<PAGE>
SUPPLEMENT DATED MAY 1, 1997
to
PROSPECTUS DATED MAY 1, 1992
(As previously supplemented on May 1, 1994 and on April 30, 1993)
for
FLEXIBLE PREMIUM MULTIFUNDED LIFE INSURANCE POLICIES
(Minimum Initial Specified Face Amount $50,000)
Issued by
METROPOLITAN TOWER LIFE INSURANCE COMPANY
This Supplement updates information contained in the Metropolitan Tower
Separate Account Two Prospectus dated May 1, 1992, (the "Prospectus") and its
supplements dated May 1, 1994 and April 30, 1993. Please call Metropolitan
Tower Life Insurance Company ("Metropolitan Tower") at 800-638-5000 if you need
another copy of the Prospectus, or either of the supplements.
The individual flexible premium multifunded life insurance policies
("Policies") offered by the Prospectus are issued by Metropolitan Tower and are
designed to provide lifetime insurance coverage on the insureds named in the
Policies, as well as maximum flexibility in connection with premium payments
and death benefits. This flexibility allows an owner of a Policy to provide for
changing insurance needs within the confines of a single insurance policy. The
Policies are no longer being sold by Metropolitan Tower.
The premiums paid, less premium expense charges, will be allocated at the
owner's discretion among one or more investment divisions of Metropolitan Tower
Separate Account Two ("Separate Account") and/or a fixed interest account
("Fixed Account") within the General Account of Metropolitan Tower. The assets
in each investment division are invested in shares of a corresponding portfolio
of the Metropolitan Series Fund, Inc. ("Fund"). The available portfolios of the
Fund are the State Street Research Growth, State Street Research Income, State
Street Research Diversified, State Street Research Aggressive Growth, MetLife
Money Market, MetLife Stock Index, GFM International Stock, Loomis Sayles High
Yield Bond, T. Rowe Price Small Cap Growth, Janus Mid Cap and Scudder Global
Equity Portfolios.
THIS SUPPLEMENT IS NOT VALID UNLESS ATTACHED TO THE CURRENT PROSPECTUS FOR THE
METROPOLITAN SERIES FUND, INC., WHICH CONTAINS ADDITIONAL INFORMATION ABOUT THE
FUND.
THIS SUPPLEMENT SHOULD BE READ AND RETAINED FOR FUTURE REFERENCE.
1 Madison Avenue, New York, New York 10010 Telephone 800-638-5000
<PAGE>
The names of the following seven portfolios of the Fund and the corresponding
divisions of the Separate Account have been changed wherever they appear in the
Prospectus:
<TABLE>
<CAPTION>
OLD PORTFOLIO AND
DIVISION NAME NEW PORTFOLIO AND DIVISION NAME
- ----------------- -------------------------------
<S> <C>
Growth State Street Research Growth
Income State Street Research Income
Money Market MetLife Money Market
Diversified State Street Research Diversified
Aggressive Growth State Street Research Aggressive Growth
Stock Index MetLife Stock Index
International Stock GFM International Stock
</TABLE>
THE SEPARATE ACCOUNT AND THE METROPOLITAN SERIES FUND
Four new investment divisions that correspond to four new portfolios of the
Fund have been added to the Separate Account. Policy owners may also allocate
net premiums and cash value to these divisions. These divisions are the Loomis
Sayles High Yield Bond Division, the T. Rowe Price Small Cap Growth Division,
the Janus Mid Cap Division, and the Scudder Global Equity Division. The
accompanying prospectus for the Fund describes the investment objectives and
certain attendant risks of these new portfolios. These investment divisions and
corresponding portfolios may not be available in all states. Consult a sales
representative for additional information. A brief summary of the investment
objectives of these new portfolios is set forth below:
Loomis Sayles High Yield Bond Portfolio. This portfolio seeks high total
investment return through a combination of current income and capital
appreciation. The portfolio will normally invest at least 65% of its assets in
fixed income securities of below investment grade quality.
T. Rowe Price Small Cap Growth Portfolio. This portfolio seeks long-term
capital growth by investing in small capitalization companies.
Janus Mid Cap Portfolio. This portfolio is a non-diversified portfolio whose
investment objective is to provide long-term growth of capital. It pursues this
objective by investing primarily in securities issued by medium sized
companies.
Scudder Global Equity Portfolio. This portfolio seeks long-term growth of
capital through a diversified portfolio of marketable securities, primarily
equity securities, including common stocks, preferred stocks and debt
securities convertible into common stocks. The portfolio invests on a worldwide
basis in equity securities of companies which are incorporated in the U.S. or
in foreign countries.
Metropolitan Life Insurance Company ("Metropolitan Life") is the investment
manager of each of the new portfolios of the Fund. Loomis, Sayles & Company,
L.P., whose general partner is indirectly owned by Metropolitan Life, is the
sub-investment manager of the Loomis Sayles High Yield Bond Portfolio. T. Rowe
Price Associates, Inc. is the sub-investment manager of the T. Rowe Price Small
Cap Growth Portfolio. Janus Capital Corporation is the sub-investment manager
of the Janus Mid Cap Portfolio. Scudder, Stevens & Clark, Inc. is the sub-
investment manager for the Scudder Global Equity Portfolio. Sub-investment
manager fees are paid by Metropolitan Life.
It is expected that State Street Research & Management Company ("State Street
Research") will become the sub-investment manager with respect to the MetLife
Money Market Portfolio and the GFM International Stock Portfolio on August 1,
1997. GFM International Investors Limited ("GFM") will become the sub-sub-
investment manager and will continue to have day-to-day investment
responsibility for the GFM International Stock Portfolio. In the event these
changes take place, the name of the portfolios will be
T-2
<PAGE>
changed to the State Street Research Money Market Portfolio and the State
Street Research International Stock Portfolio, respectively.
The GFM International Stock Portfolio is now available in connection with
Policies issued in all states. The Diversified Portfolio was substituted for
the Equity Income Portfolio in 1994 and the Equity Income Division therefore is
no longer available under any Policy.
FUND INVESTMENT MANAGEMENT FEES AND DIRECT EXPENSES
For providing investment management services to the Fund, Metropolitan Life
receives a fee from the Fund for providing investment management services to
each portfolio. The following chart shows the fee and other Fund expenses for
each portfolio.
METROPOLITAN SERIES FUND ANNUAL EXPENSES (AS A PERCENTAGE OF AVERAGE NET
ASSETS)
<TABLE>
<CAPTION>
OTHER
EXPENSES
AFTER EXPENSE
MANAGEMENT REIMBURSEMENT
FEES (A) TOTAL
---------- ------------- -----
<S> <C> <C> <C>
MetLife Stock Index Portfolio................. .25% .05% .30%
State Street Research Income Portfolio(d)..... .33% .07% .40%
MetLife Money Market Portfolio................ .25% .18% .43%
State Street Research Diversified
Portfolio(d)................................. .46% .04% .50%
State Street Research Growth Portfolio(d)..... .51% .04% .55%
State Street Research Aggressive Growth
Portfolio(d)................................. .71% .04% .75%
T. Rowe Price Small Cap Growth Portfolio(b)... .55% .20% .75%
Scudder Global Equity Portfolio(b)(c)......... .62% .20% .82%
Loomis Sayles High Yield Bond Portfolio(b).... .70% .20% .90%
Janus Mid Cap Portfolio(b).................... .75% .20% .95%
GFM International Stock Portfolio(d).......... .75% .22% .97%
</TABLE>
--------
(a) Prior to May 16, 1993, Metropolitan Life paid all expenses of the then
existing portfolios of the Fund other than management fees, brokerage
commissions, taxes, interest and any extraordinary or non-recurring
expenses.
(b) The portfolios commenced operations on March 3, 1997. Management fees
and other expenses for these Portfolios are estimated amounts for the
year ending December 31, 1997. Metropolitan Life has agreed to bear all
expenses (other than management fees, brokerage commissions, taxes,
interest and any extraordinary or non-recurring expenses) in excess of
.20% of the net assets for each of the Loomis Sayles High Yield Bond,
T. Rowe Price Small Cap Growth, Janus Mid Cap and Scudder Global Equity
Portfolios until a Portfolio's total net assets are at least $100
million, or March 2, 1999, whichever is earlier. The marginal fee rate
for the T. Rowe Price Small Cap Portfolio, Janus Mid Cap Portfolio, and
Scudder Global Equity Portfolio will decrease when the dollar amount in
each such portfolio reaches certain threshold amounts.
(c) Metropolitan Life has agreed to waive a portion of its investment
management fee for the Scudder Global Equity Portfolio during the first
year of the Portfolio's operations. The waiver of investment management
fees during the first six months of the Portfolio's operations will be
equal to .35% of the average daily value of the aggregate net assets of
the Portfolio up to $50 million, .175% of such assets on the next $50
million, .15% of such assets on the next $400 million and .1375% of
such assets on amounts in excess of $500 million. During the second six
months of the Portfolio's operations such waiver of the investment
management fee will be equal to .175% of assets up to $50 million,
.0875% of assets on the next $50 million, .075% of assets on the next
$400 million and .06875% of such assets in excess of $500 million.
Absent Metropolitan Life's waiver of its investment management fee,
Metropolitan Life estimates that the management fee and other expenses
for the Scudder Global Equity Portfolio would be .84% and .20%,
respectively, for a total of 1.04%.
(d) Reflects 1996 fees and expenses, restated for proposed management fee
revisions expected to take effect August 1, 1997.
For a full description of the Fund, see the prospectus for the Fund, which is
attached at the end of this Supplement, and the Fund's Statement of Additional
Information referred to therein.
T-3
<PAGE>
POLICY BENEFITS
DEATH BENEFIT OPTIONS
Increases. The underwriting charge for specified face amount increases has
been changed. The maximum guaranteed underwriting charge is $3 for each $1,000
of specified face amount increase. Currently the underwriting charge is a $100
for the first $100,000 of face increase (but no more than $3 per thousand), and
$3 per thousand thereafter, to an overall maximum charge of $2,500.
The information about or based on the actual investment performance of the
portfolios is deleted from the captions "Rates of Return" and "Illustrations"
in the Prospectus and the May 1, 1994 supplement.
ILLUSTRATIONS OF DEATH BENEFITS, CASH VALUES AND ACCUMULATED PREMIUMS
The addition of the new portfolios and the revisions to the older portfolios'
management fees that are expected to become effective August 1, 1997 would
affect the total cash values and total death benefits shown under
"Illustrations of Death Benefit, Cash Values, and Accumulated Premiums" in the
Prospectus and the April 30, 1993 Prospectus Supplement. Using a simple average
of the eleven available portfolios of the Fund, assuming the maximum management
fees, contemplated by the August 1, 1997 adjustment, the daily charge to the
Fund for investment management services would be increased to the equivalent of
a maximum annual rate of .57% of the average daily value of the aggregate net
assets of the Fund. The result is that the cash values would be less for both
death benefit options A and B. In addition, if the minimum death benefit
applies, the death benefit would be lower for death benefit options A and B.
Also, the death benefit will be lower for death benefit option B, even if the
minimum death benefit doesn't apply. Upon request, Metropolitan Tower will
provide a free, personalized hypothetical illustration that reflects these
changes in the investment management fees as they become effective.
EXPERTS
The financial statements included in this Supplement have been audited by
Deloitte & Touche llp, independent auditors, as stated in their reports
appearing herein, and have been so included in reliance upon such reports given
upon the authority of such firm as experts in auditing and accounting.
FINANCIAL STATEMENTS
The financial statements of Metropolitan Tower included in this Supplement
should be considered only as bearing upon the ability of Metropolitan Tower to
meet its obligations under the Policies.
T-4
<PAGE>
Annual Report
of
Metropolitan Tower
Separate Account Two
December 31, 1996
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Metropolitan Tower Life Insurance Company:
We have audited the accompanying statements of assets and liabilities of the
Growth, Income, Money Market, Diversified, Aggressive Growth, Stock Index and
International Stock Divisions of Metropolitan Tower Separate Account Two (the
"Separate Account") as of December 31, 1996, and the related statements of
operations for the year then ended and of changes in net assets for each of the
two years in the period then ended. These financial statements are the
responsibility of the Separate Account's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. Our
procedures included confirmation of securities owned as of December 31, 1996 by
correspondence with the custodian and the depositor of the Separate Account. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the net assets of the Growth, Income, Money Market, Diversified,
Aggressive Growth, Stock Index and International Stock Divisions of
Metropolitan Tower Separate Account Two as of December 31, 1996, and the
results of their operations for the year then ended and the changes in their
net assets for each of the two years in the period then ended, in conformity
with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
New York, New York
February 28, 1997
1
<PAGE>
METROPOLITAN TOWER SEPARATE ACCOUNT TWO
STATEMENTS OF ASSETS AND LIABILITIES
DECEMBER 31, 1996
<TABLE>
<CAPTION>
MONEY AGGRESSIVE STOCK INTERNATIONAL
GROWTH INCOME MARKET DIVERSIFIED GROWTH INDEX STOCK
DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION
----------- ---------- ---------- ----------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Investments in
Metropolitan Series
Fund, Inc. at Value
(Note 1A):
Growth Portfolio
(1,185,115 shares;
cost $26,082,049)..... $36,157,867 -- -- -- -- -- --
Income Portfolio
(395,589 shares; cost
$4,760,958)........... -- $4,889,480 -- -- -- -- --
Money Market Portfolio
(135,628 shares; cost
$1,446,568)........... -- -- $1,415,385 -- -- -- --
Diversified Portfolio
(3,827,998 shares;
cost $50,313,451)..... -- -- -- $63,812,728 -- -- --
Aggressive Growth
Portfolio
(135,301 shares; cost
$3,444,411)........... -- -- -- -- $3,662,608 -- --
Stock Index Portfolio
(45,318 shares; cost
$861,878)............. -- -- -- -- -- $1,007,408 --
International Stock
Portfolio
(78,178 shares; cost
$1,002,950)........... -- -- -- -- -- -- $934,227
----------- ---------- ---------- ----------- ---------- ---------- --------
Total Investments...... 36,157,867 4,889,480 1,415,385 63,812,728 3,662,608 1,007,408 934,227
Cash and Accounts
Receivable............. 20,090 2,332 9 17,072 9,650 2,443 3,813
----------- ---------- ---------- ----------- ---------- ---------- --------
Total Assets........... 36,177,957 4,891,812 1,415,394 63,829,800 3,672,258 1,009,851 938,040
LIABILITIES............. 72,249 36,534 26,606 504,913 41,337 9,460 7,741
----------- ---------- ---------- ----------- ---------- ---------- --------
NET ASSETS.............. $36,105,708 $4,855,278 $1,388,788 $63,324,887 $3,630,921 $1,000,391 $930,299
=========== ========== ========== =========== ========== ========== ========
</TABLE>
See Notes to Financial Statements.
2
<PAGE>
METROPOLITAN TOWER SEPARATE ACCOUNT TWO
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1996
-----------------------------------------------------------------------------
MONEY AGGRESSIVE STOCK INTERNATIONAL
GROWTH INCOME MARKET DIVERSIFIED GROWTH INDEX STOCK
DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION
---------- --------- -------- ----------- ---------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Income:
Dividends (Note 2)..... $3,437,586 $ 308,397 $69,320 $5,629,752 $ 97,108 $ 23,374 $ 9,586
Expenses:
Mortality and expense
charges (Note 3)...... 263,040 37,271 10,866 462,681 23,929 5,076 6,977
---------- --------- ------- ---------- -------- -------- --------
Net investment income... 3,174,546 271,126 58,454 5,167,071 73,179 18,298 2,609
---------- --------- ------- ---------- -------- -------- --------
NET REALIZED AND
UNREALIZED GAIN (LOSS)
ON INVESTMENTS:
Net realized gain (loss)
from security
transactions........... 810,822 42,671 (5,156) 1,151,621 23,432 13,140 (5,525)
Change in unrealized
appreciation
(depreciation) of
investments............ 2,410,203 (180,569) 5,113 1,469,562 63,281 102,220 (20,777)
---------- --------- ------- ---------- -------- -------- --------
Net realized and
unrealized gain (loss)
on investments
(Note 1B).............. 3,221,025 (137,898) (43) 2,621,183 86,713 115,360 (26,302)
---------- --------- ------- ---------- -------- -------- --------
NET INCREASE (DECREASE)
IN NET ASSETS RESULTING
FROM OPERATIONS........ $6,395,571 $ 133,228 $58,411 $7,788,254 $159,892 $133,658 $(23,693)
========== ========= ======= ========== ======== ======== ========
</TABLE>
See Notes to Financial Statements.
3
<PAGE>
METROPOLITAN TOWER SEPARATE ACCOUNT TWO
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------
GROWTH DIVISION INCOME DIVISION MONEY MARKET DIVISION
------------------------ ---------------------- ----------------------
1996 1995 1996 1995 1996 1995
----------- ----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
INCREASE (DECREASE) IN
NET ASSETS:
From operations:
Net investment income.. $ 3,174,546 $ 1,224,605 $ 271,126 $ 259,668 $ 58,454 $ 68,442
Net realized gain
(loss) from security
transactions.......... 810,822 466,080 42,671 27,736 (5,156) (1,861)
Change in unrealized
appreciation
(depreciation) of
investments........... 2,410,203 5,594,419 (180,569) 496,215 5,113 (162)
----------- ----------- ---------- ---------- ---------- ----------
Net increase in net
assets resulting from
operations............ 6,395,571 7,285,104 133,228 783,619 58,411 66,419
----------- ----------- ---------- ---------- ---------- ----------
From capital
transactions:
Net premiums........... 3,669,558 3,871,700 596,692 650,096 174,311 192,856
Redemptions............ (1,600,700) (1,262,576) (255,698) (174,490) (52,111) (60,477)
Net portfolio
transfers............. 334,725 41,853 (157,607) 2,406 (70,001) 4,513
Other net transfers.... (2,979,391) (2,761,673) (434,303) (472,056) (123,459) (126,378)
----------- ----------- ---------- ---------- ---------- ----------
Net increase (decrease)
in net assets
resulting from capital
transactions.......... (575,808) (110,696) (250,916) 5,956 (71,260) 10,514
----------- ----------- ---------- ---------- ---------- ----------
NET CHANGE IN NET
ASSETS................. 5,819,763 7,174,408 (117,688) 789,575 (12,849) 76,933
NET ASSETS--BEGINNING OF
YEAR................... 30,285,945 23,111,537 4,972,966 4,183,391 1,401,637 1,324,704
----------- ----------- ---------- ---------- ---------- ----------
NET ASSETS--END OF
YEAR................... $36,105,708 $30,285,945 $4,855,278 $4,972,966 $1,388,788 $1,401,637
=========== =========== ========== ========== ========== ==========
</TABLE>
See Notes to Financial Statements.
4
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
DIVERSIFIED DIVISION AGGRESSIVE GROWTH DIVISION STOCK INDEX DIVISION INTERNATIONAL STOCK DIVISION
- ------------------------ ---------------------------- ----------------------- ------------------------------
1996 1995 1996 1995 1996 1995 1996 1995
- ----------- ----------- ------------- ------------- ----------- ---------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
$5,167,071 $ 3,249,641 73,179 $ 223,279 $ 18,298 $ 5,644 $ 2,609 $ 2,202
1,151,621 869,809 23,432 16,219 13,140 3,150 (5,525) (1,063)
1,469,562 8,093,380 63,281 164,087 102,220 45,651 (20,777) 3,144
- ----------- ----------- ------------- ------------- ----------- --------- -------------- --------------
7,788,254 12,212,830 159,892 403,585 133,658 54,445 (23,693) 4,283
- ----------- ----------- ------------- ------------- ----------- --------- -------------- --------------
6,280,422 6,856,619 546,467 394,413 84,552 35,177 180,548 184,671
(2,919,234) (2,604,739) (148,481) (77,921) (39,405) (6,625) (45,108) (36,567)
(505,718) (566,501) 800,875 793,836 552,218 155,678 9,843 75,702
(5,211,472) (5,417,926) (292,344) (222,370) (61,214) (14,476) (92,889) (61,927)
- ----------- ----------- ------------- ------------- ----------- --------- -------------- --------------
(2,356,002) (1,732,547) 906,517 887,958 536,151 169,754 52,394 161,879
- ----------- ----------- ------------- ------------- ----------- --------- -------------- --------------
5,432,252 10,480,283 1,066,409 1,291,543 669,809 224,199 28,701 166,162
57,892,635 47,412,352 2,564,512 1,272,969 330,582 106,383 901,598 735,436
- ----------- ----------- ------------- ------------- ----------- --------- -------------- --------------
$63,324,887 $57,892,635 $ 3,630,921 $ 2,564,512 $ 1,000,391 $ 330,582 $ 930,299 $ 901,598
=========== =========== ============= ============= =========== ========= ============== ==============
</TABLE>
5
<PAGE>
METROPOLITAN TOWER SEPARATE ACCOUNT TWO
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
Metropolitan Tower Separate Account Two (the "Separate Account") is a multi-
division unit investment trust registered under the Investment Company Act of
1940 and presently consists of seven investment divisions. The assets in each
division are invested in shares of the corresponding portfolio of the
Metropolitan Series Fund, Inc. (the "Fund"). Each portfolio has varying
investment objectives relative to growth of capital and income.
The Separate Account was formed by Metropolitan Tower Life Insurance Company
("Metropolitan Tower Life"), a wholly-owned subsidiary of Metropolitan Life
Insurance Company ("Metropolitan Life"), on September 18, 1984 and registered
as a unit investment trust on December 21, 1984. The assets of the Separate
Account are the property of Metropolitan Tower Life.
A summary of significant accounting policies, all of which are in accordance
with generally accepted accounting principles, is set forth below:
1. SIGNIFICANT ACCOUNTING POLICIES
A. VALUATION OF INVESTMENTS
Investments in shares of the Fund are valued at the reported net asset
values of the respective portfolios. A summary of investments of the
seven designated portfolios of the Fund in which the seven investment
divisions of the Separate Account invest as of December 31, 1996 is
included as Note 5. The methods used to value the Fund's investments at
December 31, 1996 are described in Note 1A of the Fund's 1996 Annual
Report.
B. SECURITY TRANSACTIONS
Purchases and sales are recorded on the trade date. Realized gains and
losses on sales of investments are determined on the basis of identified
cost.
C. FEDERAL INCOME TAXES
The operations of the Separate Account will be reported on the federal
income tax return of Metropolitan Tower Life, which is taxed as a life
insurance company under the provisions of the Internal Revenue Code.
Metropolitan Tower Life joins with Metropolitan Life and Metropolitan
Life's includable affiliates in filing a consolidated federal income tax
return. Metropolitan Tower Life is not currently charging any federal
income taxes against the Separate Account arising from the earnings or
realized capital gains attributable to the Separate Account. Such charges
may be imposed in future years depending on market fluctuations and
transactions involving the Separate Account.
D. NET PREMIUMS
Metropolitan Tower Life deducts a sales load and a state premium tax
charge from premiums before amounts are allocated to the Separate
Account.
2. DIVIDENDS
On April 25, 1996 and December 16, 1996, the Fund declared dividends for all
shareholders of record on April 25, 1996 and December 26, 1996, respectively.
The amount of dividends received by the Separate Account was $9,575,123. The
dividends were paid to Metropolitan Tower Life on April 26, 1996 and December
27, 1996, respectively, and were immediately reinvested in additional shares of
the portfolios in which the investment divisions invest. As a result of these
investments, the number of shares of the Fund held by each of the seven
investment divisions increased by the following: Growth Portfolio 111,561
shares, Income Portfolio 24,895 shares, Money Market Portfolio 6,646 shares,
Diversified Portfolio 335,679 shares, International Stock Portfolio 773 shares,
Stock Index Portfolio 1,037 shares, and Aggressive Growth Portfolio 3,571
shares.
6
<PAGE>
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
3. EXPENSES
Metropolitan Tower Life applies a daily charge against the Separate Account
for the mortality and expense risks assumed by Metropolitan Tower Life. This
charge is equivalent to an effective annual rate of .75% of the average daily
value of the assets in the Separate Account which are attributable to the
policies.
4. RELATED PARTY AGREEMENTS
Metropolitan Life acts as the distributor and principal underwriter, as
defined in the Investment Company Act of 1940, of the policies issued through
the Separate Account. Metropolitan Life has entered into a sales agreement with
Metropolitan Tower Life, whereby Registered Representatives of Metropolitan
Life, authorized as variable life insurance agents under applicable state
insurance laws, sell the policies. The Registered Representatives are
compensated on a commission basis. Metropolitan Life has also entered into an
agreement with Metropolitan Tower Life under which Metropolitan Life performs
the administrative services related to the policies, including underwriting and
issue, billing and collections, and policyowner service.
7
<PAGE>
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
5. A SUMMARY OF INVESTMENTS AS OF DECEMBER 31, 1996 METROPOLITAN SERIES FUND,
INC.
<TABLE>
<CAPTION>
GROWTH INCOME MONEY MARKET DIVERSIFIED
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
-------------- ------- ------------ ------- ------------ ------- --------------
VALUE VALUE VALUE VALUE
(NOTE 1A) (NOTE 1A) (NOTE 1A) (NOTE 1A)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
COMMON STOCK
Aerospace.............. $ 14,697,375 (0.9%) $ 8,224,562 (0.6%)
Automotive............. 38,188,750 (2.4%) 21,290,925 (1.5%)
Banking................ 157,307,202 (9.8%) 87,632,900 (6.0%)
Broadcasting........... 19,728,750 (1.2%) 11,025,000 (0.8%)
Business Services...... 31,078,650 (1.9%) 17,361,575 (1.2%)
Chemicals.............. 105,060,638 (6.6%) 58,547,387 (4.0%)
Cosmetics.............. 20,924,887 (1.3%) 11,739,188 (0.8%)
Drugs & Health Care.... 65,432,344 (4.1%) 36,554,638 (2.5%)
Electrical Equipment... 39,896,063 (2.5%) 22,197,437 (1.5%)
Electronics............ 147,966,575 (9.3%) 82,595,572 (5.7%)
Financial Services..... 34,196,000 (2.1%) 19,078,600 (1.3%)
Food & Beverages....... 55,678,225 (3.5%) 31,081,563 (2.1%)
Hospital Management.... 26,943,900 (1.7%) 15,140,663 (1.0%)
Hospital Supply........ 64,140,600 (4.0%) 35,693,650 (2.5%)
Hotel & Restaurant..... 34,541,887 (2.2%) 19,286,312 (1.3%)
Household Products..... 27,788,750 (1.7%) 15,490,750 (1.1%)
Insurance.............. 58,992,362 (3.7%) 32,934,038 (2.3%)
Leisure................ 37,965,054 (2.4%) 21,750,587 (1.5%)
Machinery.............. 24,072,650 (1.5%) 13,385,200 (0.9%)
Metals-Aluminum........ 45,886,900 (2.9%) 25,661,113 (1.8%)
Miscellaneous.......... 17,727,000 (1.1%) 9,861,000 (0.7%)
Office & Business
Equipment............. 104,763,338 (6.6%) 58,437,513 (4.0%)
Oil.................... 27,677,510 (1.7%) 15,646,986 (1.1%)
Oil--Domestic.......... 7,318,575 (0.5%) 4,071,375 (0.3%)
Oil--International..... 32,374,200 (2.0%) 18,031,200 (1.2%)
Oil--Services.......... 46,821,401 (2.9%) 26,157,263 (1.8%)
Retail Grocery......... 23,040,750 (1.4%) 13,019,606 (0.9%)
Retail Trade........... 74,240,420 (4.7%) 41,373,775 (2.9%)
Software............... 19,964,200 (1.3%) 11,203,265 (0.8%)
Tobacco................ 22,356,062 (1.4%) 12,602,737 (0.9%)
Transportation--
Railroad.............. 8,116,800 (0.5%) 4,548,600 (0.3%)
Transportation--
Trucking.............. 0 (0.0%) 5 (0.0%)
Utilities-Gas
Distribution &
Pipelines............. 33,212,237 (2.1%) 18,517,850 (1.3%)
-------------- --------------
Total Common Stock..... 1,468,100,055 (91.9%) 820,142,835 (56.6%)
-------------- --------------
LONG-TERM DEBT
SECURITIES
Corporate Bonds:
Banking................ $ 17,291,411 (4.5%) $ 13,220,347 (0.9%)
Collateralized Mortgage
Obligations........... 8,684,394 (2.3%) 9,152,935 (0.6%)
Financial Services..... 36,834,715 (9.6%) 60,619,051 (4.2%)
Government Sponsored... 5,656,770 (1.5%) 6,496,680 (0.5%)
Industrials............ 26,858,935 (7.0%) 33,637,368 (2.3%)
Miscellaneous.......... 6,288,068 (1.6%) 8,335,834 (0.6%)
Utilities--Electric.... 7,305,058 (1.9%) 5,318,809 (0.4%)
Utilities--
Miscellaneous......... 0 (0.0%) 2,838,920 (0.2%)
Utilities--Telephone... 0 (0.0%) 5,040,000 (0.3%)
------------ --------------
Total Corporate Bonds.. 108,919,351 (28.4%) 144,659,944 (10.0%)
------------ --------------
Federal Agency
Obligations........... 19,701,551 (5.1%) 30,641,236 (2.1%)
Federal Treasury
Obligations........... 201,495,177 (52.6%) 317,610,213 (21.9%)
Foreign Obligations.... 14,393,603 (3.8%) 20,255,361 (1.4%)
Yankee Bonds........... 15,352,261 (4.0%) 21,020,607 (1.5%)
------------ --------------
Total Bonds............ 359,861,943 (93.9%) 534,187,361 (36.9%)
------------ --------------
SHORT-TERM OBLIGATIONS
Commercial Paper....... $ 125,797,417 (7.9%) $ 17,393,000 (4.5%) $25,926,227 (62.3%) $ 82,989,000 (5.7%)
Corporate Note......... 3,998,775 (9.6%)
Federal Agency
Obligations........... 11,675,628 (28.0%)
-------------- ------------ ----------- --------------
Total Short-Term
Obligations........... 125,797,417 (7.9%) 17,393,000 (4.5%) 41,600,630 (99.9%) 82,989,000 (5.7%)
-------------- ------------ ----------- --------------
TOTAL INVESTMENTS....... 1,593,897,472 (99.8%) 377,254,943 (98.4%) 41,600,630 (99.9%) 1,437,319,196 (99.2%)
Other Assets Less
Liabilities........... 3,831,003 (0.2%) 6,139,895 (1.6%) 36,001 (0.1%) 11,521,971 (0.8%)
-------------- ------------ ----------- --------------
NET ASSETS.............. $1,597,728,475 (100.0%) $383,394,838 (100.0%) $41,636,631 (100.0%) $1,448,841,167 (100.0%)
============== ============ =========== ==============
</TABLE>
8
<PAGE>
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
5. SUMMARY OF INVESTMENTS AS OF DECEMBER 31, 1996 METROPOLITAN SERIES FUND,
INC.--(CONTINUED)
<TABLE>
<CAPTION>
INTERNATIONAL
STOCK
PORTFOLIO
-------------
VALUE
(NOTE 1A)
<S> <C> <C>
COMMON STOCK
Automotive.............................................. $ 12,042,055 (4.0%)
Banking................................................. 28,537,013 (9.4%)
Broadcasting............................................ 1,583,340 (0.5%)
Business Services....................................... 1,353,994 (0.5%)
Chemicals............................................... 15,831,034 (5.2%)
Construction Materials.................................. 4,410,671 (1.5%)
Consumer Non-Durables................................... 1,078,633 (0.4%)
Drugs & Health Care..................................... 13,669,733 (4.5%)
Electrical Equipment.................................... 4,851,913 (1.6%)
Electronics............................................. 33,670,645 (11.1%)
Financial Services...................................... 16,109,145 (5.3%)
Food & Beverages........................................ 4,475,477 (1.5%)
Forest Products & Paper................................. 1,650,874 (0.6%)
General Business........................................ 81,167 (0.0%)
Homebuilders............................................ 2,312,664 (0.8%)
Household Products...................................... 1,626,631 (0.5%)
Insurance............................................... 12,269,901 (4.0%)
Investment Companies.................................... 2,234,375 (0.7%)
Leisure................................................. 2,828,608 (0.9%)
Machinery............................................... 5,079,733 (1.7%)
Metals--Gold............................................ 59,942 (0.0%)
Metals--Non-Ferrous..................................... 4,051,349 (1.3%)
Metals--Steel & Iron.................................... 6,796,496 (2.2%)
Miscellaneous........................................... 5,656,864 (1.9%)
Multi-Industry.......................................... 14,979,104 (4.9%)
Oil & Gas Exploration................................... 6,073,231 (2.0%)
Oil--International...................................... 15,038,125 (4.9%)
Printing & Publishing................................... 3,890,524 (1.3%)
Real Estate............................................. 15,753,267 (5.2%)
Retail Trade............................................ 8,007,127 (2.6%)
Textiles & Apparel...................................... 2,385,456 (0.8%)
Toys & Amusements....................................... 976,600 (0.3%)
Transportation.......................................... 1,745,426 (0.6%)
Utilities--Electric..................................... 4,565,840 (1.5%)
Utilities--Gas Distribution & Pipelines................. 3,750,981 (1.2%)
Utilities--Miscellaneous................................ 3,130,194 (1.0%)
Utilities--Telephone.................................... 7,711,745 (2.5%)
------------
Total Common Stock...................................... 270,269,877 (88.9%)
PREFERRED STOCK
Retail Trade............................................ 518,032 (0.2%)
------------
Total Equity Securities................................. 270,787,909 (89.1%)
TOTAL LONG-TERM DEBT SECURITIES--CONVERTIBLE BONDS....... 19,499,259 (6.4%)
------------
TOTAL INVESTMENTS........................................ 290,287,168 (95.5%)
Other Assets Less Liabilities........................... 13,538,315 (4.5%)
------------
NET ASSETS............................................... $303,825,483 (100.0%)
============
</TABLE>
9
<PAGE>
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
5. SUMMARY OF INVESTMENTS AS OF DECEMBER 31, 1996 METROPOLITAN SERIES FUND,
INC.--(CONTINUED)
<TABLE>
<CAPTION>
STOCK
INDEX
PORTFOLIO
---------
VALUE
(NOTE 1A)
<S> <C> <C>
COMMON STOCK
Aerospace.............................................. $ 28,736,048 (2.6%)
Automotive............................................. 28,701,626 (2.6%)
Banking................................................ 93,714,830 (8.4%)
Broadcasting........................................... 11,450,367 (1.0%)
Building & Construction................................ 7,528,376 (0.7%)
Business Services...................................... 14,455,324 (1.3%)
Chemicals.............................................. 34,500,400 (3.1%)
Containers & Glass..................................... 1,693,750 (0.2%)
Cosmetics.............................................. 3,360,350 (0.3%)
Drugs & Health Care.................................... 72,616,988 (6.5%)
Electrical Equipment................................... 48,407,363 (4.3%)
Electronics............................................ 63,125,007 (5.6%)
Financial Services..................................... 35,084,926 (3.1%)
Food & Beverages....................................... 68,548,136 (6.1%)
Forest Products & Paper................................ 16,456,307 (1.5%)
Hospital Management.................................... 10,165,689 (0.9%)
Hospital Supply........................................ 30,587,031 (2.7%)
Hotel & Restaurant..................................... 10,602,137 (0.9%)
Household Appliances & Home Furnishings................ 1,995,625 (0.2%)
Household Products..................................... 34,569,100 (3.1%)
Insurance.............................................. 38,990,773 (3.5%)
Leisure................................................ 9,888,705 (0.9%)
Liquor................................................. 2,526,500 (0.2%)
Machinery.............................................. 14,790,412 (1.3%)
Metals--Aluminum....................................... 4,013,638 (0.4%)
Metals--Gold........................................... 5,642,260 (0.5%)
Metals--Non-Ferrous.................................... 2,738,985 (0.2%)
Metals--Steel & Iron................................... 1,839,738 (0.2%)
Mining................................................. 2,180,087 (0.2%)
Miscellaneous.......................................... 3,178,900 (0.3%)
Multi-Industry......................................... 9,577,826 (0.9%)
Newspapers............................................. 6,143,637 (0.5%)
Office & Business Equipment............................ 48,538,755 (4.3%)
Oil & Gas Exploration.................................. 2,800,313 (0.2%)
Oil--Domestic.......................................... 21,819,438 (1.9%)
Oil--International..................................... 65,066,563 (5.8%)
Oil--Services.......................................... 11,558,751 (1.0%)
Photography............................................ 5,953,875 (0.5%)
Printing & Publishing.................................. 3,554,968 (0.3%)
Retail Grocery......................................... 5,887,863 (0.5%)
Retail Trade........................................... 42,490,678 (3.8%)
Software............................................... 30,829,784 (2.7%)
Textiles & Apparel..................................... 6,880,088 (0.6%)
Tires & Rubber......................................... 3,116,200 (0.3%)
Tobacco................................................ 21,138,225 (1.9%)
Toys & Amusements...................................... 2,450,273 (0.2%)
Transportation--Airlines............................... 4,475,875 (0.4%)
Transportation--Railroad............................... 11,508,961 (1.0%)
Transportation--Trucking............................... 1,006,875 (0.1%)
Utilities--Electric.................................... 27,914,283 (2.5%)
Utilities--Gas Distribution & Pipelines................ 14,503,806 (1.3%)
Utilities--Telephone................................... 72,606,227 (6.5%)
--------------
Total Common Stock..................................... 1,121,912,642 (100.0%)
PREFERRED STOCK
Hospital Supply........................................ 1,774 (0.0%)
--------------
Total Equity Securities................................ 1,121,914,416 (100.0%)
TOTAL SHORT-TERM OBLIGATIONS--U.S. TREASURY BILLS....... 6,119,501 (0.5%)
--------------
TOTAL INVESTMENTS....................................... 1,128,033,917 (100.5%)
Other Assets Less Liabilities.......................... (5,736,583) (-0.5%)
--------------
NET ASSETS.............................................. $1,122,297,334 (100.0%)
==============
</TABLE>
10
<PAGE>
NOTES TO FINANCIAL STATEMENTS--(CONCLUDED)
5. SUMMARY OF INVESTMENTS AS OF DECEMBER 31, 1996 METROPOLITAN SERIES FUND,
INC.--(CONCLUDED)
<TABLE>
<CAPTION>
AGGRESSIVE
GROWTH
PORTFOLIO
----------
VALUE
(NOTE 1A)
<S> <C> <C>
COMMON STOCK
Automotive............................................. $ 8,300,475 (0.6%)
Banking................................................ 52,161,093 (4.0%)
Broadcasting........................................... 1,911,644 (0.1%)
Business Services...................................... 111,731,275 (8.5%)
Chemicals.............................................. 8,035,150 (0.6%)
Drugs & Health Care.................................... 40,531,901 (3.1%)
Electronics............................................ 159,063,920 (12.0%)
Finance................................................ 1,903,687 (0.1%)
Financial Services..................................... 36,782,250 (2.8%)
Food & Beverages....................................... 8,800,137 (0.7%)
Hospital Supply........................................ 24,680,369 (1.9%)
Hotel & Restaurant..................................... 147,865,328 (11.2%)
Insurance.............................................. 24,104,063 (1.8%)
Leisure................................................ 22,011,718 (1.7%)
Machinery.............................................. 5,305,125 (0.4%)
Office & Business Equipment............................ 46,756,744 (3.5%)
Oil.................................................... 1,795,219 (0.1%)
Oil & Gas Exploration.................................. 22,009,875 (1.7%)
Oil--Services.......................................... 115,561,562 (8.7%)
Personal Care.......................................... 2,647,288 (0.2%)
Printing & Publishing.................................. 7,947,212 (0.6%)
Retail Trade........................................... 116,932,900 (8.9%)
Software............................................... 110,257,289 (8.3%)
Textiles & Apparel..................................... 38,388,025 (2.9%)
Tobacco................................................ 1,785,938 (0.1%)
Transportation--Airlines............................... 19,139,375 (1.4%)
Utilities--Miscellaneous............................... 7,936,000 (0.6%)
Utilities--Telephone................................... 19,502,387 (1.5%)
--------------
Total Common Stock..................................... 1,163,847,949 (88.0%)
PREFERRED STOCK
Printing & Publishing.................................. 3,590,300 (0.3%)
--------------
Total Equity Securities................................ 1,167,438,249 (88.3%)
TOTAL LONG-TERM DEBT SECURITIES--CONVERTIBLE BONDS...... 2,312,500 (0.2%)
TOTAL SHORT-TERM OBLIGATIONS--COMMERCIAL PAPER.......... 142,773,021 (10.8%)
--------------
TOTAL INVESTMENTS....................................... 1,312,523,770 (99.3%)
Other Assets Less Liabilities.......................... 9,325,594 (0.7%)
--------------
NET ASSETS.............................................. $1,321,849,364 (100.0%)
==============
</TABLE>
11
<PAGE>
Annual Financial Statements
of
Metropolitan Tower Life Insurance Company
December 31, 1996
<PAGE>
INDEPENDENT AUDITORS' REPORT
Metropolitan Tower Life Insurance Company:
We have audited the accompanying balance sheets of Metropolitan Tower Life
Insurance Company (the "Company") as of December 31, 1996 and 1995 and the
related statements of earnings, equity and cash flows for each of the three
years in the period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company at December 31, 1996 and 1995
and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 1996 in conformity with generally
accepted accounting principles.
As discussed in Notes 1 and 9 to the financial statements, the Company has
retroactively adopted applicable generally accepted accounting principles
relating to life insurance subsidiaries of mutual life insurance companies and
has changed, as of December 31, 1994, the method of accounting for fixed
maturity investments.
DELOITTE & TOUCHE LLP
New York, New York
April 4, 1997
MTL-1
<PAGE>
METROPOLITAN TOWER LIFE INSURANCE COMPANY
BALANCE SHEETS, DECEMBER 31, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
NOTES 1996 1995
----- -------- --------
<S> <C> <C> <C>
ASSETS
Investments:
Fixed Maturities: 2,8
Available for Sale, at Estimated Fair Value.......... $ 52,322 $ 54,861
Held to Maturity, at Amortized Cost.................. 816 942
Policy Loans.......................................... 8 13,466 11,540
-------- --------
Total Investments.................................. 66,604 67,343
Cash and Cash Equivalents.............................. 2,8 11,863 4,844
Deferred Policy Acquisition Costs...................... 53,017 52,142
Accrued Investment Income.............................. 1,288 1,216
Other Receivables...................................... 133 58
Other Assets........................................... 351 312
Separate Account Assets................................ 118,207 104,141
-------- --------
Total Assets....................................... $251,463 $230,056
======== ========
LIABILITIES AND EQUITY
LIABILITIES
Policyholder Account Balances.......................... $ 37,169 $ 35,477
Future Policy Benefits................................. 1,358 1,273
Other Policyholder Liabilities......................... 721 978
Unearned revenues...................................... 12,730 12,779
Federal Income Taxes Payable: 4
Current............................................... 3,625 565
Deferred.............................................. 12,660 13,135
Other Liabilities...................................... 945 2,006
Separate Account Liabilities........................... 118,207 104,141
-------- --------
Total Liabilities.................................. 187,415 170,354
-------- --------
Contingencies (Note 7)
EQUITY
Common Stock........................................... 2,000 2,000
Paid in Capital........................................ 52,500 52,500
Retained Earnings...................................... 8,460 3,720
Net Unrealized Investment Gains........................ 3 1,088 1,482
-------- --------
Total Equity....................................... 9 64,048 59,702
-------- --------
Total Liabilities and Equity....................... $251,463 $230,056
======== ========
</TABLE>
See accompanying notes to financial statements.
The New York State Insurance Department (the "Department") recognizes only
statutory accounting practices for determining and reporting the financial
condition and results of operations of an insurance company for determining
solvency under the New York Insurance Law. No consideration is given by the
Department to financial statements prepared in accordance with generally
accepted accounting principles in making such determination.
MTL-2
<PAGE>
METROPOLITAN TOWER LIFE INSURANCE COMPANY
STATEMENTS OF EARNINGS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
NOTES 1996 1995 1994
----- ------- ------- -------
<S> <C> <C> <C> <C>
REVENUES
Universal Life and Investment-Type Product Pol-
icy Fee Income................................ $12,787 $13,579 $14,406
Net Investment Income.......................... 3 5,158 4,332 3,171
Investment Gains (Losses), Net................. 3 67 (120) (578)
------- ------- -------
Total Revenues................................. 18,012 17,791 16,999
------- ------- -------
BENEFITS AND OTHER DEDUCTIONS
Policyholder Benefits.......................... 4,587 7,420 6,633
Interest Credited to Policyholder Account Bal-
ances......................................... 1,660 1,684 1,343
Other Operating Costs and Expenses............. 4,409 5,350 7,899
------- ------- -------
Total Benefits and Other Deductions............ 10,656 14,454 15,875
------- ------- -------
Earnings before Federal Income Taxes........... 7,356 3,337 1,124
Federal Income Taxes........................... 4 2,616 1,169 393
------- ------- -------
Net Earnings................................... 9 $ 4,740 $ 2,168 $ 731
======= ======= =======
</TABLE>
See accompanying notes to financial statements.
MTL-3
<PAGE>
METROPOLITAN TOWER LIFE INSURANCE COMPANY
STATEMENTS OF EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996 ,1995 AND 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
NOTES 1996 1995 1994
----- ------- ------- -------
<S> <C> <C> <C> <C>
COMMON STOCK--BEGINNING AND END OF YEAR....... $ 2,000 $ 2,000 $ 2,000
------- ------- -------
PAID IN CAPITAL--BEGINNING AND END OF YEAR.... 52,500 52,500 52,500
------- ------- -------
RETAINED EARNINGS, BEGINNING OF YEAR.......... 3,720 1,552 821
Net Earnings.................................. 4,740 2,168 731
------- ------- -------
RETAINED EARNINGS, END OF YEAR................ 8,460 3,720 1,552
------- ------- -------
NET UNREALIZED INVESTMENT GAINS (LOSSES), BE-
GINNING OF YEAR.............................. 1,482 (900) --
Cumulative Effect of Accounting Change........ 1 -- -- (900)
Change in Unrealized Investment (Losses)
Gains........................................ (394) 2,382 --
------- ------- -------
NET UNREALIZED INVESTMENT GAINS (LOSSES), END
OF YEAR...................................... 1,088 1,482 (900)
------- ------- -------
TOTAL EQUITY, END OF YEAR..................... 9 $64,048 $59,702 $55,152
======= ======= =======
</TABLE>
See accompanying notes to financial statements.
MTL-4
<PAGE>
METROPOLITAN TOWER LIFE INSURANCE COMPANY
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
NET EARNINGS.................................... $ 4,740 $ 2,168 $ 731
Adjustments to Reconcile Net Earnings to Net
Cash Provided (Used) by Operating Activities:
Change in Deferred Policy Acquisition Costs,
Net.......................................... 125 270 2,211
Change in Accrued Investment Income........... (72) (133) (29)
Change in Other Receivables................... (75) 7 244
Investment (Gains) Losses..................... (67) 120 578
Interest Credited to Policyholder Account
Balances..................................... 1,660 1,684 1,343
Universal Life and Investment-Type Product
Policy Fee Income............................ (3,163) (3,448) (3,681)
Change in Future Policy Benefits.............. 85 (136) 769
Change in Other Policyholder Liabilities...... (257) 595 (2,648)
Change in Unearned Revenues................... (49) (89) (572)
Change in Federal Income Taxes Payable........ 2,798 (1,556) (102)
Other, Net.................................... (1,353) 585 (207)
-------- -------- --------
NET CASH PROVIDED (USED) BY OPERATING
ACTIVITIES..................................... 4,372 67 (1,363)
-------- -------- --------
Cash Flows from Investing Activities:
Sales, Maturities and Repayments of Fixed
Maturities................................... 4,392 16,729 11,198
Purchases of Fixed Maturities................. (3,014) (24,314) (12,812)
Net Change in Policy Loans.................... (1,926) (1,611) (1,568)
-------- -------- --------
NET CASH USED BY INVESTING ACTIVITIES........... (548) (9,196) (3,182)
-------- -------- --------
Cash Flows from Financing Activities:
Policyholder Account Balances
Deposits..................................... 19,333 17,429 18,923
Withdrawals.................................. (16,138) (13,342) (13,643)
-------- -------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES....... 3,195 4,087 5,280
-------- -------- --------
Change in Cash and Cash Equivalents............. 7,019 (5,042) 735
Cash and Cash Equivalents, Beginning of Year.... 4,844 9,886 9,151
-------- -------- --------
CASH AND CASH EQUIVALENTS, END OF YEAR.......... $ 11,863 $ 4,844 $ 9,886
======== ======== ========
Supplemental Cash Flow Information:
Income Taxes (Refunded) Paid.................. $ (180) $ 2,725 $ 497
======== ======== ========
</TABLE>
See accompanying notes to financial statements.
MTL-5
<PAGE>
METROPOLITAN TOWER LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
Metropolitan Tower Life Insurance Company (the "Company") is a wholly-owned
subsidiary of Metropolitan Life Insurance Company ("Metropolitan Life"). The
Company is domiciled in Delaware and is chartered to sell life insurance and
annuities. The Company's current business is individual variable life
insurance.
BASIS OF PRESENTATION
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles ("GAAP"). State insurance departments
generally recognize only statutory accounting practices for determining and
reporting the financial condition and results of operations of an insurance
company for determining solvency under insurance laws.
Prior to 1996, the Company, as a subsidiary of a mutual life insurance
company, prepared its financial statements in conformity with accounting
practices prescribed or permitted by the Insurance Department of the State of
Delaware ("Department") (statutory financial statements), which accounting
practices were considered to be GAAP for a mutual life insurance company and
its life insurance subsidiaries. In 1996, the Company adopted Interpretation
No. 40, Applicability of Generally Accepted Accounting Principles to Mutual
Life Insurance and Other Enterprises (the "Interpretation") and Statement of
Financial Accounting Standards ("SFAS") No. 120, Accounting and Reporting by
Mutual Life Insurance Enterprises and by Insurance Enterprises for Certain Long
Duration Participating Policies (the "Standard"), of the Financial Accounting
Standards Board ("FASB"). The Interpretation and the Standard required mutual
life insurance companies and their life insurance subsidiaries to adopt all
standards promulgated by the FASB in their general purpose financial
statements. The financial statements of the Company for 1995 and 1994 have been
retroactively restated to reflect the adoption of applicable authoritative GAAP
pronouncements. The effect of such adoption, except for SFAS No. 115,
Accounting for Certain Investments in Debt and Equity Securities, has been
reflected in equity at January 1, 1994 (see Note 9).
As of December 31, 1994, the Company adopted SFAS No. 115 which expanded the
use of fair value accounting for those securities that a company does not have
positive intent and ability to hold to maturity. Implementation of SFAS No. 115
decreased equity at December 31, 1994, by $900,000, net of deferred income
taxes and an adjustment of deferred policy acquisition costs.
VALUATION OF INVESTMENTS
Fixed maturity securities for which the Company has the positive intent and
ability to hold to maturity are stated principally at amortized cost. All other
fixed maturity securities are classified as available for sale and are reported
at estimated fair market value. Unrealized investment gains and losses on fixed
maturity securities available for sale are reported as a separate component of
equity. Such amounts are net of related deferred income taxes and adjustments
of deferred policy acquisition costs. Costs of fixed maturity securities are
adjusted for impairments in value deemed to be other than temporary. All
security transactions are recorded on a trade date basis.
Policy loans are stated at unpaid principal balances.
INVESTMENT RESULTS
Realized investment gains and losses are determined by specific
identification and are presented as a component of revenues.
MTL-6
<PAGE>
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
RECOGNITION OF INCOME AND EXPENSES
Premiums from universal life contracts are reported as deposits to
policyholder account balances. Revenues from these contracts consist of amounts
assessed during the period against policyholder account balances for mortality,
policy administration and surrender charges. Policy benefits and claims that
are charged to expenses include benefit claims incurred in the period in excess
of related policyholder account balances and interest credited to policyholder
account balances.
DEFERRED POLICY ACQUISITION COSTS
The costs of acquiring new business, principally commissions, agency and
policy issue expenses, all of which vary with and are primarily related to the
production of new business, have been deferred. Deferred policy acquisition
costs are subject to recoverability testing at the time of policy issue and
loss recognition testing at the end of each accounting period.
Deferred policy acquisition costs are amortized over 30 years for universal
life contracts as a constant percentage of estimated gross profits arising
principally from surrender charges and interest, mortality and expense margins
based on historical and anticipated future experience, updated regularly. The
effects of revisions to experience on previous amortization of deferred policy
acquisition costs are reflected in earnings in the period estimated gross
profits are revised.
Changes in deferred policy acquisition costs are included in other operating
costs and expenses in the accompanying statements of earnings. Acquisition
costs of $116,000, $132,000 and $171,000 were capitalized in 1996, 1995 and
1994, respectively, and amortization of deferred acquisition costs was
$241,000, $402,000 and $2,382,000 in 1996, 1995 and 1994, respectively.
POLICYHOLDER ACCOUNT BALANCES
Policyholder account balances for universal life contracts are equal to the
policy account values. The policy account values represent an accumulation of
gross premium payments plus credited interest less expense and mortality
charges and withdrawals.
UNEARNED REVENUES
Unrearned revenues represent the unearned portion of front-end loads or
initiation charges that are assessed in the first policy year. The unearned
revenue is amortized over 30 years as a constant percentage of estimated gross
profits based on historical and projected experience. The effects of revisions
to estimated gross profits are adjusted by a charge or credit to the statement
of earnings in the period when such estimates are revised.
INCOME TAXES
The Company joins with Metropolitan Life and its includable affiliates in
filing a consolidated Federal income tax return. The future tax consequences of
temporary differences between financial reporting and tax basis of assets and
liabilities are measured as of the balance sheet dates and are recorded as
deferred tax assets or liabilities.
SEPARATE ACCOUNT OPERATIONS
Separate Accounts are established in conformity with the state insurance laws
and are generally not chargeable with liabilities that arise from any other
business of the Company. Separate Account assets are subject to general account
claims only to the extent the value of such assets exceeds the Separate Account
liabilities.
MTL-7
<PAGE>
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Investments held in the Separate Accounts (stated at estimated fair market
value) and liabilities of the Separate Accounts (including participants'
corresponding equity in the Separate Accounts) are reported separately as
assets and liabilities. Deposits to Separate Accounts are reported as increases
in Separate Account liabilities and are not reported in revenues. Mortality,
policy administration and surrender charges to all Separate Accounts are
included in revenues.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents includes cash on hand, amounts due from banks and
highly liquid debt instruments purchased with an original maturity of three
months or less.
ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
2. INVESTMENTS
FIXED MATURITIES
Amortized cost, gross unrealized gain and loss and estimated fair value of
fixed maturities, by category, as of December 31, 1996 and 1995, are shown
below.
AVAILABLE FOR SALE SECURITIES
(IN THOUSANDS)
<TABLE>
<CAPTION>
GROSS UNREALIZED
AMORTIZED ------------------ESTIMATED
COST GAIN LOSS FAIR VALUE
--------- --------- ------------------
<S> <C> <C> <C> <C>
1996
Fixed Maturities--Bonds:
U. S. Treasury securities and
obligations of U. S. government
corporations and agencies............. $ 7,505 $ 105 $ -- $ 7,610
Corporate.............................. 26,120 668 24 26,764
Mortgage-backed securities............. 15,056 909 18 15,947
Other.................................. 1,968 33 -- 2,001
------- --------- ------- -------
Total Fixed Maturities................ $50,649 $ 1,715 $ 42 $52,322
======= ========= ======= =======
1995
Fixed Maturities--Bonds:
U. S. Treasury securities and
obligations of U. S. government
corporations and agencies............. $ 8,314 $ 264 $ 2 $ 8,576
Corporate.............................. 26,182 1,433 24 27,591
Mortgage-backed securities............. 15,138 1,480 10 16,608
Other.................................. 1,947 139 -- 2,086
------- --------- ------- -------
Total Fixed Maturities................ $51,581 $ 3,316 $ 36 $54,861
======= ========= ======= =======
</TABLE>
MTL-8
<PAGE>
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
HELD TO MATURITY SECURITIES
(IN THOUSANDS)
<TABLE>
<CAPTION>
GROSS UNREALIZED
AMORTIZED ----------------- ESTIMATED
COST GAIN LOSS FAIR VALUE
--------- -------- -------- ----------
<S> <C> <C> <C> <C>
1996
Fixed Maturities--Corporate Bonds:....... $816 $ 39 $ -- $ 855
==== ======== ======== ======
1995
Fixed Maturities--Corporate Bonds:....... $942 $ 124 $ -- $1,066
==== ======== ======== ======
</TABLE>
Bonds classified as held to maturity at December 31, 1996 are due within five
to ten years.
The amortized cost and estimated fair value of bonds classified as available
for sale, by contractual maturity, at December 31, 1996 are shown below.
<TABLE>
<CAPTION>
AMORTIZED ESTIMATED
COST FAIR VALUE
--------- ----------
(IN THOUSANDS)
<S> <C> <C>
Due in one year or less................................. $11,993 $11,983
Due after one year through five years................... 11,366 11,555
Due after five years through 10 years................... 11,236 11,774
Due after 10 years...................................... 998 1,063
------- -------
Subtotal.............................................. 35,593 36,375
Mortgage-backed securities.............................. 15,056 15,947
------- -------
Total................................................. $50,649 $52,322
======= =======
</TABLE>
Bonds not due at a single maturity date have been included in the above table
in the year of final maturity. Expected maturities may differ from contractual
maturities because borrowers may have the right to call or prepay obligations
with or without prepayment penalties
CASH AND CASH EQUIVALENTS
As of December 31, 1996 and 1995, the Company had $11.7 million and $4.8
million, respectively, invested in Metropolitan Money Market Pool (the "pool").
The pool is a New York general partnership consisting of the Company and other
wholly-owned subsidiaries of Metropolitan Life. The pool was formed as a
private pass-through investment vehicle to enable the partners to invest, on a
pooled basis, in U.S. Treasury securities and high quality corporate money
market instruments. Although for economic and administrative convenience the
pooled securities are held in the name of the pool, each member's investment
represents that company's pro rata undivided ownership interest in each of the
pooled securities.
ASSETS ON DEPOSIT
As of December 31, 1996 and 1995, the Company had assets on deposit with
regulatory agencies of $2,898,850 and $3,026,500, respectively.
MTL-9
<PAGE>
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
3. INVESTMENT INCOME AND INVESTMENT GAINS (LOSSES)
The sources of investment income are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Fixed maturities..................................... $3,857 $3,230 $2,148
Policy loans......................................... 968 798 688
Cash and cash equivalents............................ 406 418 412
------ ------ ------
Gross investment income.............................. 5,231 4,446 3,248
Investment expenses.................................. (73) (114) (77)
------ ------ ------
Investment income, net............................... $5,158 $4,332 $3,171
====== ====== ======
</TABLE>
Proceeds from the sales of bonds classified as available for sale during
1996, 1995 and 1994 were $2,072,940, $16,081,578 and $10,304,667, respectively.
During 1996, 1995 and 1994, respectively, gross gains (losses) of $67,381,
$(120,459) and $(578,323) were realized on those sales.
Proceeds from the sales of bonds classified as held to maturity during 1996
were $124,998 and no gains or losses were incurred on such sales. Such sales
were due to prepayment and callable features on privately placed bonds. There
were no sales of held to maturity bonds in 1995 or 1994.
The unrealized investment gains (losses), which are included in the balance
sheets and statements of equity as a component of equity, and the changes for
the corresponding years are summarized as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance, end of year, comprised of:
Unrealized investment gains (losses) on fixed ma-
turities......................................... $ 1,673 $ 3,280 $(1,200)
Amounts of unrealized investment gains (losses) at-
tributable to:
Deferred policy acquisition cost allowances....... -- (1,000) (183)
Deferred income tax (expense) benefit............. (585) (798) 483
------- ------- -------
Balance, end of year................................ $ 1,088 $ 1,482 $ (900)
======= ======= =======
Balance, beginning of year.......................... $ 1,482 $ (900) $ --
Change in unrealized investment gains (losses).... (1,607) 4,480 --
Unrealized loss at date of adoption of SFAS No.
115.............................................. -- -- (1,200)
Change in unrealized investment gains (losses) at-
tributable to:
Deferred policy acquisition cost allowances..... 1,000 (817) (183)
Deferred income tax benefit (expense)........... 213 (1,281) 483
------- ------- -------
Balance, end of year................................ $ 1,088 $ 1,482 $ (900)
======= ======= =======
</TABLE>
4. FEDERAL INCOME TAXES
Federal income tax expense has been calculated in accordance with the
provisions of the Internal Revenue Code, as amended (the "Code").
The Company joins with Metropolitan Life and its includable affiliates in
filing a consolidated Federal income tax return. The consolidating companies
have executed a tax allocation agreement. Under this agreement the Federal
income tax provision is computed on a separate return basis and members receive
reimbursement to the extent their losses and other credits result in a
reduction of the consolidated tax liability.
MTL-10
<PAGE>
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The Company uses the liability method of accounting for Federal income taxes.
Deferred Federal income taxes arise from the recognition of temporary
differences between income determined for financial reporting purposes and
income tax purposes.
A summary of Federal income tax expense (benefit) in the statements of
earnings is shown below.
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Current.............................................. $2,880 $1,434 $1,287
Deferred............................................. (264) (265) (894)
------ ------ ------
Total.............................................. $2,616 $1,169 $ 393
====== ====== ======
</TABLE>
The provision for Federal income taxes approximates amounts computed by
multiplying income before Federal income taxes by the statutory rate of 35
percent.
The deferred income tax asset or liability recorded represents the net
temporary differences between the tax bases of assets and liabilities and their
amounts for financial reporting. The components of the net Federal deferred
income tax asset or liability are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1996 1995
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Deferred income tax assets:
Policyholder liabilities.............................. $ 4,075 $ 4,082
Other................................................. 211 --
-------- --------
Total assets........................................ 4,286 4,082
-------- --------
Deferred income tax liabilities:
Investments........................................... 18 2
Deferred policy acquisition costs..................... 16,343 16,417
Net unrealized investment gains....................... 585 798
-------- --------
Total liabilities................................... 16,946 17,217
-------- --------
Net deferred Federal income tax liability............... $(12,660) $(13,135)
======== ========
</TABLE>
The sources of the deferred Federal income taxes and their tax effects are as
follows:
<TABLE>
<CAPTION>
1996 1995 1994
----- ----- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Policyholder liabilities............................. $ 7 $ 71 $ 288
Investments.......................................... 16 (1) --
Deferred policy acquisition costs.................... (75) (335) (1,182)
Other, net........................................... (212) -- --
----- ----- -------
Total.............................................. $(264) $(265) $ (894)
===== ===== =======
</TABLE>
5. RELATED PARTIES
Metropolitan Life employees provide management, administrative, investment
and policyholder service functions for the Company. Metropolitan Life
establishes guidelines for reasonable determination of costs of services
provided, based on time spent or use of services, and charges its subsidiaries
for services rendered. The charges for such services to the Company were
$3,592,488, $4,156,135 and $3,927,443 million during 1996, 1995 and 1994,
respectively.
MTL-11
<PAGE>
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
6. DIVIDEND RESTRICTIONS
Under Delaware Insurance Law, the maximum amount of distributions which can
be made to the Company's parent in any given year, without prior approval by
the Insurance Commissioner, is equal to the greater of 10 percent of the
Company's surplus as of the last calendar year, or the net gain from operations
for the last calendar year. The Company did not pay dividends in 1996, 1995 and
1994.
7. CONTINGENCIES
It is the opinion of management that any litigation, claims or assessments
against the Company that have arisen in the course of the Company's business,
in addition to those that might otherwise be provided for in the financial
statements, are not likely to have a material adverse effect on the Company's
financial position or the results of its operations.
8. FAIR VALUE INFORMATION
The estimated fair value amounts of financial instruments presented below
have been determined by the Company using market information available as of
December 31, 1996 and 1995, and appropriate valuation methodologies. However,
considerable judgment is necessarily required to interpret market data to
develop the estimates of fair value for financial instruments for which there
are no available market value quotations.
The estimates presented below are not necessarily indicative of the amounts
the Company could have realized in a market exchange. The use of different
market assumptions and/or estimation methodologies may have a material effect
on the estimated fair value amounts.
<TABLE>
<CAPTION>
CARRYING ESTIMATED
DECEMBER 31, 1996: VALUE FAIR VALUE
------------------ -------- ----------
(IN THOUSANDS)
<S> <C> <C>
Assets
Fixed maturities....................................... $53,138 53,177
Policy loans........................................... 13,466 16,269
Cash and cash equivalents.............................. 11,863 11,863
<CAPTION>
DECEMBER 31, 1995:
------------------
<S> <C> <C>
Assets
Fixed maturities....................................... $55,803 $55,927
Policy loans........................................... 11,540 11,540
Cash and cash equivalents.............................. 4,844 4,844
</TABLE>
For bonds that are publicly traded, estimated fair value was obtained from an
independent market pricing service. Publicly traded bonds represented
approximately 98 percent of the carrying value and estimated fair value of the
total bonds as of December 31, 1996 and 1995. For all other bonds, estimated
fair value was determined by management, based primarily on interest rates,
maturity, credit quality and average life. Estimated fair values of policy
loans were based on discounted projected cash flows using U.S. Treasury rates
to approximate interest rates and Company experience to project patterns of
loan accrual and repayment. For cash and cash equivalents, the carrying amount
is a reasonable estimate of fair value.
MTL-12
<PAGE>
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
9. STATUTORY FINANCIAL INFORMATION
The Interpretation and Standard referred to in Note 1 required mutual life
insurance companies and their life insurance subsidiaries to adopt all
standards promulgated by the FASB in their general purpose financial
statements. The effect of all adjustments of initially applying the
Interpretation and Standard is as follows (in thousands):
<TABLE>
<S> <C>
DECEMBER 31, 1993, statutory capital and surplus................... $ 24,469
Future policy benefits and policyholder account balances......... 1,887
Unearned revenue................................................. (13,440)
Deferred policy acquisition costs................................ 55,623
Statutory asset valuation reserve................................ 208
Deferred Federal income taxes.................................... (13,496)
Other............................................................ 70
--------
January 1, 1994, equity............................................ $ 55,321
========
</TABLE>
The following reconciles net change in statutory capital and surplus and
statutory capital and surplus determined in accordance with accounting
practices prescribed or permitted by insurance regulatory authorities with net
earnings and equity on a GAAP basis.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1996 1995 1994
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Net change in statutory capital and surplus...... $ 4,341 $ 2,147 $ 1,775
Future policy benefits and policyholders account
balances....................................... 183 (27) 316
Deferred policy acquisition costs............... (125) (270) (2,211)
Deferred Federal income taxes................... 264 265 894
Statutory asset valuation reserves.............. 57 58 24
Other, net...................................... 20 (5) (67)
------- ------- -------
Net Earnings..................................... $ 4,740 $ 2,168 $ 731
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1996 1995
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Statutory capital and surplus $ 32,733 $ 28,392
Future policy benefits and policyholders account bal-
ances................................................. 2,082 1,512
Unearned revenue....................................... (12,730) (12,779)
Deferred policy acquisition costs...................... 53,017 52,142
Deferred Federal income taxes.......................... (12,660) (13,135)
Valuation of investments............................... 1,673 3,280
Statutory asset valuation reserves..................... 347 290
Other, net............................................. (414) --
-------- --------
Equity.................................................. $ 64,048 $ 59,702
======== ========
</TABLE>
MTL-13
<PAGE>
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