemption price payable to the undersigned the pro rata unamortized
portion of such expenses attributable to the redeemed shares (based on the ratio
that the number of redeemed shares bears to the number of initial shares then
outstanding).
THE NORTHWESTERN MUTUAL
LIFE INSURANCE COMPANY
ATTEST:
By:
- ------------------------------ ----------------------------------------
Assistant Secretary President and Chief Executive Officer
120519
