<PAGE>
PROSPECTUS
FOR
METROPOLITAN SERIES FUND, INC.
April 30, 1999
[LOGO OF METLIFE APPEARS HERE]
The investment option currently offered by the Metropolitan Series Fund (the
"Fund") under this prospectus is the MetLife Stock Index Portfolio.
TABLE OF CONTENTS FOR THIS PROSPECTUS
<TABLE>
<CAPTION>
Page
in this
Subject Prospectus
------- ----------
<S> <C>
Risk/Return Summary............................................... 2
Performance and Volatility........................................ 3
About the Investment Manager...................................... 4
Portfolio Turnover Rates.......................................... 5
Dividends, Distributions and Taxes................................ 5
General Information About the Fund and its Purpose................ 5
Sale and Redemption of Shares..................................... 6
Financial Highlights.............................................. 7
Appendix A--Certain Investment Practices.......................... 9
Appendix B--Description of Some Investments,
Techniques, and Risks............................................ 11
</TABLE>
As with all mutual fund shares, neither the Securities and Exchange Commission
nor any state securities authority have approved or disapproved these
securities, nor have they determined if this Prospectus is accurate or
complete. Any representation otherwise is a criminal offense.
<PAGE>
[SIDEBAR: Carefully review the objectives and investment practices of the
Portfolio and consider your ability to assume the risks involved before
allocating payments to the Portfolio.]
Risk/Return Summary
About The MetLife Stock Index Portfolio
The MetLife Stock Index Portfolio has its own investment objective. Since
investment in the Portfolio involves both opportunities for gain and risks of
loss, we cannot give you assurance that the Portfolio will achieve its
objectives. You should carefully review the objectives and investment practices
of the Portfolio and consider your ability to assume the risks involved before
allocating payments to the Portfolio.
While certain of the investment techniques, instruments and risks associated
with the Portfolio are referred to in the discussion that follows, additional
information on these subjects appears in Appendix A and B to this Prospectus.
However, those discussions do not list every type of investment, technique, or
risk to which the Portfolio may be exposed. Further, the Portfolio may change
its investment practices at any time without notice, except for those policies
that this Prospectus or the Statement of Additional Information ("SAI")
specifically identify as requiring a shareholder vote to change. Unless
otherwise indicated, all percentage limitations, as well as characterization of
a company's capitalization, are evaluated as of the date of purchase of the
security.
Investment objective: to equal the performance of the Standard & Poor's 500
Composite Stock Price Index ("S&P 500 Index").
Principal investment strategies: The Portfolio will normally invest most of its
assets in common stocks included in the S&P 500 Index. The S&P 500 Index
consists of 500 common stocks, most of which are listed on the New York Stock
Exchange. The stocks included in the S&P 500 Index are issued by companies
among those whose outstanding stock have the largest aggregate market value,
although stocks that are not among the 500 largest are included in the S&P 500
Index for diversification purposes. In addition to securities of the type
contained in its index, the Portfolio also expects to invest, as a principal
investment strategy, in securities index futures contracts to simulate full
investment in the index while retaining liquidity, to facilitate trading, to
reduce transaction costs or to seek higher return when these derivatives are
priced more attractively than the underlying security. Also, since the
Portfolio attempts to keep transaction costs low, the portfolio manager
generally will rebalance the Portfolio only if it deviates from the actual
index by a certain percent, depending on the company, industry, and country, as
applicable. MetLife monitors the tracking performance of the Portfolio through
examination of the "correlation coefficient." A perfect correlation would
produce a coefficient of 1.00. The Portfolio will attempt to maintain a target
correlation coefficient of at least .95.
Principal risks: The risks described after the following captions under
"Principal Risks of Investing in the Fund:" "Equity investing;" "Investing in
larger companies;" and "Index investing." Volatility may be indicative of risk.
Please refer to the discussion under "Performance and Volatility."
2
<PAGE>
Performance and Volatility
The following table and chart are provided to illustrate the variability of the
investment returns that the Portfolio has earned in the past.
. Average annual total return measures a Portfolio's performance over time,
and compares those returns to a representative index. Periods of 1 and 5
years and since inception are presented.
. The graph of year-by-year returns examines volatility by illustrating the
Portfolio's historic highs and lows, as well as the consistency of returns.
. In general, as reflected in this section, a Portfolio with higher average
annual total returns tends to be more volatile.
. Return calculations do not reflect insurance product fees or other charges,
and if included these charges would reduce the Portfolio's past performance.
Also, past performance does not necessarily indicate how the Portfolio will
perform in the future.
MetLife Stock Index
------------------------------------------------------
Investment Results
Average Annual Total Returns
As of December 31, 1998
------------------------------
1 Year 5 Years Inception
------ ------- ---------
MetLife
Stock Index 28.23% 23.55% 18.88%
------------------------------------------------------
S&P 500 28.60% 24.05% 19.39%
------------------------------------------------------
[BAR GRAPH APPEARS HERE]
------------------------------------------------------
1991 29.76%
1992 7.44%
1993 9.54%
1994 1.18%
1995 36.87%
1996 22.66%
1997 32.19%
1998 28.23%
------------------------------------------------------
During the period shown in the bar chart, the highest return for a quarter was
21.3% (quarter ended Dec. 31, 1998) and the lowest return for a quarter was
- -13.6% (quarter ended Sept. 30, 1990).
3
<PAGE>
[SIDEBAR: Carefully review the principal risks associated with investing in the
Portfolio.]
Principal Risks of Investing in the Fund
The following briefly describes the principal risks that are associated with
the MetLife Stock Index Portfolio.
Equity investing: Portfolios that invest in equities could lose money due to
sudden unpredictable drops in value and the potential for periods of lackluster
performance. Such adverse developments could result from general market or
economic conditions and/or developments at a particular company that the
portfolio managers do not foresee or circumstances that they do not evaluate
correctly. Historically, investments in equities have been more volatile than
many other investments.
Investing in larger companies: Larger more established companies may be unable
to respond quickly to new competitive challenges such as changes in technology
and consumer tastes. Many larger companies also may not be able to attain the
high growth rates of successful smaller companies, especially during extended
period of economic expansion.
Index investing: Unlike actively managed portfolios, portfolios that attempt to
match the return of an index generally will not use any defensive strategies.
You, therefore, will bear the risk of adverse market conditions with respect to
the market segment that the index seeks to match. In addition, transaction
costs, other Portfolio or Fund expenses, brief delays that occur until a
Portfolio can invest cash it receives and other tracking errors may result in a
Portfolio's return being lower than the return of the applicable index.
[SIDEBAR: About MetLife]
About The Investment Manager
Metropolitan Life Insurance Company ("MetLife") has day-to-day investment
management responsibility for the Portfolio. (MetLife also performs general
administrative and management services for the Fund.) In addition, MetLife is
the Fund's principal underwriter and distributor. MetLife also manages its own
investment assets and those of certain affiliated companies and other entities.
MetLife is a mutual life insurance company which sells insurance policies and
annuity contracts. On December 31, 1998, it had total life insurance in force
of approximately $1.7 trillion and total assets under management of
approximately $359 billion. MetLife is the parent of Metropolitan Tower Life
Insurance Company ("Metropolitan Tower").
[SIDEBAR: Investment Management Fees]
The Fund pays MetLife monthly for its investment management services. The
investment management fee for the year ending December 31, 1998 was .25% as an
annual percentage of the average daily net assets of the Portfolio.
4
<PAGE>
Portfolio Turnover Rates
The rate of portfolio turnover is the annual amount, expressed as a percentage,
of the Portfolio's securities that it replaces in one year. The portfolio
turnover rate will not be a limiting factor when it is deemed appropriate to
purchase or sell securities for the Portfolio. Portfolio turnover may vary from
year to year or within a year, depending upon economic, market or business
conditions and client contributions and withdrawals. To the extent that
brokerage commissions and transaction costs are incurred in buying and selling
portfolio securities, the rate of portfolio turnover could affect the
Portfolio's net asset value. The historical rates of portfolio turnover for the
Portfolio are set forth in the Prospectus under the Financial Highlights.
[SIDEBAR: Dividends are reinvested]
Dividends, Distributions and Taxes
The Fund intends to qualify as a regulated investment company under the tax law
and, as such distributes substantially all of the Portfolio's ordinary net
income and capital gains each calendar year as a dividend to the separate
accounts funding the Contracts to avoid an excise tax on certain undistributed
amounts. The Fund expects to pay no income tax. Dividends are reinvested in
additional full and partial shares of the Portfolio as of the dividend payment
date.
The Fund and the Portfolio intend to comply with special diversification and
other tax law requirements that apply to investments under variable life
insurance and annuity contracts. Under these rules, shares of the Fund will
generally only be available through the purchase of a variable life insurance
or annuity contract. Income tax consequences to Contract owners who allocate
premiums to Fund shares are discussed in the prospectus for the Contracts that
is attached at the front of this Prospectus.
General Information about the Fund and its Purpose
The Fund is an open-end management investment company (or "mutual fund"). The
Fund is a "series" type of mutual fund, which issues separate classes (or
series) of stock. Each class or series represents an interest in a separate
portfolio of Fund investments.
The Fund offers its shares to MetLife and its affiliated insurance companies
("Insurance Companies"), including Metropolitan Tower. The Insurance Companies
hold the Fund's shares in separate accounts that they use to support variable
life insurance policies and variable annuity contracts (together, the
"Contracts"). Not all of the Portfolios of the Fund are available to each of
these separate accounts. An Insurance Company holding Fund shares for a
separate account has different rights from those of the owner of a Contract.
The terms "shareholder" or "shareholders" in this Prospectus refer to the
Insurance Companies, and not to any Contract owner.
5
<PAGE>
[SIDEBAR: Contract owners may allocate the amounts under the Contracts for
ultimate investment in the Portfolio.]
Within limitations described in the appropriate Contract, owners may allocate
the amounts under the Contracts for ultimate investment in the Portfolio. See
the prospectus which is attached at the front of this Prospectus for a
description of (a) the Contract, (b) the Portfolio of the Fund that is
available under that Contract and (c) the relationship between increases or
decreases in the net asset value of Fund shares (and any dividends and
distributions on such shares) and the benefits provided under that Contract.
It is conceivable that in the future it may be disadvantageous for different
types of variable life insurance and variable annuity separate accounts to
invest simultaneously in the Fund. However, the Fund, Metropolitan Tower and
MetLife do not currently foresee any such disadvantages. The Fund's Board of
Directors intends to monitor for the existence of any material irreconcilable
conflict between or among such owners, and the Insurance Companies will take
whatever remedial action may be necessary.
[SIDEBAR: Fund shares are available only through variable life and variable
annuity contracts.]
Sale and Redemption of Shares
Shares are sold and redeemed at a price equal to the net asset value without
any sales charges. The Insurance Companies purchase or redeem shares of the
Portfolio, based on, among other things: (1) the amount of net Contract
premiums or purchase payments transferred to the separate accounts; (2)
transfers to or from separate account investment divisions; (3) policy loans;
(4) loan repayments; and (5) benefit payments to be effected on a given date
under the Contracts. Generally, these purchases and redemptions are priced
using the Portfolio net asset value computed for the same date and time as are
used to price the corresponding Contract transaction.
The Portfolio's net asset value per share is calculated by taking its assets
(including dividends and interest received or accrued), deducting its
liabilities (including accrued expenses and dividends payable) and dividing the
result by the total number of the Portfolio's outstanding shares. To determine
the value of a Portfolio's assets, cash and receivables are valued at their
face amounts. Interest is recorded as accrued and dividends are recorded on the
ex-dividend date.
Securities, options and futures contracts held by the Portfolio are valued at
market value. Short-term debt instruments with a maturity of 60 days or less
held by the Portfolio are valued on an amortized cost basis. When market
quotations are not readily available for securities and assets, or when the
Board of Directors determines that customary pricing procedures would result in
an unreliable valuation, they are valued at fair value as determined by the
Board of Directors. Such a fair value procedure could be followed, for example,
if (1) an event occurs after the time of the most recent available market
quotations that is likely to have affected the value of those securities or (2)
such market quotations for other reasons do not reflect information material to
the value of those securities. The possibility of fair value pricing means that
changes in the Portfolio's net asset value may not always correspond to changes
in quoted prices of the Portfolio's investments.
[SIDEBAR: The Portfolio's net asset value per share is determined once daily.]
The Portfolio's net asset value per share is determined once daily immediately
after any dividends are declared and is currently determined at the close of
regular trading on the New York Stock Exchange. When it is open, regular
trading on the New York Stock Exchange usually ends at 4:00 p.m., Eastern time.
The net asset value may also be determined on days when the New York Stock
Exchange is closed when there has been trading in the Portfolio's securities
which would result in a material change in the net asset value.
6
<PAGE>
Computer Software Systems
The services provided to the Fund by MetLife as investment manager and
distributor and the transfer agent, depend on the smooth functioning of their
computer systems. Many computer software systems in use today cannot
distinguish the year 2000 from the year 1900 because of the way dates are
encoded and calculated. That failure could negatively impact handling of
securities trades, pricing and account services and otherwise adversely impact
the companies, organizations, and markets in which the Portfolio may invest and
may reduce the Portfolio's returns. MetLife and the transfer agent are actively
working on necessary changes to their computer systems to deal with this issue
and expect that their systems will be adapted in time for that event, although
there cannot be assurance of success.
Financial Highlights
The financial highlights table is intended to help you understand the
Portfolio's financial performance since inception. Certain information reflects
financial results for a single share of the Portfolio. The total returns in the
table represent the rate that a shareholder would have earned or lost on an
investment in the Portfolio (assuming reinvestment of all dividends and
distributions). This information has been audited by Deloitte & Touche LLP,
whose report, along with the Fund's financial statements, are included in the
annual report, which is available upon request.
7
<PAGE>
FINANCIAL HIGHLIGHTS
The table below has been audited by Deloitte & Touche LLP, independent auditors,
as stated in their report appearing with the full financial statements and notes
thereto. For further information about the performance of the Portfolios, see
the Fund's December 31, 1998 Management Discussion and Analysis which appears in
the Fund's annual report, which is incorporated by reference into the Statement
of Additional Information.
<TABLE>
<CAPTION>
Selected Data For a Share of Capital METLIFE STOCK INDEX PORTFOLIO
Stock Outstanding Throughout Period: ----------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- -----------
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE: Beginning of period $28.78 $22.23 $18.56 $13.87 $14.25
-------------------------------------------------------------------------------------------------------------------------
Investment Operations:
Net investment income..................... 0.37 0.34 0.33 0.32 0.33
Net realized and unrealized gain/(loss)... 7.75 6.79 3.88 4.79 (0.17)
---------- ---------- ---------- ---------- -----------
Total From Investment Operations...... 8.12 7.13 4.21 5.11 0.16
---------- ---------- ---------- ---------- -----------
Less Distributions:
Dividends from net investment income...... (0.36) (0.34) (0.33) (0.32) (0.32)
Distributions from net realized capital
gains................................... (1.16) (0.24) (0.21) (0.10) (0.22)
---------- ---------- ---------- ---------- -----------
Total Distributions................... (1.52) (0.58) (0.54) (0.42) (0.54)
---------- ---------- ---------- ---------- -----------
-------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE: End of period $35.38 $28.78 $22.23 $18.56 $13.87
-------------------------------------------------------------------------------------------------------------------------
Total return.............................. 28.23% 32.19% 22.66% 36.87% 1.18
Net assets at end of period (000's)....... $3,111,919 $2,020,480 $1,122,297 $635,823 $363,001
Supplemental Data/Significant Ratios:
Operating expenses to average net assets.. 0.30% 0.33% 0.30% 0.32% 0.33%
Net investment income to average net
assets.................................. 1.21% 1.47% 1.91% 2.22% 2.51%
Portfolio turnover (1).................... 15.07% 10.69% 11.48% 6.35% 6.66%
</TABLE>
Notes:
------
(1) The lesser of purchases or sales of portfolio securities for a period,
divided by the monthly average of the market value of portfolio securities
owned during the period. Securities with a maturity or expiration date at
the time of acquisition of one year or less are excluded from the
calculation. Purchases and sales of securities (excluding short-term
securities) for the year ended December 31, 1998 are as follows:
<TABLE>
<CAPTION>
Purchases Sales of Securities
--------- -------------------
<S> <C> <C>
MetLife Stock Index......... 863,635,727 382,070,345
</TABLE>
See Notes to Financial Statements.
8
<PAGE>
Appendix A To Prospectus
Certain Investment Practices
The Table that follows sets forth certain investment practices in which the
Portfolio may engage. These practices will not be the primary activity of the
Portfolio, however, except if noted under "Risk/Return Summary" in the
Prospectus.
<TABLE>
<CAPTION>
Item Investment practice Percentage limit on assets/1/
- ------------------------------------------------------------------------------------
<C> <S> <C>
1 Sell covered call options on securities and None
stock indices as a hedge against or to
minimize anticipated loss in value.
- ------------------------------------------------------------------------------------
2 Purchase put options on securities and None
indices that correlate with the Portfolio's
securities for defensive purposes in order to
protect against anticipated declines in
values.
- ------------------------------------------------------------------------------------
3 Purchase call options on securities and None
indices that correlate with that Portfolio's
securities.
- ------------------------------------------------------------------------------------
4 Purchase and sell future contracts (on Combined limit on the sum of
recognized futures exchanges) on equity the initial margin for
securities or stock indices as a hedge or to futures and options sold on
enhance return. futures, plus premiums paid
for unexpired options on
futures, is 5% of total
assets.
- ------------------------------------------------------------------------------------
5 Sell covered call options on and purchase put Combined limit on the sum of
and call options contracts on futures the initial margin for
contracts (on recognized futures exchanges) futures and options sold on
of the type and for the same reasons the futures, plus premiums paid
Portfolio is permitted to enter futures for unexpired options on
contracts. futures, is 5% of total
assets.
- ------------------------------------------------------------------------------------
6 Enter into transactions to offset or close None
out any of the above.
- ------------------------------------------------------------------------------------
7 Mortgage-related securities (except for IOs None
and POs).
- ------------------------------------------------------------------------------------
8 Invest in foreign securities (including Not more than 10% of its
investments through European Depository total assets in securities
Receipts ("EDRs") and International of foreign issuers, except
Depository Receipts ("IDRs")). up to 25% of its total
assets may be invested in
securities: issued, assumed
or guaranteed by foreign
governments or their
political subdivisions or
instrumentalities; assumed
or guaranteed by domestic
issuers; or issued, assumed
or guaranteed by foreign
issuers with a class
securities listed on the New
York Stock Exchange.*
- ------------------------------------------------------------------------------------
9 Lend Portfolio securities. 20% of total assets*
- ------------------------------------------------------------------------------------
10 Invest in securities that are illiquid. 15% of total assets
- ------------------------------------------------------------------------------------
11 Invest in other investment companies, which 10% of total assets (except
may involve payment of duplicate fees. that only 5% of total assets
may be invested in a single
investment company and the
Portfolio cannot purchase
more than 3% of the total
outstanding voting
securities of any one
investment company or,
together with other
investment companies having
the same investment adviser,
purchase more than 10% of
the voting stock of any
"closed-end" investment
company).
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
Item Investment practice Percentage limit on assets/1/
- -----------------------------------------------------------------------------------
<C> <S> <C>
12 Invest in securities issued by companies 25% of total assets
primarily engaged in any one industry. (provided that the following
will be considered separate
industries: each type of
utility service; each type
of oil or oil-related
company. Also, savings and
loans are a separate
industry from finance
companies. (The Fund will
disclose when more than 25%
of a Portfolio's total
assets are invested in four
oil related industries).
- -----------------------------------------------------------------------------------
13 Borrow in the form of short-term credits Together with item 14, up to
necessary to clear Portfolio transactions; 1/3 of the amount by which
enter into reverse repurchase arrangements. total assets exceed total
liabilities (less those
represented by such
obligations).*
- -----------------------------------------------------------------------------------
14 Borrow money for extraordinary or emergency 5% of total assets*
purposes (e.g. to honor redemption requests
which might otherwise require the sale of
securities at an inopportune time).
- -----------------------------------------------------------------------------------
15 Invest in real estate interests, including 10% of total assets*
real estate mortgage loans, but excluding
investments in exchange-traded real estate
investment trusts and shares of other real
estate companies.
- -----------------------------------------------------------------------------------
16 Purchase American Depository Receipts 30% of total assets
("ADRs").
- -----------------------------------------------------------------------------------
17 Invest in debt securities. None
- -----------------------------------------------------------------------------------
18 Invest in preferred stocks. None
- -----------------------------------------------------------------------------------
19 Invest in common stocks. None
- -----------------------------------------------------------------------------------
20 Invest in hybrid instruments. None
</TABLE>
- ------------
/1/At time of investment, unless otherwise noted.
* Policy may be changed only by shareholder vote.
10
<PAGE>
Appendix B To Prospectus
Description Of Some Investments, Techniques, And Risks
Investment Styles
[SIDEBAR: To varying extents, the portfolio manager may use the following
techniques and investments in managing the Portfolio.]
A value investing approach concentrates on securities that are undervalued in
relation to a company's fundamental economic values. Securities may be
undervalued for various reasons including special situations (i.e., where the
portfolio manager believes that a company's securities will appreciate when the
market recognizes a specific development at the company, such as a new product
or process, a management change or a technological breakthrough). A growth
investing approach emphasizes stocks of companies that are projected to grow at
above-average rates based on the company's earnings growth potential.
Index Portfolios attempt to equal the return of a particular index, which can
provide broad exposure to various market segments. Unlike actively managed
portfolios, they do not expect to use any defensive strategies and investors
bear the risk of adverse market conditions.
[SIDEBAR: Equity Securities]
Equity securities include common stocks, preferred stocks, convertible
securities and warrants. Equity securities may offer a higher rate of return
than debt securities. However, the risks associated with investments in equity
securities may also be higher, because the investment performance of equity
securities depends upon factors which are difficult to predict. Equity security
values may fluctuate in response to the activities of an individual company or
in response to general market, interest rate, and/or economic conditions.
Historically, equity securities have provided greater long-term returns and
have entailed greater short-term risk than other securities choices. Depending
on their terms, however, preferred stock and convertible securities may have
investment and risk characteristics more closely resembling those of debt
securities than those of other equity securities.
Common stocks represent ownership in a company and participate in company
profits through dividend payments or capital appreciation after other claims
are satisfied. Common stock generally has the greatest potential for
appreciation and depreciation of all corporate securities (other than warrants)
since the share price reflects the company's earnings.
Preferred stocks represent an ownership interest in a company of a specified
rank (after bonds and before common stocks) with respect to dividend payments
and company assets. Preferred stock generally receives a dividend, but may also
omit or be in danger of omitting a dividend payment, in which case it would be
purchased for its capital appreciation potential.
Convertible securities generally are bonds or preferred stocks which can be
exchanged, through warrants or otherwise, into a specified number of shares of
the issuer's common stock. Convertible securities generally pay higher interest
or dividends than common stock but lower interest or dividends than non-
convertible securities.
11
<PAGE>
Warrants are rights issued by the issuer of a security (usually common stock)
to purchase that security at a specified price for a specified period of time.
They do not represent an ownership interest in the issuing company, and their
prices do not necessarily parallel the prices of the underlying security.
Mortgage-related securities represent a direct or indirect interest in a pool
of mortgages such as FNMAs, FHLMCs, Collateralized Mortgage Obligations
("CMOs"), and related securities including GNMAs and mortgage-backed
securities. They may be issued or guaranteed by U.S. government
instrumentalities or other entities whose obligation is securitized by the
underlying portfolio of mortgages or mortgage-backed securities. These
securities are valued based on expected prepayment rates. The risks associated
with prepayment of the obligations makes these securities more volatile in
response to changing interest rates than other fixed-income securities.
Interest only securities ("IOs") are entitled to interest payments from a class
of these securities and principal only securities ("POs") are entitled to
principal payments from a class of these securities. POs are more volatile in
response to changing interest rates than mortgage-related securities that
provide for interest payments. IOs also are extremely volatile and generally
experience a loss in value in the event prepayment rates are greater than
anticipated, which occurs generally when interest rates fall, and an increase
in value when interest rates rise.
Asset-backed securities represent a direct or indirect interest in a pool of
receivables such as automobile, credit cards, equipment leases, or student
loans. The issuers of the asset-backed securities are special purpose entities
that do not have significant assets other than the receivables securitizing the
securities. The collateral supporting these securities generally is of shorter
maturity than mortgage-related securities, but exposes the Portfolio to similar
risks associated with prepayment of the receivables prior to maturity.
Zero coupon securities credit interest at a specified rate but do not
distribute cash payments for interest as it falls due. These securities
fluctuate in value due to changes in interest rates more than comparable debt
obligations that pay periodic interest.
[SIDEBAR: Foreign Investments]
Foreign securities include equity securities and debt securities of non-U.S.
domiciled issuers. A few of the many varieties of foreign investments are
described below.
EDRs and IDRs are receipts issued in Europe, generally by a non-U.S. bank or
trust company, that evidence ownership of non-U.S. securities.
GDRs are securities convertible into equity securities of foreign issuers.
Forward Foreign Currency Exchange Contracts obligate the Portfolio to purchase
or sell a specific currency on a specified date for a specified amount. They
can be used to hedge the currency risk relating to securities traded in or
exposed to a foreign currency. When used as a hedge, substitute or proxy
currency can also be used instead of the currency in which the investment is
actually denominated. This is known as proxy hedging. These contracts can also
be used to generate income or adjust the Portfolio's exposure to various
currencies.
Synthetic Non-U.S. Money Market positions are created through the simultaneous
purchase of a U.S. dollar-denominated money market
12
<PAGE>
instrument and a forward foreign currency exchange contract to deliver U.S.
dollars for a foreign currency. These are purchased instead of foreign currency
denominated money market securities because they can provide greater liquidity.
Foreign Securities Risk Considerations.
Although the Portfolio may reduce its overall risk by providing further
diversification, the Portfolio will be exposed to the risks listed below. In
addition, these risks may be heightened for investments in developing
countries:
. adverse effects from changing political, social or economic conditions,
diplomatic relations, taxation or investment regulations
. limitations on repatriation of assets
. expropriation
. costs associated with currency conversions
. less publicly available information because foreign securities and issuers
are generally not subject to the reporting requirements of the SEC
. differences in financial evaluation because foreign issuers are not subject
to the domestic accounting, auditing and financial reporting standards and
practices
. lack of development or efficiency with respect to non-domestic securities
markets and brokerage practices (including higher, non-negotiable brokerage
costs)
. less liquidity (including due to delays in transaction settlement)
. more price volatility
. smaller options and futures markets, causing lack of liquidity for these
securities
. higher custodial and settlement costs
. change in net asset value of the Portfolio's shares on days when shareholders
will not be able to purchase or redeem Fund shares.
[SIDEBAR: American Depository Receipts ("ADRs")]
ADRs are U.S. dollar-denominated certificates issued by a U.S. bank or trust
company which represent the right to receive securities of a foreign issuer
deposited in a domestic bank or foreign branch of a U.S. bank. ADRs are traded
on domestic exchanges or in the U.S. over-the-counter market and are registered
domestically. These factors eliminate certain risks associated with investing
in foreign securities.
[SIDEBAR: U.S. Dollar-Denominated Money Market Securities of Foreign Issuers]
These securities may be registered domestically and traded on domestic
exchanges or in the U.S. over-the-counter market (e.g., Yankee securities). If
the securities are registered domestically, certain risk factors of investing
in foreign securities are eliminated. These securities may also be registered
abroad and traded exclusively in foreign markets (e.g., Eurodollar securities).
[SIDEBAR: Derivative Instruments]
Futures contracts are agreements to buy or sell a security, or deliver a final
cash settlement price in connection with an index, interest rate, currency, or
other contracts not calling for physical delivery, for a set price in the
future. The Portfolio must post an amount equal to a portion of the total
market value of the futures contract as initial margin, which is returned when
the Portfolio's obligations under the contract have been satisfied. From time
to time thereafter, the Portfolio may have to post variation margin to maintain
this amount as the market value of the contract fluctuates.
13
<PAGE>
Special skill is required in order to effectively use futures contracts. The
Portfolio will not use futures contracts or options thereon for leveraging
purposes. Certain risks exist when the Portfolio uses futures contracts
including the:
. inability to close out or offset futures contract transactions at favorable
prices
. reduction of the Portfolio's income
. reduction in the value of the subject of the futures contract or of the
contract itself
. imperfect correlation between the value of the futures contract and the value
of the subject of the contract
. prices moving contrary to the portfolio manager's expectation
Call options give the purchaser the right to buy and obligate the seller to
sell an underlying security, currency, stock index (which is based on the
weighted average of the securities in the index), or futures contract at a
specified "exercise" price during the option period. There are certain risks to
the Portfolio that sells call options, including the inability to effect
closing transactions at favorable prices or to participate in the appreciation
of the subject of the call option above the exercise price. Purchasing call
options exposes the Portfolio to the risk of losing the entire premium it has
paid for the option.
Put options give the purchaser the right to sell and obligate the seller to
purchase an underlying security, currency, stock index (which is based on the
weighted average of the securities in the index) or futures contract at a
specified "exercise" price during the option period. There are certain risks to
the Portfolio that sells put options, including the inability to effect closing
transactions at favorable prices and the obligation to purchase the subject of
the put option at prices which may be greater than current market values or
exchange rates. Purchasing put options exposes the Portfolio to the risk of
losing the entire premium it has paid for the option if the option cannot be
exercised profitably.
Covered options involve the Portfolio's (a) segregating liquid assets with its
custodian that at all times at least equal the Portfolio's obligations under
such options, (b) holding an appropriate offsetting option or other derivative
instrument, or, (c) in the case of a call option sold by the Fund, owning the
securities or other investments subject to the option.
Hybrid instruments combine elements of futures contracts or options with
elements of debt, preferred equity, depository instruments, or other evidence
of indebtedness. A portion of or all interest payments to the Portfolio and/or
the principal or stated amount payable to the Portfolio at maturity,
redemption, or retirement of the hybrid instrument are determined by reference
to prices, changes in prices, or differences between prices of securities,
currencies, intangibles, goods, articles, or commodities or by another
benchmark such as an index or interest rate.
Hybrid instruments can be an efficient means of exposing the Portfolio to a
particular market in order to enhance total return. Hybrid instruments are
potentially more volatile and carry greater market risks than traditional debt
instruments. The risks of investing in these instruments reflect a combination
of the risks of investing in securities, options, futures and currencies.
Hybrid securities typically do not trade on exchanges. Hybrid instruments are
frequently (or may become) less liquid than other types of
14
<PAGE>
investments. They also expose the Portfolio to losses if the other party to the
transaction fails to meet its obligations.
Portfolios use swaps, caps, floors and collars as risk management tools to
protect against changes in interest rates or in security or currency values, or
to gain exposure to certain markets in an economical way. Swap transactions
involve an agreement where one party exchanges payments equal to a floating
interest rate, currency exchange rate or variation in interest rates or
currency indexes on a specified amount (the "notional amount"), and the other
party agrees to make payments equal to a fixed rate on the same amount for a
specified period. Caps give the purchaser the right to receive payments from
the seller to the extent a specified interest rate, currency exchange rate or
index exceeds a specified level during a specified period of time. Floors give
the purchaser the right to receive payments from the seller to the extent a
specified interest rate, currency exchange rate or index is less than a
specified level during a specified period of time. Collars give the purchaser
the right to receive payments from the seller to the extent a specified
interest rate, currency exchange rate or index is outside an agreed upon range
during a specified period of time.
The Portfolio will not use swaps, caps, floors or collars to leverage its
exposure to changing interest rates, currency rates, or security values. Nor
will the Portfolio sell interest rate caps, floors or collars unless it owns
securities that will provide the interest that the Portfolio may be required to
pay.
The use of swaps, caps and floors exposes the Portfolio to investment risks
different than those associated with other security transactions including:
. total loss of the Portfolio's investment in swaps and the sale of caps,
floors and collars (the Portfolio's purchase of caps, floors and collars can
result only in the loss of the purchase price)
. investment performance of the Portfolio can be worse than if these techniques
were not used if the assumptions used in entering into the transactions were
incorrect
. since these instruments generally do not trade on exchanges, the Portfolio
may not be able to enter into offsetting positions, or may suffer other
losses, if the other party to the transaction fails to meet its obligations
. more market volatility than other types of investments
[SIDEBAR: When-Issued Securities]
Purchasing securities "when-issued" is a commitment by the Portfolio to buy a
security before the security is actually issued. The amount of the Portfolio's
payment obligation and the security's interest rate are determined when the
commitment is made, even though no interest accrues until the security is
issued, which is generally 15 to 120 days later. The Portfolio will segregate
liquid assets with its custodian sufficient at all times to satisfy these
commitments. If the value of the security is less when delivered than when the
commitment was made, the Portfolio will suffer a loss.
[SIDEBAR: Securities Lending]
Securities lending involves lending some of the Portfolio's securities to
brokers, dealers and financial institutions. As collateral for the loan, the
Portfolio receives an amount that is at all times equal to at least 100% of the
current market value of the loaned securities. The Portfolio invests the
collateral in short-term high investment grade securities, or in a mutual fund
that invests in such securities. Securities lending can increase current income
for the Portfolio because the Portfolio continues to receive payments equal to
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<PAGE>
the interest and dividends on loaned securities. Also, the investment
experience of the cash collateral will inure to the Portfolio. Loans will not
have a term longer than 30 days and will be terminable at any time. As with any
extension of credit, securities lending exposes the Portfolio to some risks
including delay in recovery and loss of rights in the collateral if the
borrower fails financially.
16
<PAGE>
Metropolitan Series Fund, Inc.
---------------------
Principal Office of the Fund
1 Madison Avenue
New York, New York 10010
---------------------
Investment Manager
Metropolitan Life Insurance Company
1 Madison Avenue
New York, New York 10010
(Principal Business Address)
Custodian, Transfer Agent and
Dividend Paying Agent
State Street Bank and Trust Company
225 Franklin Street
Boston, Massachusetts 02110
(Principal Business Address)
No dealer, salesman, or other person has been authorized to give any informa-
tion or to make any representations, other than those contained in this Pro-
spectus, in connection with the offer made by this Prospectus, and, if given or
made, such other information or representations must not be relied upon as hav-
ing been authorized by the Fund, Metropolitan Life or Metropolitan Tower. This
Prospectus does not constitute an offering in any state in which such offering
may not lawfully be made.
<PAGE>
How to learn more:
We have incorporated the Statement of Additional Information ("SAI") into this
Prospectus. That means the SAI is considered part of this Prospectus as though
it were included in it. The SAI contains more information about the Fund. Also,
the Fund's annual and semi-annual reports to shareholders (the "reports")
contain more information including information on the Portfolio's investments
and a discussion of the market conditions and investment strategies that
affected the Portfolio's performance for the period covered by the report.
How to get copies:
To request a free copy of the SAI or the reports or to make any other
inquiries, write or call:
Metropolitan Life Insurance Company
One Madison Avenue
New York, NY 10010
Phone: (800) 553-4459
You can also get information about the Fund (including the SAI) from the
Securities and Exchange Commission (a copying fee may apply) by visiting or
writing to its Public Reference Room or using its Internet site at:
Securities and Exchange Commission
Public Reference Room
Washington, D.C. 20549
Call 1-800-SEC-0330 (for information about
using the Public Reference Room)
Internet site: http://www.sec.gov
IC# 811-3618
99042XJL(exp0500)MLIC-LD
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
FOR
METROPOLITAN SERIES FUND, INC.
April 30, 1999
The investment options ("Portfolios") currently offered by the Metropolitan
Series Fund, Inc. (the "Fund") are:
State Street Research Aggressive Neuberger Berman Partners Mid Cap
Growth Portfolio Value Portfolio
State Street Research Diversified Scudder Global Equity Portfolio
Portfolio
T. Rowe Price Large Cap Growth
State Street Research Growth Portfolio
Portfolio
T. Rowe Price Small Cap Growth
State Street Research Income Portfolio
Portfolio
Lehman Brothers(R) Aggregate Bond
State Street Research Money Market Index Portfolio
Portfolio
MetLife Stock Index Portfolio
Santander International Stock
Portfolio (formerly State Street Morgan Stanley(R) EAFE Index Portfolio
Research International Stock
Portfolio) Russell 2000(R) Index Portfolio
Harris Oakmark Large Cap Value
Portfolio
Janus Mid Cap Portfolio
Loomis Sayles High Yield Bond
Portfolio
This Statement of Additional Information ("SAI") is not a prospectus. It should
be read in conjunction with the Prospectus dated April 30, 1999. The annual
report for the Fund for the year ending December 31, 1998 accompanies this SAI
and is incorporated by reference. A copy of the April 30, 1999 Prospectus and
the annual report may be obtained, without charge, from Metropolitan Life
Insurance Company, One Madison Avenue, New York, New York 10010, Area 2H or by
calling (800) 553-4459.
99042XJI(exp0500)MLIC-LD
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Headings Page
- -------- ----
<S> <C>
The Fund's Organization.................................................... 2
Description of Some Investment Practices, Policies and Risk................ 3
Certain Investment Limitations............................................. 7
Investment Management Arrangements......................................... 8
Directors and Officers of the Fund......................................... 10
Placing Portfolio Transactions............................................. 12
Shareholder Meetings....................................................... 15
Voting..................................................................... 16
Sale and Redemption of Shares.............................................. 16
Pricing of Portfolio Securities............................................ 16
Taxes...................................................................... 18
General Information........................................................ 19
Financial Statements....................................................... 20
Appendix................................................................... 22
</TABLE>
THE FUND'S ORGANIZATION
The Fund, an open-end management investment company, is a corporation that was
formed in Maryland on November 23, 1982. The Fund has 3 billion shares of
authorized common stock at $0.01 par value per share. The Board of Directors
may classify and reclassify any authorized and unissued shares. The Fund can
issue additional classes of shares without shareholder consent. The shares are
presently divided into classes (or series), including one for each Portfolio
consisting of 100 million shares (200 million shares for the State Street
Research Diversified, State Street Research Growth, and MetLife Stock Index
Portfolios). Each Portfolio, other than the Janus Mid Cap Portfolio, is
"diversified" for purposes of the Investment Company Act of 1940.
Each Portfolio's issued and outstanding shares participate equally in dividends
and distributions declared by such Portfolio and receive a portion (divided
equally among all of the Portfolio's outstanding shares) of the Portfolio's
assets (less liabilities) if the Portfolio is liquidated or dissolved.
Liabilities which are not clearly assignable to a Portfolio are generally
allocated among the Portfolios in proportion to their relative net assets. In
the unlikely event that any Portfolio has liabilities in excess of its assets,
the other Portfolios may be held responsible for the excess liabilities.
MetLife purchased shares of each of the Portfolios at their inception for its
general account. MetLife has sold some of those shares, but will not sell
shares if the sale would reduce the Fund's net worth below $100,000. MetLife
paid all of the organizational expenses of the Fund and will not be reimbursed.
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<PAGE>
DESCRIPTION OF SOME INVESTMENT PRACTICES, POLICIES, AND RISKS
The information that follows expands on the similar discussion in the Fund's
Prospectus and does not describe every type of investment, technique, or risk
to which a Portfolio maybe exposed. Each Portfolio reserves the right, without
notice, to make any investment, or use any investment technique, except to the
extent that such activity would require a shareholder vote, as discussed below
under "Fundamental Policies."
Money market instruments generally have a remaining maturity of no more than 13
months when acquired by the Fund. They include the following:
. United States Government securities -- direct obligations (in the form of
Treasury bills, notes and bonds) of the United States Government, differing
mainly by maturity lengths.
. Government Agency Securities -- debt securities issued by agencies or
instrumentalities of the United States Government. They are backed by the
full faith and credit of the United States, guaranteed by the United States
Treasury, supported by the issuing agency's or instrumentality's right to
borrow from the United States Treasury, or supported by the issuing agency's
or instrumentality's credit. Agency securities include several of the types
of instruments discussed below under "Mortgage-Backed Securities."
. Certificates of Deposit -- generally short-term, interest-bearing negotiable
certificates issued by commercial banks or savings and loan associations
against funds deposited in the issuing institution. Any non-negotiable time-
deposits must mature in seven days or less.
. Bankers' Acceptances -- time drafts drawn by borrowers on commercial banks,
usually in connection with an international commercial transaction where both
the borrower and the bank guarantee the payment of the draft in its face
amount on the maturity date (which is usually within six months). These
securities are traded in secondary markets prior to maturity. The Portfolios
will not invest in non-negotiable bankers' acceptance maturing in more than 7
days.
. Commercial Paper -- short-term unsecured promissory notes issued by
corporations, usually to finance short-term credit needs. Commercial paper is
generally sold on a discount basis, with maturity from issue not exceeding
nine months. The Portfolios may purchase commercial paper with the highest
(two highest for the T. Rowe Price Large Cap Growth and T. Rowe Price Small
Cap Growth Portfolios) rating (and, for the State Street Research Money
Market Portfolio, it must also be rated in one of the top two "modifiers"
that indicate the best investment attributes of such rating) given by a
nationally recognized statistical rating organization ("NRSRO") or, if
unrated (a) of comparable quality or (b) issued by companies having
outstanding debt issues in with ratings with one of the top three ratings
given by an NRSRO (and for State Street Research Money Market Portfolio the
debt issues must be in the top two rating categories).
. Variable Amount Master Demand Notes -- commercial paper of companies that
permit the purchaser to lend varying investment amounts (up to the maximum
indicated in the note) at varying rates to the borrower. The borrower can
prepay the amount borrowed at any time with no penalty and the lender can
redeem the note at any time and receive the face value plus accrued interest.
No secondary market exists for these notes. The same rating/credit quality
requirements apply as described above for other forms of commercial paper.
. Non-convertible Corporate Debt Securities -- such as bonds and debentures
that will mature within a short time and that have credit characteristics
comparable to those required above for commercial paper.
. Repurchase Agreements -- the purchaser acquires ownership of another money
market instrument, and the seller agrees at the time of sale to repurchase
such other instrument at a specified time and price which determine the
purchaser's yield during the holding period. This insulates the purchaser
from market fluctuations unless the seller defaults. Repurchase agreements
are collateralized by cash or the purchased (or equivalent) underlying
instrument at all times at least equal in value to the price the Fund paid
for the underlying instrument plus interest accrued to date. The Fund can
B-3
<PAGE>
enter into repurchase agreements with primary dealers for periods not to
exceed 30 days. Repurchase agreements with a duration of more than 7 days are
considered illiquid. If the seller defaults on its repurchase obligation, the
Fund could experience a delay in recovery or inadequacy of the collateral and
a cost associated with the disposition of the collateral.
. Reverse Repurchase Agreements -- the sale of money market instrument by the
Fund with an agreement by the Fund to repurchase the instrument at a
specified time, price and interest payment. These agreements can be used when
interest income earned from the reinvestment of the proceeds (in money market
instruments with the same or shorter duration to maturity or resale) is
greater than the interest expense of the reverse repurchase transaction.
These agreements can also be used by the Fund as a form of borrowing and they
therefore are subject to the limitations regarding borrowing by the Fund. In
order to minimize the risk that it will have insufficient assets to
repurchase the instrument subject to the agreement, the Fund will keep in a
segregated account with its custodian liquid assets at least equal to the
value of the specified repurchase price or the proceeds received on the sale
subject to repurchase, plus accrued interest.
Mortgage-Related Securities
GNMA -- partial ownership interests in a pool of mortgage loans which are
individually guaranteed or insured by the Federal Housing Administration, the
Farmers Home Administration or the Veterans Administration. The GNMA
certificates are issued and guaranteed by the Government National Mortgage
Association, a U.S. Government corporation, and backed by the full faith and
credit of the United States.
FNMA and FHLMC -- partial ownership interests in pools of mortgage loans. FNMA
certificates are issued and guaranteed by the Federal National Mortgage
Association, a federally chartered, privately owned corporation and are not
backed by the U.S. Government (although the U.S. Secretary of the Treasury has
discretionary authority to lend it up to $2.25 billion). FHLMC certificates are
issued and guaranteed by the Federal Home Loan Corporation, a federally
chartered corporation owned by the Federal Home Loan Bank and are not backed by
the U.S. government (although the U.S. Secretary of the Treasury has
discretionary authority to lend it up to $2.25 billion).
Mortgage-backed securities -- may be issued by governmental or non-governmental
entities such as banks and other mortgage lenders. Non-governmental securities
may offer higher yield to the Fund but may also expose the Fund to greater
price fluctuation and risk than governmental securities. Many issuers guarantee
payment of interest and principal on the securities regardless of whether
payments are made on the underlying securities, which generally increases the
quality and security. Risks which affect mortgage-backed securities' market
values or yields, include actual or perceived interest rate changes,
creditworthiness of the issuer or guarantor, prepayment rates value of the
underlying mortgages and changes in governmental regulation or tax policies. In
addition, certain mortgage-related securities may be settled only through
privately owned clearing corporations whose solvency and creditworthiness are
not backed by the U.S. Government and whose operational problems may result in
delays in settlement or losses to a Portfolio. Mortgage-related securities
include:
. Mortgage-backed bonds, which are secured by a first lien on a pool of single-
family detached properties and are also general obligations of their issuers.
. Mortgage pass-through bonds, which are secured by a pool of mortgages where
the cash flow generated from the mortgage collateral pool is dedicated to
bond repayment.
. Stripped agency mortgage-backed securities, which are interests in a pool of
mortgages, where the cash flow has been separated into its interest only
("interest only" or "IOs") and principal only ("principal only" or "POs")
components. IOs or POs, other than government-issued IOs or POs backed by
fixed rate mortgages, are considered illiquid securities.
. Other mortgage-related securities, which are other debt obligations secured
by mortgages on commercial real estate or residential properties.
Below investment grade securities (or junk bonds) -- debt securities that are
not rated in
B-4
<PAGE>
(or judged to be of comparable quality to) one of the top four categories by an
NRSRO. These securities expose the Fund to more risks than higher rated
securities, including:
. greater doubt as to the issuer's capacity to pay interest and principal
. greater fluctuations in market values due to individual corporate
developments
. greater risk of default for various reasons including that (1) the issuers of
these securities tend to be more highly leveraged and may not have available
to them more traditional methods of financing and (2) the securities are
unsecured and are generally subordinated to debts of other creditors
. greater difficulty in obtaining accurate market quotations for valuation
purposes
. increased expenses to the extent the Fund must seek recovery due to a default
in payment
. less liquid trading markets
Restricted or illiquid securities -- securities for which there is no readily
available market. These securities are priced at fair value under procedures
approved by the Fund's Board of Directors. A Portfolio can sell restricted
securities only in privately negotiated transactions or in a public offering
registered with the Securities and Exchange Commission ("SEC"). Subsequent to
the purchase of a restricted security, SEC registration of such security may
become necessary and a Portfolio that owns the security may need to pay all or
part of the registration expenses and may need to wait until such registration
becomes effective before it can sell the security. In addition, the absence of
ready markets may delay a Portfolio's sale of an illiquid investment. Delays in
disposing of an investment expose a Portfolio to fluctuations in value for
longer periods than it desired.
Rule 144A securities -- securities that are not registered with the SEC but
under certain circumstances may be considered as liquid. Pursuant to procedures
approved by the Board of Directors, these securities are subject to ongoing
evaluation to monitor their liquidity, and the purchase of these securities
could have the effect of increasing the percent of a Portfolio's securities
invested in illiquid securities. Liquidity is evaluated based on various
factors including:
. the availability of trading markets for the security
. the frequency of trades and quotes
. the number of dealers and potential purchasers
. dealer undertakings to make a market
. the nature of the security and of the marketplace trades (including disposal
time, solicitation methods and mechanics of transfer)
Lending portfolio securities. The Fund may pay reasonable finders,
administrative and custodial fees to persons that are unaffiliated with the
Fund for services in connection with loans of its portfolio securities.
Payments received by a Portfolio equal to dividends, interest and other
distributions on loaned securities may be treated as income other than
qualified income for the 90% test discussed under "Taxes" below. The Fund
intends to engage in securities lending only to the extent that it does not
jeopardize its qualification as a regulated investment company under the
Internal Revenue Code (the "Code").
Options on securities, currencies and indices. Options that are traded on
recognized securities exchanges often have less of a risk of loss than those
sold "over-the-counter." A Portfolio will not sell the security or currencies
against which options have been written until after the option period has
expired, a closing purchase transaction is executed, a corresponding put or
call option has been purchased, or the sold option is otherwise covered. The
sale and purchase of options involves paying brokerage commissions and other
transaction costs. In addition, selling covered call options can increase the
portfolio turnover rate.
The purchase and sale of index options have additional risks. For example if
trading of certain securities in the index is interrupted, a Portfolio would
not be able to close out options which it had purchased or sold if restrictions
on exercise were also imposed. To address such liquidity concerns the Fund
limits use of index options to options on indices (1) with a sufficient number
of securities to minimize the likelihood of a trading halt and (2) for which
there is a developed secondary market.
A Portfolio will cover any option it has sold on a stock index by (1) if the
option is a call option, segregating with the Fund's custodian bank either (a)
cash or other liquid assets having a
B-5
<PAGE>
value that, when added to any related margin deposits, at all times at least
equals the value of the securities comprising the index, or (b) securities that
substantially replicate changes in value of the securities in the index; (2) if
the option is a put option, segregating with the Fund's custodian bank cash or
other liquid assets having a value that, when added to any related margin
deposits, at all times at least equals the exercise price; or (3) regardless of
whether the option is a call or a put option, holding an offsetting position in
the same option at an exercise price that is at least as favorable to the Fund.
Forward foreign currency exchange contracts. These contracts are traded in the
interbank market through currency traders. The traders do not charge a fee, but
they do realize a profit based on the difference between the prices at which
they are buying and selling various currencies. The use of these contracts
involves various risks including:
. inability to enter into a contract at advantageous times or with respect to
the desired foreign currencies
. poor correlation between a currency's value and any proxy currency that a
Portfolio is using
. the creditworthiness of the counterparty to the transaction
. losses (or lost profits) due to unanticipated or otherwise adverse changes in
the relative value of currencies
. additional expense due to transaction costs or the need to purchase or sell
foreign currency on the spot market to correlate with the currency delivery
requirements of the contract
The Portfolios will cover outstanding forward currency contracts by maintaining
liquid portfolio securities denominated in or exposed to the currency
underlying the forward contract or the currency being hedged. To the extent
that a Portfolio is not able to cover its forward currency positions with
underlying portfolio securities, the Portfolio will have its bank custodian
segregate cash or liquid assets having a value equal to the aggregate amount of
such Portfolio's commitments under forward contracts. As an alternative to
segregating assets, a Portfolio may buy call options permitting such Portfolio
to buy the amount of foreign currency being hedged by a forward sale contract
or a Portfolio may buy put options permitting it to sell the amount of foreign
currency subject to a forward buy contract.
Swaps, caps, floors and collars. A Portfolio will not enter into any swap, cap,
floor or collar unless the portfolio manager thinks that the other party to the
transaction is creditworthy. If the other party defaults, the Portfolio may
have contractual remedies pursuant to agreements related to the transaction.
Portfolios for which swaps are a permissible investment can enter credit
protection swap arrangements which involve the sale by the Portfolio of a put
option on a debt security which is exercisable by the buyer upon certain
events, such as default by the referenced creditor on the underlying debt or a
bankruptcy event of the creditor.
The swap market has grown substantially in recent years and the swap market has
become relatively liquid due to a large number of banks and investment banks
acting as principals and agents and using standardized documentation. Caps,
floors and collars are more recent innovations and standardized documentation
has not yet been fully developed. For that reason they are less liquid than
swaps. Liquidity of swaps, caps, floors and collars will be evaluated based on
various factors including:
. the frequency of trades and quotations
. the number of dealers and prospective purchasers in the marketplace
. dealer undertakings to make a market
. the nature of the instrument (including demand or tender features)
. the nature of the marketplace (including the ability to assign or offset a
Portfolio's rights and obligations)
Futures contracts and options on futures contracts. A Portfolio will cover any
futures contract it has sold, or any call option it has sold on a futures
contract, by (1) segregating with the Fund's custodian bank (a) cash or other
liquid assets having a value that, when added to any related margin deposits,
at all times at least equals the value of the securities or currency on which
the futures contract (or related index) is based or (b) securities or
currencies that substantially replicate changes in value of the securities or
currencies on which the futures contract (or related index) is based or (2)
holding an offsetting call option on that futures contract at the same or
better
B-6
<PAGE>
settlement price. A Portfolio will cover any futures contract it has
purchased, or any put option it has sold on a futures contract, by (1)
segregating with the Fund's custodian bank cash or other liquid assets having
a value that, when added to any related margin deposits, at all times at least
equals the amount payable upon settlement of such futures contract or (2)
holding an offsetting call option on that futures contract at the same or
better settlement price.
CERTAIN INVESTMENT LIMITATIONS
Fundamental policies are those that may not be changed without approval of the
outstanding voting shares of each affected Portfolio. If such a vote is
required, approval requires a favorable vote of at least the lesser of: (A)
67% of the shares represented (in person or by proxy) at a meeting and
entitled to vote thereon; or (B) if at least 50% of such shares are
represented at the meeting, a majority of those represented.
A policy is fundamental only if the Prospectus or this SAI states that it is
fundamental or that it may be changed only by shareholder vote. If the
Prospectus or SAI specifically states that one or more Portfolios may engage
in practices that would otherwise violate a fundamental policy, such exception
is also part of the Fund's fundamental policies. (On the other hand, any
policy set forth in the Prospectus that is more restrictive than any
fundamental policy on the same subject may be changed without any shareholder
vote.) Unless otherwise indicated, all restrictions apply only at the time of
purchase.
No Portfolio may:
. borrow money to purchase securities or purchase securities on margin
. engage in the underwriting of securities of other issuers except to the
extent that in selling portfolio securities it may be deemed to be a
"statutory" underwriter for purposes of the Securities Act of 1933
. issue senior securities
. sell call options which are not covered options
. sell put options other than to close out option positions previously entered
into
. invest in commodities or commodity contracts. In this regard, the following
aspects of the Prospectus's table of "Certain Investment Practices" are non-
fundamental: all of the prohibitions and limitations in item 9; the
recognized exchange requirement in, and the omission of any Portfolio that
invests in equity securities from, item 10; the recognized exchange
requirement and the limitations on purpose in item 11; and all of item 12,
except the requirement that the Portfolio must be authorized to use the
underlying futures contract.
. make loans but this shall not prohibit a Portfolio from entering into
repurchase agreements or purchasing bonds, notes, debentures or other
obligations of a character customarily purchased by institutional or
individual investors
. For purposes of the industry concentration limit in item 25 of the
Prospectus table, the following additional fundamental policies will apply:
domestic crude oil and gas producers, domestic integrated oil companies,
international oil companies, and oil service companies each will be deemed a
separate industry; money market instruments issued by a foreign branch of a
domestic bank will not be deemed to be an investment in a domestic bank.
No more than 5% of the Scudder Global Equity Portfolio's assets will be
committed to transactions in options, futures or other "derivative"
instruments that are intended for any purpose other than to protect against
changes in market values of investments the Portfolio owns or intends to
acquire, to facilitate the sale or disposition of investments for the
Portfolio, or to adjust the effective duration or maturity of fixed income
instruments owned by the Portfolio
Non-Fundamental Policies are those that may be changed without approval of
shareholders. Unless otherwise indicated, all restrictions apply at the time
of purchase. The following non-fundamental policies are in addition to those
described elsewhere in the Prospectus or SAI.
. No Portfolio will acquire securities for the purpose of exercising control
over the management of any company
. At least 75% of a Portfolio's total assets must be: (1) securities of
issuers in which the Portfolio has not invested more than 5% of its total
assets, (2) voting securities of issuers as to which the Fund owns no more
than 10% of such securities, and (3) securities issued or guaranteed by the
U.S.
B-7
<PAGE>
government, its agencies or instrumentalities. These restrictions do not
apply to the Janus Mid Cap Portfolio.
. No Portfolio may make any short sale
. No Portfolio (except for the Janus Mid Cap Portfolio) may participate on a
joint or joint and several basis in any trading account in securities
Insurance Law Restrictions
The ability to sell contracts in New York requires that each portfolio manager
use his or her best efforts to assure that each Portfolio of the Fund complies
with the investment restrictions and limitations prescribed by Sections 1405
and 4240 of the New York State Insurance Law and regulations thereunder in so
far as such restrictions and limitations are applicable to investment of
separate account assets in mutual funds. Failure to comply with these
restrictions or limitations will result in the Insurance Companies ceasing to
make investments in that Portfolio for the separate accounts. The current law
and regulations permit the Fund to make any purchase if made on the basis of
good faith and with that degree of care that an ordinarily prudent person in a
like position would use under similar circumstances.
INVESTMENT MANAGEMENT ARRANGEMENTS
Investment Management Agreements and Sub-investment Management Agreements
MetLife and the Fund have entered into investment management agreements under
which MetLife has the primary management responsibility for the Fund's four
index Portfolios and overall responsibility for all Portfolios. In addition,
MetLife has entered into sub-investment management agreements for all other
Portfolios. For simplicity, each of MetLife and the sub-investment managers are
referred to as "managers" when discussing issues affecting all of them.
Each agreement continues from year to year with annual approval by (a) the
Board of Directors or a majority of that Portfolio's outstanding shares, and
(b) a majority of the Board of Directors who are not "interested persons" of
any party of the agreement. Each agreement may be terminated by any party to
the agreement, without penalty, with 60 days' written notice. Shareholders of a
Portfolio may vote to terminate an agreement as to services provided for that
Portfolio.
Managers make investment decisions and effect transactions based on information
from a variety of sources including their own securities and economic research
facilities. Managers are also obligated to provide office space, facilities,
equipment and personnel necessary to perform duties associated with their
designated Portfolio(s).
Payment of Fund Expenses
As detailed in the Prospectus, MetLife currently pays certain expenses for the
Loomis Sayles High Yield Bond, Harris Oakmark Large Cap Value, T. Rowe Price
Large Cap Growth, Neuberger Berman Partners Mid Cap Value, Lehman Brothers
Aggregate Bond Index, Russell 2000 Index and Morgan Stanley EAFE Index
Portfolios to the extent they exceed certain amounts.
Apart from any such payment by MetLife, each Portfolio bears its share of all
Fund expenses, including those for: (1) fees of the Fund's directors; (2)
custodian and transfer agent fees; (3) audit and legal fees; (4) printing and
mailing costs for the Fund's prospectuses, proxy material and periodic reports
to shareholders; (5) MetLife's investment management fee; (6) brokerage
commissions on portfolio transactions (including costs for acquisition,
disposition, lending or borrowing of investments); (7) Fund taxes; (8) interest
and other costs related to any Fund borrowing; and (9) extraordinary or one-
time expenses (such as litigation related costs).
All of the Fund's expenses, except extraordinary or one-time expenses, are
accrued daily.
B-8
<PAGE>
Management Fees
The Fund pays MetLife for its investment management services.
MetLife pays the sub-investment managers for their investment management
services.
The following table shows the fee schedules for the investment management fees
and sub-investment management fees as a percentage per annum of the average net
assets and the investment management fees paid to MetLife for each Portfolio:
<TABLE>
<CAPTION>
Sub-
Investment Investment
Management Management
Fee Fee Investment Management Fees
Average Schedule-- Schedule-- For the Year Ended December 31,
Daily Net % Per % Per ---------------------------------
Portfolio Assets Annum Annum 1996 1997 1998
- --------- ----------------- ---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
State Street Research All assets .25% .25% $ 102,785 $ 105,515 $ 105,727
Money Market
State Street Research
Growth 1st $500 million .55% .40% $3,351,614 $7,305,001 $13,095,405
next $500 million .50% .35%
over $1 billion .45% .30%
State Street Research
Income 1st $250 million .35% .27%
next $250 million .30% .22% $ 911,476 $1,102,819 $ 1,514,111
over $500 million .25% .17%
State Street Research
Diversified 1st $500 million .50% .35%
next $500 million .45% .30% $3,179,254 $5,811,475 $10,067,374
over $1 billion .40% .25%
State Street Research
Aggressive Growth 1st $500 million .75% .55%
next $500 million .70% .50% $8,815,041 $9,931,653 $ 9,539,534
over $1 billion .65% .45%
Santander International
Stock 1st $500 million .75% .55%
next $500 million .70% .50% $2,330,738 $2,258,438 $ 2,161,315
over $1 billion .65% .45%
Loomis Sayles High Yield All assets .70% .50% -- $ 84,589 $ 266,117
Bond
T. Rowe Price Small Cap
Growth 1st $100 million .55% .35%
next $300 million .50% .30% -- $ 187,380 $764,242
over $400 million .45% .25%
T. Rowe Price Large Cap
Growth 1st $50 million .70% .50%
over $50 million .60% .40% -- -- $ 3,585
Janus Mid Cap 1st $100 million .75% .55%
next $400 million .70% .50% -- $ 263,954 $ 1,584,660
over $500 million .65% .45%
Scudder Global Equity 1st $50 million .90% .70%
next $50 million .55% .35% -- $ 201,758 $ 674,520
next $400 million .50% .30%
over $500 million .475% .275%
Harris Oakmark Large Cap
Value 1st $250 million .75% .65%
over $250 million .70% .60% -- -- $ 6,470
Neuberger Berman
Partners Mid Cap Value 1st $100 million .70% .50%
next $250 million .675% .475% -- -- $ 6,314
next $500 million .65% .45%
next $750 million .625% .425%
over $1.6 billion .60% .40%
MetLife Stock Index All Assets .25% N/A $2,154,140 $3,961,131 $ 6,387,967
Lehman Brothers All Assets .25% N/A -- -- $ 18,962
Aggregate Bond Index
Russell 2000 Index All Assets .25% N/A -- -- $ 11,355
Morgan Stanley EAFE All Assets .30% N/A -- -- $ 9,366
Index
</TABLE>
B-9
<PAGE>
DIRECTORS AND OFFICERS OF THE FUND
The Fund's Directors review actions of the Fund's investment manager and sub-
investment managers, and decide upon matters of general policy. The Fund's
officers supervise the daily business operations of the Fund. The Board of
Directors and the Fund's officers are listed below. Unless otherwise noted, the
address of each executive officer and director listed below is One Madison
Avenue, New York, New York 10010.
<TABLE>
<CAPTION>
Principal Occupation(s)
Name, (Age) and Address Position(s) with Fund During Past 5 Years
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Steve A. Garban (61)+ Director Retired, formerly Senior Vice-President
The Pennsylvania State Finance and Operations and Treasurer, The
University Pennsylvania State University
208 Old Main
University Park, PA
16802
- ------------------------------------------------------------------------------------------------
David A. Levene (59)* Chairman of the Board, Executive Vice-President, MetLife since
Chief Executive Officer 1996; prior thereto, Senior Vice-President
and Director and Chief Actuary
- ------------------------------------------------------------------------------------------------
Malcolm T. Hopkins (71)+ Director Private Investor, formerly Vice-Chairman of
14 Brookside Road the Board and Chief Financial Officer, St.
Biltmore Forest Regis Corp. (forest and paper products)
Asheville, NC 28803
- ------------------------------------------------------------------------------------------------
Dean O. Morton (67)+ Director Retired, formerly Executive Vice-President,
3200 Hillview Avenue Chief Operating Officer and Director,
Palo Alto, CA 94304 Hewlett-Packard Company
- ------------------------------------------------------------------------------------------------
Michael S. Scott Morton Director Jay W. Forrester Professor of Management at
(61)+ Sloan School of Management, MIT
Massachusetts Institute
of
Technology ("MIT")
50 Memorial Drive
Cambridge, MA 02139-4307
- ------------------------------------------------------------------------------------------------
Arthur G. Typermass Director Retired, formerly Senior Vice-President and
(62)* Treasurer, MetLife
43 Chestnut Drive
Garden City, NY 11530
- ------------------------------------------------------------------------------------------------
Bradford W. White (33)+* Controller Senior Technical Consultant -- Pensions,
MetLife since 1993; Senior Financial
Analyst -- Retirement and Savings Center,
1992-1993; prior thereto, Financial Analyst
- ------------------------------------------------------------------------------------------------
Christopher P. Nicholas President and Chief Associate General Counsel, MetLife
(50)+* Operating Officer
- ------------------------------------------------------------------------------------------------
Janet Morgan (36)* Treasurer Assistant Vice-President, MetLife since
1997; prior thereto, Director
- ------------------------------------------------------------------------------------------------
Elaine Stevenson (40)* Vice-President Vice-President, MetLife
- ------------------------------------------------------------------------------------------------
Lawrence A. Vranka (59)* Vice-President Vice-President, MetLife
- ------------------------------------------------------------------------------------------------
Robin Wagner (38)* Secretary Assistant General Counsel, MetLife since
1997, Counsel, 1995-1997; prior thereto,
Associate Counsel
- ------------------------------------------------------------------------------------------------
Patricia S. Worthington Assistant Secretary Assistant Vice-President and Assistant
(42)* Compliance Director of MetLife since 1997;
prior thereto Associate Counsel
- ------------------------------------------------------------------------------------------------
Nancy A. Turchio (30)* Assistant Secretary Legal Assistant, MetLife since 1994; prior
thereto, legal assistant Cadwalader,
Wickersham & Taft
- ------------------------------------------------------------------------------------------------
Harold Lerner (63)* Assistant Controller Technical Consultant -- Financial
Management, MetLife since 1996; prior
thereto, Pricing/Contracts Analyst --
Retirement and Savings Center
- ------------------------------------------------------------------------------------------------
Dianne Johnson (47)* Assistant Controller Senior Technical Consultant -- Financial
Management, MetLife since 1997; Technical
Consultant -- Retirement and Savings Center,
1994-1997; prior thereto, Accounting
Supervisor -- Retirement and Savings Center
</TABLE>
- -----------
(*) Interested Person, as defined in the Investment Company Act of 1940 ("1940
Act"), of the Fund.
(+) Serves as a trustee, director and/or officer of one or more of the
following investment companies, each of which has a direct or indirect
advisory relationship with the Investment Manager or its affiliates: State
Street Research Financial Trust, State Street Research Income Trust, State
Street Research Money Market Trust, State Street Research Tax-Exempt Trust,
State Street Research Capital Trust, State Street Research Master
Investment Trust, State Street Research Equity Trust, State Street Research
Securities Trust, State Street Research Growth Trust, State Street Research
Exchange Trust and State Street Research Portfolios, Inc.
B-10
<PAGE>
The Directors have been compensated as follows:
<TABLE>
<CAPTION>
(3)
Pension or (5)
Retirement (4) Total
(2) Benefits Estimated Compensation
Aggregate Accrued Annual from the Fund
(1) Compensation as part of Benefits and Fund
Name of from Fund Upon Complex Paid
Director(b) Fund(a)(c) Expenses Retirement to Directors(b)
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Jeffrey J. Hodgman(d) 0 0 0 0
- -----------------------------------------------------------------------------
Steve A. Garban $29,000 0 0 $110,300
- -----------------------------------------------------------------------------
Malcolm T. Hopkins $27,500 0 0 $ 97,200
- -----------------------------------------------------------------------------
Robert A. Lawrence(e) $26,000 0 0 $ 96,700
- -----------------------------------------------------------------------------
Dean O. Morton $26,000 0 0 $110,700
- -----------------------------------------------------------------------------
Michael S. Scott Morton $26,000 0 0 $115,500
- -----------------------------------------------------------------------------
David A. Levene 0 0 0 0
- -----------------------------------------------------------------------------
Arthur G. Typermass $19,668 0 0 $ 19,668
</TABLE>
- ------------
(a) For the fiscal year ended December 31, 1998.
(b) Complex is comprised of 10 trusts and two corporations with a total of 31
funds and/or series. "Total Compensation from the Fund and Fund Complex
Paid to Directors" is for the 12 months ended December 31, 1998.
(c) Directors and officers who are currently active employees of MetLife
receive no compensation for services rendered to the Fund other than their
regular compensation from MetLife or its affiliate of which they are
employees. Effective April 1, 1999 other directors who are not currently
active employees of MetLife receive a fee of $15,000 per year, plus $3,500
for each directors' meeting they attend, $500 for each audit committee
meeting they attend, and reimbursement for out-of-pocket expenses related
to such attendance. Messrs. Garban and Hopkins also each receive $1,500 for
attending any contract committee meeting. The chairmen of the audit and
contracts committees each receive a fee of $1,500 for each full calendar
year during which he/she serves as chairman.
(d) Jeffrey J. Hodgman resigned as a director effective May 1, 1998.
(e) Robert A. Lawrence resigned as a director effective April 1, 1999.
- ------------
None of the above officers and directors of the Fund owns any stock of the
Fund.
B-11
<PAGE>
PLACING PORTFOLIO TRANSACTIONS
Each Portfolio's manager has day-to-day responsibility for selecting broker-
dealers who will process investment transactions for the Portfolio. The
managers follow similar policies and procedures for each Portfolio. When a
manager's policy or practice is significantly different, it is specifically
identified below. In the discussion that follows, the term broker-dealer
includes both brokers (brokerage firms who act as agents in purchases or sales
of portfolio investments by the Fund) and dealers (investment firms who act for
their own account in selling or purchasing securities to or from the Fund).
Primary Policy
Each manager's primary policy is to get prompt and reliable execution of orders
with the most favorable overall net prices to the Fund. To this end, when
selecting the best broker-dealer for a given transaction, each manager will
consider one or more of the following:
. the price of the security or instrument
. the nature of the market for the security or instrument
. the size and difficulty of the order
. the execution experience of the broker-dealer with respect to specific
markets or securities (see, for example, "Fixed Income Securities" and "Over-
the-Counter Securities Market" below)
. confidentiality
. the broker-dealer's financial responsibility
. the competitiveness of the commission or spread (see "Competitiveness of
Commission Rates and Net Prices" below)
. proven integrity and reliability
. the quality of execution
. the broker-dealer's research and statistical services and capabilities (see
"Research and Statistical Services" below)
. the broker-dealer's capital clearance and settlement capabilities
. desired timing of the trade
. any broker rebate of commissions to pay Portfolio expenses under any
"directed brokerage" arrangements (see "Directed Brokerage" below)
Research and Statistical Services
When more than one firm satisfies the Portfolio's other standards, managers may
consider the range of services and capabilities that those broker-dealers
provide, including:
. recommendations and advice about market projections and data, security
values, asset allocation and portfolio evaluation, purchasing or selling
specific securities, and portfolio strategy
. seminars, information, analyses, and reports concerning companies,
industries, securities, trading markets and methods, legislative and
political developments, changes in accounting practices and tax law, economic
and business trends, proxy voting, issuer credit-worthiness, technical charts
and portfolio strategy
. access to research analysts, corporate management personnel, industry
experts, economists, government representatives, technical market measurement
services and quotation services, and comparative performance evaluation
. products and other services including financial publications, reports and
analysis, electronic access to data bases and trading systems, computer
equipment, software, information and accessories
. statistical and analytical data relating to various investment companies,
including historical performance, expenses and fees, and risk measurements
In most cases, these services supplement a manager's own research and
statistical efforts. Research and statistical information and materials are
generally subject to internal analysis before being incorporated into a
manager's investment process.
Generally, services are received primarily in the form of written reports,
computer generated services, telephone contacts and personal meetings. Often
managers use internal surveys and other methods to evaluate the quality of
research and other services provided by various broker-dealer firms. Results of
these studies are available to the managers' trading departments for use when
selecting broker-dealers to execute portfolio transactions.
Multiple Uses for Services The same research and statistical products and
services may be useful for multiple accounts. Managers may use such products
and services when managing any of their investment accounts. Therefore,
managers may use research and statistical information received from broker-
dealers who
B-12
<PAGE>
have handled transactions for any such account (which may or may not include
any Portfolio) in the management of the same or any such other account (which,
again, may or may not include that Portfolio). If any research or statistical
product or service has a mixed use, so that it also serves functions other than
assisting in a manager's investment decision process, then the manager may
allocate the costs and value accordingly. Only the portion of the cost or value
attributable to a product or service that assists the manager with the
investment decision process may be considered by the manager in allocating
transactions to broker-dealers.
Competitiveness of Commission Rates and Net Prices
Brokerage and other services furnished by broker-dealers are routinely reviewed
and evaluated. Managers try to keep abreast of commission structures and the
prevalent bid/ask spread of the market and/or security in which transactions
for the Portfolios occur. Commissions on foreign transactions are often higher
and fixed, unlike in the United States where commission rates are negotiable.
Against this backdrop, managers evaluate the reasonableness of a commission or
net price for each transaction.
Other considerations which determine reasonableness of a broker-dealer's
commission rates or net prices include:
.the difficulty of execution and settlement
. the size of the transaction (number of shares, dollar amount, and number of
clients involved)
. historical commission rates or spreads
. rates and prices quoted by other brokers and dealers
. familiarity with commissions or net prices paid by other institutional
investors
. the level and type of business done with the broker-dealer over time
. the extent to which broker or dealer has capital at risk in the transaction
After considering a combination of all the factors, managers may not
necessarily select the broker with the lowest commission rate or the dealer
with the lowest net price. Managers may or may not ask for competitive bids
based on their judgment as to whether such bids would have a negative effect on
the execution process.
Compensating Broker-Dealers for Non-Execution Services
Managers do not intentionally pay a broker-dealer brokerage commission or net
price that is higher than another firm would charge for handling the same
transaction in a recognition of services (other than execution services)
provided.
This is an area where differences of opinion as to fact and circumstances may
exist, however. Therefore, to the extent necessary, managers rely on Section
28(e) of the Securities Exchange Act of 1934, which permits managers to pay
higher commission rates if the manager determines in good faith that the rate
is reasonable in relation to the value of the brokerage, research and
statistical services provided.
Accordingly, while it is difficult to determine any extent to which commission
rates or net prices charged by broker-dealers reflect the value of their
services, managers expect commissions to be reasonable in light of total
brokerage and research services provided by each particular broker. Although it
is also difficult to place an exact dollar value on research and statistical
services received from broker-dealers, the managers believe that these services
tend to reduce the Portfolio's expenses in the long-run.
When purchasing securities for a Portfolio in fixed price underwriting
transactions, managers follow instructions received from the Fund as to the
allocation of new issue discounts, selling concessions and designations to any
brokers or dealers which provide the Fund with research, performance
evaluation, master trustee and other services. Absent instructions from the
Fund, the manager may make such allocations to broker-dealers which provide it
with research, statistical, and brokerage services.
Brokerage Allocation Agreements and Understandings Managers may pay cash for
certain services provided by external sources or choose to allocate brokerage
business as compensation for the services. Managers do not have fixed
agreements with any broker-dealer as to the amount of brokerage business which
that firm may expect to receive because of the services they supply. However,
managers may have understandings with certain firms which acknowledge that in
order for such firms to be
B-13
<PAGE>
able to continuously supply certain services, they need to receive allocation
of a specified amount of brokerage business. These understandings are honored
to the extent possible in accordance with the policies set forth above.
Managers have internal brokerage allocation procedures for that portion of
their discretionary client brokerage business where more than one broker-dealer
can provide best price and execution. In such cases, managers make judgments as
to the level of business which would recognize any research and statistical
services provided. In addition, broker-dealers sometimes suggest a level of
business they would like to receive in return for the various brokerage,
research and statistical services they provide. The actual brokerage received
by any firm may be less than the suggested allocations but can, and often do,
exceed the suggestions, because the total business is allocated on the basis of
all the considerations described above. Broker-dealers are never excluded from
receiving business because they do not provide research or statistical
services.
Directed Brokerage
On behalf of the Portfolios, the Fund may request that managers also consider
directed brokerage arrangements, which involve rebates of commissions by a
broker-dealer to pay Portfolio expenses. The Fund may condition its requests by
requiring that managers effect transactions with specified broker-dealers only
if the broker-dealers are competitive as to price and execution. While the Fund
believes that overall this practice can benefit the Fund, in some cases
managers may be unable to negotiate commissions or obtain volume discounts or
best execution and commissions charged under directed brokerage arrangements
may be higher than those not using such arrangements. Directed brokerage
arrangements may also result in a loss of the possible advantage from
aggregation of orders for several clients as a single transaction for the
purchase or sale of a particular security. Among other reasons why best
execution may not be achieved using directed brokerage arrangements is that in,
an effort to achieve orderly execution of transactions, execution of orders
using directed brokerage arrangements may, at the discretion of the trading
desk, be delayed until execution of other orders have been completed. The Board
of Directors will monitor directed brokerage transactions to help ensure that
they are in the best interest of the Fund and its shareholders.
Fixed Income Securities
Fixed income securities are generally purchased from the issuer or a primary
market-maker acting as principal for the securities on a net basis, with no
brokerage commission paid, although the price usually includes undisclosed
compensation. Transactions placed through dealers serving as primary market-
makers reflect the spread between the bid and asked prices known as a dealer's
mark-up. Securities may also be purchased from underwriters at prices which
include underwriting fees paid by the issuer.
Over-the-Counter Securities Market
Orders through the over-the-counter securities market are placed with the
principal market-makers for the security, unless a more favorable result is
available elsewhere. A principal market-maker is one who actively and
effectively trades in the relevant security.
Bunching of Orders
When securities are purchased or sold for a Portfolio, managers may also be
purchasing or selling the same securities for other accounts. Managers may
group orders of various accounts for execution to get lower prices and
commission rates. To be fair to all accounts over time, managers allocate
aggregate orders executed in a series of transactions or orders in which the
amount of securities available does not fill the order or price requirements at
the average price and, as nearly as practicable, on a pro-rata basis in
proportion to the amounts intended to be purchased or sold by each account.
Managers also consider the investment objectives, amount of money available to
invest, order size, amount an account already has committed to the investment,
and relative investment risks. While the Fund believes this practice
contributes to better overall execution of portfolio transactions, occasionally
this policy may adversely affect the price or number of shares in a particular
Portfolio's transaction caused by either increased demand or supply of the
security involved in the transaction.
The Board of Directors has adopted procedures governing bunching to ensure that
bunching remains in the best interest of the Fund and its shareholders. Because
the procedures do not
B-14
<PAGE>
always adequately accommodate all facts and circumstances, exceptions are made
to the policy of allocating trades on an adjusted, pro-rata basis. Exceptions
to the policy may include not aggregating orders and/or reallocating to:
. recognize a manager's negotiation efforts
. eliminate de minimus positions
. give priority to accounts with specialized investment policies and objectives
. give special consideration of an account's characteristics (such as
concentrations, duration, or credit risk)
. avoid a large number of small transactions which may increase custodial and
other transaction costs (which effect smaller accounts disproportionately)
Depending on the circumstances, such exceptions may or may not cause an account
to receive a more or less favorable execution relative to other accounts.
Harris Associates L.P. may use its affiliate, Harris Associates Securities
L.P., and Neuberger Berman Management Inc. may use its affiliate, Neuberger
Berman, LLC (the "affiliated brokers") as brokers for effecting securities
transactions for the respective portfolios for which they are the managers. The
Board of Directors, including a majority of the directors who are not
"interested" directors, has determined that securities transactions for a
Portfolio may be executed through these affiliated brokers, if, in the judgment
of the manager, the use of the affiliated broker is likely to result in prices
and execution at least as favorable to the Portfolio as those available from
other qualified brokers and, if, in such transactions, the affiliated broker
charges the Portfolio commission rates at least as favorable as those charged
by the affiliated broker to comparable unaffiliated customers in similar
transactions. The Board of Directors has adopted procedures designed to provide
that commissions, fees or other remuneration paid to affiliated brokers are
consistent with this standard. The Portfolios will not effect principal
transactions with affiliated brokers.
The following table shows the brokerage commissions paid by the Fund for each
of the Portfolios for the years ended December 31, 1996, 1997 and 1998:
<TABLE>
<CAPTION>
Portfolio 1996 1997 1998
<S> <C> <C> <C>
State Street Research
Money Market
State Street Research N/A N/A N/A
Income
State Street Research $1,522,211 $1,771,904 $2,204,538
Diversified
State Street Research $2,719,753 $3,228,651 $4,486,471
Growth
State Street Research $4,285,962 $5,031,886 $3,260,411
Aggressive Growth
Santander $1,971,314 $3,009,725 $2,313,364
International Stock
Loomis Sayles High N/A $ 4,236 $ 6,463
Yield Bond
T. Rowe Price Small N/A $ 84,657 $ 174,688
Cap Growth
T. Rowe Price Large N/A N/A $ 5,222
Cap Growth
Janus Mid Cap N/A $ 139,969 $ 482,758
Scudder Global Equity N/A $ 143,783 $ 165,847
Harris Oakmark Large N/A N/A $ 12,228
Cap Value
Neuberger Berman N/A N/A $ 11,875
Partners Mid Cap
MetLife Stock Index $ 229,771 $ 341,117 $ 469,162
Lehman Brothers N/A N/A N/A
Aggregate Bond Index
Russell 2000 Index N/A N/A $ 41,989
Morgan Stanley EAFE N/A N/A $ 79,325
</TABLE>
SHAREHOLDER MEETINGS
Regular annual shareholder meetings are not required and the Fund does not
expect to have regular meetings. For certain purposes, the Fund is required to
have a shareholder meeting. Examples of the reasons a meeting might be held are
to: (1) approve certain agreements required by securities laws; (2) change
fundamental investment objectives and restrictions of the Portfolios; and (3)
fill vacancies on the Board of Directors when less than a majority have been
elected by shareholders. Also, if 10% or more of the outstanding shares request
a shareholders' meeting, then by a vote of two-thirds of the Fund's outstanding
shares (as of a designated record date) a director may be removed from
B-15
<PAGE>
office. The Fund assists with all shareholder communications. Except as
mentioned above, directors will continue in office and may appoint directors
for vacancies.
VOTING
Each share has one vote and fractional shares have fractional votes. Votes for
all Portfolios are generally aggregated. When there is a difference of
interests between the Portfolios, votes are counted on a per Portfolio basis
and not totaled. Shares in a Portfolio not affected by a matter are not
entitled to vote on that matter. A Portfolio-by-Portfolio vote may occur, for
example, when there are proposed changes to a particular Portfolio's
fundamental investment policies or investment management agreement.
Owners of Contracts supported by separate accounts registered as unit
investment trusts under the Investment Company Act of 1940 have certain voting
interests in Fund shares. The Contract prospectus attached to the Fund
Prospectus describes how Contract owners can give voting instructions for Fund
shares. Shares held by MetLife's general account or in a separate account not
registered as a unit investment trust vote in the same proportion as shares
held by the Insurance Companies in their separate accounts registered as unit
investment trusts.
SALE AND REDEMPTION OF SHARES
Portfolio shares, when issued, are fully paid and non-assessable. In addition,
there are no preference, preemptive, conversion, exchange
or similar rights, and shares are freely transferable. Shares do not have
cumulative voting rights.
MetLife need not sell any specific number of Fund shares. MetLife will pay the
Fund's distribution expenses and costs (which are those arising from activities
primarily intended to sell Fund shares).
The Fund may suspend sales and redemptions of a Portfolio's shares during any
period when (1) trading on the New York Stock Exchange is restricted or the
Exchange is closed (other than customary weekend and holiday closings); (2) an
emergency exists which makes disposing of portfolio securities or establishing
a Portfolio's net asset value impractical; or (3) the Securities and Exchange
Commission orders suspension to protect Portfolio shareholders.
If the Board of Directors decides that continuing to offer shares of one or
more Portfolios will not serve the Fund's best interest (e.g. changing market
conditions, regulatory problems or low Portfolio participation), the Fund may
stop offering such shares and, by a vote of the Board of Directors, may require
redemption (at net asset value) of outstanding shares in such Portfolio(s) upon
30 day's prior written notice to affected shareholders.
In the future, the Fund may offer shares to be purchased by separate accounts
of life insurance companies not affiliated with MetLife to support insurance
contracts they issue.
PRICING OF PORTFOLIO SECURITIES
Portfolio securities are priced as described in the table that follows. If the
data necessary to employ the indicated pricing methods are not available, the
investment will be assigned a fair value in good faith pursuant to procedures
approved by the Board of Directors. Such "fair value" pricing may also be used
if the customary pricing procedures are judged for any reason to result in an
unreliable valuation.
B-16
<PAGE>
PRICING OF SECURITIES CHART
<TABLE>
<CAPTION>
Value
Average Established by
Last Between Recognized
Last Spot Last Bid Exchange or
Sale Last Bid Price and Asked Other
(primary (primary (primary (primary Amortized Recognized
market) market) market) market) Cost* Sources
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Portfolio Securities All
Traded on Domestic Stock All Portfolios/2/
Exchanges Portfolios/1/ L/2/ except L
- ----------------------------------------------------------------------------------------------------------------
Portfolio Securities
Traded Primarily on
Non-Domestic All
Securities Exchanges Portfolios/1/
- ----------------------------------------------------------------------------------------------------------------
Securities Listed or All All
Traded on More than All Portfolios/3/ Portfolios/2/
One Exchange Portfolios/1/ S/2/ except S
- ----------------------------------------------------------------------------------------------------------------
Domestic Securities All
Traded in the Over Portfolios/1/
the Counter Market except S, L,
S/1/, NB/1/ L/1/ S/2/ NB and MM MM
- ----------------------------------------------------------------------------------------------------------------
Non-U.S. Securities All
Traded in the Over All Portfolios/2/
the Counter Market Portfolios/1/ except NB NB/2/
- ----------------------------------------------------------------------------------------------------------------
Short-term
Instruments with
Remaining Maturity
of Sixty Days or All
Less Portfolios/1/
- ----------------------------------------------------------------------------------------------------------------
Options on Securities,
Indices, or Futures All All
Contracts Portfolios/1/ Portfolios/2/
- ----------------------------------------------------------------------------------------------------------------
All
Currencies Portfolios/1/
- ----------------------------------------------------------------------------------------------------------------
All
Futures Contracts Portfolios/1/
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
- ------------
1. primary method used
2. if primary method is unavailable
3. if both primary and secondary methods are unavailable
L. Loomis Sayles High Yield Bond Portfolio Only
NB.Neuberger Berman Partners Mid Cap Value Portfolio Only
S. Scudder Global Equity Portfolio Only
MM.State Street Research Money Market Portfolio Only
* Amortized Cost Method: Securities are valued at the cost on the date of
purchase and thereafter, a constant proportionate amortization value is
assumed until maturity of any discount or premium (regardless of
fluctuating interest rates on the market value of the security).
Maturity is deemed to be the next date on which the interest rate is to
be adjusted. Note, using this method may result in different yield and
net asset values than market valuation methods.
B-17
<PAGE>
TAXES
The following summarizes some of the relevant tax considerations associated
with the Fund. It is not a complete explanation and should not substitute for
careful tax planning and consulting with individual tax advisers.
The Fund's tax attributes are allocated among the Portfolios as if they were
separate corporations. For example, if a Portfolio has a net capital loss for a
taxable year, including any allocated net capital loss carryforwards, such
loss(es) will only offset net capital gains of that Portfolio. Also, each
Portfolio stands alone to determine that Portfolio's net ordinary income or
loss.
The Fund currently qualifies (and intends to continue to qualify) as a
"regulated investment company" under the Code. To qualify, among other things,
each Portfolio must derive at least 90% of its gross income from dividends,
interest, payments for security loans, and gains or other income derived from
each Portfolio's business of investing in stocks, securities or foreign
currencies. As a regulated investment company, the Fund does not pay federal
income tax on net ordinary income and net realized capital gains distributed to
shareholders. A nondeductible 4% excise tax applies to any regulated investment
company on any excess of required distributions for the calendar year over the
amount actually distributed. The Fund must distribute 98% of its ordinary
income and capital gain net income. The Fund does not expect to incur excise
taxes.
Dividends paid by a Portfolio from its ordinary income, and distributions of
its net realized short-term capital gains, are taxable to the shareholder as
ordinary income. Generally, any of a Portfolio's income which represents
dividends on common or preferred stock of a domestic corporation (rather than
interest income), distributed to the Insurance Companies may be deducted as
dividends received, to the extent the deduction is available to a life
insurance company.
Distributions from the Fund's net realized long-term gains are taxable to the
Insurance Companies as long-term capital gains regardless of the holding period
of the Portfolio shares. Long-term capital gain distributions are not eligible
for the dividends received deduction.
Dividends and capital gains distributions may also be subject to state and
local taxes.
The Fund complies with section 817(h) of the Code and its related regulations.
This means that the Fund generally may issue shares only to life insurance
company segregated asset accounts (also referred to as separate accounts) that
fund variable life insurance or annuity contracts ("variable insurance
contracts") and the general account of MetLife which provided the initial
capital for the Portfolios. The prospectus for the Contracts discusses in more
depth the taxation of segregated asset accounts and of the Contract owner.
Section 817(h) of the Code and related regulations require segregated asset
accounts investing in the Portfolios to diversify. These diversification
requirements, which are in addition to those imposed on the Fund under the 1940
Act and under Subchapter M of the Code, may affect selection of securities for
the Portfolios. Failing to meet Section 817(h) requirements may have adverse
tax consequences for the insurance company offering the variable insurance
contract and result in immediate taxation of the contract owner if the
investment in the contract has appreciated in value.
The Treasury Department may possibly adopt regulations or the IRS may issue a
revenue ruling which may deem a Contract owner, rather than the insurance
company, to be treated as owner of the assets of a segregated asset account
based on the extent of investment control by the contract owner. As a result,
the Fund may take action to assure that a Contract continues to qualify as a
variable insurance contract under federal tax laws. For example, the Fund may
alter the investment objectives of a Portfolio or substitute shares of one
Portfolio for those of another. To the extent legally necessary, a change of
investment objectives or share substitution will only occur with prior notice
to affected shareholders, approval by a majority of shareholders and approval
by the Securities and Exchange Commission.
Several unique tax considerations arise in connection with a Portfolio which
may invest in foreign securities. The Portfolio may have to pay foreign taxes,
which could reduce its investment performance. Dividends paid by a Portfolio
corresponding to dividends paid by
B-18
<PAGE>
non-United States companies do not qualify for the dividends received
deduction.
Those Portfolios that invest substantial amounts of their assets in foreign
securities may make an election to pass through to the Insurance Companies any
taxes withheld by foreign taxing jurisdictions on foreign source income. Such
an election will result in additional taxable income and income tax to the
Insurance Companies. The amount of additional income tax, however, may be more
than offset by credits for the foreign taxes withheld, which are also passed
through. These credits may provide a benefit to the Insurance Companies.
GENERAL INFORMATION
Experts
The Board of Directors annually approves an independent auditor which is expert
in accounting and auditing. Deloitte & Touche LLP, 555 17th Street, Suite 3600,
Denver, CO, 80202, is the Fund's independent auditor. The Fund's financial
statements for the 12 months ended December 31, 1998 incorporated by reference
into this SAI have been audited by Deloitte & Touche LLP. The Fund relies on
this firm's report which appears with the financial statements.
Introduction of the Euro
Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the
Netherlands, Portugal, and Spain are members of the European Economic and
Monetary Union (the "European Union"). On January 1, 1999, the European Union
established a common European currency for participating countries that will
generally be known as the "Euro." Each such member country supplements its
existing currency with the Euro and intends to replace its existing currency
with the Euro on July 1, 2002. Additional European countries that are members
of the European Union may elect to supplement their existing currencies with
the Euro after January 1, 1999.
The introduction of the Euro presents unique risks and uncertainties, including
the treatment of outstanding financial contracts after January 1, 1999; the
application of exchange rates for existing currencies and the Euro; and the
creation of suitable clearing and settlement systems for the new currency.
While it is impossible to predict what effect the Euro's introduction may have
on a Portfolio's investments in foreign securities and foreign currencies,
these and other factors could cause market disruptions and could, among other
things, adversely affect the value of securities held by the Portfolio.
Custodian Arrangement
State Street Bank and Trust Company of Boston, Massachusetts, is the custodian
of the assets of all Portfolios. The custodian's duties include safeguarding
and controlling the Fund's cash and investments, handling the receipt and
delivery of securities, and collecting interest and dividends on the Fund's
investments. Portfolio securities purchased in the United States are maintained
in the custody of State Street Bank, although such securities may be deposited
in the Book-entry system of the Federal Reserve System or with Depository Trust
Company. Except as otherwise permitted under applicable Securities and Exchange
Commission "no-action" letters or exemptive orders, the Fund holds foreign
assets in qualified foreign banks and depositories meeting the requirements of
Rule 17f-5 under the Investment Company Act of 1940.
Index Sponsors
The Prospectus describes certain aspects of the limited relationship the index
sponsors have with the Fund.
In addition, with respect to Morgan Stanley, the Morgan Stanley EAFE (R) Index
Portfolio is not sponsored, endorsed, sold or promoted by Morgan Stanley.
Morgan Stanley makes no representation or warranty, express or implied, to the
owners of this Portfolio or any member of the public regarding the advisability
of investing in funds generally or in this Portfolio particularly or the
ability of the MSCI EAFE (R) index to track general stock market performance.
Morgan Stanley is the licensor of certain trademarks, service marks and trade
names of Morgan Stanley and of the MSCI EAFE (R) index which is determined,
composed and calculated by Morgan Stanley without regard to the issuer of this
Portfolio or this Portfolio. Morgan Stanley has no obligation to take the needs
of the issuer of this Portfolio or the owners of this Portfolio into
consideration in determining, composing or calculating the MSCI EAFE (R) index.
Morgan Stanley is not responsible for and has not participated in the
determination of the timing of, prices at, or
B-19
<PAGE>
quantities of this Portfolio to be issued or in the determination or
calculation of the equation by which this Portfolio is redeemable for cash.
Morgan Stanley has no obligation or liability to owners of this Portfolio in
connection with the administration, marketing or trading of this Portfolio.
ALTHOUGH MORGAN STANLEY SHALL OBTAIN INFORMATION FOR INCLUSION IN OR FOR USE IN
THE CALCULATION OF THE INDEXES FROM SOURCES WHICH MORGAN STANLEY CONSIDERS
RELIABLE, NEITHER MORGAN STANLEY NOR ANY OTHER PARTY GUARANTEES THE ACCURACY
AND/OR THE COMPLETENESS OF THE INDEXES OR ANY DATA INCLUDED THEREIN. NEITHER
MORGAN STANLEY NOR ANY OTHER PARTY MAKES ANY WARRANTY, EXPRESS OR IMPLIED, AS
TO RESULTS TO BE OBTAINED BY LICENSEE, LICENSEE'S CUSTOMERS AND COUNTERPARTIES,
OWNERS OF THE PORTFOLIO, OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE
INDEXES OR ANY DATA INCLUDED THEREIN IN CONNECTION WITH THE RIGHTS LICENSED
HEREUNDER OR FOR ANY OTHER USE. NEITHER MORGAN STANLEY NOR ANY OTHER PARTY
MAKES ANY EXPRESS OR IMPLIED WARRANTIES, AND MORGAN STANLEY HEREBY EXPRESSLY
DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE
WITH RESPECT TO THE INDEXES OR ANY DATA INCLUDED THEREIN. WITHOUT LIMITING ANY
OF THE FOREGOING, IN NO EVENT SHALL MORGAN STANLEY OR ANY OTHER PARTY HAVE ANY
LIABILITY FOR ANY DIRECT, INDIRECT, SPECIAL, PUNITIVE, CONSEQUENTIAL OR ANY
OTHER DAMAGES (INCLUDING LOST PROFITS) EVEN IF NOTIFIED OF THE POSSIBILITY OF
SUCH DAMAGES. The MSCI EAFE (R) Index is the exclusive property of Morgan
Stanley. Morgan Stanley Capital International is a service mark of Morgan
Stanley and has been licensed for use by MetLife.
With respect to Frank Russell Company, the Russell 2000 Index Portfolio is not
promoted, sponsored or endorsed by, nor in any way affiliated with Frank
Russell Company. Frank Russell Company is not responsible for and has not
reviewed the Portfolio nor any associated literature or publications and Frank
Russell Company makes no representation or warranty, express or implied, as to
their accuracy, or completeness, or otherwise. Frank Russell Company reserves
the right at any time and without notice, to alter, amend, terminate or in any
way change its index. The Russell 2000(R) Index is a service mark of the Frank
Russell Company. Russell(TM) is a trademark of the Frank Russell Company. Frank
Russell Company has no obligation to take the needs of any particular fund or
its participants or any other product or person into consideration in
determining, composing or calculating the index. Frank Russell Company's
publication of the index in no way suggests or implies an opinion by Frank
Russell Company as to the attractiveness or appropriateness of investment in
any or all securities upon which the index is based. FRANK RUSSELL COMPANY
MAKES NO REPRESENTATION, WARRANTY, OR GUARANTEE AS TO THE ACCURACY,
COMPLETENESS, RELIABILITY, OR OTHERWISE OF THE INDEX OR ANY DATA INCLUDED IN
THE INDEX. FRANK RUSSELL COMPANY MAKES NO REPRESENTATION OR WARRANTY REGARDING
THE USE, OR THE RESULTS OF USE, OF THE INDEX OR ANY DATA INCLUDED THEREIN, OR
ANY SECURITY (OR COMBINATION THEREOF) COMPRISING THE INDEX. FRANK RUSSELL
COMPANY MAKES NO OTHER EXPRESS OR IMPLIED WARRANTY, AND EXPRESSLY DISCLAIMS ANY
WARRANTY, OF ANY KIND, INCLUDING, WITHOUT MEANS OF LIMITATION, ANY WARRANTY OF
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE WITH RESPECT TO THE INDEX
OR ANY DATA OR ANY SECURITY (OR COMBINATION THEREOF) INCLUDED THEREIN.
FINANCIAL STATEMENTS
The Fund's financial statements for periods ending December 31, 1998, and the
related schedules of investments for each Portfolio and report of independent
auditors thereon, are included in the Fund's annual report to
B-20
<PAGE>
shareholders for 1998 that accompanies this Statement of Additional Information
and are incorporated by reference into this SAI.
B-21
<PAGE>
APPENDIX
DESCRIPTION OF CERTAIN CORPORATE BOND AND DEBENTURE RATINGS
<TABLE>
<CAPTION>
Rating Moody's Investor Service, Inc. (Moody's) Description Rating Standard & Poor's Rating Group (S&P) Description
- -----------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
Aaa Bonds with this rating are judged AAA An obligation with this rating
to be of the best quality, has the highest rating assigned
carrying the smallest degree or by S&P. The obligor's capacity to
investment risk. They are meet its financial commitment on
generally referred to as "gilt the obligation is extremely
edged." Interest payments are strong.
protected by a large or by an
exceptionally stable margin and
principal is secure. While the
various protective elements are
likely to change, such changes as
can be visualized are most
unlikely to impair the
fundamentally strong position of
such issues.
- -----------------------------------------------------------------------------------------------------------
Aa Bonds with this rating are judged AA An obligation with this rating
to be of high quality by all differs from the highest
standards. Together with the Aaa obligations only in small degree.
group, they comprise what are The obligor's capacity to meet
generally known as high-grade its financial commitment on the
bonds. They are rated lower than obligation is very strong.
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 greater than in Aaa
securities.
- -----------------------------------------------------------------------------------------------------------
A Bonds with this rating possess A An obligation with this rating is
many favorable investment somewhat more susceptible to the
attributes and are to be adverse effects of changes in
considered as upper-medium-grade circumstances and economic
obligations. Factors giving conditions than obligations in
security to principal and higher-rated categories. However,
interest are considered adequate, the obligor's capacity to meet
but elements may be present which its financial commitment on the
suggest a susceptibility to obligation is still strong.
impairment sometime in the
future.
- -----------------------------------------------------------------------------------------------------------
Baa Bonds with this rating are BBB An obligation with this rating
considered as medium grade exhibits adequate protection
obligations, i.e., they are parameters. However, adverse
neither highly protected nor economic conditions or change
poorly secured. Interest payments circumstances are more likely to
and principal security appear lead to weakened capacity of the
adequate for the present but obligor to meet its financial
certain protective elements may commitment on the obligation.
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 with this rating are judged BB An obligation with this rating
to have speculative elements; has significant speculative
their future cannot be considered characteristics, but is less
as well-assured. Often, the vulnerable to nonpayment than
protection of interest and bonds in the lower ratings.
principal payments may be very However, it faces major ongoing
moderate, and thereby not well uncertainties or exposure to
safeguarded during both good and adverse business, financial or
bad times over the future. economic conditions which could
Uncertainty of position lead to the obligor's inadequate
characterizes bonds in this capacity to meet its financial
class. commitment on the obligation.
- -----------------------------------------------------------------------------------------------------------
B Bonds with this rating generally B An obligation with this rating is
lack characteristics of the more vulnerable to nonpayment
desirable investment. Assurance than obligations rated BB, but
of interest and principal the obligor currently has the
payments of maintenance of other capacity to meet its financial
terms of the contract of any long commitment on the obligation.
period of time may be small. Adverse business, financial or
economic conditions will likely
impair the obligator's capacity
or willingness to meet its
financial commitment on the
obligation.
</TABLE>
B-22
<PAGE>
<TABLE>
<CAPTION>
Rating Moody's Investor Service, Inc. (Moody's) Description Rating Standard & Poor's Rating Group (S&P)Description
- --------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
Caa Bonds with this rating are of CCC An obligation with this rating is
poor standing. Such issues may be currently vulnerable to
in default or there may be nonpayment, and is dependent upon
present elements of danger with favorable business, financial,
respect to principal or interest. and economic conditions for the
obligor to meet its financial,
and economic 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.
- --------------------------------------------------------------------------------------------------------------------------
Ca Bonds with this rating represent C An obligation with this rating
obligations which are speculative may be used to cover a situation
in a high degree. Such issues are where a bankruptcy petition has
often in default or have other been filed or similar action has
marked shortcomings. been taken, but payments on this
obligation are being continued.
- --------------------------------------------------------------------------------------------------------------------------
C Bonds with this rating are the D An obligation rated D is in
lowest rated class of bonds, and payment default. This rating
issues so rated can be regarded category is used when payments on
as having extremely poor an obligation are not made on the
prospects of ever attaining any date due even if the applicable
real investment standing. grace period has not expired,
unless S&P believes that such
payments will be made during such
grace period. This rating also
will be used upon the filing of a
bankruptcy petition on an
obligation are jeopardized.
- --------------------------------------------------------------------------------------------------------------------------
1 This modifier is used with Aa, A, (+)/(-) These modifiers are used with
Baa, Ba and B ratings and ratings from AA to CCC to show
indicates the bond possesses relative standing within the
strongest investment attributes rating category.
within the rating class.
- --------------------------------------------------------------------------------------------------------------------------
No Rating This might arise if: (1) an r This symbol attached to the
application for rating was not ratings of instruments with
received or accepted; (2) the significant non credit risks. It
issue or issuer belongs to a highlights risks to principal or
group of securities that are not volatility of expected returns
rated as a matter of policy; which are not addressed in the
(3) there is a lack of essential credit rating. Examples include:
data pertaining to the issue or obligations linked or indexed to
issuer; (4) the issue was equities, currencies or
privately placed in which case commodities; obligations exposed
the rating is not published in to severe prepayment risk such as
the Moody's publication; or interest only principal only
(5) the rating was suspended or mortgage securities; and
withdrawn because new and obligations with unusually risky
material circumstances arose, the interest terms, such as inverse
effects of which preclude floaters.
satisfactory analysis; there is
no longer available reasonable
up-to-date data to permit a
judgment to be formed; a bond is
called for redemption or for
other reasons.
</TABLE>
B-23
<PAGE>
DESCRIPTION OF COMMERCIAL PAPER RATINGS
<TABLE>
<CAPTION>
Rating Moody's Investor Service, Inc. (Moody's) Description Rating Standard & Poor's Rating Group (S&P)Description
- ----------------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C>
Prime Commercial paper with this rating A Commercial paper with this rating
is the highest rated based on the is the highest based on: (1)
following factors: (1) management liquidity ratios are adequate to
of the issuer; (2) economics of meet cash requirements; (2) the
the issuer's industry or issuer's long-term senior debt is
industries and the speculative- rated "A" or better, although in
type risks which may be inherent some cases "BBB" or better may be
in certain areas; (3) the allowed; (3) the issuer has
issuer's products in relation to access to at least two additional
competition and customer channels of borrowing; (4) the
acceptance; (4) liquidity; (5) issuer's basic earnings and cash
amount and quality of long-term flow have an upward trend with
debt; (6) trend of earnings over allowance made for unusual
a period of 10 years; (7) circumstances; (5) Typically, the
financial strength of any parent issuer's industry is well
and the relationships which exist established and the issuer has a
with the issuer; and (8) strong position within the
recognition by the management of industry; and (6) the reliability
obligations which may be present and quality of management are
or may arise as a result of unquestioned.
public interest questions and
preparations to meet such
obligations.
- ----------------------------------------------------------------------------------------------------------------------------
1, 2 or 3 These modifiers indicates the 1, 2 or 3 These modifiers indicate the
relative degree to which the relative degree to which the
commercial paper possesses the commercial paper possesses the
qualities that are required to qualities that are required to
receive a Prime rating. receive an A rating.
- ----------------------------------------------------------------------------------------------------------------------------
(+) Commercial paper with an A-1
rating can be further modified
with this modifier to show that
they possess overwhelming safety
characteristics.
</TABLE>
B-24
