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
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PRE-EFFECTIVE AMENDMENT NO
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POST-EFFECTIVE AMENDMENT NO. 5 X
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AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY
ACT OF 1940
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AMENDMENT NO 7 X
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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)
[ X ] ON JUNE 30,2000 PURSUANT TO PARAGRAPH (b)
[ ] 60 DAYS AFTER FILING PURSUANT TO PARAGRAPH (a)(1)
[ ] ON (DATE) PURSUANT TO PARAGRAPH (a)(1)
[ ] 75 DAYS AFTER FILING PURSUANT TO PARAGRAPH (a)(2)
[ ] ON (DATE) PURSUANT TO PARAGRAPH (a)(2) OF RULE 485
[ ] 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
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1 Cover Page
2 Summary
3 Expense Information
4 The Funds In Detail
5 <F1>
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
<F1> Indicates inapplicable or negative
<PAGE>
BOND FUNDS MULTI-ASSET FUND STOCK FUNDS
(LOGO)
MasonStreet
FUNDS/R
PROSPECTUS
JUNE 30, 2000
<PAGE>
MASON STREET FUNDS/R PROSPECTUS JUNE 30, 2000 (LOGO)
MasonStreet
FUNDS
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
FUNDSR, 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.
<PAGE>
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M A S O N S T R E E T F U N D S
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This Prospectus does not constitute an offering in any jurisdiction in which
such offering may not lawfully be made. No person is authorized to make any
representations in connection with this offering other than those contained in
this Prospectus and in the Statement of Additional Information.
CONTENTS
SUMMARY 3
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Funds at a Glance 3
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Primary Risks 5
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Performance 6
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Expense Information 8
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PERFORMANCE 11
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THE FUNDS IN DETAIL 12
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Stock Funds Category 12
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Multi-Asset Fund Category 16
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Bond Funds Category 17
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Other Risks 19
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MANAGEMENT OF THE FUNDS 21
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BUYING AND SELLING FUND SHARES 24
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Investment Minimums 24
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Flexible Sales Charge Options 24
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Class A Shares 24
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Class B Shares 26
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How Shares are Priced 27
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SHAREHOLDERS' GUIDE 28
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How to Buy Shares 28
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How to Exchange Shares 29
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How to Sell Shares 29
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Quick Address and Telephone Reference 30
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DISTRIBUTIONS AND TAXES 31
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FINANCIAL HIGHLIGHTS 33
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APPENDIX A - GLOSSARY 42
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APPENDIX B 44
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<PAGE>
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JUNE 30, 2000
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SUMMARY
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 ON P. 12) FOR THOSE
FUNDS YOU WISH TO PURCHASE. A GLOSSARY OF TERMS IS INCLUDED IN APPENDIX A.
FUNDS AT A GLANCE
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STOCK FUNDS
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SMALL CAP GROWTH STOCK FUND
OBJECTIVE: 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 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. The investment process involves detailed studies of individual
companies. In evaluating individual companies, factors such as the company
management team, the growth rate of revenues and earnings, opportunities for
margin expansion and strong financial characteristics are important variables
used in the analysis.
PRINCIPAL RISKS: The primary risks for this Fund are the risks for stocks in
general, growth stocks and small cap stocks, as described in the next section.
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. The investment process involves detailed studies of individual
companies. In evaluating individual companies, factors such as the company
management team, the growth rate of revenues and earnings, opportunities for
margin expansion and strong financial characteristics are important variables
used in the analysis.
PRINCIPAL RISKS: The primary risks for this Fund are the risks for stocks in
general, growth stocks and small cap stocks, as described in the next section.
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 undervalued stocks of foreign companies
offering the greatest discounts to their long-term values. 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.
PRINCIPAL RISKS: The primary risks for this Fund are the risks for
international securities, stocks in general and value stocks, as described in
the next section.
INDEX 400 STOCK FUND
OBJECTIVE: To seek investment results that approximate the performance of the
S&P MidCap 400 Index, by investing in stocks included in the S&P MidCap 400
Index.
PORTFOLIO: The S&P MidCap 400 Index is composed of 400 common stocks. The S&P
MidCap 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 MidCap 400
Index have a market value in the range of $750 million to
$5 billion.
STRATEGY: To capture mid-cap market performance by investing in a portfolio
modeled after a mid-cap stock index. The Fund invests in stocks included in the
S&P MidCap 400 Index in proportion to their weightings in the Index. The 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. The Fund will not buy stocks that are
not in the S&P MidCap 400 Index and will seek to sell such stocks in an orderly
manner in the event of changes in the Index or spin-offs.
PRINCIPAL RISKS: The primary risks for this Fund are the risks for stocks in
general as described in the next section.
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M A S O N S T R E E T F U N D S
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GROWTH STOCK FUND
OBJECTIVE: To seek long-term growth of capital by investing in companies
believed to have above-average earnings growth potential; current income is
secondary.
PORTFOLIO: Diversified mix of high-quality growth stocks in medium and large
companies.
STRATEGY: To analyze economic trends to determine their impact on various
sectors and industries and to select high-quality stocks from industries with
the best earnings potential. The Growth Stock Fund invests primarily in common
stocks of well-established companies, with emphasis placed on high-quality
companies with strong financial characteristics. The investment process is
initiated with an analysis of the economic outlook. Further study of economic
sectors leads to the identification of growth-oriented industries, and to
detailed studies of individual companies. In evaluating individual companies,
factors such as the company management team, product outlook, global exposure,
industry leadership position and financial characteristics are important
variables used in the analysis.
PRINCIPAL RISKS: The primary risks for this Fund are the risks for stocks in
general and growth stocks as described in the next section.
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/R Index"). 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/R Index to seek to enhance
the Fund's total return or reduce fluctuations in market value relative to the
S&P 500/R Index. In selecting securities, the manager may emphasize securities
that it believes to be undervalued.
PRINCIPAL RISKS: The primary risks for this Fund are the risks for stocks in
general and value stocks as described in the next section.
INDEX 500 STOCK FUND
OBJECTIVE: To seek investment results that approximate the performance of the
S&P 500/R Index, by investing in stocks included in the S&P 500/R Index.
PORTFOLIO: The S&P 500/R Index is composed of 500 common stocks representing
approximately three-fourths of the total market value of all publicly-traded
common stocks in the United States.
STRATEGY: To capture broad market performance by investing in a portfolio
modeled after a broadly based stock index. The Fund invests in stocks included
in the S&P 500/R Index in proportion to their weightings in the Index. 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. The Fund will not buy
stocks that are not in the S&P 500R Index and will seek to sell such stocks in
an orderly manner in the event of changes in the Index or spin-offs.
PRINCIPAL RISKS: The primary risks for this Fund are the risks for stocks in
general as described in the next section.
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MULTI-ASSET FUND
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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" on pp. 19-20. The Fund may invest up to 10% of its
total assets in noninvestment-grade debt obligations.
STRATEGY: To adjust the mix between asset sectors to capitalize on the changing
financial markets and economic conditions. The advisor intends to actively
manage the Fund's assets, maintaining a balance over time between investment
opportunities and their associated potential risks.
PRINCIPAL RISKS: The primary risks for this Fund are the risks for stocks in
general: interest rate risk, credit risk and the risks for international
securities, as described in the next section.
<PAGE>
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JUNE 30, 2000
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BOND FUNDS
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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. 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. 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.
PRINCIPAL RISKS: The primary risks for this Fund are credit risk, interest rate
risk and the risks for international securities, as described below.
MUNICIPAL BOND FUND
OBJECTIVE: To seek a high level of current income exempt from federal income
taxes, consistent with the preservation of capital, by investing primarily in
investment-grade municipal obligations.
PORTFOLIO: Diversified investment-grade bonds, 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. While
the Fund has no security maturity restrictions, its average maturity will
normally be ten years or longer.
PRINCIPAL RISKS: The primary risk for this Fund is interest rate risk, as
described in the next section.
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. 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.
STRATEGY: To actively manage the portfolio to take advantage of changes in
interest rates, quality and maturity of fixed income securities.
PRINCIPAL RISKS: The primary risks for this Fund are interest rate risk, credit
risk and the risks for international securities, as described below.
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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.
<PAGE>
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M A S O N S T R E E T F U N D S
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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.
ASSET ALLOCATION RISK In addition to the risks involved with each kind of
security 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.
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PERFORMANCE
The following bar charts provide one indication of the risks of investing in the
Funds by showing each Fund's performance for calendar years 1998 and 1999.
Performance of Class A shares is shown.
ANNUAL TOTAL RETURNS
AGGRESSIVE GROWTH STOCK FUND INTERNATIONAL EQUITY FUND GROWTH STOCK FUND
1998 13.98% 1998 (1.08)% 1998 27.47%
1999 51.68% 1998 19.60% 1999 25.21%
GROWTH AND INCOME STOCK FUND INDEX 500 STOCK FUND
1998 22.08% 1998 27.71%
1999 6.88% 1999 20.24%
ASSET ALLOCATION FUND HIGH YIELD BOND FUND
1998 14.10% 1998 (1.90)%
1999 22.98% 1999 (0.31)%
MUNICIPAL BOND FUND SELECT BOND FUND
1998 6.65% 1998 5.68%
1999 (2.15)% 1999 0.44%
Sales loads are not reflected in the bar charts. 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.
<PAGE>
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JUNE 30, 2000
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The chart below shows the Funds' total returns for the period 12/31/99-3/31/00.
The chart also shows the highest and lowest quarterly return for each Fund for
the periods shown in the bar chart.
QUARTERLY TOTAL RETURNS
Total Return
12/31/99-3/31/00 Best Quarter Worst Quarter
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AGGRESSIVE GROWTH STOCK FUND 17.31% 34.81%(4Q/99) (20.86)%(3Q/98)
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INTERNATIONAL EQUITY FUND (0.94)% 14.11%(4Q/98) (17.34)%(3Q/98)
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GROWTH STOCK FUND 6.98% 22.09%(4Q/98) (11.89)%(3Q/98)
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GROWTH AND INCOME STOCK FUND 4.53% 21.43%(4Q/98) (12.72)%(3Q/99)
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INDEX 500 STOCK FUND 2.18% 21.13%(4Q/98) (10.01)%(3Q/98)
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ASSET ALLOCATION FUND 7.95% 14.63%(4Q/99) (9.00)%(3Q/98)
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HIGH YIELD BOND FUND (1.55)% 4.38%(1Q/98) (10.57)%(3Q/98)
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MUNICIPAL BOND FUND 3.04% 2.98%(3Q/98) (1.86)%(2Q/99)
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SELECT BOND FUND 2.02% 3.75%(4Q/98) (0.80)%(3Q/98)
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AVERAGE ANNUAL RETURNS
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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, 1999, 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.
Since
Inception
1 Year (annualized)<F1>
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AGGRESSIVE GROWTH
STOCK FUND - CLASS A 44.49% 33.60%
AGGRESSIVE GROWTH
STOCK FUND - CLASS B 45.70% 34.47%
WILSHIRE SMALL CAP INDEX<F2> 36.86% 22.45%
WILSHIRE NEXT 1750 INDEX<F3> 10.47% 14.44%
S&P MIDCAP 400 INDEX<F4> 14.69% 24.64%
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INTERNATIONAL EQUITY
FUND - CLASS A 13.89% 3.81%
INTERNATIONAL EQUITY
FUND - CLASS B 13.89% 4.00%
MORGAN STANLEY CAPITAL
INTERNATIONAL EAFE
(EUROPE-AUSTRALASIA-
FAR EAST) INDEX 27.30% 18.28%
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GROWTH STOCK FUND - CLASS A 19.30% 27.53%
GROWTH STOCK FUND - CLASS B 19.38% 28.28%
S&P 500R INDEX<F5> 21.06% 29.05%
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Since
Inception
1 Year (annualized)<F1>
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GROWTH AND INCOME
STOCK FUND - CLASS A 1.78% 18.05%
GROWTH AND INCOME
STOCK FUND - CLASS B 1.16% 18.57%
S&P 500/R INDEX<F5> 21.06% 29.05%
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INDEX 500 STOCK FUND - CLASS A 14.52% 25.86%
INDEX 500 STOCK FUND - CLASS B 14.49% 26.60%
S&P 500/R INDEX<F5> 21.06% 29.05%
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ASSET ALLOCATION FUND - CLASS A 17.11% 18.21%
ASSET ALLOCATION FUND - CLASS B 17.09% 18.73%
S&P 500/R INDEX<F5> 21.06% 29.05%
MERRILL LYNCH DOMESTIC
MASTER INDEX<F6> (0.96)% 7.16%
MERRILL LYNCH 91-DAY
T-BILL INDEX<F7> 4.85% 5.12%
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<F1> THE FUNDS COMMENCED OPERATIONS ON MARCH 31, 1997.
<PAGE>
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M A S O N S T R E E T F U N D S
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Since
Inception
1 Year (annualized)<F1>
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HIGH YIELD BOND FUND - CLASS A (5.07)% 3.42%
HIGH YIELD BOND FUND - CLASS B (5.47)% 3.68%
LEHMAN BROTHERS HIGH YIELD
INTERMEDIATE MARKET INDEX 2.64% 5.29%
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MUNICIPAL BOND FUND - CLASS A (6.79)% 3.45%
MUNICIPAL BOND FUND - CLASS B (7.43)% 3.58%
LEHMAN BROTHERS MUNICIPAL
BOND INDEX (2.06)% 4.92%
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SELECT BOND FUND - CLASS A (4.35)% 4.18%
SELECT BOND FUND - CLASS B (4.86)% 4.43%
MERRILL LYNCH DOMESTIC
MASTER INDEX<F6> (0.96)% 7.16%
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<F1> The Funds commenced operations on March 31, 1997.
<F2> 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
largest sectors represented in this index are technology, materials and
services, and consumer non-durables. Its average market capitalization is
approximately $1.1 billion as of March 31, 2000.
<F3> 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, materials and services, and consumer non-
durables. Its average market capitalization is approximately $997 million
as of March 31, 2000.
<F4> The S&P MidCap 400 Index is a capitalization-weighted index that measures
the performance of the mid-range sector of the U.S. stock market. As of
March 31, 2000, the 400 companies in the composite had a median market
capitalization of $1.7 billion and a total market value of $1,022.6
billion. The MidCap 400 represents approximately 6% of the market value of
S&P's database of about 8,100 equities. Because the average market
capitalization of the Aggressive Growth Stock Fund has recently increased,
the S&P MidCap 400 Index is more representative of the current composition
of this Portfolio than the Wilshire Next 1750 Index and Wilshire Small Cap
Index, which are the small-capitalization indices used in the past.
<F5> 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 three-fourths of the
total market value of all domestic common stocks.
<F6> 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.
<F7> 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.
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EXPENSE INFORMATION
The expense tables and the Examples on pp. 9-10 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.
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SHAREHOLDER TRANSACTION EXPENSES (ALL FUNDS)
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Class A Class B
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MAXIMUM SALES CHARGE
ON PURCHASES (AS % OF
OFFERING PRICE) 4.75% 0.00%
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MAXIMUM CONTINGENT
DEFERRED SALES CHARGE 0.00% 5.00%
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REDEMPTION FEE None None
-------------------------------------------------
EXCHANGE FEE None None
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<PAGE>
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JUNE 30, 2000
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ANNUAL FUND OPERATING EXPENSES<F1>
----------------------------------
<TABLE>
<CAPTION>
Fund Small Cap Growth Aggressive Growth International Index 400
-----------------------------------------------------------------------------------------------------------------
Class A Class B Class A Class B Class A Class B Class A Class B
---------------------------------------------------------------------------------------------------------------------
Nasdaq ticker symbols - - MAGAX MAGHX MEQAX MEQBX MSIAX -
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
MANAGEMENT FEES 0.85% 0.85% 0.75% 0.75% 0.85% 0.85% 0.40% 0.40%
---------------------------------------------------------------------------------------------------------------------
12b-1 DISTRIBUTION AND SERVICE FEES<F2> 0.35% 1.00% 0.35% 1.00% 0.35% 1.00% 0.35% 1.00%
--------------------------------------------------------------------------------------------------------------------
OTHER EXPENSES 2.11% 2.04% 0.40% 0.40% 0.66% 0.66% 0.86% 0.84%
--------------------------------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 3.31% 3.89% 1.50% 2.15% 1.86% 2.51% 1.61% 2.24%
--------------------------------------------------------------------------------------------------------------------
FEE WAIVER<F3> 1.91% 1.84% 0.20% 0.20% 0.21% 0.21% 0.66% 0.64%
--------------------------------------------------------------------------------------------------------------------
NET TOTAL OPERATING EXPENSES<F3> 1.40% 2.05% 1.30% 1.95% 1.65% 2.30% 0.95% 1.60%
--------------------------------------------------------------------------------------------------------------------
Fund Growth Growth and Income Index 500 Asset Allocation
--------------------------------------------------------------------------------------------------------------------
Class A Class B Class A Class B Class A Class B Class A Class B
--------------------------------------------------------------------------------------------------------------------
Nasdaq ticker symbols MGSAX MGSBX MSKAX MSKBX MISAX MISBX MASSX MASVX
--------------------------------------------------------------------------------------------------------------------
MANAGEMENT FEES 0.75% 0.75% 0.65% 0.65% 0.30% 0.30% 0.70% 0.70%
--------------------------------------------------------------------------------------------------------------------
12b-1 DISTRIBUTION AND SERVICE FEES<F2> 0.35% 1.00% 0.35% 1.00% 0.35% 1.00% 0.35% 1.00%
--------------------------------------------------------------------------------------------------------------------
OTHER EXPENSES 0.40% 0.40% 0.44% 0.45% 0.39% 0.42% 0.52% 0.52%
--------------------------------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 1.50% 2.15% 1.44% 2.10% 1.04% 1.72% 1.57% 2.22%
--------------------------------------------------------------------------------------------------------------------
FEE WAIVER<F3> 0.20% 0.20% 0.24% 0.25% 0.19% 0.22% 0.22% 0.22%
-----------------------------------------------------------------------------------------------------------------
NET TOTAL OPERATING EXPENSES<F3> 1.30% 1.95% 1.20% 1.85% 0.85% 1.50% 1.35% 2.00%
--------------------------------------------------------------------------------------------------------------------
Fund High Yield Bond Municipal Bond Select Bond
--------------------------------------------------------------------------------------------------------------------
Class A Class B Class A Class B Class A Class B
--------------------------------------------------------------------------------------------------------------------
Nasdaq ticker symbols MHYAX MHYBX MMBAX MMDBX MBDAX MBDBX
--------------------------------------------------------------------------------------------------------------------
MANAGEMENT FEES 0.75% 0.75% 0.30% 0.30% 0.30% 0.30%
--------------------------------------------------------------------------------------------------------------------
12b-1 DISTRIBUTION AND SERVICE FEES<F2> 0.35% 1.00% 0.35% 1.00% 0.35% 1.00%
--------------------------------------------------------------------------------------------------------------------
OTHER EXPENSES 0.50% 0.50% 0.49% 0.48% 0.61% 0.60%
--------------------------------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 1.60% 2.25% 1.14% 1.78% 1.26% 1.90%
--------------------------------------------------------------------------------------------------------------------
FEE WAIVER<F3> 0.30% 0.30% 0.29% 0.28% 0.41% 0.40%
--------------------------------------------------------------------------------------------------------------------
NET TOTAL OPERATING EXPENSES<F3> 1.30% 1.95% 0.85% 1.50% 0.85% 1.50%
--------------------------------------------------------------------------------------------------------------------
</TABLE>
<F1> 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.
<F2> 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.
<F3> NMIS and its affiliates have contractually agreed to waive their fees and
absorb certain other operating expenses, until at least March 31, 2004,
to the extent necessary so that Net Total Operating Expenses will not
exceed the amount shown for each Fund. The contractual fee waiver may not
be unilaterally altered by NMIS or its affiliates.
<PAGE>
--------------------------------------------------------------------------------
M A S O N S T R E E T F U N D S
--------------------------------------------------------------------------------
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 $708 $897 $ 943 $1,414 $1,509 $3,341 $3,447
---------------------------------------------------------------------------------------------------------------------
Aggressive Growth Stock Fund $601 $698 $868 $ 912 $1,176 $1,275 $2,109 $2,247
---------------------------------------------------------------------------------------------------------------------
International Equity Fund $635 $733 $971 $1,018 $1,352 $1,454 $2,480 $2,616
---------------------------------------------------------------------------------------------------------------------
Index 400 Stock Fund $567 $663 $763 $ 805 $1,050 $1,144 $2,061 $2,191
---------------------------------------------------------------------------------------------------------------------
Growth Stock Fund $601 $698 $868 $ 912 $1,176 $1,275 $2,109 $2,247
---------------------------------------------------------------------------------------------------------------------
Growth and Income Stock Fund $591 $688 $838 $ 882 $1,130 $1,229 $2,031 $2,174
---------------------------------------------------------------------------------------------------------------------
Index 500 Stock Fund $558 $653 $733 $ 774 $ 946 $1,044 $1,614 $1,769
---------------------------------------------------------------------------------------------------------------------
Asset Allocation Fund $606 $703 $882 $ 927 $1,204 $1,303 $2,176 $2,314
---------------------------------------------------------------------------------------------------------------------
High Yield Bond Fund $601 $698 $868 $ 912 $1,187 $1,286 $2,179 $2,317
---------------------------------------------------------------------------------------------------------------------
Municipal Bond Fund $558 $653 $733 $ 774 $ 957 $1,051 $1,688 $1,823
---------------------------------------------------------------------------------------------------------------------
Select Bond Fund $558 $653 $733 $ 774 $ 971 $1,065 $1,775 $1,910
---------------------------------------------------------------------------------------------------------------------
</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 for Class B shares:
<TABLE>
<CAPTION>
Fund 1 Year 3 Years 5 Years 10 Years
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SMALL CAP GROWTH STOCK FUND $208 $643 $1,309 $3,447
-------------------------------------------------------------------------------------------
AGGRESSIVE GROWTH STOCK FUND $198 $612 $1,075 $2,247
-------------------------------------------------------------------------------------------
INTERNATIONAL EQUITY FUND $233 $718 $1,254 $2,616
-------------------------------------------------------------------------------------------
INDEX 400 STOCK FUND $163 $505 $ 944 $2,191
-------------------------------------------------------------------------------------------
GROWTH STOCK FUND $198 $612 $1,075 $2,247
-------------------------------------------------------------------------------------------
GROWTH AND INCOME STOCK FUND $188 $582 $1,029 $2,174
-------------------------------------------------------------------------------------------
INDEX 500 STOCK FUND $153 $474 $ 844 $1,769
-------------------------------------------------------------------------------------------
ASSET ALLOCATION FUND $203 $627 $1,103 $2,314
-------------------------------------------------------------------------------------------
HIGH YIELD BOND FUND $198 $612 $1,086 $2,317
-------------------------------------------------------------------------------------------
MUNICIPAL BOND FUND $153 $474 $ 851 $1,823
-------------------------------------------------------------------------------------------
SELECT BOND FUND $153 $474 $ 865 $1,910
-------------------------------------------------------------------------------------------
</TABLE>
The Examples should not be considered a representation of past or future returns
or expenses, which may be more or less than those shown.
--------------------------------------------------------------------------------
------------------
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"), the fifth largest life insurance
company in the U.S., with more than $85 billion in assets. Founded in 1857,
Northwestern Mutual is one of the best established and well-respected companies
in operation today. Headquartered in Milwaukee, Wisconsin, Northwestern Mutual
has developed its reputation by providing excellence in both financial
management and personal service over the past 143 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'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.
<PAGE>
--------------------------------------------------------------------------------
JUNE 30, 2000
--------------------------------------------------------------------------------
--------------------------------
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" on pp. 24-28 for
a description of the specific sales charges or contingent deferred sales charges
which might apply to your purchase.
--------------------------------------------------------------------------------
PERFORMANCE
THE PERFORMANCE OF THE FUNDS IS GENERALLY MEASURED IN TERMS OF TOTAL RETURN. IN
ADDITION, THE BOND FUNDS MAY MEASURE YIELD AS WELL. OUR NEWSLETTERS AND
ADVERTISEMENTS MAY INCLUDE COMPARISONS OF A FUND'S PERFORMANCE TO THE
PERFORMANCE OF OTHER MUTUAL FUNDS, MUTUAL FUND AVERAGES OR RECOGNIZED INDICES.
-------------------------------
MASON STREET FUND PERFORMANCE
-------------------------------
The figures set forth below reflect each Fund's total return for the fiscal year
ended March 31, 2000, and the average annual total return for the three fiscal
years ended March 31, 2000 (since inception). These figures are based on the
actual performance of the Funds. The Funds' investment advisor and its
affiliates waived certain Fund expenses for these years. Without this waiver
total return figures would have been lower. Past performance is not necessarily
indicative and is no guarantee of future performance of the Funds.
<TABLE>
CLASS A SHARES
WITH THE MAXIMUM WITH NO INITIAL
INITIAL SALES CHARGE SALES CHARGE<F1>
Since Inception Since Inception
Fund 1 Year (annualized) 1 Year (annualized)
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SMALL CAP GROWTH STOCK FUND N/A 72.87%<F2> N/A 81.52%<F2>
-----------------------------------------------------------------------------------------------------------------------
AGGRESSIVE GROWTH STOCK FUND 78.68% 37.59% 87.53% 39.85%
-----------------------------------------------------------------------------------------------------------------------
INTERNATIONAL EQUITY FUND 11.40% 3.17% 16.91% 4.86%
-----------------------------------------------------------------------------------------------------------------------
INDEX 400 STOCK FUND N/A 14.11%<F2> N/A 19.81%<F2>
-----------------------------------------------------------------------------------------------------------------------
GROWTH STOCK FUND 21.72% 27.85% 27.78% 29.95%
-----------------------------------------------------------------------------------------------------------------------
GROWTH AND INCOME STOCK FUND 4.70% 18.18% 9.95% 20.12%
-----------------------------------------------------------------------------------------------------------------------
INDEX 500 STOCK FUND 11.57% 24.39% 17.15% 26.43%
-----------------------------------------------------------------------------------------------------------------------
ASSET ALLOCATION FUND 25.17% 19.60% 31.38% 21.57%
-----------------------------------------------------------------------------------------------------------------------
HIGH YIELD BOND FUND (4.66)% 2.60% 0.12% 4.29%
-----------------------------------------------------------------------------------------------------------------------
MUNICIPAL BOND FUND (4.84)% 4.20% (0.10)% 5.91%
-----------------------------------------------------------------------------------------------------------------------
SELECT BOND FUND (2.58)% 4.53% 2.26% 6.24%
-----------------------------------------------------------------------------------------------------------------------
</TABLE>
<F1> 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
pp. 25-26).
<F2> Reflects total return for the period 7/12/99-3/31/00. Returns are not
annualized.
<PAGE>
--------------------------------------------------------------------------------
M A S O N S T R E E T F U N D S
--------------------------------------------------------------------------------
<TABLE>
CLASS B SHARES
WITH REDEMPTION<F1> WITH NO REDEMPTION
Since Inception Since Inception
Fund 1 Year (annualized) 1 Year (annualized)
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SMALL CAP GROWTH STOCK FUND N/A 75.95%<F2> N/A 80.95%
----------------------------------------------------------------------------------------------------------------------
AGGRESSIVE GROWTH STOCK FUND 81.13% 38.40% 86.13% 38.92%
----------------------------------------------------------------------------------------------------------------------
INTERNATIONAL EQUITY FUND 11.10% 3.26% 16.10% 4.19%
----------------------------------------------------------------------------------------------------------------------
INDEX 400 STOCK FUND N/A 14.38%<F2> N/A 19.38%<F2>
----------------------------------------------------------------------------------------------------------------------
GROWTH STOCK FUND 22.02% 28.54% 27.02% 29.14%
----------------------------------------------------------------------------------------------------------------------
GROWTH AND INCOME STOCK FUND 4.28% 18.66% 9.28% 19.36%
----------------------------------------------------------------------------------------------------------------------
INDEX 500 STOCK FUND 11.30% 24.98% 16.30% 25.61%
----------------------------------------------------------------------------------------------------------------------
ASSET ALLOCATION FUND 25.47% 20.09% 30.47% 20.78%
----------------------------------------------------------------------------------------------------------------------
HIGH YIELD BOND FUND (5.07)% 2.80% (0.54)% 3.54%
----------------------------------------------------------------------------------------------------------------------
MUNICIPAL BOND FUND (5.49)% 4.28% (0.75)% 5.19%
----------------------------------------------------------------------------------------------------------------------
SELECT BOND FUND (3.24)% 4.67% 1.49% 5.50%
</TABLE>
<F1> Assumes redemption on the last day of the year beginning with the purchase
date. Redemption on the next day would result in a lower redemption charge
and higher return.
<F2> Reflects total return for the period 7/12/99-3/31/00. Returns are not
annualized.
Further information about the performance of the Funds is contained in
Mason Street Funds/R annual report to shareholders, which may be obtained
without charge from your Registered Representative or by writing to the
address or calling the phone number listed on p. 30.
--------------------------------------------------------------------------------
THE FUNDS IN DETAIL
THIS SECTION TAKES A CLOSER LOOK AT THE FUNDS' INVESTMENT OBJECTIVES AND
POLICIES AND THE SECURITIES THAT MAY BE PURCHASED. PLEASE REVIEW THE "OTHER
RISKS" SECTION ON PP. 19-20 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/R 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 SUMMARY
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/R Index
Performance
-----------------------------------------------------------
Approximate the
Index 400 Stock Fund S&P MidCap 400
Index Performance
-----------------------------------------------------------
PRIMARY HOLDINGS: Common Stocks
SHAREHOLDER'S INVESTMENT HORIZON: Long-term
<PAGE>
-------------------------------------------------------------------------------
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 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.
The investment process involves detailed studies of individual companies. In
evaluating individual companies, factors such as the company management team,
the growth rate of revenues and earnings, opportunities for margin expansion and
strong financial characteristics are important variables used in the analysis.
Under normal circumstances, the Fund will invest at least 65% of its assets in
small cap stocks. For this purpose, small cap is defined as stocks with market
capitalizations of less than $3 billion. This number is subject to periodic
adjustment to reflect changes in stock market valuations.
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. The investment process involves detailed studies
of individual companies. In evaluating individual companies, factors such as the
company management team, the growth rate of revenues and earnings, opportunities
for margin expansion and strong financial characteristics are important
variables used in the analysis.
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" on pp. 19-20.
<PAGE>
--------------------------------------------------------------------------------
M A S O N S T R E E T F U N D S
--------------------------------------------------------------------------------
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 MidCap 400 Stock Price Index
("S&P MidCap 400 Index"). The Fund will attempt to meet this objective by
investing in stocks included in the S&P MidCap 400 Index in proportion to their
weightings in the Index.
The S&P MidCap 400 Index<F1> is composed of 400 common stocks. The companies
included in the S&P MidCap 400 Index are generally smaller than those that
comprise the S&P 500/R Index. See the description of the Index 500 Stock Fund
below. The S&P MidCap 400 Index does not include the very large issues that
account for most of the weighting in the S&P 500/R Index. Most of the companies
in the S&P MidCap 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 MidCap 400
Index. The Fund will not buy stocks that are not in the S&P MidCap 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 MidCap
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.
<F1> "Standard & Poor's/R," "S&P/R," "S&P MidCap 400 Index," "Standard & Poor's
MidCap 400 Index," "S&P 500/R" and "Standard & Poor's 500" are trademarks
of The McGraw-Hill Companies, Inc. and have been licensed for use by The
Northwestern Mutual Life Insurance Company and Mason Street Funds/R. The
funds are not sponsored, endorsed, sold or promoted by Standard & Poor's,
and Standard & Poor's makes no representation regarding the advisability of
investing in the funds.
GROWTH STOCK FUND
The investment objective of the Growth Stock Fund is long-term growth of
capital; current income is secondary. The Fund will seek to achieve this
objective by selecting investments in companies which have above-average
earnings growth potential. Under normal circumstances, the Fund will invest at
least 65% of its assets in stocks.
The Growth Stock Fund invests primarily in common stocks of well-established
companies, with emphasis placed on high-quality companies with strong financial
characteristics. The investment process is initiated with an analysis of the
economic outlook. Further study of economic sectors leads to the identification
of growth-oriented industries, and to detailed studies of individual companies.
In evaluating individual companies, factors such as the company management team,
product outlook, global exposure, industry leadership position and financial
characteristics are important variables used in the analysis.
The market capitalization of companies the Fund may invest in is not limited by
size, but the Fund will generally invest in 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 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 500R 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 500R Index to seek to enhance the Fund's total return or reduce
fluctuations in market value relative to the S&P 500/R 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.
<PAGE>
--------------------------------------------------------------------------------
JUNE 30, 2000
--------------------------------------------------------------------------------
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/R Index"). The Fund will attempt to meet this
objective by investing in stocks included in the S&P 500/R Index in proportion
to their weightings in the Index.
The S&P 500/R Index<F1> is composed of 500 common stocks representing
approximately three-fourths 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 500R Index.
The Fund will not buy stocks that are not in the S&P 500/R 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 500R
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.
<F1> "Standard & Poor's/R," "S&P/R," "S&P MidCap 400 Index," "Standard & Poor's
MidCap 400 Index," "S&P 500/R" and "Standard & Poor's 500" are trademarks
of The McGraw-Hill Companies, Inc. and have been licensed for use by The
Northwestern Mutual Life Insurance Company and Mason Street Funds/R. The
funds are not sponsored, endorsed, sold or promoted by Standard & Poor's,
and Standard & Poor's makes no representation regarding the advisability of
investing in the funds.
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). As a non-
principal investment strategy, 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" on pp. 19-20. The Funds may enter into firm
commitment agreements and purchase securities on a "when-issued" basis.
As a non-principal investment strategy, 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.
<PAGE>
--------------------------------------------------------------------------------
M A S O N S T R E E T F U N D S
--------------------------------------------------------------------------------
MULTI-ASSET FUND CATEGORY
ASSET ALLOCATION FUND SUMMARY
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" on pp. 19-20.
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.
The Asset Allocation 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.
<PAGE>
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June 30, 2000
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BOND FUNDS CATEGORY
BOND FUNDS SUMMARY
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'sR. 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. As a non-principal investment strategy, 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
<PAGE>
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M A S O N S T R E E T F U N D S
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or Standard & Poor's/R, 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 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/R Ratings Group ("S&P/R"); or (2)
commercial paper rated in the top two categories by a NRSRO; or (3) cash or cash
equivalents. Up to 20% of the value of the Fund's net assets may be invested in
lower-rated securities (below investment-grade). See "High Yield/High Risk
Securities" on p. 20. 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/R; mortgage-backed and asset-backed fixed income securities;
obligations of or guaranteed by the U.S. government or its agencies;
<PAGE>
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JUNE 30, 2000
--------------------------------------------------------------------------------
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'sR; 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/R; 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'/R
Board of Directors, are of comparable quality to debt securities rated
investment-grade or better by Moody's or Standard & Poor's/R; preferred stocks,
convertible securities; and securities carrying warrants to purchase equity
securities. 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 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"
and "High Yield/High Risk Securities" on p. 20.
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 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.
<PAGE>
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M A S O N S T R E E T F U N D S
--------------------------------------------------------------------------------
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 creditworthiness of individual issuers tend to
occur more frequently and in a more pronounced manner than do changes in higher-
quality segments of the fixed income securities market. The yield and price of
medium- to lower-rated securities therefore may experience greater volatility
than is the case with higher-rated securities.
Under adverse market or economic conditions, the secondary market for high
yield/high risk securities could contract further, independent of any specific
adverse changes in the condition of a particular issuer. As a result, Mason
Street Funds/R 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'/R Board of 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.
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.
RISKS FOR ALL SECURITIES
The value of a security on a given date depends entirely on its market price.
Investors 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.
<PAGE>
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JUNE 30, 2000
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MANAGEMENT OF THE FUNDS
-------------------
INVESTMENT ADVISORS
-------------------
ALL FUNDS
The Funds' investment advisor is NMIS, a wholly-owned subsidiary of Northwestern
Mutual. 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, 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 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 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/R.
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 Stock 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, joined Northwestern Mutual 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, 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 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, 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 in 1984. Prior to this, he worked for the
Chicago Board Options Exchange, the Milwaukee Company and Armco Insurance. Mr.
Walker is a Chartered Financial Analyst and holds a B.S. degree from Marquette
University and an M.B.A. from Miami of Ohio. He has primary responsibility for
the management of the 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.
JULIE M. VAN CLEAVE, Managing Director of Northwestern Investment Management
Company, joined Northwestern Mutual 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.
TIMOTHY S. COLLINS, Director of Northwestern Investment Management Company,
joined Northwestern Mutual 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.
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 in 1997. From 1993 through 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
<PAGE>
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M A S O N S T R E E T F U N D S
--------------------------------------------------------------------------------
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.
RONALD C. ALBERTS, Director of Northwestern Investment Management Company,
joined Northwestern Mutual 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 in 1986. He holds a B.A. degree from the
University 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.
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 is solely responsible for the Growth and Income Stock
Fund. He also shares primary responsibility for the Growth and Income Stock
Portfolio of the Series Fund.
GARY R. CLEMONS, Executive 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:
Fund Fee
----------------------------------------------------
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%
----------------------------------------------------
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 on p. 9 in the fiscal years through
March 31, 2004.
<PAGE>
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JUNE 30, 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 219419
Kansas City, Missouri 64121-9419
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 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 and, therefore, an
affiliate of NMIS.
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FUND EXPENSES
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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" on p. 26.
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ADMINISTRATIVE FEES
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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.
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M A S O N S T R E E T F U N D S
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BUYING AND SELLING FUND SHARES
INVESTMENT MINIMUMS
Shares of the Funds are available through Registered Representatives of Baird
including Northwestern Mutual 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.
Investment Minimums
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Initial Subsequent
Type of Account Investment Investment
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REGULAR ACCOUNT $1,000 $100
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INDIVIDUAL IRAS
(REGULAR OR SPOUSAL) $500 $100
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OTHER TAX QUALIFIED
RETIREMENT PLANS $50 $50
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AUTOMATIC
INVESTMENT PLANS $50 $50
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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:
Sales Charge as a
Percentage of
------------------------------------------------------------------
Offering Net Amount
Amount of Purchase Price Invested
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Less than $50,000 4.75% 4.99%
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$50,000 but less than $100,000 3.75% 3.90%
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$100,000 but less than $250,000 2.75% 2.83%
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$250,000 but less than $500,000 2.00% 2.04%
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$500,000 but less than $1,000,000 1.50% 1.52%
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$1,000,000 or more None<F1> None
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<F1> 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" on p. 27.
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?
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 Funds' 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/R, Northwestern Mutual, 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/R 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 he or she redeemed the shares 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/R 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/R 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 pay-
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M A S O N S T R E E T F U N D S
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ing a sales charge. This privilege applies only to redemptions of Class A
shares on which an initial or deferred sales charge was paid or to redemptions
of Class A shares of the Fund that you purchased by reinvesting dividends or
distributions. You must ask the Transfer Agent or your Registered Representative
to apply this privilege when you send your payment.
The reduced sales charge programs may be changed or discontinued at any time
upon prior written notice to shareholders of the Funds.
DISTRIBUTION AND SERVICE FEES
Each Fund has adopted plans pursuant to Rule 12b-1 under the Investment Company
Act of 1940, which provide that all shareholders shall be subject to a
distribution fee. Because these fees are paid out of the Funds' assets on an
ongoing 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.
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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" on p. 27. 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.
<TABLE>
<CAPTION>
Contingent Deferred Sales Charge Applicable in the Year of Redemption After Purchase<F1>
--------------------------------------------------------------------------------------------------------------
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<F2>
--------------------------------------------------------------------------------------------------------------
</TABLE>
<F1> 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. Purchases of $250,000 or more
by qualified retirement plans are not accepted in Class B shares. Class A
shares will be issued in these cases.
<F2> Purchases of $1 million or more are not accepted in Class B shares. Class A
shares will be issued in these cases.
<PAGE>
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JUNE 30, 2000
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In determining whether a contingent deferred sales charge is applicable to a
redemption of Class B shares, the calculation will be made in a manner that
results in the lowest possible charge. It will be assumed that the redemption is
made first from shares acquired through the reinvestment of dividends and
distributions; then from amounts representing the increase in net asset value of
your holdings of Class B shares above the total amount of payments for the
purchase of Class B shares during the preceding six years; then from shares held
beyond the applicable contingent deferred sales charge period; and finally, from
shares subject to the lowest contingent deferred sales charge.
If you are exchanging shares for shares of the SSgA Money Market Fund, no
contingent deferred sales charge is charged at the time of the exchange. If you
later redeem your Money Market Fund shares, you will be charged the applicable
contingent deferred sales charge as if your shares were redeemed as of the time
of your exchange into the Money Market Fund. The contingent deferred sales
charge will not decrease for the time amounts are held in the Money Market Fund.
AUTOMATIC CONVERSION OF CLASS B SHARES
Class B shares are automatically converted to Class A shares two years after the
expiration of any contingent deferred sales charge. This conversion feature
relieves Class B shareholders of the higher asset-based sales charge that
otherwise applies to Class B shares under the Class B distribution plan
described below. The conversion is based on the relative net asset value of the
two Classes, and no charge is imposed in connection with the conversion.
WHEN WILL THE CONTINGENT DEFERRED SALES
CHARGE SCHEDULE BE REDUCED?
There are two ways to reduce the contingent deferred sales charge schedule:
COMBINED PURCHASES Purchases made at the same time for any of the Funds in
related accounts may be aggregated for the purpose of receiving a reduced
contingent deferred sales charge schedule. Notice must be given at the time the
orders are placed that there are multiple orders which qualify for a reduced
contingent deferred sales charge schedule.
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.
LETTER OF INTENT 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" on p. 26. 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.
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M A S O N S T R E E T F U N D S
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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'R 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.
SHAREHOLDERS' GUIDE
HOW TO BUY SHARES
GENERAL
You must indicate at the time of investment whether you are purchasing Class A
shares or Class B shares. You also are required by federal regulations to
certify your Taxpayer Identification 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 FundsR. Personal third-party
checks will not be accepted.
OPENING AN ACCOUNT
Contact your Registered Representative for instructions.
ADDING TO AN ACCOUNT
Contact your Registered Representative for instructions, or
BY MAIL Identify the Fund and account number or use the remittance slip
attached to your account statement. Send a check payable to Mason Street FundsR.
Mail all subsequent investments to the following address:
Mason Street Funds/R
P.O. Box 219419
Kansas City, MO 64121-9419
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 Funds' account
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).
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JUNE 30, 2000
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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 account 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.
- 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"
on pp. 26-27.
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/R
P.O. Box 219419
Kansas City, MO 64121-9419
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 on p. 30.
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 account
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M A S O N S T R E E T F U N D S
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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 $1,000 minimum
balance as a result of redemptions.
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.
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QUICK ADDRESS AND TELEPHONE REFERENCE
-------------------------------------
REGULAR MAIL
Mason Street Funds/R
P.O. Box 219419
Kansas City, MO 64121-9419
EXPRESS OR CERTIFIED MAIL
Mason Street FundsR
330 West 9th Street
Kansas City, MO 64105
INTERNET
www.masonstreetfunds.com
TOLL-FREE NUMBER
1-888-MASONST (1-888-627-6678)
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<PAGE>
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JUNE 30, 2000
---------------------------------------------------------------------
DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
Each Fund distributes substantially all of its net realized capital gains and
net investment income to its shareholders. A capital gain or loss is the
difference between the purchase and sale price of a security. The Funds will
have net capital gains if their capital gains exceed their capital losses, which
cannot be assured. Net investment income is determined by subtracting expenses
from any interest and dividend income earned by a Fund.
All the Funds distribute any net realized short- and long-term capital gains at
least annually.
The Stock Funds and the Asset Allocation Fund distribute any net investment
income to shareholders annually. The Bond Funds declare net investment income
dividends daily and distribute such dividends to the shareholders monthly.
Each Fund pays its dividends and other distributions in additional Fund shares
at net asset value unless the shareholder requests cash payments. Shareholders
who elect to receive dividends and/or other distributions in cash or in shares
of another Fund should contact their Registered Representative or the Transfer
Agent or complete the applicable item on the Funds' account 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
<PAGE>
--------------------------------------------------------------------------------
M A S O N S T R E E T F U N D S
--------------------------------------------------------------------------------
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 or
her Taxpayer Identification Number, or who is otherwise subject to backup
withholding. Corporate and governmental entities are generally exempt from
withholding requirements.
TAX INFORMATION FOR SHAREHOLDERS
Following the end of each calendar year, each Fund notifies its shareholders of
the amount of dividends and capital gains distributions paid (or deemed paid)
during that year, and shows the portion of those dividends that qualifies for
the corporate dividends-received deduction. The Funds identify amounts taxable
as ordinary income and amounts taxable as capital gains, and indicate whether
any portion of such income is possibly exempt from state or local taxes. The
Municipal Bond Fund provides its shareholders with information about the exempt-
interest dividends paid to them (since they must disclose it on their federal
income tax returns), and reports the amount that relates to private activity
bonds which could be subject to the AMT. Under certain circumstances, notices
provided to 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.
<PAGE>
--------------------------------------------------------------------------------
JUNE 30, 2000
--------------------------------------------------------------------------------
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 three 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 Funds' financial statements, is included in the Funds' Annual Report, which
is available upon request.
<TABLE>
<CAPTION>
SMALL CAP GROWTH
STOCK FUND AGGRESSIVE GROWTH STOCK FUND
----------------------------------------------------------------------------------------------------------------------------------
Class A Class B Class A Class B
----------------------------------------------------------------------------------------------------------------------------------
2000<F1> 2000<F1> 2000<F2> 1999<F2> 1998<F2> 2000<F2> 1999<F2> 1998<F2>
----------------------------------------------------------------------------------------------------------------------------------
SELECTED PER SHARE DATA
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $10.00 $10.00 $13.73 $14.50 $10.00 $13.58 $14.43 $10.00
INCOME FROM INVESTMENT
OPERATIONS:
NET INVESTMENT INCOME (LOSS) (0.08)<F4> (0.10)<F4> (0.21)<F4> (0.11) (0.12)<F3> (0.27)<F4> (0.19) (0.21)<F3>
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS 8.12 8.09 11.82 (0.43) 5.18 11.59 (0.43) 5.18
----------------------------------------------------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT
OPERATIONS 8.04 7.99 11.61 (0.54) 5.06 11.32 (0.62) 4.97
----------------------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
DISTRIBUTIONS FROM NET
INVESTMENT INCOME (0.01) 0.00 0.00 0.00 0.00 0.00 0.00 0.00
DISTRIBUTIONS FROM REALIZED
GAINS ON INVESTMENTS (0.44) (0.42) (2.11) (0.23) (0.56) (2.04) (0.23) (0.54)
----------------------------------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (0.45) (0.42) (2.11) (0.23) (0.56) (2.04) (0.23) (0.54)
----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE,
END OF PERIOD $17.59 $17.57 $23.23 $13.73 $14.50 $22.86 $13.58 $14.43
==================================================================================================================================
TOTAL RETURN <F6> 81.52%<F5> 80.95%<F5> 87.53% (3.78)% 51.57% 86.13% (4.35)% 50.59%
==================================================================================================================================
RATIOS AND
SUPPLEMENTAL DATA:
NET ASSETS, END OF PERIOD $10,133,996 $1,892,130 $84,847,655 $43,840,289 $41,640,193 $11,401,550 $4,695,396 $1,870,132
==================================================================================================================================
RATIO OF GROSS EXPENSES TO
AVERAGE NET ASSETS 3.31%<F7> 3.89%<F7> 1.50% 1.62% 1.64% 2.15% 2.27% 2.29%
==================================================================================================================================
RATIO OF NET EXPENSES TO
AVERAGE NET ASSETS 1.40%<F7> 2.05%<F7> 1.30% 1.30% 1.30% 1.95% 1.95% 1.95%
==================================================================================================================================
RATIO OF NET INVESTMENT
INCOME (LOSS) TO
AVERAGE NET ASSETS (0.92)%<F7> (1.57)%<F7> (0.82)% (0.80)% (0.96)% (1.47)% (1.45)% (1.61)%
==================================================================================================================================
PORTFOLIO TURNOVER RATE 89.96% 89.96% 92.54% 84.46% 64.91% 92.54% 84.46% 64.91%
==================================================================================================================================
</TABLE>
<F1> For the period of July 12, 1999 (commencement of operations) through March
31, 2000.
<F2> For the twelve months ended March 31.
<F3> Calculated based on average shares outstanding.
<F4> Calculated prior to adjustment for certain book and tax income differences.
<F5> Reflects total return for the period 7/12/99-3/31/00. Returns are not
annualized.
<F6> 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.
<F7> Computed on an annualized basis.
<PAGE>
--------------------------------------------------------------------------------
M A S O N S T R E E T F U N D S
--------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
<TABLE>
<CAPTION>
INDEX 400
INTERNATIONAL EQUITY FUND STOCK FUND
----------------------------------------------------------------------------------------------------------------------------------
Class A Class B Class A Class B
2000<F1> 1999<F1> 1998<F1> 2000<F1> 1999<F1> 1998<F1> 2000<F2> 2000<F2>
----------------------------------------------------------------------------------------------------------------------------------
SELECTED PER SHARE DATA
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $9.09 $10.58 $10.00 $9.03 $10.53 $10.00 $10.00 $10.00
INCOME FROM INVESTMENT
OPERATIONS:
NET INVESTMENT INCOME (LOSS) 0.15<F4> 0.19<F4> 0.24<F3> 0.07<F4> 0.14<F3> 0.10<F3> 0.04<F4> 0.00<F4>
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS 1.39 (1.13) 0.56 1.39 (1.13) 0.63 1.93 1.93
----------------------------------------------------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT
OPERATIONS 1.54 (0.94) 0.80 1.46 (0.99) 0.73 1.97 1.93
----------------------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
DISTRIBUTIONS FROM NET
INVESTMENT INCOME (0.13) (0.17) (0.22) (0.08) (0.13) (0.20) (0.05) (0.03)
DISTRIBUTIONS FROM REALIZED
GAINS ON INVESTMENTS (0.01) (0.38) 0.00 (0.01) (0.38) 0.00 (0.06) (0.06)
----------------------------------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTION<F5> (0.14) (0.55) (0.22) (0.09) (0.51) (0.20) (0.11) (0.09)
==================================================================================================================================
NET ASSET VALUE,
END OF PERIOD $10.49 $9.09 $10.58 $10.40 $9.03 $10.53 $11.86 $11.84
==================================================================================================================================
TOTAL RETURN <F6> 16.91% (8.85)% 8.19% 16.10% (9.36)% 7.49% 19.81%<F5> 19.38%<F5>
==================================================================================================================================
RATIOS AND
SUPPLEMENTAL DATA:
NET ASSETS, END OF PERIOD $34,368,631 $28,543,601 $29,451,833 $4,060,630 $2,718,073 $1,444,924 $32,001,909 $3,602,444
==================================================================================================================================
RATIO OF GROSS EXPENSES TO
AVERAGE NET ASSETS 1.86% 1.91% 2.13% 2.51% 2.56% 2.78% 1.61%<F7> 2.24%<F7>
==================================================================================================================================
RATIO OF NET EXPENSES TO
AVERAGE NET ASSETS 1.65% 1.65% 1.65% 2.30% 2.30% 2.30% 0.95%<F7> 1.60%<F7>
==================================================================================================================================
RATIO OF NET INVESTMENT
INCOME (LOSS) TO
AVERAGE NET ASSETS 1.07% 2.34% 2.34% 0.42% 1.69% 1.69% 0.55%<F7>(0.10)%<F7>
==================================================================================================================================
PORTFOLIO TURNOVER RATE 23.99% 70.31% 10.07% 23.99% 70.31% 10.07% 35.40% 35.40%
==================================================================================================================================
</TABLE>
<F1> For the period of July 12, 1999 (commencement of operations) through March
31, 2000.
<F2> For the twelve months ended March 31.
<F3> Calculated based on average shares outstanding.
<F4> Calculated prior to adjustment for certain book and tax income differences.
<F5> Reflects total return for the period 7/12/99-3/31/00. Returns are not
annualized.
<F6> 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.
<F7> Computed on an annualized basis.
<PAGE>
----------------------------------------------------------------------
JUNE 30, 2000
----------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
<TABLE>
<CAPTION>
GROWTH STOCK FUND
---------------------------------------------------------------------------------------------------------------------------------
Class A Class B
---------------------------------------------------------------------------------------------------------------------------------
2000<F1> 1999<F1> 1998<F1> 2000<F1> 1999<F1> 1998<F1>
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
SELECTED PER SHARE DATA
NET ASSET VALUE,
BEGINNING OF PERIOD $15.86 $14.10 $10.00 $15.73 $14.03 $10.00
INCOME FROM INVESTMENT
OPERATIONS:
NET INVESTMENT INCOME (LOSS) 0.05<F3> 0.04 0.04<F2> (0.05)<F3> (0.01) (0.05)<F2>
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS 4.27 2.52 4.41 4.22 2.46 4.41
---------------------------------------------------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT
OPERATIONS 4.32 2.56 4.45 4.17 2.45 4.36
---------------------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
DISTRIBUTIONS FROM NET
INVESTMENT INCOME (0.06) (0.06) (0.05) 0.00 (0.01) (0.03)
DISTRIBUTIONS FROM REALIZED
GAINS ON INVESTMENTS (1.11) (0.74) (0.30) (1.09) (0.74) (0.30)
---------------------------------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (1.17) (0.80) (0.35) (1.09) (0.75) (0.33)
---------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE,
END OF PERIOD $19.01 $15.86 $14.10 $18.81 $15.73 $14.03
==================================================================================================================================
TOTAL RETURN <F4> 27.78% 18.36% 45.08% 27.02% 17.66% 44.12%
==================================================================================================================================
RATIOS AND
SUPPLEMENTAL DATA:
NET ASSETS, END OF PERIOD $65,591,773 $49,045,112 $38,224,386 $6,301,198 $3,516,193 $811,173
==================================================================================================================================
RATIO OF GROSS EXPENSES TO
AVERAGE NET ASSETS 1.50% 1.57% 1.63% 2.15% 2.22% 2.28%
==================================================================================================================================
RATIO OF NET EXPENSES TO
AVERAGE NET ASSETS 1.30% 1.30% 1.30% 1.95% 1.95% 1.95%
==================================================================================================================================
RATIO OF NET INVESTMENT
INCOME (LOSS) TO
AVERAGE NET ASSETS 0.28% 0.42% 0.29% (0.37)% (0.23)% (0.36)%
==================================================================================================================================
PORTFOLIO TURNOVER RATE 35.34% 32.00% 37.52% 35.34% 32.00% 37.52%
==================================================================================================================================
</TABLE>
<F1> For the twelve months ended March 31.
<F2> Calculated based on average shares outstanding.
<F3> Calculated prior to adjustment for certain book and tax income differences.
<F4> 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.
<PAGE>
--------------------------------------------------------------------------------
M A S O N S T R E E T F U N D S
--------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
<TABLE>
<CAPTION>
GROWTH AND INCOME STOCK FUND
----------------------------------------------------------------------------------------------------------------------------------
Class A Class B
----------------------------------------------------------------------------------------------------------------------------------
2000<F1> 1999<F1> 1998<F1> 2000<F1> 1999<F1> 1998<F1>
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
SELECTED PER SHARE DATA
NET ASSET VALUE,
BEGINNING OF PERIOD $11.96 $12.44 $10.00 $11.85 $12.37 $10.00
INCOME FROM INVESTMENT
OPERATIONS:
NET INVESTMENT INCOME (LOSS) 0.02<F3> 0.01 0.04<F2> (0.04)<F3> (0.03) (0.03)<F2>
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS 1.14 1.33 3.90 1.11 1.28 3.88
----------------------------------------------------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT
OPERATIONS 1.16 1.34 3.94 1.07 1.25 3.85
----------------------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
DISTRIBUTIONS FROM NET
INVESTMENT INCOME 0.00 (0.04) (0.06) 0.00 0.00 (0.04)
DISTRIBUTIONS FROM REALIZED
GAINS ON INVESTMENTS (0.67) (1.78) (1.44) (0.67) (1.77) (1.44)
----------------------------------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (0.67) (1.82) (1.50) (0.67) (1.77) (1.48)
----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE,
END OF PERIOD $12.45 $11.96 $12.44 $12.25 $11.85 $12.37
=================================================================================================================================
TOTAL RETURN <F4> 9.95% 11.09% 41.90% 9.28% 10.41% 40.96%
=================================================================================================================================
RATIOS AND
SUPPLEMENTAL DATA:
NET ASSETS, END OF PERIOD $51,513,192 $45,619,789 $37,800,412 $6,235,397 $4,314,429 $1,529,206
=================================================================================================================================
RATIO OF GROSS EXPENSES TO
AVERAGE NET ASSETS 1.44% 1.52% 1.57% 2.10% 2.17% 2.22%
=================================================================================================================================
RATIO OF NET EXPENSES TO
AVERAGE NET ASSETS 1.20% 1.20% 1.20% 1.85% 1.85% 1.85%
=================================================================================================================================
RATIO OF NET INVESTMENT
INCOME (LOSS) TO
AVERAGE NET ASSETS 0.19% 0.20% 0.37% (0.46)% (0.45)% (0.28)%
=================================================================================================================================
PORTFOLIO TURNOVER RATE 89.66% 156.92% 140.29% 89.66% 156.92% 140.29%
=================================================================================================================================
</TABLE>
<F1> For the twelve months ended March 31.
<F2> Calculated based on average shares outstanding.
<F3> Calculated prior to adjustment for certain book and tax income differences.
<F4> 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.
<PAGE>
----------------------------------------------------------------------
JUNE 30, 2000
----------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
<TABLE>
<CAPTION>
INDEX 500 STOCK FUND
----------------------------------------------------------------------------------------------------------------------------------
Class A Class B
----------------------------------------------------------------------------------------------------------------------------------
2000<F1> 1999<F1> 1998<F1> 2000<F1> 1999<F1> 1998<F1>
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
SELECTED PER SHARE DATA
NET ASSET VALUE,
BEGINNING OF PERIOD $16.80 $14.43 $10.00 $16.65 $14.35 $10.00
INCOME FROM INVESTMENT
OPERATIONS:
NET INVESTMENT INCOME (LOSS) 0.10<F3> 0.10 0.13<F2> (0.01)<F3> 0.03 0.05<F2>
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS 2.77 2.47 4.48 2.72 2.43 4.47
----------------------------------------------------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT
OPERATIONS 2.87 2.57 4.61 2.71 2.46 4.52
----------------------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
DISTRIBUTIONS FROM NET
INVESTMENT INCOME (0.13) (0.06) (0.11) (0.05) (0.02) (0.10)
DISTRIBUTIONS FROM REALIZED
GAINS ON INVESTMENTS (0.29) (0.14) (0.07) (0.29) (0.14) (0.07)
----------------------------------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (0.42) (0.20) (0.18) (0.34) (0.16) (0.17)
----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE,
END OF PERIOD $19.25 $16.80 $14.43 $19.02 $16.65 $14.35
==================================================================================================================================
TOTAL RETURN <F4> 17.15% 17.88% 46.35% 16.30% 17.17% 45.44%
==================================================================================================================================
RATIOS AND
SUPPLEMENTAL DATA:
NET ASSETS, END OF PERIOD $66,308,048 $70,034,287 $43,567,584 $31,609,672 $17,802,313 $4,246,552
==================================================================================================================================
RATIO OF GROSS EXPENSES TO
AVERAGE NET ASSETS 1.04% 1.15% 1.30% 1.72% 1.80% 1.95%
==================================================================================================================================
RATIO OF NET EXPENSES TO
AVERAGE NET ASSETS 0.85% 0.85% 0.85% 1.50% 1.50% 1.50%
==================================================================================================================================
RATIO OF NET INVESTMENT
INCOME (LOSS) TO
AVERAGE NET ASSETS 0.57% 0.88% 1.04% (0.08)% 0.23% 0.39%
==================================================================================================================================
PORTFOLIO TURNOVER RATE 19.61% 3.83% 2.47% 19.61% 3.83% 2.47%
==================================================================================================================================
</TABLE>
<F1> For the twelve months ended March 31.
<F2> Calculated based on average shares outstanding.
<F3> Calculated prior to adjustment for certain book and tax income differences.
<F4> 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.
--------------------------------------------------------------------------------
M A S O N S T R E E T F U N D S
--------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
<TABLE>
<CAPTION>
ASSET ALLOCATION FUND
---------------------------------------------------------------------------------------------------------------------------------
Class A Class B
---------------------------------------------------------------------------------------------------------------------------------
2000<F1> 1999<F1> 1998<F1> 2000<F1> 1999<F1> 1998<F1>
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
SELECTED PER SHARE DATA
NET ASSET VALUE,
BEGINNING OF PERIOD $12.49 $12.32 $10.00 $12.39 $12.26 $10.00
INCOME FROM INVESTMENT
OPERATIONS:
NET INVESTMENT INCOME (LOSS) 0.39<F3> 0.32 0.31<F2> 0.32<F3> 0.24 0.23<F2>
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS 3.41 0.46 2.50 3.35 0.46 2.50
---------------------------------------------------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT
OPERATIONS 3.80 0.78 2.81 3.67 0.70 2.73
---------------------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
DISTRIBUTIONS FROM NET
INVESTMENT INCOME (0.37) (0.31) (0.24) (0.31) (0.27) (0.22)
DISTRIBUTIONS FROM REALIZED
GAINS ON INVESTMENTS (0.99) (0.30) (0.25) (0.99) (0.30) (0.25)
---------------------------------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (1.36) (0.61) (0.49) (1.30) (0.57) (0.47)
---------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE,
END OF PERIOD $14.93 $12.49 $12.32 $14.76 $12.39 $12.26
=================================================================================================================================
TOTAL RETURN <F4> 31.38% 6.41% 28.51% 30.47% 5.77% 27.69%
=================================================================================================================================
RATIOS AND
SUPPLEMENTAL DATA:
NET ASSETS, END OF PERIOD $56,394,478 $40,249,915 $34,564,169 $11,039,829 $5,825,603 $1,569,081
=================================================================================================================================
RATIO OF GROSS EXPENSES TO
AVERAGE NET ASSETS 1.57% 1.62% 1.67% 2.22% 2.27% 2.32%
=================================================================================================================================
RATIO OF NET EXPENSES TO
AVERAGE NET ASSETS 1.35% 1.35% 1.35% 2.00% 2.00% 2.00%
=================================================================================================================================
RATIO OF NET INVESTMENT
INCOME (LOSS) TO
AVERAGE NET ASSETS 2.90% 2.89% 2.67% 2.25% 2.24% 2.02%
=================================================================================================================================
PORTFOLIO TURNOVER RATE 115.67% 79.71% 65.67% 115.67% 79.71% 65.67%
=================================================================================================================================
</TABLE>
<F1> For the twelve months ended March 31.
<F2> Calculated based on average shares outstanding.
<F3> Calculated prior to adjustment for certain book and tax income differences.
<F4> 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.
<PAGE>
--------------------------------------------------------------------------------
JUNE 30, 2000
--------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
<TABLE>
<CAPTION>
HIGH YIELD BOND FUND
----------------------------------------------------------------------------------------------------------------------------------
Class A Class B
----------------------------------------------------------------------------------------------------------------------------------
2000<F1> 1999<F1> 1998<F1> 2000<F1> 1999<F1> 1998<F1>
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
SELECTED PER SHARE DATA
NET ASSET VALUE,
BEGINNING OF PERIOD $8.77 $10.79 $10.00 $8.76 $10.79 $10.00
INCOME FROM INVESTMENT
OPERATIONS:
NET INVESTMENT INCOME (LOSS) 0.85<F3> 1.00 1.01<F2> 0.80<F3> 0.93 0.93<F2>
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS (0.83) (1.82) 1.19 (0.83) (1.83) 1.20
----------------------------------------------------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT
OPERATIONS 0.02 (0.82) 2.20 (0.03) (0.90) 2.13
----------------------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
DISTRIBUTIONS FROM NET
INVESTMENT INCOME (0.85) (1.02) (1.00) (0.80) (0.95) (0.93)
DISTRIBUTIONS FROM REALIZED
GAINS ON INVESTMENTS 0.00 (0.18) (0.41) 0.00 (0.18) (0.41)
----------------------------------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (0.85) (1.20) (1.41) (0.80) (1.13) (1.34)
----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE,
END OF PERIOD $7.94 $8.77 $10.79 $7.93 $8.76 $10.79
==================================================================================================================================
TOTAL RETURN <F4> 0.12% (7.87)% 22.95% (0.54)% (8.48)% 22.09%
==================================================================================================================================
RATIOS AND
SUPPLEMENTAL DATA:
NET ASSETS, END OF PERIOD $34,696,895 $37,414,394 $32,811,316 $4,622,028 $4,683,841 $1,360,925
==================================================================================================================================
RATIO OF GROSS EXPENSES TO
AVERAGE NET ASSETS 1.60% 1.65% 1.66% 2.25% 2.30% 2.31%
==================================================================================================================================
RATIO OF NET EXPENSES TO
AVERAGE NET ASSETS 1.30% 1.30% 1.30% 1.95% 1.95% 1.95%
==================================================================================================================================
RATIO OF NET INVESTMENT
INCOME (LOSS) TO
AVERAGE NET ASSETS 10.05% 10.51% 9.30% 9.40% 9.86% 8.65%
==================================================================================================================================
PORTFOLIO TURNOVER RATE 193.63% 178.63% 178.61% 193.63% 178.63% 178.61%
==================================================================================================================================
</TABLE>
<F1> For the twelve months ended March 31.
<F2> Calculated based on average shares outstanding.
<F3> Calculated prior to adjustment for certain book and tax income
differences.
<F4> 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.
--------------------------------------------------------------------------------
M A S O N S T R E E T F U N D S
--------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
<TABLE>
<CAPTION>
MUNICIPAL BOND FUND
----------------------------------------------------------------------------------------------------------------------------------
Class A Class B
----------------------------------------------------------------------------------------------------------------------------------
20001 1999<F1> 1998<F1> 2000<F1> 1999<F1> 1998<F1>
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
SELECTED PER SHARE DATA
NET ASSET VALUE,
BEGINNING OF PERIOD $10.63 $10.55 $10.00 $10.63 $10.55 $10.00
INCOME FROM INVESTMENT
OPERATIONS:
NET INVESTMENT INCOME (LOSS) 0.46<F3> 0.42 0.46<F2> 0.40<F3> 0.36 0.38<F2>
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS (0.49) 0.25 0.69 (0.49) 0.23 0.70
----------------------------------------------------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT
OPERATIONS (0.03) 0.67 1.15 (0.09) 0.59 1.08
----------------------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
DISTRIBUTIONS FROM NET
INVESTMENT INCOME (0.46) (0.45) (0.47) (0.40) (0.37) (0.40)
DISTRIBUTIONS FROM REALIZED
GAINS ON INVESTMENTS (0.07) (0.14) (0.13) (0.07) (0.14) (0.13)
----------------------------------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (0.53) (0.59) (0.60) (0.47) (0.51) (0.53)
----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE,
END OF PERIOD $10.07 $10.63 $10.55 $10.07 $10.63 $10.55
==================================================================================================================================
TOTAL RETURN <F4> (0.10)% 6.42% 11.73% (0.75)% 5.72% 10.93%
==================================================================================================================================
RATIOS AND
SUPPLEMENTAL DATA:
NET ASSETS, END OF PERIOD $33,486,954 $32,692,209 $28,172,205 $877,436 $849,347 $472,387
==================================================================================================================================
RATIO OF GROSS EXPENSES TO
AVERAGE NET ASSETS 1.14% 1.17% 1.24% 1.78% 1.82% 1.89%
==================================================================================================================================
RATIO OF NET EXPENSES TO
AVERAGE NET ASSETS 0.85% 0.85% 0.85% 1.50% 1.50% 1.50%
==================================================================================================================================
RATIO OF NET INVESTMENT
INCOME (LOSS) TO
AVERAGE NET ASSETS 4.55% 4.18% 4.38% 3.90% 3.53% 3.73%
==================================================================================================================================
PORTFOLIO TURNOVER RATE 184.70% 344.11% 169.37% 184.70% 344.11% 169.37%
==================================================================================================================================
</TABLE>
<F1> For the twelve months ended March 31.
<F2> Calculated based on average shares outstanding.
<F3> Calculated prior to adjustment for certain book and tax income differences.
<F4> 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.
--------------------------------------------------------------------------------
JUNE 30, 2000
--------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
<TABLE>
<CAPTION>
SELECT BOND FUND
---------------------------------------------------------------------------------------------------------------------------------
Class A Class B
---------------------------------------------------------------------------------------------------------------------------------
2000<F1> 1999<F1> 1998<F1> 2000<F> 1999<F1> 1998<F1>
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
SELECTED PER SHARE DATA
NET ASSET VALUE,
BEGINNING OF PERIOD $9.66 $9.98 $10.00 $9.66 $9.98 $10.00
INCOME FROM INVESTMENT
OPERATIONS:
NET INVESTMENT INCOME (LOSS) 0.68<F3> 0.61 0.71<F2> 0.60<F3> 0.56 0.66<F2>
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS (0.47) (0.16) 0.46 (0.46) (0.18) 0.44
---------------------------------------------------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT
OPERATIONS 0.21 0.45 1.17 0.14 0.38 1.10
---------------------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
DISTRIBUTIONS FROM NET
INVESTMENT INCOME (0.63) (0.68) (0.71) (0.57) (0.61) (0.64)
DISTRIBUTIONS FROM REALIZED
GAINS ON INVESTMENTS (0.11) (0.09) (0.48) (0.11) (0.09) (0.48)
---------------------------------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (0.74) (0.77) (1.19) (0.68) (0.70) (1.12)
---------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE,
END OF PERIOD $9.13 $9.66 $9.98 $9.12 $9.66 $9.98
==================================================================================================================================
TOTAL RETURN <F4> 2.26% 4.60% 12.11% 1.49% 3.91% 11.34%
==================================================================================================================================
RATIOS AND
SUPPLEMENTAL DATA:
NET ASSETS, END OF PERIOD $32,388,650 $31,478,811 $28,617,421 $2,277,324 $2,425,059 $643,332
==================================================================================================================================
RATIO OF GROSS EXPENSES TO
AVERAGE NET ASSETS 1.26% 1.26% 1.29% 1.90% 1.91% 1.94%
==================================================================================================================================
RATIO OF NET EXPENSES TO
AVERAGE NET ASSETS 0.85% 0.85% 0.85% 1.50% 1.50% 1.50%
==================================================================================================================================
RATIO OF NET INVESTMENT
INCOME (LOSS) TO
AVERAGE NET ASSETS 6.70% 7.03% 6.93% 6.05% 6.38% 6.28%
==================================================================================================================================
PORTFOLIO TURNOVER RATE 92.12% 252.44% 362.32% 92.12% 252.44% 362.32%
==================================================================================================================================
</TABLE>
<F1> For the twelve months ended March 31.
<F2> Calculated based on average shares outstanding.
<F3> Calculated prior to adjustment for certain book and tax income differences.
<F4> 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.
<PAGE>
-------------------------------------------------------------------------------
M A S O N S T R E E T F U N D S
-------------------------------------------------------------------------------
APPENDIX A - GLOSSARY
THE FOLLOWING GLOSSARY GIVES YOU A MORE DETAILED DESCRIPTION OF SOME OF THE
TYPES OF SECURITIES IN WHICH THE FUNDS MAY INVEST, SUBJECT TO THEIR SPECIFIC
RESTRICTIONS AND POLICIES. IT ALSO DISCUSSES OTHER INVESTMENT TECHNIQUES AND
OTHER TERMINOLOGY THAT IS INCLUDED IN THIS PROSPECTUS. ADDITIONAL INFORMATION ON
ELIGIBLE INVESTMENTS CAN BE FOUND ELSEWHERE IN THIS PROSPECTUS AND IN THE
STATEMENT OF ADDITIONAL INFORMATION.
EQUITY AND DEBT SECURITIES
AMERICAN DEPOSITARY RECEIPTS (ADRS) see "Depositary receipts" below.
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/R and Aa or better by Moody's.
HIGH-GRADE INSTRUMENTS are securities rated A or better by Standard & Poor's/R
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/R 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/R 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.
<PAGE>
---------------------------------------------------------------------------
JUNE 30, 2000
---------------------------------------------------------------------------
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, 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.
<PAGE>
---------------------------------------------------------------------------
M A S O N S T R E E T F U N D S
---------------------------------------------------------------------------
APPENDIX B
-------------------------------
STANDARD & POOR'S/R CORPORATION
-------------------------------
Bond Rating Explanation
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
--------------------------------
Moody's Investors Services, Inc.
--------------------------------
Bond Rating Explanation
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
<PAGE>
AT MASON STREET FUNDS/R, 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 FUNDSR IS
DISTINCT IN OBJECTIVE AND STRATEGY, ALL OFFER THE SAME CONVENIENT AND EASY-
TO-USE FEATURES. (SOME SERVICES ARE AVAILABLE ONLY FOR NON-BAIRD ACCOUNTS.)
<TABLE>
<CAPTION>
TELEPHONE
YOUR REGISTERED 1-888-MASONST MAIL WIRE INTERNET
SERVICE REPRESENTATIVE (1-888-627-6678) (SEE PP. 28-30) (SEE PP. 28-30) 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
BALANCE INFORMATION X X X X
(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 FUNDSR, 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 FUNDSR AND IS THERE TO
HELP YOU WORK TOWARD YOUR INVESTMENT GOALS NOW...AND IN THE FUTURE.
<PAGE>
MASON STREET FUNDS/R
P.O. BOX 219419
KANSAS CITY, MO 64121-9419
1-888-MASONST (1-888-627-6678)
WWW.MASONSTREETFUNDS.COM
More information about Mason Street Funds/R 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.
Robert W. Baird & Co. Incorporated, Distributor 94-1000
Investment Company Act File No. 811-07961 4/97 (Rev. 6/00)
<PAGE>
MASON STREET FUNDS, INC.
CROSS REFERENCE SHEET
Cross reference sheet showing location in Statement of Additional
Information required by the Items in Part B of Form N-1A.
Heading in Statement
Item Number of Additional Information
----------- -------------------------
10 Cover Page, 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
<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 June 30, 2000.
The date of this Statement of Additional Information is
June 30, 2000.
<PAGE>
TABLE OF CONTENTS
CROSS-REFERENCE TO
PAGE PAGE IN PROSPECTUS
---- ------------------
Investment Policies B-4 13
Investment Restrictions B-4 -
Portfolio Securities for the Municipal Bond Fund B-5 17
Repurchase Agreements B-7 -
Financial Futures and Forward Contracts B-8 -
Options - In General B-13 -
Future Developments B-14 -
Reverse Repurchase Agreements B-14 -
Warrants B-14 -
Eurodollar Certificates of Deposit B-14 -
Asset-Backed and Variable Rate Securities B-15 -
Short-Term Trading B-15 -
Firm Commitment Agreements and "When-Issued" B-15 -
Securities
Private Placement Transactions B-16 -
and Illiquid Assets
Securities on The Restricted List of The
Northwestern Mutual Life Insurance Company B-16 -
Risk Factors for the International
Equity Fund and International Investments
of the Other Funds B-16 18
Portfolio Turnover B-20 -
Management of MSF B-21 19
Other Information About MSF B-25 -
Investment Advisory Services B-27 20, 21
Fund Expenses B-29 21
Distribution Arrangements B-29 23
Distribution Financing Plans and
Shareholder Services Agreement B-30 24
Class A Plan and Agreement B-30 22
Class B Plan and Agreement B-30 23
General B-31 -
Portfolio Transactions and
Brokerage Allocation and Other Practices B-31 -
Determination of Net Asset Value B-33 25
Purchase and Redemption of Shares B-34 27
Special Waivers B-35 22
Cumulative Discount B-35 22
Letter of Intent B-35 22
Systematic Withdrawal Plan B-35 27
Special Redemptions B-36 -
Suspension of Redemptions B-36 -
Investment Performance B-38 6
<PAGE>
Performance Terms B-39 -
Standardized Average Annual Total Return
Quotations B-39 -
Standardized Yield Quotations B-40 -
Non-Standardized Performance B-41 -
General Information B-41 -
Taxes B-43 27
Municipal Bond Fund B-46 28
State and Local B-47 -
Custodians B-47 21
Transfer Agent Services B-47 21
Independent Certified Public Accountants B-47 -
Financial Statements B-47 -
Appendix A B-48 -
Appendix B B-48 -
<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
<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
<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
<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
<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").
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 or as a long position to gain
additional exposure to the stock market. 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 or to gain additional exposure to the stock market. 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
<PAGE>
to be acquired by the Funds. The Funds' hedging may include sales of futures
as an offset against the effect of expected decreases in stock values or
increases in interest rates, and purchases of futures as an offset against
the effect of expected increases in stock values or decreases in interest
rates.
The Funds will not enter into financial futures contracts for speculation,
and will only enter into futures contracts that are traded on national futures
exchanges and are standardized as to maturity date and underlying securities.
Currently, stock index futures contracts can be purchased or sold with respect
to various Standard and Poor's stock indicies on the Chicago Mercantile
Exchange, the New York Stock Exchange Composite Index on the New York Futures
Exchange and the Value Line Stock Index on the Kansas City Board of Trade. The
principal interest rate futures exchanges in the United States are the Chicago
Board of Trade, the Chicago Mercantile Exchange and the New York Futures
Exchange. Futures exchanges and trading are regulated under the Commodity
Exchange Act by the Commodity Futures Trading Commission.
A Fund will not enter into a futures contract if, as a result thereof the
sum of the initial margin deposits of all open futures positions (other than an
offsetting transaction) would be more than 5% of the Fund's total assets. More
than 5% of the Fund's total assets may be committed to the aggregate of initial
and variation margin payments however.
The Funds will incur brokerage commissions in connection with transactions
in futures contracts.
Description. A stock index futures contract is an agreement whereby one
party agrees to take and another party agrees to make delivery of an amount of
cash equal to a specified dollar amount times the difference between the stock
index value at the close of the last trading day of the contract and the price
at which the futures contract is originally struck. A stock index assigns
relative values to the common stocks included in the index, and the index
fluctuates with changes in the market values of the common stocks included. No
physical delivery of the underlying stocks in the index is made.
Currently, stock index futures contracts covering the stock market as a
whole and covering certain industries are being traded. It is expected that
futures contracts covering stock indexes of additional industries will
eventually be traded.
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
<PAGE>
Fund will be able to enter into an offsetting transaction with respect to a
particular contract at a particular time. If the Fund is not able to enter
into an offsetting transaction, the Fund will continue to be required to
maintain the margin deposits on the contract.
As an example of an offsetting transaction, the contractual obligations
arising from the sale of one contract of September Treasury Bills on an exchange
may be fulfilled at any time before delivery of the contract is required (i.e.,
on a specified date in September, the "delivery month") by the purchase of one
contract of September Treasury Bills on the same exchange. In such instance the
difference between the price at which the futures contract was sold and the
price paid for the offsetting purchase, after allowance for transaction costs,
represents the profit or loss to the Fund.
Persons who trade in futures contracts may be broadly classified as
"hedgers" and "speculators." Hedgers, such as the Funds, whose business
activity involves investment or other commitment in equity and debt securities
or other obligations, use the financial futures markets primarily to offset
unfavorable changes in value that may occur because of fluctuations in the value
of the securities or obligations held or expected to be acquired by them.
The speculator, like the hedger, generally expects neither to deliver nor
to receive the security underlying the futures contract, but unlike the hedger,
hopes to profit from fluctuations in prevailing stock market values or interest
rates.
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
<PAGE>
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.
For example, assume that the market price of certain stocks held by the
Fund tend to move in concert with the Standard and Poor's 500 Stock Index. The
stock currently has a market value of 125, which the Fund believes will decline
because of an anticipated decline in the stock market. The Fund wishes to
attempt to fix the current market value of the stock until some time in the
future. The Fund might enter into a futures contract sale of the Standard and
Poor's 500 Stock Index at a price of 125. If the market price of the stock
should decline from 125 to 120, the futures market price of the Standard and
Poor's 500 Stock Index might also decline, e.g. from 125 to 120. In that case
the five-point loss in the market value of the stock would be offset by the
five-point gain realized by closing out the futures contract. The futures
market price of the Standard and Poor's 500 Stock Index might decline to more or
less than 120 because of the imperfect correlation with the prices of the stocks
hedged.
If the Fund should be mistaken in its forecast of the stock market, and the
futures market price of the Standard and Poor's 500 Stock Index should increase
above 125, the market price of the stock would increase. The benefit of this
increase would be offset by the loss realized on closing out the futures
contract sale.
Example of Purchase of Interest Rate Futures Contract. The Fund might
purchase an interest rate futures contract when it wishes to defer for a time a
fully invested position in longer term securities, for example, in order to
continue holding shorter term securities with higher yields. The Fund would be
endeavoring to eliminate the effect of all or part of an expected increase in
market price of the longer term bonds that the Fund may wish to purchase at a
later date.
For example, assume that the market price of a type of longer term bonds
that the Fund may later purchase, currently yielding 10%, tends to move in
concert with futures market prices of long-term U.S. Treasury bonds. The Fund
wishes to attempt to fix the purchase price (and thus the 10% yield) of its
anticipated longer term bond investment until the time (four months away in this
example) when it may purchase the bond. Assume the longer term bond has a
market price of 100, and the Fund believes that, because of an anticipated
decline in interest rates, the price will have risen (and correspondingly the
yield will have declined) in four months. The Fund might enter into futures
contract purchases of Treasury bonds for a price of 98. If the market price of
the longer term bond should increase from 100 to 105, the futures market price
for Treasury bonds might also increase, e.g., from 98 to 103. In that case, the
five-point increase in the price that the Fund would have to pay for the longer
term bond would be offset by the five-point gain realized by closing out the
futures contract purchase.
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.
<PAGE>
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 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.
<PAGE>
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.
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
<PAGE>
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 and Asset Allocation FundsFund may enter into reverse
repurchase agreements with banks and broker-dealers. Such agreements involve
the sale of money market securities held by athe 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. AThe 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, athe 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 athe Fund enter
into a reverse repurchase agreement with Northwestern Mutual.
WARRANTS
--------
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
----------------------------------
<PAGE>
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
adviser of a Fund anticipates a decline in the yield of securities of a given
issuer and is able to obtain a more advantageous yield by committing currently
to purchase securities to be issued or delivered later.
A Fund will not enter into such a transaction for the purpose of investment
leverage. Liability for the purchase price - and all the rights and risks of
ownership of the securities - accrue to the Fund at the time it becomes
obligated to purchase such securities, although delivery and payment occur at a
later date. Accordingly, if the market price of the security should decline,
the effect of the agreement would be to obligate the Fund to purchase the
security at a price above the current market price on the date of
<PAGE>
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 totalnet 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.
SECURITIES ON THE RESTRICTED LIST OF THE NORTHWESTERN MUTUAL LIFE INSURANCE
----------------------------------------------------------------------------
COMPANY
-------
The Funds may be precluded from purchasing or selling securities of
issuers that from time to time are placed on the restricted list of The
Northwestern Mutual Life Insurance Company. An issuer is placed on Northwestern
Mutual's restricted list (i)when certain Northwestern Mutual employees come into
possession of what may be material, nonpublic information or (ii) as necessary
to ensure compliance with other securities laws or regulations. The presence of
an issuer on Northwestern Mutual's restricted list could impair liquidity for
securities of the issuer owned by the Funds and may result in a loss of buying
opportunities for the Funds.
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, Growth and Income
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.
<PAGE>
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 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
<PAGE>
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
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
<PAGE>
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.
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 adviser 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
<PAGE>
"lock in" the U.S. dollar price of the security. In addition, when the Fund's
adviser believes that the currency of a particular foreign country may suffer
or enjoy a substantial movement against another currency, it may enter into a
forward contract to sell or buy the amount of the former foreign currency,
approximating the value of some or all of the Fund's securities denominated
in such foreign currency. The projection of short-term currency market
movement is extremely difficult, and the successful execution of a short-term
hedging strategy is highly uncertain.
It is impossible to forecast with absolute precision the market value of
Fund securities at the expiration of the contract. Accordingly, it may be
necessary for the Fund to purchase additional foreign currency on the spot
market (and bear the expense of such purchase) if the market value of the
security is less than the amount of foreign currency the Fund is obligated to
deliver and if a decision is made to sell the security and make delivery of the
foreign currency. Conversely, it may be necessary to sell on the spot market
some of the foreign currency received upon the sale of the Fund security if its
market value exceeds the amount of foreign currency the Fund is obligated to
deliver.
If the Fund retains the security and engages in an offsetting transaction,
the Fund will incur a gain or a loss to the extent that there has been movement
in forward contract prices. If the Fund engages in an offsetting transaction,
it may subsequently enter into a new forward contract to sell the foreign
currency. Should forward prices decline during the period between the Fund
entering into a forward contract for the sale of a foreign currency and the date
it enters into an offsetting contract for the purchase of the foreign currency,
the Fund will realize a gain to the extent the price of the currency it has
agreed to sell exceeds the price of the currency it has agreed to purchase.
Should forward prices increase, the Fund will suffer a loss to the extent the
price of the currency it has agreed to purchase exceeds the price of the
currency it has agreed to sell.
INITIAL PUBLIC OFFERINGS
-----------------------------
Each Fund may participate in initial public offerings. The Small Cap
Growth Stock Fund benefited from participation in a number of initial public
offerings which experienced almost immediate appreciation in the fiscal period
ended March 31, 2000. Out of a total return of 81.5% since the Small Cap Growth
Stock Fund's inception, management estimates that IPO holdings contributed 37.8%
of that total with the remaining 43.7% resulting from non-IPO holdings. For IPO
offerings in which the advisor is offered a relatively small number of shares, a
disproportionate number of such shares may be allocated to the Small Cap Growth
Stock Fund or other Funds, in the advisor's discretion.
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 Fundportfolio turnover rates.
For the years ended March 31, 1999 and March 31, 2000, the portfolio
turnover rates were:
Portfolio Turnover Rate 1999 2000
----------------------- ---- ----
Small Cap Growth Stock Fund NA 89.96%<F1>
Aggressive Growth Stock Fund 84.46% 92.54%
International Equity Fund 70.31% 23.99%
Index 400 Stock Fund NA 35.40%<F1>
Growth Stock Fund 32.00% 35.34%
Growth and Income Stock Fund 156.92% 89.66%
Index 500 Stock Fund 3.83% 19.61%
Asset Allocation fund 79.71% 115.67%
High Yield Bond Fund 178.63% 193.63%
Municipal Bond Fund 344.11% 184.70%
Select Bond Fund 252.44% 92.12%
<F1> From commencement of operations on July 12, 1999.
<PAGE>
The annual Fundportfolio 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, 2000, portfolio turnover for the
International Equity Fund decreased significantly from the prior year. This
decrease was due to the sales and purchases of portfolio securities during 1998
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.
For the fiscal year ended March 31, 2000, portfolio turnover for the Growth
and Income Stock Fund decreased significantly from the prior year. This
decrease was due to a change in the primary Fund manager.
For the fiscal year ended March 31, 2000, portfolio turnover for the Asset
Allocation Fund increased significantly from the prior year. This increase was
due to a change in equity security emphasis and a change in the high yield bond
manager.
For the fiscal year ended March 31, 2000, portfolio turnover for the
Municipal Bond Fund decreased significantly from the prior year. This decrease
was due to less liquidity in the municipal bond market.
For the fiscal year ended March 31, 2000, portfolio turnover for the Select
Bond Fund decreased significantly from the prior year. This decrease was due to
less liquidity in the bond market and an unchanging investment strategy
throughout the fiscal year.
MANAGEMENT OF MSF
The Board of Directors of Mason Street Funds/R is responsible for setting
and overseeing the investment objectives and policies of each Fund, but
delegates daily management of the Funds to the investment adviser, the
subadvisers where applicable and the officers of Mason Street Funds/R.
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 (64), President and Director<F1>
720 East Wisconsin Avenue
Milwaukee, WI 53202
Chairman and Chief Executive Officer of Northwestern Mutual since
2000; prior thereto, President and Chief Executive Officer. Trustee
of Northwestern Mutual
Edward J. Zore (54), Director<F1>
720 East Wisconsin Avenue
Milwaukee, WI 53202
President of Northwestern Mutual since 2000; prior thereto, Executive
Vice President. Trustee of Northwestern Mutual
Stephen N. Graff (65), Director<F1>
805 Lone Tree Road
Elm Grove, WI 53122
Retired Partner, Arthur Andersen LLP (Public Accountants). Trustee of
Northwestern Mutual since 1996
Martin F. Stein (63), Director
1800 East Capitol Drive
Milwaukee, WI 53211
Founder of Stein Optical (retail sales of eyewear)
<PAGE>
John K. MacIver (69), Director
100 East Wisconsin Avenue
Milwaukee, WI 53202
Partner, Michael Best & Friedrich, Attorneys at Law
William J. Blake (68), Director
731 North Jackson Street
Milwaukee, WI 53202
Chairman, Blake Investment Corp. (real estate investments and venture
capital)
William A. McIntosh (61), Director
525 Sheridan Road
Kenilworth, IL 60043
Retired Division Head, U.S. Fixed Income of Salomon Brothers
(investment securities)
Mark G. Doll (50), 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 since 1996. Executive Vice President, Investment
Advisory Services of Northwestern Mutual Investment Services, LLC
since 1996; prior thereto, President
Leonard F. Stecklein (53), Vice President - Marketing and Operations
720 East Wisconsin Avenue
Milwaukee, WI 53202
Senior Vice President-Annuity and Accumulation Products of
Northwestern Mutual since March 31, 2000; prior thereto, Senior Vice
President (May 1999 - March 31, 2000), Senior Vice President - Agency
Services (1996 - 1999), and Vice President - Individual Product
Marketing (1992 - 1996). Vice President, Variable Annuities of
Northwestern Mutual Investment Services, LLC since June 2000; prior
thereto, Vice President, Trust Services (June 1999 - June 2000), Vice
President, Sales Support (September 1996 - June 1999), and Vice
President (1993 - 1996).
Patricia L. Van Kampen (49), 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. Vice President-Common Stocks of Northwestern Mutual Investment
Services, LLC
William R. Walker (43), 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.
Vice President of Northwestern Mutual Investment Services, LLC
<PAGE>
Julie M. Van Cleave (41), 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.
Vice President-Common Stocks of Northwestern Mutual Investment
Services, LLC
Varun Mehta (32), 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 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.
Jefferson V. DeAngelis (42), 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. Vice President-Fixed Income Securities of
Northwestern Mutual Investment Services, LLC
Timothy S. Collins (38), Vice President-Investments
720 East Wisconsin Avenue
Milwaukee, WI 53202
Director of Northwestern Investment Management Company since 1998;
Director of Investments for Northwestern Mutual from October of 1996
to December of 1997; Associate Director - Investments from 1993 to
1996; prior thereto, Investment Officer
Ronald C. Alberts (36), 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 (39), 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 (60), Secretary
720 East Wisconsin Avenue
Milwaukee, WI 53202
Assistant General Counsel of Northwestern Mutual. Secretary of
Northwestern Mutual Investment Services, LLC
Barbara E. Courtney (42), Controller
720 East Wisconsin Avenue
Milwaukee, WI 53202
Associate Director of Mutual Fund Accounting of Northwestern Mutual
since 1996; prior thereto, Assistant Director of Investment
<PAGE>
Accounting. Assistant Treasurer of Northwestern Mutual Investment
Services, LLC
<F1> 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 and Edward J. Zore, who have served as Directors
since May 8, 1997, and May 18, 2000, respectively.
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 Leonard F. Stecklein,
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 in connection with variable annuity and
variable life insurance contracts issued by Northwestern Mutual. Each of the
Directors and principal officers of MSF who is also an affiliated person of
Northwestern Mutual Investment Services, LLC ("NMIS") or Northwestern Mutual is
named above, together with the capacity in which such person is affiliated with
NMIS or Northwestern Mutual.
On March 31, 2000, The Directors and officers of MSF as a group did not own
more than 1% of any class of shares of any Fund.
<PAGE>
COMPENSATION OF OFFICERS AND DIRECTORS
MSF pays no salaries or compensation to any of its officers or Directors
employed by Northwestern Mutual. Effective April 1, 2000, 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 adviser
to Northwestern Mutual Series Fund, Inc., pays each of the directors of the
Series Fund a total of up to $27,000 per year, consisting of a $15,000 retainer
paid in January and $3,000 per meeting of the board of the Series Fund attended.
COMPENSATION TABLE
FISCAL YEAR ENDING MARCH 31, 2000
(1) (2) (3) (4) (5)
Name of Person, Aggregate Pension or Estimated Total
Position Compensation Retirement Annual Compensation
From Benefits Benefits Upon From
Registrant Accrued as Retirement Registrant
Part of Fund and Fund
Expenses Complex Paid
to Directors
-------------------------------------------------------------------------------
James D. Ericson None None None None
Director
William Blake $13,000 None None $40,000
Director
Stephen N. Graff $13,000 None None $40,000
Director
John K. MacIver $13,000 None None $40,000
Director
Martin F. Stein $13,000 None None $40,000
Director
William A. McIntosh $13,000 None None $40,000
Director
As stated in the Prospectus, directors and officers of MSF, as well as employees
and agents of Northwestern Mutual 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
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.
<PAGE>
VOTING RIGHTS
Neither Mason Street Funds nor its Funds are required to hold annual
meetings of shareholders, but special meetings may be called to elect or remove
Directors, change fundamental policies or the 12b-1 plans, or to approve an
investment advisory agreement. All shares of the Funds have equal voting rights.
Shares are voted in the aggregate, unless voting by series is required by law,
or when an issue affects the series or Class separately. As of March 31, 2000,
Northwestern Mutual 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 March 31, 2000, 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, 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 March 31, 2000: Small Cap Growth Stock Fund
76%; Aggressive Growth Stock Fund 71%; International Equity Fund 75%; Index 400
Stock Fund 88%; Growth Stock Fund 76%; Growth and Income Stock Fund 75%; Index
500 Stock Fund 26%; Asset Allocation Fund 67%; High Yield Bond Fund 72%;
Municipal Bond Fund 86%; and Select Bond Fund 87%. Because of this stock
ownership, Northwestern Mutual is able to exercise voting control over each
Fund, except for the Index 500 Stock 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
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. 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, March 31, 1999, and March 31,
2000, NMIS received $697,488, $1,409,515, and $1,289,071, respectively, for its
services as investment adviser 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 described in the prospectus. The amount of $1,289,071 is net of
$1,749,724 of investment advisory fees waived under the expense limitation
agreement described in the prospectus.
Northwestern Mutual and its wholly-owned subsidiary, Northwestern
Investment Management Company, employ a full staff of investment personnel to
manage the investment assets of Northwestern Mutual. 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. Under the Agreement
providing such consent, MSF recognizes the prior rights of Northwestern Mutual
in the name and mark, agrees that use of the name and mark by MSF will inure to
the benefit of Northwestern Mutual and agrees that its right to use the name and
mark can be terminated by Northwestern Mutual 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.
Templeton Investment Counsel, Inc. ("Templeton Counsel"), a Florida
corporation with principal offices at 500 East Broward Boulevard, Ft.
Lauderdale, Florida 33394 has been retained under an investment sub-advisory
agreement to provide investment advice and, in general, to conduct the
management investment program of the International Equity Fund, subject to the
general control of the Board of Directors of MSF. Templeton Counsel is a
wholly-owned indirect subsidiary of Franklin Resources, Inc. Certain clients of
Templeton Counsel may have investment objectives and policies similar to those
of the International Equity Fund. Templeton Counsel may, from time to time,
make recommendations which result in the purchase or sale of a particular
security by its other clients simultaneously with the International Equity Fund.
If transactions on behalf of more than one client during the same period
increase the demand for securities being purchased or the supply of securities
being sold, there may be an adverse effect on price. It is the policy of
Templeton Counsel to allocate advisory recommendations and the placing of orders
in a manner which is deemed equitable by Templeton Counsel to the accounts
involved, including the International Equity Fund. When two or more of the
clients of Templeton Counsel (including the International Equity Fund) are
purchasing the same security on a given day from the same broker-dealer, such
transactions may be averaged as to price. For its services pursuant to the sub-
advisory agreement, Templeton Counsel is paid, by NMIS, compensation at the
annual rate of .50% of the average net assets of the International Equity Fund,
reduced to .40% on assets in excess of $100 million. The $100 million break
point for fees paid to Templeton Counsel is based on the aggregate assets of the
International Equity Fund and the International Equity Portfolio of the Series
Fund. NMIS accrued $14,211.57 of
<PAGE>
investment advisory fees payable to Templeton Counsel with respect to the
International Equity Fund for the fiscal year ended March 31, 2000.
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
$15,404.12 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,
2000.
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 is the licensee under two License Agreements with
Standard & Poor's, dated as of November 30, 1990, as amended, March 1, 1997, and
June 30, 1999, relating to MSF as well as certain other mutual funds sponsored
by Northwestern Mutual. 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.
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
<PAGE>
WARRANTIES, AND HEREBY EXPRESSLYDISCLAIMS 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. Incorporated ("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.
The dealer allowance paid to RWB in connection with sales of shares of MSF
is based on the following schedule:
Dealer
Amount of Purchase Allowance<F1>
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%
<PAGE>
$500,000 but less than $1,000,000 1.00%
$1,000,000 or more 1.00%<F2>
<F1> Dealer allowance may be changed periodically.
<F2> 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 $1,036,801 for its services as principal underwriter for the Fund. Of
this amount, RWB retained $302,874. Compensation on redemptions paid to RWB was
$63,278. Brokerage commissions paid to RWB by the Fund were $4,014. For fiscal
year ended March 31, 2000, RWB received $838,976 for its services as principal
underwriter for the Fund. Of this amount, RWB retained $269,337. Compensation
on redemptions paid to RWB was $137,225. Brokerage commissions paid to RWB by
the Fund were $7,010.
RWB's principal business address and mailing address is at 777 East
Wisconsin Avenue, Milwaukee, Wisconsin 53202. RWB was organized as a Wisconsin
corporation on December 27, 1919, and is an indirect majority-owned subsidiary
of The Northwestern Mutual Life Insurance Company.
DISTRIBUTION FINANCING PLANS AND SHAREHOLDER SERVICES AGREEMENT
MSF has adopted separate distribution plans (the "Plans") for Class A and
Class B shares of each Fund pursuant to appropriate resolutions of MSF's Board
of Directors in accordance with the requirements of Rule 12b-1 under the 1940
Act and the requirements of the applicable rule of the NASD regarding asset
based sales charges. MSF has also entered into a shareholder services agreement
with RWB for both Class A and Class B shares of each Fund.
CLASS A PLAN AND AGREEMENT
Pursuant to the Class A Plan, a Fund may compensate RWB for its
expenditures in financing any activity primarily intended to result in the sale
of Fund shares. The expenses of a Fund pursuant to the Class A Plan are accrued
on a fiscal year basis and may not exceed, with respect to the Class A shares of
each Fund, the annual rate of 0.10% of the Fund's average daily net assets
attributable to Class A shares. All or any portion of this fee may be remitted
to brokers who provide distribution services.
The Funds will also compensate RWB under the Shareholder Services Agreement
for maintenance and personal service provided to existing Class A shareholders.
The expenses of a Fund under the Shareholder Services Agreement are accrued on a
fiscal year basis and will equal 0.25% of the Fund's average daily net assets
attributable to Class A shares. All or any portion of this fee may be remitted
to brokers who provide shareholder account services.
CLASS B PLAN AND AGREEMENT
Pursuant to the Class B Plan, a Fund may pay RWB a fee of up to 0.75% of
the average daily net assets attributable to Class B shares for distribution
financing activities. All or any portion of such fees may be remitted to
brokers who assist in the distribution of Class B shares.
The purpose of the 0.75% fee representing distribution payments to RWB under
the Class B Plan is to compensate RWB for its distribution services to the
Funds. RWB pays commissions to registered representatives as well as
reimbursement of expenses of printing prospectuses and reports used for sales
purposes, expenses with respect to the preparation and printing of sales
literature and other distribution related expenses, including without
limitation, the cost necessary to provide distribution-related services, or
personnel, travel, office expenses and equipment.
The Funds will compensate RWB under the Shareholder Services Agreement for
shareholder account services at the rate of .25% of the average daily net
<PAGE>
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, 2000, unreimbursed distribution expenses were $3,400,593
for Class A shares and $2,815,929 for Class B shares, which was .7% of Class A
assets and 3.4% 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 provide 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 $892,832 in its fiscal year ended March
31, 2000. This amount was net of $36,324 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, 2000 were as
follows: advertising in the amount of $567,204; prospectuses to new shareholders
in the amount of $39,211; commissions in the amount of $590,751; and marketing
salaries in the amount of $1,311,204.
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
<PAGE>
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 adviser and subadvisers 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 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
<PAGE>
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, 1999, and 2000, MFS paid brokerage
commissions of $386,043, $454,923, and $519,315, respectively.
During the fiscal year ended March 31, 1998 MSF 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, MSF paid $4,014 in commissions to RWB. This represents
.9% of aggregate brokerage commissions paid during the fiscal year and .00% of
aggregate Fund transactions. During the fiscal year ended March 31, 2000, MSF
paid $7,010 in commissions to RWB. This represents 1.3% of aggregate brokerage
commissions paid during the fiscal year and .00% 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 ("Northwestern
Mutual"), the Funds' Administrator, in the manner described in the Funds'
Prospectus. The net asset value of the shares of the International Equity Fund
is determined by Brown Brothers Harriman & Co., the Fund's custodian. The Funds
will be closed for business and will not price their shares on the following
business holidays: New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
The net asset value of each share of each Fund is the net asset value of
the entire Fund divided by the number of shares of the Fund outstanding. The
net asset value of an entire Fund is determined by computing the value of all
assets of the Fund and deducting all liabilities, including reserves and accrued
liabilities of the Fund. Fund securities for which market quotations are
readily available are valued at current market value.
Equity securities listed on a stock exchange and all call options are
valued at the closing sale price on the stock or options exchange or, if there
has been no such sale, at the closing bid price; stock index futures contracts
and interest rate futures contracts are valued at the closing settlement price
on the commodities exchange; unlisted equity securities are valued at the
closing bid price on the over-the-counter market.
Debt securities with maturities generally exceeding one year, other than
municipal obligations, are valued on the basis of valuations furnished by
Interactive Data Corporation, a facility which utilizes electronic data
processing techniques to report valuations for normal institutional size trading
units of debt securities, without regard to exchange or over-the-counter prices,
unless the Directors of MSF determine that in the case of a particular security
some other value is fair. 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
<PAGE>
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
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.
<PAGE>
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 Class A shares of
all Funds of MSF owned by the shareholder. Such value is determined based on
the public offering price on the date of the LOI. During the term of an LOI,
National Financial Data Services, Inc. ("NFDS"), MSF's transfer agent, will hold
shares in escrow to secure payment of the higher sales charge applicable for
shares actually purchased if the indicated amount on the LOI is not purchased.
Dividends and capital gains will be paid on all escrowed shares and these shares
will be released when the amount indicated on the LOI has been purchased. An
LOI does not obligate the investor to buy or the Fund to sell the indicated
amount in the LOI. If a Class A shareholder exceeds the specified amount of the
LOI and reaches an amount which would qualify for a further quantity discount, a
retroactive price adjustment will be made at the time of the expiration of the
LOI. The resulting difference in offering price will purchase additional Class
A shares for the shareholder's account at the applicable offering price. If the
specified amount of the LOI is not purchased, the shareholder shall remit to
NFDS an amount equal to the difference between the sales charge paid and the
sales charge that would have been paid had the aggregate purchases been made at
a single time. If the Class A shareholder does not within twenty days after a
written request by NFDS pay such difference in sales charge, NFDS will redeem an
appropriate number of escrowed shares in order to realize such difference.
Additional information about the terms of the Letter of Intent are available
from your registered representative or from NFDS at 1-888-626-6678.
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.
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
<PAGE>
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.
<PAGE>
The total offering price per share for each Fund is computed as follows:
SPECIMEN PRICE-MAKE-UP SHEET
(as of March 31, 2000)
SMALL CAP AGGRESSIVE
GROWTH STOCK GROWTH STOCK INTERNATIONAL INDEX 400
FUND FUND EQUITY FUND STOCK FUND
(CLASS A) (CLASS A) (CLASS A) (CLASS A)
-------- -------- -------- --------
NET ASSETS $10,133,996 $84,847,655 $32,001,909 $34,368,631
NUMBER OF SHARES
OUTSTANDING 576,139 3,651,913 2,698,508 3,276,728
NET ASSET VALUE
PER SHARE
(NET ASSETS /
NUMBER OF SHARES
(OUTSTANDING) $17.59 $23.23 $11.86 $10.49
OFFERING PRICE
PER SHARE $18.47 $24.39 $12.45 $11.01
REDEMPTION PRICE
PER SHARE $17.59 $23.23 $11.86 $10.49
GROWTH AND ASSET
GROWTH STOCK INCOME STOCK INDEX 500 ALLOCATION
FUND FUND STOCK FUND FUND
(CLASS A) (CLASS A) (CLASS A) (CLASS A)
-------- -------- -------- --------
NET ASSETS $65,591,773 $51,513,192 $66,308,048 $56,394,478
NUMBER OF SHARES
OUTSTANDING 3,449,669 4,136,014 3,445,265 3,777,996
NET ASSET VALUE
PER SHARE
(NET ASSETS /
NUMBER OF SHARES
OUTSTANDING) $19.01 $12.45 $19.25 $14.93
OFFERING PRICE
PER SHARE $19.96 $13.07 $20.21 $15.67
REDEMPTION PRICE
PER SHARE $19.01 $12.45 $19.25 $14.93
HIGH YIELD MUNICIPAL SELECT BOND
BOND FUND BOND FUND FUND
(CLASS A) (CLASS A) (CLASS A)
-------- -------- --------
NET ASSETS $34,696,895 $33,486,954 $32,388,650
NUMBER OF SHARES
OUTSTANDING 4,371,667 3,325,015 3,549,364
NET ASSET VALUE
PER SHARE
(NET ASSETS /
NUMBER OF SHARES
OUTSTANDING) $7.94 $10.07 $9.13
OFFERING PRICE
PER SHARE $8.34 $10.57 $9.59
REDEMPTION PRICE
PER SHARE $7.94 $10.07 $9.13
<PAGE>
SMALL CAP AGGRESSIVE
GROWTH STOCK GROWTH STOCK INTERNATIONAL INDEX 400
FUND FUND EQUITY FUND STOCK FUND
(CLASS B) (CLASS B) (CLASS B) (CLASS B)
-------- -------- -------- --------
NET ASSETS $1,892,130 $11,401,550 $3,602,444 $4,060,630
NUMBER OF SHARES
OUTSTANDING 107,707 498,718 304,177 390,451
NET ASSET VALUE
PER SHARE
(NET ASSETS /
NUMBER OF SHARES $10.40
(OUTSTANDING) $17.57 $22.86 $11.84
OFFERING AND
REDEMPTION
PRICE PER SHARE $17.57 $22.86 $11.84 $10.40
GROWTH AND ASSET
GROWTH STOCK INCOME STOCK INDEX 500 ALLOCATION
FUND FUND STOCK FUND FUND
(CLASS B) (CLASS B) (CLASS B) (CLASS B)
-------- -------- -------- -------
NET ASSETS $6,301,198 $6,235,397 $31,609,672 $11,039,829
NUMBER OF SHARES
OUTSTANDING 335,023 509,112 1,661,567 748,001
NET ASSET VALUE
PER SHARE
(NET ASSETS /
NUMBER OF SHARES
OUTSTANDING) $18.81 $12.25 $19.02 $14.76
OFFERING AND
REDEMPTION PRICE
PER SHARE $18.81 $12.25 $19.02 $14.76
HIGH YIELD MUNICIPAL SELECT BOND
BOND FUND BOND FUND FUND
(CLASS B) (CLASS B) (CLASS B)
-------- -------- --------
NET ASSETS $4,622,028 $877,436 $2,277,324
NUMBER OF SHARES
OUTSTANDING 582,747 87,124 249,571
NET ASSET VALUE
PER SHARE
(NET ASSETS /
NUMBER OF SHARES
OUTSTANDING) $7.93 $10.07 $9.12
OFFERING AND
REDEMPTION PRICE
PER SHARE $7.93 $10.07 $9.12
<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)
<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 to the
subject class
<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, 2000, were as
follows:
Municipal Bond Fund
Class A 4.76%
Class B 4.36%
Select Bond Fund
Class A 6.68%
Class B 6.38%
High Yield Bond Fund
Class A 10.63%
Class B 10.50%
The tax equivalent yield for the Municipal Bond Fund for the 30-day period ended
March 31, 2000, was 6.90% for Class A shares and 6.32% 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 & Poor's Mid Cap 400 Stock Price Index is designed to represent
price movements in the mid cap U.S. equity 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.
<PAGE>
The Wilshire Next 1750 is an unmanaged, equally weighted index. Included in
this index are those stocks which are ranked 750 to 2500 by market
capitalization in the Wilshire 5000.
The Wilshire Small Cap Index is a subset of the Wilshire Next 1750 and includes
250 stocks chosen based upon their size, sector and liquidity characteristics.
Each stock is equally weighted in this unmanaged index.
The Merrill Lynch Domestic Master Index is an unmanaged market value weighted
index comprised of U.S. Government, mortgage and investment-grade corporate
bonds. The index measures the income provided by, and the price changes of, the
underlying securities.
The Lehman Government Bond Index is a measure of the market value of all public
obligations of the U.S. Treasury; all publicly issued debt of all agencies of
the U.S. Government and all quasi-federal corporations; and all corporate debt
guaranteed by the U.S. Government. Mortgage backed securities, bonds and
foreign targeted issues are not included in the Lehman Government Index.
The Lehman Government/Corporate Bond Index is a measure of the market value of
approximately 5,300 bonds with a face value currently in excess of $1.3
trillion. To be included in the Lehman Government/Corporate Index, an issue
must have amounts outstanding in excess of $1 million, have at least one year to
maturity and be rated "Baa" or higher ("investment grade") by a nationally
recognized rating agency.
The Russell 2000 Index represents the bottom two thirds of the largest 3000
publicly traded companies domiciled in the U.S. Russell uses total market
capitalization to sort its universe to determine the companies that are included
in the Index. Only common stocks are included in the Index. REITs are eligible
for inclusion.
The Russell 2500 Index is a market value-weighted, unmanaged index showing total
return (i.e., principal changes with income) in the aggregate market value of
2,500 stocks of publicly traded companies domiciled in the United States. The
Index includes stocks traded on the New York Stock Exchange and the American
Stock Exchange as well as in the over-the-counter market.
The Morgan Stanley Capital International EAFE Index (the "EAFE Index") is an
unmanaged index, which includes over 1,000 companies representing the stock
markets of Europe, Australia, New Zealand and the Far East. The EAFE Index is
typically shown weighted by market capitalization. However, EAFE is also
available weighted by Gross Domestic Product (GDP). These weights are modified
on July lst of each year to reflect the prior year's GDP. Indices with
dividends reinvested constitute an estimate of total return arrived at by
reinvesting one twelfth of the month-end yield at every month end. The series
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
<PAGE>
31,098 Issues totaling $440 billion par amount. The index represents
approximately 30% of the municipal bond market capitalization.
Each Fund's investment performance may be advertised in various financial
publications, newspapers and magazines.
From time to time MSF may publish the sales of shares of one or more of the
Funds on a gross or net basis and for various periods of time, and compare such
sales with sales similarly reported by other investment companies.
TAXES
Each Fund is treated as a separate entity for accounting and tax purposes.
Each Fund has qualified and elected or intends to qualify and elect to be
treated as a "regulated investment company" under Subchapter M of the Internal
Revenue Code of 1986, as amended (the "Code"), and intends to continue to so
qualify in the future. As such and by complying with the applicable provisions
of the Code regarding the sources of its income, the timing of its
distributions, and the diversification of its assets, each Fund will not be
subject to federal income tax on taxable income (including net short-term and
long-term capital gains) which is distributed to shareholders at least annually
in accordance with the timing requirements of the Code.
Each Fund will be subject to a 4% non-deductible federal excise tax on
certain amounts not distributed (and not treated as having been distributed) on
a timely basis in accordance with annual minimum distribution requirements. The
Funds intend under normal circumstances to avoid liability for such tax by
satisfying such distribution requirements.
If a Fund acquires stock in certain non-U.S. corporations that receive at
least 75% of their annual gross income from passive sources (such as interest,
dividends, rents, royalties or capital gain) or hold at least 50% of their
assets in investments producing such passive income ("passive foreign investment
companies"), that Fund could be subject to federal income tax and additional
interest charges on "excess distributions" received from such companies or gain
from the sale of stock in such companies, even if all income 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.
<PAGE>
For Federal income tax purposes, each Fund is permitted to carry forward a
net capital loss in any year to offset its own capital gains, if any, during the
eight years following the year of the loss. To the extent subsequent capital
gains are offset by such losses, they would not result in federal income tax
liability to the applicable Fund and would not be distributed as such to
shareholders. At the end of its last fiscal year, the High Yield Bond Fund had
an unused capital loss carryforward of $640,754.
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
<PAGE>
had they elected to receive the distributions in cash, divided by the number
of shares received.
At the time of an investor's purchase of shares of a Fund, a portion of the
purchase price is often attributable to realized or unrealized appreciation in
the Fund's portfolio or undistributed taxable income of the Fund. Consequently,
subsequent distributions from such appreciation or income may be taxable to such
investor even if the net asset value of the investor's shares is, as a result of
the distributions, reduced below the investor's cost for such shares, and the
distributions in reality represent a return of a portion of the purchase price.
Upon a redemption of shares of a Fund, (including by exercise of the
exchange privilege) a shareholder may realize a taxable gain or loss depending
upon his basis in his shares. Such gain or loss will be treated as capital 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
<PAGE>
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 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 qualifies 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
<PAGE>
"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.
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
Each Fund's audited financial statements as of and for the fiscal year
ended March 31, 2000, 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.
<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.
<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.
The obligor's capacity to meet its financial commitment on the obligation is
extremely strong.
AA--Debt rated 'AA' differs from the highest rated obligations only in
small degree. The obligor's capacity to meet its financial commitment on the
obligation is very strong.
A--Debt rated 'A' is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than obligations in higher
rated categories. However, the obligor's capacity to meet its financial
commitment on the obligation is still strong.
BBB--Debt rated 'BBB' exhibits adequate protection parameters. However,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity of the obligor to meet its financial commitment on the
obligation.
Debt rated 'BB', 'B', 'CCC', 'CC', and 'C' is regarded as having
significant speculative characteristics. 'BB' indicates the least degree of
speculation and 'C' the highest. While such obligations will likely have some
quality and protective characteristics, these may be outweighed by large
uncertainties or major exposures to adverse conditions.
BB--Debt rated 'BB' is less vulnerable to nonpayment than other speculative
issues. However, it faces major ongoing uncertainties or exposure to adverse
business, financial, or economic conditions which could lead to the obligor's
inadequate capacity to meet its financial commitment on the obligation.
B--Debt rated 'B' is more vulnerable to nonpayment than obligations rated
'BB', but the obligor currently has the capacity to meet its financial
commitment on the obligation. Adverse business, financial, or economic
conditions will likely impair the obligor's capacity or willingness to meet its
financial commitment on the obligation.
CCC--Debt rated 'CCC' is currently vulnerable to nonpayment, and is
dependent upon favorable business, financial, and economic conditions for the
obligor to meet its financial commitment on the obligation. In the event of
adverse business, financial, or economic conditions, the obligor is not likely
to have the capacity to meet its financial commitment on the obligation.
CC--Debt rated 'CC' is currently highly vulnerable to nonpayment.
C--A subordinated debt or preferred stock obligation rated 'C' is CURRENTLY
HIGHLY VULNERABLE to nonpayment. The 'C' rating may be used to cover
<PAGE>
a situation where a bankruptcy petition has been filed or similar action taken,
but payments on this obligation are being continued. A 'C' also will be assigned
to a preferred stock issue in arrears on dividends or sinking fund payments, but
that is currently paying.
D-Debt rated 'D' is in payment default. The 'D' rating category is used
when payments on an obligation are not made on the date due even if the
applicable grace period has not expired, unless Standard & Poor's believes that
such payments will be made during such grace period. The 'D' rating also will be
used upon the filing of a bankruptcy petition or the taking of a similar action
if payments on an obligation 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.
r--This symbol is attached to the ratings of instruments with significant
noncredit risks. It highlights risks to principal or volatility of expected
returns which are not addressed in the credit rating. Examples include:
obligations linked or indexed to equities, currencies, or commodities;
obligations exposed to severe prepayment risk - such as interest-only or
principal-only mortgage securities; and obligations with unusually risky
interest terms, such as inverse floaters.
N.R.--This indicates that no rating has been requested, that there is
insufficient information on which to base a rating, or that Standard & Poor's
does not rate a particular obligation as a matter of policy.
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.
<PAGE>
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.
COMMERCIAL PAPER
Moody's Investors Service
-------------------------
The term "commercial paper" as used by Moody's means promissory obligations
not having an original maturity in excess of one year.
Moody's employs the following three designations, all judged to be
investment grade, to indicate the relative repayment capacity of rated issuers:
Issuers rated PRIME-1 (or supporting institutions) have a superior ability
for repayment of senior short-term debt obligations. PRIME-1 repayment ability
will often be evidenced by the following characteristics:
-- Leading market positions in well-established industries.
-- High rates of return on funds employed.
-- Conservative capitalization structures with moderate reliance on debt
and ample asset protection.
-- Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
-- Well-established access to a range of financial markets and assured
sources of alternate liquidity.
Issuers rated PRIME-2 (or supporting institutions) have a strong ability
for repayment of senior short-term debt obligations. This will normally be
evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
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"
<PAGE>
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"
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.
<PAGE>
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.
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
<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.
<PAGE>
PART C
OTHER INFORMATION
Item 23. Exhibits
--------
Exhibit A <F1> Articles of Incorporation of Mason Street Funds, Inc.
(Exhibit B(1))
<F1> 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))
<F7> Amendment to the Articles of Incorporation adopted by the
Directors of Mason Street Funds, Inc. on May 11, 1999
Exhibit B Amendment to the By-Laws adopted by the Directors of Mason
Street Funds, Inc. on May 18, 2000
<F1> By-Laws of Mason Street Funds, Inc. (Exhibit B(2))
<F4> Amendment to By-Laws of Mason Street Funds, Inc. (Exhibit
B(2)(a))
<F5> Amendment to By-Laws of Mason Street Funds, Inc. (Exhibit
B(2)(b))
<F6> Amendment to the By-Laws adopted by the Directors of Mason
Street Funds, Inc. on August 6, 1998 (Exhibit B)
<F7> Amendments to the By-Laws adopted by the Directors of Mason
Street Funds, Inc. on May 11, 1999
Exhibit D <F1> Form of Investment Advisory Agreement between Mason Street
Funds, Inc. and Northwestern Mutual Investment Services,
LLC. (Exhibit B(5)(a))
<F2> 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))
<F2> 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))
<F6> 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 D)
Exhibit E <F2> Form of Principal Underwriting Agreement (Exhibit B(6))
Exhibit F Not Applicable
Exhibit G <F3> Form of Custodian Agreement with Chase Manhattan Bank
(Exhibit B(8)(a))
<F3> Form of Custodian Agreement with Bankers Trust Co. (Exhibit
B(8)(b))
<F3> Form of Custodian Agreement with Brown Brothers Harriman &
Co. (Exhibit B(8)(c))
<PAGE>
<F6> Form of Custodian Agreement between Mason Street Funds, Inc.
and Chase Manhattan Bank for the Small Cap Growth and Index
400 Stock Funds (Exhibit G)
Exhibit H <F7> Fee Waiver Agreement with Robert W. Baird & Co. Incorporated
Exhibit H(1) <F6> Form of License Agreement between Standard & Poor's
Corporation and Mason Street Funds, Inc. (on behalf of the
Index 400 Stock Fund) (Exhibit H(1))
Exhibit H(2) <F6> Fee Waiver Agreement with Robert W. Baird & Co. Incorporated
(Exhibit H(2))
Exhibit H(3) <F2> Form of Transfer Agency and Service Agreement (Exhibit
B(9)(a))
<F2> Form of Shareholder Servicing Agreement with Robert W. Baird
& Co. Incorporated (Exhibit B(9)(b)(1))
<F2> Form of Administration Agreement with The Northwestern Mutual
Life Insurance Company (Exhibit B(9)(c))
<F3> Opinion and Consent of Counsel (Exhibit B(10))
<F5> Amended Shareholder Servicing Agreement with Robert W. Baird
& Co. Incorporated (Exhibit B(9)(b)(2))
<F5> Shareholder Account Services Agreement with Robert W. Baird
& Co. Incorporated (Exhibit B(9)(e))
<F6> Form of Master Agreement/DST FAN Services - Mutual Funds
(Exhibit H(3))
Exhibit I Opinion and Consent of Counsel
Exhibit J Consent of PricewaterhouseCoopers LLP
Exhibit L <F6> Form of Subscription Agreement (Exhibit L)
<F2> Form of Subscription Agreement (Exhibit B(13))
Exhibit M(1) <F2> Form of Rule 12b-1 Distribution Plan for Class A Shares
(Exhibit B(15)(a))
Exhibit M(2) <F2> Form of Rule 12b-1 Distribution plan for Class B Shares
(Exhibit B(15)(b))
Exhibit O <F1> Form of Rule 18f-3 Plan (Exhibit B(18))
Exhibit P(1) Code of Ethics for Mason Street Funds, Inc.
Exhibit P(2) Code of Ethics for The Franklin Templeton Group
Exhibit P(3) Code of Ethics for J.P. Morgan Investment Management Inc.
Exhibit P(4) Code of Ethics for Robert W. Baird & Co. Incorporated
<F1> Exhibits previously filed with Form N-1A Registration Statement for Mason
Street Funds, Inc. on December 6, 1996, and incorporated herein by
reference.
<F2> 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.
<F3> 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.
<PAGE>
<F4> 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.
<F5> 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.
<F6> Exhibits previously filed with Form N-1A Post-Effective Amendment No. 3 for
Mason Street Funds, Inc. on April 28, 1999, and incorporated herein by
reference.
<F7> Exhibits previously filed with Form N-1A Post-Effective Amendment No. 4 for
Mason Street Funds, Inc. on June 25, 1999 and incorporated herein by
reference.
Item 24. Persons Controlled by or under Common Control with Registrant
-------------------------------------------------------------
As of May 31, 2000, 70% of the shares of the Registrant were owned by
The Northwestern Mutual Life Insurance Company ("Northwestern
Mutual"), a mutual life insurance company organized by a special act
of the Wisconsin Legislature. Northwestern Mutual directly controls
the Registrant. Subsidiaries of Northwestern Mutual when considered in
the aggregate as a single subsidiary would not constitute a
significant subsidiary.
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
permit indemnification by Northwestern Mutual of persons who are
serving as directors of another corporation at the request of
Northwestern Mutual. Pursuant to the By-Law provision, the Trustees
of Northwestern Mutual 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. Directors' and officers' liability insurance which covers the
directors and officers of the Registrant as well as Trustees and
officers of Northwestern Mutual 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 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 who engage in the
distribution of variable annuities and variable life insurance issued
by Northwestern Mutual. The directors and officers of NMIS also serve
as officers of Northwestern Mutual.
Item 27. Principal Underwriter
---------------------
Robert W. Baird & Co. Incorporated ("RWB") serves as the principal
underwriter for each Fund. RWB is an indirect majority-owned
subsidiary of Northwestern Mutual. 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
Paul E. Purcell President and CEO
<PAGE>
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
Leonard M. Rush Managing Director
Russell P. Schwei Managing Director
Michael J. Schroeder Managing Director
Robert J. Venable 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 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
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all the
requirements for effectiveness of this Amended Registration Statement pursuant
to Rule 485(b) under the Securities Act of 1933 and 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 26th day of
June, 2000.
MASON STREET FUNDS, INC.
(Registrant)
By: /s/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
--------- -----
/s/ JAMES D. ERICSON President, Director
---------------------- and Principal Executive
James D. Ericson Officer
/s/ MARK G. DOLL Vice President,
---------------------- Treasurer and Principal
Mark G. Doll Financial Officer
/s/ BARBARA E. COURTNEY Controller and
------------------------- Principal Accounting Dated
Barbara E. Courtney Officer June 26,
2000
/s/ EDWARD J. ZORE Director
----------------------
Edward J. Zore
/s/ WILLIAM J. BLAKE<F2> Director
----------------------
William J. Blake
/s/ STEPHEN N. GRAFF<F1> Director
----------------------
Stephen N. Graff
/s/ MARTIN F. STEIN<F1> Director
----------------------
Martin F. Stein
/s/ JOHN K. MACIVER<F1> Director
----------------------
John K. MacIver
/s/ WILLIAM A. MCINTOSH<F1> Director
----------------------
William A. McIntosh
<F1> By /s/ JAMES D. ERICSON
James D. Ericson, Attorney
in fact, pursuant to the Power
of Attorney attached hereto.
<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 3, 2000.
/s/ STEPHEN N. GRAFF Director
-----------------------------------
Stephen N. Graff
/s/ WILLIAM J. BLAKE Director
-----------------------------------
William J. Blake
/s/ JOHN K. MACIVER Director
-----------------------------------
John K. MacIver
/s/ MARTIN F. STEIN Director
-----------------------------------
Martin F. Stein
/s/ JAMES D. ERICSON Director
-----------------------------------
James D. Ericson
/s/ WILLIAM A. MCINTOSH Director
-----------------------------------
William A. McIntosh
<PAGE>
EXHIBIT INDEX
EXHIBITS FILED WITH FORM N-1A
POST-EFFECTIVE AMENDMENT NO. 5 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 May 18, 2000
Exhibit I Opinion and Consent of Counsel
Exhibit J Consent of PricewaterhouseCoopers LLP
Exhibit P(1) Code of Ethics for Mason Street Funds, Inc.
Exhibit P(2) Code of Ethics for The Frank Templeton Group
Exhibit P(3) Code of Ethics for J.P. Morgan Investment
Management Inc.
Exhibit P(4) Code of Ethics for Robert W. Baird & Co. Incorporated
<PAGE>
