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Money Market Fund Sweep Shares Prospectus
November 24, 1998
The Money Market Fund Sweep Shares (the "Sweep Shares") are a separate class of
the Money Market Fund (the "Fund"), which is a separate series of MainStay
Institutional Funds Inc. (the "Company"). The Fund seeks to provide a high level
of current income while preserving capital and maintaining liquidity.
READ THIS!
THIS FUND IS NOT FEDERALLY INSURED OR GUARANTEED BY THE U.S. GOVERNMENT. The
Sweep Shares are not deposits or obligations of, or guaranteed or insured by,
any financial institution, the Federal Deposit Insurance Corporation, the
Federal Reserve Board, or any other government agency. INVESTMENTS IN THE FUND
ARE SUBJECT TO INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL (SEE
"DESCRIPTION OF INVESTMENTS AND INVESTMENT PRACTICES" ON PAGE 12).
NO GUARANTEES. There can be no assurance that the investment objective of the
Fund will be achieved. All mutual funds involve risk, including the potential to
lose some or all of your original investment. FURTHERMORE, ALTHOUGH THE FUND
ATTEMPTS TO MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE, THERE CAN BE
NO ASSURANCE THAT IT WILL SUCCEED IN DOING SO.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Please read this Prospectus carefully before you invest, and keep it for
future reference. It includes information you should know before investing. We
hope you will easily find and understand the information you need. For more
details, write to NYLIFE Distributors Inc., 300 Interpace Parkway, Parsippany,
NJ 07054 or call 1-800-695-2126 for a free copy of the Statement of Additional
Information (SAI) dated November 24, 1998 (as amended from time to time). The
SAI is incorporated by reference into this Prospectus and also has been filed
with the Securities and Exchange Commission (SEC). The SEC maintains a website
(http://www.sec.gov) that contains the SAI, material incorporated by reference
and other information regarding registrants that file electronically with the
SEC.
TELL ME THE KEY FACTS
Analyze the Costs of Investing: Ongoing
Fees...........................................................................2
If You Invest $1,000 You Might Pay.............................................2
Description of the Fund........................................................4
General Investment Considerations..............................................5
Open an Account and Buy Shares...............................................6-7
Know How to Sell Shares........................................................7
Your Earnings..................................................................8
Understand the Tax Consequences................................................8
Know Who You're Investing With..............................................9-10
Know Your Rights as a Shareholder.............................................11
TELL ME THE DETAILS
The Company...................................................................12
Description of Investments and Investment Practices...........................12
Manager and Sub-Adviser.......................................................14
Portfolio Transactions........................................................15
Other Information.............................................................16
Appendix A: Description of Short-Term Securities Ratings......................16
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TELL ME THE KEY FACTS
Analyze the Costs of Investing: Ongoing Fees
To help you understand the costs of investing in the Fund, we've provided
expense information based on estimated expenses for the Sweep Shares for the
current fiscal year. You should only use these figures as estimates of what you
might actually pay.
ONGOING FEES
The Fund pays ongoing operating fees to the manager, custodian, shareholder
service agents and other professionals who provide services to the Fund. These
fees are billed to the Fund and are then factored into the share price. They're
not billed to you separately; but they do reduce the Fund's total assets. (See
pg. 14, "Manager and Sub-Adviser" for further details.)
EXPENSES HAVE BEEN CAPPED
The Fund's manager has voluntarily agreed to limit the Fund's total expenses.
This expense limitation has the effect of lowering the Fund's total operating
expenses and increasing its earnings. (See pg. 15, "Voluntary Expense
Limitation," for more on the limitation for the Fund.)
The manager may end or change the voluntary expense limitation at any time. If
this occurs, the Fund's expenses may increase and its earnings may be reduced,
depending on its total assets. (See pg. 15, "Voluntary Expense Limitation," for
more on the limitation for the Fund.)
ACCOUNT REPRESENTATIVES
Account representatives may impose other conditions on buying and selling
shares. They may also charge you additional fees. They are responsible for
giving you a schedule of fees and information about any conditions they've
added. Ask your account representative about these fees and conditions.
WHY READ ABOUT COSTS?
Costs are important since they may lower your earnings. For example, a fund
with higher costs must perform better just to equal the return of a fund with
lower costs. All things being equal, therefore, a lower-cost fund will begin
with an advantage. Lower fees alone, however, will not guarantee better total
return performance.
If You Invest $1,000 You Might Pay . . .
The "Example" on the following page is provided to help you understand the
various costs and expenses that an investor in the Sweep Shares will bear
directly or indirectly.
The example on page 3 is based on a hypothetical 5% annual return on an
investment of $1,000, redemption at the end of each period and reinvestment of
all your dividends and distributions. The pie chart illustrates the expenses
that would be paid by a shareholder for shares held for a period of five years
with the same assumptions.
THE ACTUAL RETURN ON YOUR INVESTMENT, OF COURSE, MAY BE MORE OR LESS THAN 5%;
AND THE ACTUAL EXPENSES MAY ALSO BE MORE OR LESS THAN THOSE SHOWN DEPENDING ON A
VARIETY OF FACTORS, INCLUDING THE PERFORMANCE OF THE FUND. THE FIGURES IN THE
FOLLOWING CHART, THEREFORE, DO NOT NECESSARILY REPRESENT HOW YOUR INVESTMENT
WILL PERFORM. THEY ARE STRICTLY HYPOTHETICAL EXAMPLES.
TAKE NOTE:
We have also assumed that total Fund operating expenses remain the same each
year, and that the voluntary expense limitation would apply for all periods.
Without the limitation, your expenses would generally be higher. The Fund's
manager may end or revise these limitations at any time.
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Operating Expenses Example
SWEEP SHARES
<TABLE>
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES None
ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE DAILY
NET ASSETS)
Management Fees* (after fee waivers) .39%
Distribution (Rule 12b-1) Fees .25
Shareholder Service Fees .25
Other Expenses+ .11
----
Total Fund Operating Expenses* (after
fee waivers) 1.00%
====
</TABLE>
<TABLE>
<S> <C>
After 1 year $ 10
After 3 years $ 32
After 5 years $ 55(a)
After 10 years $ 122
</TABLE>
IF YOU INVEST $1,000 TODAY, 5 YEARS FROM NOW YOU WOULD HAVE PAID:
[PIE CHART]
$22 management fees
14 Rule 12b-1 fees
14 shareholder service fees
5 other expenses
---------------------------------
$55 total fund operating expenses
+"Other Expenses" is based on estimated amounts for the current fiscal year.
*MainStay Management, Inc., as the Fund's manager, has voluntarily agreed to
waive a portion of the fees otherwise payable to it under the terms of the
Fund's Management Agreement (up to the amount of such fees) to the extent
necessary to limit the total operating expenses for the Sweep Shares to the
amount shown above. These expenses are described under "Tell Me The
Details--Manager and Sub-Adviser." Absent the voluntary fee waiver, estimated
total Fund operating expenses for the Sweep Shares would be 1.11%. Absent the
voluntary fee waiver, Fund management fees would be 0.50%.
(a) If the voluntary fee waiver were not applied, the expenses for each period
would generally be higher. For example, the expenses for the Fund for the
five-year period would be $61.
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Manager: MainStay
Money Market Fund Management, Inc.
The Fund's objective is: Sub-Adviser: New York
Life Insurance Company
to seek to provide a high level of current income
while preserving capital and maintaining liquidity.
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INVESTMENTS IN THE FUND ARE NEITHER INSURED NOR
GUARANTEED BY THE U.S. GOVERNMENT. ALTHOUGH THE FUND
ATTEMPTS TO MAINTAIN A STABLE NET ASSET VALUE (NAV) OF
$1 PER SHARE, THERE CAN BE NO ASSURANCE THAT IT WILL
SUCCEED IN DOING SO.
The Fund invests in:
...HIGH QUALITY, SHORT-TERM SECURITIES
(that mature within 397 days) denominated
in U.S. dollars, including obligations
issued or guaranteed by the U.S.
Government or any of its agencies or
instrumentalities, foreign securities,
certificates of deposit, time deposits,
bankers' acceptances, commercial paper,
repurchase agreements, reverse repurchase
agreements, loan participation interests
and corporate bonds.
...UP TO 5% OF TOTAL ASSETS in the
securities of one issuer (this doesn't
apply to U.S. Government securities and
related repurchase agreements and
securities subject to certain puts)
except, up to 25% of total assets may be
invested in securities of a single issuer
for up to 3 days if they're rated in the
highest category ("First Tier") by at
least two major rating agencies.
...UP TO 1% OF TOTAL ASSETS (or $1
million, whichever is greater at the time
of purchase) in securities of any one
issuer rated in the top two categories by
at least two major rating agencies
("Second Tier"); or, if unrated,
determined to be of comparable quality by
the sub-adviser.
...UP TO 5% OF TOTAL ASSETS in securities
that were "Second Tier" when acquired.
...UNRATED SECURITIES determined to be of
comparable quality to rated securities.
The Fund may borrow money for temporary
or emergency purposes, purchase
securities on a when-issued basis, and
enter into firm or standby commitments to
purchase securities.
The Fund generally cannot invest in
securities with remaining maturities
longer than 397 days (13 months). In
addition, the weighted average portfolio
maturity may not exceed 90 days. (See the
SAI for a more detailed explanation.)
RISKS? Any investment the Fund makes must present minimal credit risk
in the opinion of the sub-adviser. If rated, a security must be rated within
the two highest rating categories for short-term debt securities by at least
two major rating agencies (or by one major agency, if only that agency has
rated the security or issuer).
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General Investment Considerations
SOME IMPORTANT POINTS TO UNDERSTAND ABOUT INVESTING IN THE FUND.
INVESTMENT OBJECTIVE:
There cannot be any assurance that the Fund will achieve its investment
objective. The investment objective of the Fund is fundamental, which means it
can't be changed without shareholder approval. Other investment policies may,
however, be changed by the Board of Directors. Unless an investment policy or
restriction is defined or described as "fundamental", it may be changed
without shareholder approval.
THE FUND MAY:
- - borrow up to 15% of total assets;
- - lend its securities to brokers, dealers and other financial institutions to
earn income;
- - buy securities on a when-issued, firm, or standby commitment basis. The market
value of these securities may change prior to their delivery to the Fund;
- - invest in high quality commercial paper;
- - invest in repurchase agreements, and enter into reverse repurchase agreements,
which can create leverage and increase the Fund's investment risk; and
- - invest in loan participation interests which involve certain risks, including
credit and liquidity risks. (See pg. 13, "Loan Participation Interests" for
further details.)
INVESTMENTS IN ILLIQUID AND RESTRICTED SECURITIES
The Fund has a nonfundamental policy that it will not invest more than 10% of
its net assets in "illiquid" securities. These are securities subject to legal
or contractual restrictions on resale (other than restricted securities eligible
for resale pursuant to Rule 144A or Section 4(l) under the Securities Act of
1933 ("1933 Act") determined to be liquid pursuant to procedures established by
the Board of Directors), repurchase agreements maturing in more than seven days,
certain options traded over the counter or other securities which legally or in
the opinion of the sub-adviser are deemed illiquid.
There may be undesirable delays and added costs in selling restricted
securities.
FEATURES OF DEBT SECURITIES
The Fund invests primarily in debt securities. Debt securities may have fixed,
variable or floating rates of interest.
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Open an Account . . .
WHO SHOULD READ THIS SECTION
If you are participating in an account sweep arrangement with a financial
institution, that institution will provide you with the information you need
to open an account and buy Sweep Shares.
WHO MAY BUY SWEEP SHARES
You are eligible to buy Sweep Shares if you are a customer of a financial
institution that has made arrangements with NYLIFE Distributors, Inc. for the
purchase of Sweep Shares.
HOW TO OPEN AN ACCOUNT
You should speak to your account representative at your financial institution to
open an account in the Fund in conjunction with your brokerage account.
A financial institution will establish a single omnibus account with the Fund's
transfer agent on behalf of its clients. You should read this prospectus along
with the financial institution's agreement or literature describing its services
(including sweep arrangements with the Fund) and fees charged by the financial
institution. (See the SAI for more information on the purchase and redemption of
Sweep Shares.)
. . . and Buy Shares
MINIMUM AMOUNT FOR INVESTMENT
The minimum required investment by a financial institution is:
- - Initial combined investment--at least $250,000, which may be spread over a
thirteen-month period after opening the account.
- - Each investment after that--at least $1,000.
Please check with your account representative for investment minimums and/or
other requirements that may apply to brokerage or other accounts through which
you own Sweep Shares.
For your convenience and to save money, certificates for shares will usually
not be issued.
NOT ON HOLIDAYS
No wires are accepted on days when the New York Stock Exchange is closed or on
Martin Luther King Day, Columbus Day or Veterans Day, because the bank that
would receive your wire is closed.
6
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BUY SHARES
Shares (and fractions of shares) are purchased at market price (known as the net
asset value or NAV) on any day the New York Stock Exchange is open. Your price
per share, generally $1.00, will be the next NAV that is set after the order is
received from your financial institution in proper form.
The NAV -- the price of a share that is used for buying and selling -- is
determined once each day at noon, Eastern time. It is intended that the Fund
will maintain a stable NAV of $1.00.
The Fund's NAV is calculated by using the amortized cost method of valuation.
(See the SAI for the full details on calculating NAV.)
Know How to Sell Shares
Check with your account representative for information on how your Sweep Shares
may be redeemed (sold).
Generally, if your financial institution offers an automatic sweep arrangement,
the sweep will automatically transfer from your Fund account sufficient amounts
to cover security purchases in your brokerage account.
The price of each share will be the next NAV determined after receipt of a
redemption request. The Fund imposes no charge for selling your shares. You
should check with your account representative to determine if your financial
institution imposes a charge for selling shares.
7
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Your Earnings
TWO KINDS OF EARNINGS
DIVIDENDS AND INTEREST
Most funds earn either dividends from stocks, interest from bonds and other
securities, or both. A money market fund generally earns interest from its
investments. A mutual fund, however, always pays this income to you as
"dividends."
WHEN THE FUND PAYS
The Fund declares dividends daily and pays them monthly.
The Sweep Shares begin earning dividends the business day the transfer agent
receives an order by noon and payment through the Federal Funds wire system by
4:00 p.m., Eastern time.
CAPITAL GAINS
The Fund will distribute all, or almost all, of its net capital gains at least
once a year.
REINVESTMENT OF EARNINGS
Your earnings will automatically be reinvested in Sweep Shares.
Understand the Tax Consequences
The Fund intends to be treated as a regulated investment company under
subchapter M of the Internal Revenue Code. As a regulated investment company, it
is required to distribute at least 90% of its:
- - net taxable income;
- - net short-term capital gains; and
- - net tax-exempt income.
"Net" means the amount remaining after tax deductible expenses (expenses reduce
"gross" earnings); in other words, the amount the Fund can pay to you.
YOUR DIVIDENDS AND CAPITAL GAINS MAY BE TAXABLE
If you are a tax-exempt shareholder, you won't pay Federal income tax on
distributions unless applicable tax laws say otherwise. If you're not
tax-exempt, you will have to pay taxes on dividends whether you receive them in
cash or reinvest them in more shares. Redemptions also may be taxable.
Dividends, other than from capital gains, are ordinary income. Capital gain
distributions are taxable as long-term capital gain, except to the extent
provided by an applicable tax exemption. Some distributions may be a return of
capital or, in some cases, capital gain. You will be advised each year about the
amount and nature of dividends paid to you.
The Fund may pay dividends in January that were declared in December of the
previous year. If you're not tax-exempt, you will be taxed on these dividends as
if you had been paid on December 31 of the previous year.
DON'T FORGET . . .
This page only tells you about Federal income tax. Other tax laws may be
different. For additional information about the tax aspects of investing,
please see the SAI. Consult your tax adviser on any additional questions you
may have about the tax aspects of investing.
8
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Know Who You're Investing With
WHO WORKS TO PROTECT YOUR INTERESTS?
THE BOARD OF DIRECTORS oversees the Fund. The Directors have financial or other
relevant experience and meet several times during the year to review contracts,
Fund activities and the quality of services provided to the Fund. Other than
serving as Directors, most of the Board members have no affiliation with the
Company or its service providers. Information relating to the Directors and
officers appears under the heading "Management of the Company" in the SAI.
WHO RUNS THE FUND'S DAY-TO-DAY BUSINESS?
MainStay Management, Inc., 300 Interpace Parkway, Parsippany, NJ 07054, serves
as manager for the Fund, handling its business affairs, subject to the
supervision of the Company's Directors. MainStay Management, Inc. is a
corporation organized under the laws of the State of Delaware and is an indirect
wholly owned subsidiary of New York Life Insurance Company. The manager, among
other things, furnishes the Fund with office facilities and with ordinary
clerical, bookkeeping and recordkeeping services. The manager has delegated its
portfolio management responsibilities to the sub-adviser.
The manager pays the salaries and expenses of all personnel affiliated with the
Fund and all the operational expenses that are not the responsibility of the
Fund, including the fees that are paid to the sub-adviser. For its services, the
Fund pays the manager a monthly fee. (See pg. 14, "Manager and Sub-Adviser," and
the SAI for more details.)
WHO MANAGES YOUR MONEY?
New York Life Insurance Company, 51 Madison Avenue, New York, New York 10010,
serves as the Fund's sub-adviser. Under the supervision of the Company's
Directors and in accordance with the Fund's investment objective and investment
policies, the sub-adviser is responsible for making the specific decisions about
buying, selling and holding securities; selecting brokers and brokerage firms to
trade for them; maintaining accurate records; and, if possible, negotiating
favorable commissions and fees with the brokers and brokerage firms.
New York Life Insurance Company is a mutual life insurance company organized
under the laws of the State of New York. Authorized to conduct business as a
life insurance company since 1845, it offers a complete line of life insurance
policies and annuity contracts, as well as financial and retirement contracts.
As of September 30, 1998, New York Life had total assets of approximately $88
billion and managed approximately $23 billion in assets for qualified retirement
plans. (See pg. 15, "Manager and Sub-Adviser"--"The Sub-Adviser" for an
explanation of the fees paid to the sub-adviser by the manager.)
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WHO DISTRIBUTES THE FUND?
NYLIFE Distributors Inc.
300 Interpace Parkway
Parsippany, NJ 07054
NYLIFE DISTRIBUTORS INC. is a corporation organized under New York laws and is
an indirect wholly owned subsidiary of New York Life Insurance Company. NYLIFE
Distributors acts as the principal underwriter and distributor of the Fund's
shares. They pay the costs of printing and mailing prospectuses and sales
literature to potential investors and any advertising expenses connected with
distributing Fund shares.
New York Life Insurance Company, NYLIFE Distributors or MainStay Management,
Inc. may pay, out of its own resources, additional compensation to third parties
who provide services or through broker-dealer subsidiaries to certain agents or
employees who sell shares of the Fund. As compensation for account sweep and
other distribution-related services, the Fund pays a monthly fee to NYLIFE
Distributors, NYLIFE Securities or other financial institutions. (See pg. 15,
"Manager and Sub-Adviser--Distribution and Shareholder Services Plans")
WHO PROVIDES CUSTOMER SERVICE AND
MAINTAINS FINANCIAL RECORDS?
MAINSTAY SHAREHOLDER SERVICES INC. (MSS) is the Fund's Transfer, Dividend
Disbursing and Shareholder Servicing Agent. MSS, whose address is 260 Cherry
Hill Road, Parsippany, NJ 07054, is an indirect wholly owned subsidiary of New
York Life Insurance Company. MSS provides customer service, is responsible for
preparing and sending statements, confirms and checks, and keeps certain
financial and accounting records. MSS has entered into an agreement with Boston
Financial Data Services (BFDS), whose address is 2 Heritage Drive, North Quincy,
MA 02171. BFDS will perform certain of the services for which MSS is
responsible. In addition, the Fund may contract with other service
organizations, including broker-dealers and other financial institutions, which
will establish a single omnibus account for their clients with the Fund. The
service organizations will provide shareholder services to the shareholders
within the omnibus accounts and receive fees for those services from the Fund.
THE BANK OF NEW YORK (BONY) is custodian of the Fund's investments and has
subcustodial agreements for holding the Fund's foreign investments. BONY is at
90 Washington Street, New York, NY 10286.
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Know Your Rights as a Shareholder
YOU HAVE THE RIGHT TO ASK ANY QUESTIONS.
If you have a question about the Fund, you should:
- - call 1-800-695-2126 (between 8:30 a.m. and 5:00 p.m. Eastern time), or
- - write to:
MAINSTAY INSTITUTIONAL FUNDS INC.
260 CHERRY HILL ROAD
PARSIPPANY, NJ 07054
If you have a question about your account, you should call your account
representative.
THE RIGHT TO RECEIVE INFORMATION ABOUT YOUR INVESTMENT
You will receive periodic statements covering the Fund, including the number and
value of shares owned, dividends declared or paid and other information from
your financial institution.
PERIODIC STATEMENTS
The transactions that were made with the Fund on your behalf will be reflected
on the periodic statements that you receive from your financial institution.
FINANCIAL REPORTS
You will receive an annual financial statement for the Fund, audited by the
Fund's independent accountants. You will also receive a semiannual statement
which is unaudited.
Each financial report shows:
- - the investments owned by the Fund,
- - the market value of each investment, and
- - other financial information.
TAKE NOTE:
Keep your statements. You may need them for tax reporting purposes.
Be alert: mistakes can happen. Always review your statements immediately.
THE RIGHT TO HAVE ONE SHARE, ONE VOTE
Every share issued by the Fund carries equal ownership rights. By owning shares
on your behalf, your financial institution is entitled to vote on certain issues
and policies regarding the Fund or class of shares. There is one vote per share.
You have a right to approve any changes in fundamental investment restrictions
or objectives of the Fund, and you have the right to approve the adoption of any
new management agreement, sub-advisory agreement or plan of distribution.
THE RIGHT TO ATTEND MEETINGS
Although the Company doesn't intend to hold annual shareholder meetings, NYLIFE
Securities, or another financial institution, as shareholder, has the right to
call a meeting of shareholders for the purpose of voting on removing a Director
for cause. Removing a Director requires the approval of a majority of the
outstanding shares of the Company. Generally, shareholder meetings are only held
when the Directors recommend an action which requires shareholder approval.
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TELL ME THE DETAILS
THE COMPANY
The Company is registered with the SEC as an open-end management investment
company under the Investment Company Act of 1940, as amended (the "1940 Act").
Registration involves no supervision of management of the Company by the SEC.
The Company currently has eleven Funds. Each Fund has a different investment
objective which it pursues through separate investment policies. The Company was
incorporated under the laws of the State of Maryland on September 21, 1990.
The Fund is a diversified investment company under the 1940 Act.
The Company also offers Institutional Class and Institutional Service Class
shares, which have different expenses that may affect performances. You may
obtain free copies of the prospectuses which contain more information about the
Institutional Class and the Institutional Service Class shares of the Fund by
calling NYLIFE Distributors at 1-800-695-2126.
The Board of Directors may, at its discretion, classify and allocate shares to
additional Funds or classify and allocate additional shares to the existing
Funds without further action by the shareholders.
As of September 1, 1998, New York Life Trust Company and the Northern Trust
Company as Trustee for Baker Hughes Thrift Plan own a controlling interest (as
that term is defined under the 1940 Act) of the Fund.
DESCRIPTION OF INVESTMENTS AND
INVESTMENT PRACTICES
Investment restrictions that appear below or elsewhere in this Prospectus that
involve a maximum percentage of securities or assets shall not be considered to
be violated unless an excess over the percentage occurs immediately after, and
is caused by, an acquisition or encumbrance of securities or assets of, or
borrowings by or on behalf of the Fund. For more information about the Fund's
investments, investment practices and investment restrictions, including those
described in this section, please see the SAI.
BANKING INDUSTRY OBLIGATIONS
The Fund may invest in certificates of deposit, time deposits, bankers'
acceptances, and other short-term debt obligations issued by commercial banks.
BORROWING
The Fund may borrow from a bank up to a limit of 15% of its total assets, but
only for temporary or emergency purposes. Money borrowed will be subject to
interest costs (which may include commitment fees and/or the cost of maintaining
minimum average balances). The Fund will repay any money borrowed from a bank in
excess of 5% of its total assets prior to purchasing additional securities.
CORPORATE DEBT SECURITIES
The Fund's investments in U.S. dollar denominated corporate debt securities of
domestic or foreign issuers are limited to corporate debt securities (corporate
bonds, debentures, notes, commercial paper and other similar corporate debt
instruments) which meet the credit quality and maturity criteria of the Fund.
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FIRM AND STANDBY COMMITMENT
AGREEMENTS AND WHEN-ISSUED SECURITIES
New issues of certain debt securities are often offered on a when-issued basis.
That is, the payment obligation and the interest rate are fixed at the time the
buyer enters into the commitment, but delivery and payment for the securities
normally take place after the date of the commitment to purchase. Firm and
standby commitment agreements call for the purchase of securities at an
agreed-upon price on a specified future date.
The transactions are entered into in order to secure what is considered to be an
advantageous price and yield to the Fund and not for purposes of leveraging the
Fund's assets. However, the Fund will not accrue any income on these securities
prior to delivery. There is a risk that a party with whom the Fund has entered
into such transactions will not perform its commitment, which could result in a
gain or loss to the Fund.
FLOATERS
The Fund may invest in floating rate debt instruments ("floaters"). The interest
rate on a floater is a variable rate which is tied to another interest rate. To
be an eligible investment for the Fund, there must be a reasonable expectation
that, at any time until the final maturity of the floater or the period
remaining until the principal amount can be recovered through demand, the market
value of a floater will approximate its amortized cost.
GOVERNMENT SECURITIES
Government securities are obligations of, or guaranteed by, the U.S. government
or its agencies or instrumentalities.
LENDING OF PORTFOLIO SECURITIES
The Fund may lend its investment securities to brokers, dealers and financial
institutions for the purpose of realizing additional income in accordance with
guidelines adopted by the Board of Directors. The total market value of
securities loaned will not at any time exceed 33% of the total assets of the
Fund. The risks in lending portfolio securities, as with other extensions of
credit, consist of possible loss of rights in the collateral should the borrower
fail financially. In determining whether to lend securities, the Fund's
sub-adviser will consider all relevant facts and circumstances, including the
creditworthiness of the borrower.
LOAN PARTICIPATION INTERESTS
The Fund may invest in participation interests in loans. Such participation
interests, which may take the form of interests in or assignments of loans, are
acquired from banks which have made loans or are members of lending syndicates.
The Fund's investments in loan participation interests will be subject to its
limitation on investments in illiquid securities.
In a typical corporate loan syndication, a number of institutional lenders lend
a corporate borrower a specified sum pursuant to the terms and conditions of a
loan agreement. One of the co-lenders usually agrees to act as the agent bank
with respect to the loan. The loan agreement among the corporate borrower and
the co-lenders identifies the agent bank as well as sets forth the rights and
duties of the parties. The agreement often (but not always) provides for the
collateralization of the corporate borrower's obligations thereunder and
includes various types of restrictive covenants which must be met by the
borrower.
The principal credit risk associated with acquiring participation interests from
a co-lender or another participant is the credit risk associated with the
underlying corporate borrower. The Fund may incur additional credit risk,
however, when it is in the position of participant rather than co-lender because
the Fund must assume the risk of insolvency of the co-lender from
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<PAGE> 14
which the participation interest was acquired and that of any person
interpositioned between the Fund and the co-lender.
MORTGAGE-BACKED AND
ASSET-BACKED SECURITIES
Mortgage-backed and asset-backed securities are securities which derive their
value from underlying pools of loans. The Fund may only invest in
mortgage-backed and asset-backed securities that meet the requirements of Rule
2a-7 under the 1940 Act.
REPURCHASE AGREEMENTS AND
REVERSE REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements, which entail the purchase of a
portfolio eligible security from a bank or broker-dealer that agrees to
repurchase the security at the Fund's cost plus interest within a specified time
(normally one day).
The Fund may enter into reverse repurchase agreements with banks or
broker-dealers, which involves the sale of a security by the Fund and its
agreement to repurchase the instrument at a specified time and price. The Fund
will maintain a segregated account consisting of liquid assets to cover its
obligations under reverse repurchase agreements. The Fund will limit its
investments in reverse repurchase agreements and other borrowing to no more than
one-third of its total assets. The use of reverse repurchase agreements by the
Fund creates leverage which increases the Fund's investment risk. If the income
and gains on securities purchased with the proceeds of reverse repurchase
agreements exceed the cost of the agreements, the Fund's earnings will increase
faster than otherwise would be the case; conversely, if the income and gains
fail to exceed the costs, earnings would decline faster than otherwise would be
the case.
The Directors have reviewed and approved certain sellers who they believe to be
creditworthy and have authorized the Fund to enter into repurchase agreements
with such sellers. If the other party to a repurchase agreement were to become
bankrupt, the Fund could experience delays in recovering its investment or
losses.
RESTRICTED SECURITIES
To the extent that it invests in restricted securities, the Fund may be exposed
to additional risks. "Restricted" securities are those securities which have not
been registered under the 1933 Act. Because they are unregistered, only a
limited number of investors are qualified to invest in such securities. The
smaller market may create undesirable delays in selling restricted securities.
Attempting to dispose of restricted securities may incur additional transaction
costs in finding a buyer or, in an extreme case, the cost of registering the
security.
MANAGER AND SUB-ADVISER
THE MANAGER
MainStay Management, Inc. serves as the Fund's manager pursuant to a Management
Agreement dated November 21, 1997 between MainStay Management, Inc. and the
Company. The manager may consult with or utilize the services of its affiliated
companies to assist the manager in carrying out its responsibilities to the
Company.
14
<PAGE> 15
In connection with its administration of the business affairs of the Fund, the
manager bears the following expenses:
1. the salaries and expenses of all personnel of the Company and the manager,
except the fees and expenses of Directors not affiliated with the manager or the
Fund's sub-adviser; and
2. all expenses incurred by the manager in connection with administering the
ordinary course of the Fund's business, other than those assumed by the Company.
As compensation for these services, the Fund has agreed to pay the manager a
monthly fee calculated on the basis of the Fund's average daily net assets
during the preceding month at an annual rate of 0.50%.
THE SUB-ADVISER
As compensation for services, the manager, not the Fund, pays the Fund's
sub-adviser a monthly fee calculated on the basis of the Fund's average daily
net assets during the preceding month at an annual rate of 0.10%.
DISTRIBUTION AND SHAREHOLDER
SERVICES PLANS
The Company has adopted a Plan of Distribution ("Distribution Plan") pursuant to
Rule 12b-1 under the 1940 Act with respect to the Sweep Shares. Under the terms
of the Distribution Plan, the Fund is authorized to pay to NYLIFE Distributors,
NYLIFE Securities, or any other broker-dealer or financial institution, as
compensation for certain account sweep and/or other distribution-related
services rendered to the Sweep Shares, a distribution fee at the rate of 0.25%
on an annualized basis of the average daily net assets of the Sweep Shares. The
Company has also adopted a Shareholder Services Plan with respect to the Sweep
Shares (the "Plan"). Under the terms of the Plan, the Fund is authorized to pay
to New York Life, as compensation for service activities rendered by New York
Life, its affiliates or independent third-party service providers, to the
shareholders of the Sweep Shares, a shareholder services fee at the rate of
0.25% on an annualized basis of the average daily net asset value of the Sweep
Shares.
The Fund may pay to service agents "service fees" as that term is defined in the
rules of the National Association of Securities Dealers, Inc. (the "NASD") for
services provided to shareholders of the Sweep Shares. These fees are for
personal services, including assistance in establishing and maintaining
shareholder accounts and assisting shareholders that have questions or other
needs relating to their accounts. (For a more complete description of the
Distribution Plan and the Plan and their terms, see the SAI.)
VOLUNTARY EXPENSE LIMITATION
The manager has voluntarily agreed to limit the total expenses (excluding
interest, taxes, brokerage commissions, litigation and indemnification expenses,
and other extraordinary expenses and any class-specific expenses) of the Sweep
Shares to an annual rate of 1.00% of average daily net assets. This expense
limitation may be amended or terminated at any time. As long as this temporary
expense limitation continues, it may lower the Fund's expenses and increase its
yield. If the voluntary expense limitation is terminated or changed, the Fund's
expenses may increase and its yield may be reduced, depending on the total
assets of the Fund.
PORTFOLIO TRANSACTIONS
Pursuant to the Fund's Sub-Advisory Agreement, the sub-adviser places orders for
the purchase and sale of portfolio investments for the Fund's accounts with
brokers or dealers selected by it in its discretion. In effecting purchases and
sales of portfolio securities for the account of the Fund, the Fund's
sub-adviser will seek the best price and execution of the
15
<PAGE> 16
Fund's orders. In doing so, the Fund may pay higher commission rates than the
lowest available when the Fund's sub-adviser believes it is reasonable to do so
in light of the value of the brokerage and research services provided by the
broker effecting the transaction. Consistent with the foregoing primary
consideration, the Rules of Fair Practice of the NASD and such other policies as
the Directors may determine, the Fund's sub-adviser may consider sales of shares
of the Fund as a factor in the selection of broker-dealers to execute the Fund's
portfolio transactions. NYLIFE Securities Inc. may act as a broker for the
Company in accordance with applicable regulation.
Some securities considered for investment by the Fund may also be appropriate
for other clients served by the Fund's sub-adviser. If a purchase or sale of
securities consistent with the investment policies of the Fund and one or more
of the clients served by the Fund's sub-adviser is considered at or about the
same time, transactions in such securities may be executed together and will, to
the extent practicable, be allocated among the Fund and clients in a manner
deemed equitable to the Fund and the clients by the Fund's sub-adviser. Although
there is no specified formula for allocating such transactions, the various
allocation methods used by the Fund's sub-adviser, and the results of such
allocations, are subject to periodic review by the Company's Directors.
OTHER INFORMATION
The services provided to the Fund by the manager, the sub-adviser and the Fund's
other service providers are dependent on those service providers' computer
systems. Many computer software and hardware systems in use today cannot
distinguish between the year 2000 and the year 1900 because of the way dates are
encoded and calculated (the "Year 2000 Issue"). The failure to make this
distinction could have a negative implication on handling securities trades,
pricing and account services. The manager, the sub-adviser and the Fund's other
service providers are taking steps that each believes are reasonably designed to
address the Year 2000 Issue with respect to the computer systems that they use.
The Fund has no reason to believe these steps will not be sufficient to avoid
any material adverse impact on the Fund, although there can be no assurances.
The costs or consequences of incomplete or untimely resolution of the Year 2000
Issue are unknown to the manager, the sub-adviser and the Fund's other service
providers at this time but could have a material adverse impact on the
operations of the Fund and the manager, the sub-adviser and the Fund's other
service providers.
APPENDIX A
DESCRIPTION OF SHORT-TERM
SECURITIES RATINGS
MOODY'S INVESTORS SERVICE, INC.
Moody's short-term debt ratings are opinions of the ability of issuers to repay
punctually senior debt obligations which have an original maturity not exceeding
one year, unless explicitly noted.
Moody's employs the following three designations, all judged to be investment
grade, to indicate the relative repayment ability of rated issuers:
PRIME-1: Issuers rated Prime-1 (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. PRIME-1 repayment
ability will often be evidenced by many of the following characteristics:
leading market positions in well-established industries; high rates of return on
funds employed; conservative capitalization structure with moderate reliance on
debt and ample asset protection; broad margins in earnings coverage of fixed
financial charges and high internal cash generation; and well-established access
to a
16
<PAGE> 17
range of financial markets and assured sources of alternate liquidity.
PRIME-2: Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
PRIME-3: Issuers rated Prime-3 (or supporting institutions) have an acceptable
ability for repayment of senior short-term obligations. The effect of industry
characteristics and market compositions may be more pronounced. Variability in
earnings and profitability may result in changes in the level of debt protection
measurements and may require relatively high financial leverage. Adequate
alternate liquidity is maintained.
NOT PRIME: Issuers rated Not Prime do not fall within any of the Prime rating
categories.
STANDARD & POOR'S
A-1: A short-term obligation rated "A-1" is rated in the highest category by
Standard & Poor's. The obligor's capacity to meet its financial commitment on
the obligation is strong. Within this category, certain obligations are
designated with a plus sign (+). This indicates that the obligor's capacity to
meet its financial commitment on these obligations is extremely strong.
A-2: A short-term obligation rated "A-2" is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than
obligations in higher rating categories. However, the obligor's capacity to meet
its financial commitment on the obligation is satisfactory.
A-3: A short-term obligation rated "A-3" exhibits adequate protection
parameters. However, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation.
B: A short-term obligation rated "B" is regarded as having significant
speculative characteristics. The obligor currently has the capacity to meet its
financial commitment on the obligation; however, it faces major ongoing
uncertainties which could lead to the obligor's inadequate capacity to meet its
financial commitment on the obligation.
C: A short-term obligation rated "C" is currently vulnerable to nonpayment and
is dependent upon favorable business, financial, and economic conditions for the
obligor to meet its financial commitment on the obligation.
D: A short-term obligation rated "D" is in payment default. The "D" rating
category is used when payments on an obligation are not made on the date due
even if the applicable grace period has not expired, unless Standard & Poor's
believes that such payments will be made during such grace period. The "D"
rating also will be used upon the filing of a bankruptcy petition or the taking
of a similar action if payments on an obligation are jeopardized.
17
<PAGE> 18
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<PAGE> 19
No dealer, salesperson or any other person has been authorized to give any
information or to make any representation other than those contained in this
Prospectus and in the related Statement of Additional Information, in connection
with the offer contained in this Prospectus, and, if given or made, such other
information or representations must not be relied upon as having been authorized
by the Company or the Distributor. This Prospectus and the related Statement of
Additional Information do not constitute an offer by the Company or by the
Distributor to sell or a solicitation of any offer to buy any of the securities
offered hereby in any jurisdiction to any person to whom it is unlawful to make
such offer in such jurisdiction.
<PAGE> 20
MONEY MARKET
FUND SWEEP
SHARES
Money Market Fund Sweep Shares ------------------------------------
Distributed by NYLIFE Distributors Inc., PROSPECTUS DATED
Member NASD NOVEMBER 24, 1998
300 Interpace Parkway, Building A
Parsippany, NJ 07054 This Cover is Not Part of the
Prospectus
13816-11/98
<PAGE> 21
MAINSTAY INSTITUTIONAL FUNDS INC.
MONEY MARKET FUND SWEEP SHARES
STATEMENT OF ADDITIONAL INFORMATION
DATE: NOVEMBER 24, 1998
MainStay Institutional Funds Inc. (the "Company") is an open-end
management investment company currently consisting of eleven separate investment
portfolios, one of which is the Money Market Fund (the "Fund"). This Statement
of Additional Information discusses the Money Market Fund Sweep Shares (the
"Sweep Shares"), a class of shares offered by the Fund.
This Statement of Additional Information supplements the information
contained in the Prospectus for the Sweep Shares dated November 24, 1998 (the
"Prospectus"), and should be read in conjunction with the Prospectus. The
Prospectus is available without charge by writing to MainStay Institutional
Funds Inc., P.O. Box 461, Parsippany, New Jersey 07054-0461, or by calling
1-800-695-2126. This Statement of Additional Information, although not in itself
a prospectus, is incorporated in its entirety by reference in and is made a part
of the Prospectus.
No dealer, salesman or any other person has been authorized to give any
information or to make any representations, other than those contained in this
Statement of Additional Information or in the Prospectus, in connection with the
offer contained herein, and, if given or made, such other information or
representations must not be relied upon as having been authorized by the Fund or
NYLife Distributors, Inc. (the "Distributor"). This Statement of Additional
Information and the Prospectus do not constitute an offer by the Company or by
the Distributor to sell or a solicitation of any offer to buy any of the
securities offered hereby in any jurisdiction to any person to whom it is
unlawful to make such offer in such jurisdiction.
<PAGE> 22
TABLE OF CONTENTS
<TABLE>
<S> <C>
INVESTMENT OBJECTIVE AND POLICIES......................................... 1
Borrowing............................................................ 4
Commercial Paper..................................................... 4
Repurchase Agreements and Reverse Repurchase
Agreements...................................................... 5
Government Securities................................................ 6
Lending of Portfolio Securities...................................... 6
Banking Industry and Savings and Loan Industry
Obligations..................................................... 7
Floating and Variable Rate Securities................................ 7
Foreign Securities................................................... 8
When-Issued and Firm or Standby Commitment Agreements................ 9
Mortgage-Related and Other Asset-Backed Securities................... 9
Loan Participation Interests......................................... 17
Zero Coupon Bonds.................................................... 19
INVESTMENT RESTRICTIONS................................................... 19
ADDITIONAL RESTRICTIONS................................................... 21
MANAGEMENT OF THE COMPANY................................................. 24
Directors and Officers............................................... 24
Compensation Table................................................... 27
Management Agreement................................................. 28
Sub-Advisory Agreement............................................... 29
Distributor.......................................................... 31
Service Fees......................................................... 31
Distribution Fees.................................................... 32
ADDITIONAL INFORMATION.................................................... 33
PURCHASES AND REDEMPTIONS................................................. 34
PORTFOLIO TRANSACTIONS AND BROKERAGE...................................... 35
NET ASSET VALUE........................................................... 37
TAX INFORMATION........................................................... 37
PERFORMANCE INFORMATION................................................... 41
OTHER INFORMATION......................................................... 43
Capitalization....................................................... 43
Beneficial Ownership of Shares....................................... 44
Code of Ethics....................................................... 44
Independent Accountants.............................................. 44
Legal Counsel........................................................ 44
Financial Statements................................................. 44
Registration Statement............................................... 45
</TABLE>
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<PAGE> 23
INVESTMENT OBJECTIVE AND POLICIES
The Prospectus discusses the investment objective of the Fund and the
policies to be employed to achieve that objective. This section contains
supplemental information concerning certain of the securities and other
instruments in which the Fund may invest, the investment policies and portfolio
strategies the Fund may utilize, and certain risks involved with those
investments, policies and strategies.
The Fund may invest its assets in U.S. dollar-denominated securities of
U.S. or foreign issuers and in securities of foreign branches of U.S. banks,
such as negotiable certificates of deposit (Eurodollars). Since the portfolio of
the Fund may contain such securities, an investment therein involves investment
risks that are different in some respects from an investment in a fund which
invests only in debt obligations of U.S. domestic issuers. Such risks may
include future political and economic developments, the possible imposition of
foreign withholding taxes on interest income payable on the securities held in
the portfolio, possible seizure or nationalization of foreign deposits, the
possible establishment of exchange controls or the adoption of other foreign
governmental restrictions which might adversely affect the payment of the
principal of and interest on securities in the portfolio.
All of the assets of the Fund generally will be invested in obligations
which mature in 397 days or less and substantially all of these investments will
be held to maturity; however, securities collateralizing repurchase agreements
may have maturities in excess of 397 days. The Fund will, to the extent
feasible, make portfolio investments primarily in anticipation of or in response
to changing economic and money market conditions and trends. The dollar-weighted
average maturity of the Fund's portfolio may not exceed 90 days. Consistent with
the provisions of Rule 2a-7 under the Investment Company Act of 1940 (the "1940
Act"), the Fund invests only in U.S. dollar-denominated money market instruments
that present minimal credit risk and, with respect to 95% of its total assets,
measured at the time of investment, that are of the highest quality. The Fund's
sub-adviser, New York Life Insurance Company (the "Sub-Adviser" or "New York
Life"), shall determine whether a security presents minimal credit risk under
procedures adopted by the Company's Board of Directors. A money market
instrument will be considered to be of the highest quality (1) if rated in the
highest rating category (i.e., Aaa or Prime-1 by Moody's, AAA or A-1 by S&P's)
by (i) any two nationally recognized statistical rating organizations ("NRSROs")
or, (ii) if rated by only one NRSRO, by that NRSRO; (2) if issued by an issuer
that has received a short-term rating from an NRSRO with respect to a class of
debt obligations that is comparable in priority and security, and that are rated
in the highest rating category by (i) any two NRSROs or, (ii) if rated by only
one NRSRO, by that NRSRO; (3) an
<PAGE> 24
unrated security that is of comparable quality to a security in the highest
rating category as determined by the Sub-Adviser; (4)(i) with respect to a
security that is subject to any features that entitle the holder, under certain
circumstances, to receive the approximate amortized cost of the underlying
security or securities plus accrued interest "Demand Feature" or obligations of
a person other than the issuer of the security, under certain circumstances, to
undertake to pay the principal amount of the underlying security plus interest
"Guarantee," the Guarantee has received a rating from an NRSRO or the Guarantee
is issued by a guarantor that has received a rating from an NRSRO with respect
to a class of debt obligations that is comparable in priority and security to
the Guarantee, with certain exceptions, and (ii) the issuer of the Demand
Feature or Guarantee, or another institution, has undertaken promptly to notify
the holder of the security in the event that the Demand Feature or Guarantee is
substituted with another Demand Feature or Guarantee; (5) if it is a security
issued by a money market fund registered with the Securities and Exchange
Commission ("SEC") under the 1940 Act; or (6) if it is a Government Security.
With respect to 5% of its total assets, measured at the time of investment, the
Fund may also invest in money market instruments that are in the second-highest
rating category for short-term debt obligations (i.e., rated Aa or Prime-2 by
Moody's or AA or A-2 by S&P).
The Fund may not invest more than 5% of its total assets, measured at
the time of investment, in securities of any one issuer that are of the highest
quality, except that the Fund may exceed this 5% limitation with respect to 25%
of its total assets for up to three business days after the purchase of
securities of any one issuer and except that this limitation shall not apply to
U.S. government securities or securities subject to certain Guarantees.
Immediately after the acquisition of any Demand Feature or Guarantee, the Fund,
with respect to 75% of its total assets, shall not have invested more than 10%
of its assets in securities issued by or subject to Demand Features or
Guarantees from the institution that issued the Demand Feature or Guarantee,
with certain exceptions. In addition, immediately after the acquisition of any
Demand Feature or Guarantee (or a security after giving effect to the Demand
Feature or Guarantee) that is not within the highest rating category by NRSROs,
the Fund shall not have invested more than 5% of its total assets in securities
issued by or subject to Demand Features or Guarantees from the institution that
issued the Demand Feature or Guarantee. The Fund may not invest more than the
greater of 1% of its total assets or one million dollars, measured at the time
of investment, in securities of any one issuer that are in the second-highest
rating category, except that this limitation shall not apply to U.S. government
securities or securities subject to certain Guarantees. In the event that an
instrument acquired by
- 2 -
<PAGE> 25
the Fund is downgraded or otherwise ceases to be of the quality that is eligible
for the Fund, the Sub-Adviser, under procedures approved by the Board, shall
promptly reassess whether such security presents minimal credit risk and shall
recommend to the Valuation Committee of the Board (the "Valuation Committee")
that the Fund take such action as it determines is in the best interest of the
Fund and its shareholders. The Valuation Committee, after consideration of the
recommendation of the Sub-Adviser and such other information as it deems
appropriate, shall cause the Fund to take such action as it deems appropriate,
and shall report promptly to the Board the action it has taken and the reasons
for such action.
Pursuant to the rule, the Fund uses the amortized cost method of
valuing its investments, which facilitates the maintenance of the Fund's per
share net asset value at $1.00. The amortized cost method, which is normally
used to value all of the Fund's portfolio securities, involves initially valuing
a security at its cost and thereafter amortizing to maturity any discount or
premium, regardless of the impact of fluctuating interest rates on the market
value of the instrument.
The Directors have also established procedures designed to stabilize,
to the extent reasonably possible, the Fund's price per share as computed for
the purpose of sales and redemptions at $1.00. Such procedures include review of
the Fund's portfolio by the Directors, at such intervals as they deem
appropriate, to determine whether the Fund's net asset value calculated by using
available market quotations or market equivalents (the determination of value by
reference to interest rate levels, quotations of comparable securities and other
factors) deviates from $1.00 per share based on amortized cost.
The extent of deviation between the Fund's net asset value based upon
available market quotations or market equivalents and $1.00 per share based on
amortized cost will be periodically examined by the Directors. If such deviation
exceeds 1/2 of 1%, the Directors will promptly consider what action, if any,
will be initiated. In the event the Directors determine that a deviation exists
which may result in material dilution or other unfair results to investors or
existing shareholders, they will take such corrective action as they regard to
be necessary and appropriate, including the sale of portfolio instruments prior
to maturity to realize capital gains or losses or to shorten average portfolio
maturity; withholding part or all of dividends or payment of distributions from
capital or capital gains; redemptions of shares in kind; or establishing a net
asset value per share by using available market quotations or equivalents. In
addition, in order to stabilize the net asset value per share at $1.00, the
Directors have the authority (1) to reduce or
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<PAGE> 26
increase the number of shares outstanding on a pro rata basis, and (2) to offset
each shareholder's pro rata portion of the deviation between the net asset value
per share and $1.00 from the shareholder's accrued dividend account or from
future dividends.
The Fund may hold cash for the purpose of stabilizing its net asset
value per share. Holdings of cash, on which no return is earned, would tend to
lower the yield on the Fund's shares.
The Fund may also, consistent with the provisions of the rule, invest
in securities with a face maturity of more than 397 days, provided that the
security is a variable or floating rate security that meets the guidelines of
Rule 2a-7 with respect to maturity.
BORROWING
The Fund may borrow from a bank up to a limit of 15% of its total
assets, but only for temporary or emergency purposes. This borrowing may be
unsecured. The 1940 Act requires the Fund to maintain continuous asset coverage
(that is, total assets including borrowings, less liabilities exclusive of
borrowings) of 300% of the amount borrowed. If the 300% asset coverage should
decline as a result of market fluctuations or other reasons, the Fund may be
required to sell some of its portfolio holdings within three days to reduce the
debt and restore the 300% asset coverage, even though it may be disadvantageous
from an investment standpoint to sell securities at that time and could cause
the Fund to be unable to meet certain requirements for qualification as a
regulated investment company for Federal tax purposes. To avoid the potential
leveraging effects of the Fund's borrowings, the Fund will repay any money
borrowed in excess of 5% of its total assets prior to purchasing additional
securities. Borrowing may exaggerate the effect on the Fund's net asset value of
any increase or decrease in the market value of the Fund's portfolio securities.
Money borrowed will be subject to interest costs which may or may not be
recovered by appreciation of the securities purchased. The Fund also may be
required to maintain minimum average balances in connection with such borrowing
or to pay a commitment or other fee to maintain a line of credit; either of
these requirements would increase the cost of borrowing over the stated interest
rate.
COMMERCIAL PAPER
The Fund may invest in commercial paper. The Fund will invest in
commercial paper only if rated at the time of investment Prime-1 by Moody's or
A-1 by S&P, or, if not rated by Moody's or S&P, if the Sub-Adviser determines
that the commercial
- 4 -
<PAGE> 27
paper is of comparable quality. Commercial paper represents short-term unsecured
promissory notes issued by banks or bank holding companies, corporations and
finance companies. (See "Appendix A - Description of Short-Term Securities
Ratings" in the Prospectus.)
REPURCHASE AGREEMENTS AND REVERSE REPURCHASE AGREEMENTS
The Fund may enter into domestic or foreign repurchase agreements with
certain sellers deemed to be creditworthy pursuant to guidelines adopted by the
Directors. A repurchase agreement, which provides a means for the Fund to earn
income on uninvested cash for periods as short as overnight, is an arrangement
under which the purchaser (i.e., the Fund) purchases securities (the
"Obligation") and the seller agrees, at the time of sale, to repurchase the
Obligation at a specified time and price. Repurchase agreements with foreign
banks may be available with respect to government securities of the particular
foreign jurisdiction. The custody of the Obligation will be maintained by the
Fund's Custodian. The repurchase price may be higher than the purchase price,
the difference being income to the Fund, or the purchase and repurchase prices
may be the same, with interest at a stated rate due to the Fund together with
the repurchase price upon repurchase. In either case, the income to the Fund is
unrelated to the interest rate on the Obligation subject to the repurchase
agreement.
In the event of the commencement of bankruptcy or insolvency
proceedings with respect to the seller of the Obligation before repurchase of
the Obligation under a repurchase agreement, the Fund may encounter delays and
incur costs before being able to sell the security. Delays may involve loss of
interest or decline in price of the Obligation. The Sub-Adviser seeks to
minimize the risk of loss from repurchase agreements by analyzing the
creditworthiness of the obligor, in this case the seller of the Obligation.
Apart from the risk of bankruptcy or insolvency proceedings, there is also the
risk that the seller may fail to repurchase the security. However, if the market
value of the Obligation subject to the repurchase agreement becomes less than
the repurchase price (including accrued interest), the Fund will direct the
seller of the Obligation to deliver additional securities so that the market
value of all securities subject to the repurchase agreement equals or exceeds
the repurchase price. The Fund will not invest more than 10% of its net assets
(taken at current market value) in repurchase agreements maturing in more than
seven days.
The Fund may enter into reverse repurchase agreements with banks or
broker-dealers, which involve the sale of a security by the Fund and its
agreement to repurchase the instrument at a
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<PAGE> 28
specified time and price. The Fund will maintain a segregated account consisting
of liquid assets to cover its obligations under reverse repurchase agreements.
The Fund will limit its investments in reverse repurchase agreements and other
borrowing to no more than one-third of its total assets. The use of reverse
repurchase agreements by the Fund creates leverage which increases the Fund's
investment risk. If the income and gains on securities purchased with the
proceeds of reverse repurchase agreements exceed the cost of the agreements, the
Fund's earnings or net asset value will increase faster than otherwise would be
the case; conversely, if the income and gains fail to exceed the costs, earnings
or net asset value would decline faster than otherwise would be the case.
GOVERNMENT SECURITIES
Government securities are obligations of, or guaranteed by, the U.S.
government or its agencies or instrumentalities. Some U.S. government
securities, such as Treasury bills, notes and bonds, are supported by the full
faith and credit of the United States; others, such as those of the Federal Home
Loan Bank, are supported by the right of the issuer to borrow from the Treasury;
others, such as those of the Federal National Mortgage Association, are
supported by the discretionary authority of the U.S. government to purchase the
agency's obligations; and still others, such as those of the Student Loan
Marketing Association, are supported only by the credit of the instrumentality.
LENDING OF PORTFOLIO SECURITIES
In accordance with guidelines adopted by the Board of Directors, the
Fund may seek to increase its income by lending portfolio securities. Under
present regulatory policies, such loans may be made to institutions, such as
broker-dealers, and would be required to be secured continuously by collateral
in cash or U.S. Government securities maintained on a current basis at an amount
at least equal to 100% of the current market value of the securities loaned. The
Fund would have the right to call a loan and obtain the securities loaned at any
time generally on less than five days' notice. For the duration of a loan, the
Fund would continue to receive the equivalent of the interest or dividends paid
by the issuer on the securities loaned and would also receive compensation from
the investment of the collateral. The Fund would not, however, have the right to
vote any securities having voting rights during the existence of the loan, but
the Fund would call the loan in anticipation of an important vote to be taken
among holders of the securities or of the giving or withholding of their consent
on a material matter affecting the investment. The Company, on behalf of the
Fund, has entered into an agency agreement with Merrill Lynch Portfolio
Services,
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Inc. which acts as the Fund's agent in making loans of portfolio securities and
short-term money market investments of the cash collateral received, subject to
the supervision and control of the Sub-Adviser.
As with other extensions of credit, there are risks of delay in
recovery of, or even loss of rights in, the collateral should the borrower of
the securities fail financially. However, the loans would be made only to firms
deemed by a Sub-Adviser to be creditworthy and approved by the Board, and when,
in the judgment of the Sub-Adviser, the consideration which can be earned
currently from securities loans of this type justifies the attendant risk. If
the Sub-Adviser determines to make securities loans, it is intended that the
value of the securities loaned would not exceed 33% of the value of the total
assets of the Fund. Under the guidelines adopted by the Board of Directors, the
Fund may not enter into a lending agreement with a counterparty which would
cause the Fund to have loans outstanding to that counterparty for securities
having a value greater than 5% of the Fund's total assets.
BANKING INDUSTRY AND SAVINGS AND LOAN INDUSTRY OBLIGATIONS
Certificates of deposit are receipts from a bank or savings and loan
association ("S&L"), for funds deposited for a specified period of time at a
specified rate of return. Time deposits in banks or S&Ls are generally similar
to certificates of deposit, but are uncertificated. Bankers' acceptances are
time drafts drawn on commercial banks by borrowers, usually in connection with
international commercial transactions. The Fund may not invest in time deposits
maturing in more than seven days which are subject to withdrawal penalties. The
Fund will limit its investment in time deposits for which there is a penalty for
early withdrawal to 10% of its net assets.
The Fund will not invest in any obligation of a domestic or foreign
bank unless (i) the bank has capital, surplus, and individual profits (as of the
date of the most recently published financial statements) in excess of $100
million, or the equivalent in other currencies, and (ii) in the case of a U.S.
bank, its deposits are insured by the Federal Deposit Insurance Corporation.
These limitations do not prohibit investments in the securities issued by
foreign branches of U.S. banks, provided such U.S. banks meet the foregoing
requirements.
FLOATING AND VARIABLE RATE SECURITIES
Floating and variable rate securities provide for a periodic adjustment
in the interest rate paid on the obligations. The terms of such obligations must
provide that interest rates are
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adjusted periodically based upon an interest rate adjustment index as provided
in the respective obligations. The adjustment intervals may be regular, and
range from daily up to annually, or may be event based, such as based on a
change in the prime rate.
The interest rate on a floating rate debt instrument ("floater") is a
variable rate which is tied to another interest rate, such as a money-market
index or Treasury bill rate. The interest rate on a floater resets periodically,
typically every six months. While, because of the interest rate reset feature,
floaters provide the Fund with a certain degree of protection against rises in
interest rates, the Fund will participate in any declines in interest rates as
well.
The interest rate on a leveraged inverse floating rate debt instrument
("inverse floater") resets in the opposite direction from the market rate of
interest to which the inverse floater is indexed. An inverse floater may be
considered to be leveraged to the extent that its interest rate varies by a
magnitude that exceeds the magnitude of the change in the index rate of
interest. The higher degree of leverage inherent in inverse floaters is
associated with greater volatility in their market values. Accordingly, the
duration of an inverse floater may exceed its stated final maturity. Certain
inverse floaters may be determined to be illiquid securities for purposes of the
Fund's limitation on investments in such securities.
FOREIGN SECURITIES
The Fund may purchase U.S. dollar-denominated securities of foreign
issuers. Foreign investing involves the possibility of expropriation,
nationalization, confiscatory taxation, foreign taxation of income earned in the
foreign nation (including withholding taxes on interest and dividends) or other
foreign taxes imposed with respect to investments in the foreign nation, foreign
exchange controls (which may include suspension of the ability to transfer
currency from a given country), default in foreign government securities,
political or social instability or diplomatic developments which could affect
investments in securities of issuers in those nations. In addition, in many
countries there is less publicly available information about issuers than is
available in reports about companies in the United States. Foreign companies are
not generally subject to uniform accounting and auditing and financial reporting
standards, and auditing practices and requirements may not be comparable to
those applicable to U.S. companies. In many foreign countries, there is less
government supervision and regulation of business and industry practices, stock
exchanges, brokers and listed companies than in the United States. Foreign
securities transactions may be subject to higher brokerage and
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custodial costs than domestic securities transactions. In addition, the foreign
securities markets of many of the countries in which the Fund may invest may
also be smaller, less liquid and subject to greater price volatility than those
in the United States.
WHEN-ISSUED AND FIRM OR STANDBY COMMITMENT AGREEMENTS
The Fund may from time to time purchase securities on a "when-issued"
or "firm commitment" or "standby commitment" basis. Debt securities are often
issued in this manner. The price of such securities, which may be expressed in
yield terms, is fixed at the time a commitment to purchase is made, but delivery
of and payment for the when-issued, or firm or standby commitment securities
take place at a later date. Normally, the settlement date occurs within one
month of the purchase. During the period between purchase and settlement, no
payment is made by the Fund and no interest accrues to the Fund. To the extent
that assets of the Fund are held in cash pending the settlement of a purchase of
securities, the Fund would earn no income; however, it is the Company's
intention that the Fund will be fully invested to the extent practicable and
subject to the policies stated herein. Although when-issued, or firm or standby
commitment securities may be sold prior to the settlement date, the Company
intends to purchase such securities with the purpose of actually acquiring them
unless a sale appears desirable for investment reasons.
At the time the Company makes the commitment on behalf of the Fund to
purchase a security on a when-issued, or firm or standby commitment basis, it
will record the transaction and reflect the amount due and the value of the
security in determining the Fund's net asset value. The market value of the
when-issued, or firm or standby commitment securities may be more or less than
the purchase price payable at the settlement date. The Directors do not believe
that the Fund's net asset value or income will be exposed to additional risk by
the purchase of securities on a when-issued or firm commitment basis. The Fund
will establish a segregated account in which it will maintain liquid assets at
least equal in value to any commitments to purchase securities on a when-issued,
firm, or standby commitment basis. Such segregated securities either will mature
or, if necessary, be sold on or before the settlement date.
MORTGAGE-RELATED AND OTHER ASSET-BACKED SECURITIES
The value of some mortgage-related or asset-backed securities in which
the Fund invests may be particularly sensitive to changes in prevailing interest
rates, and, like the other investments of the Fund, the ability of the Fund to
successfully utilize these instruments may depend in part upon
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the ability of an investment adviser to forecast interest rates and other
economic factors correctly. While principal and interest payments on some
mortgage-related securities may be guaranteed by the U.S. government, government
agencies or other guarantors, the market value of such securities is not
guaranteed.
The Fund will invest only in mortgage-related (or other asset-backed)
securities that meet the requirements of Rule 2a-7 under the 1940 Act. In
addition, if any such security is determined to be illiquid, the Fund will limit
its investments in these and other illiquid instruments to not more than 10% of
its net assets.
Mortgage Pass-Through Securities. Mortgage pass-through securities,
which are securities representing interests in pools of mortgage-related
securities, differ from other forms of debt securities, which normally provide
for periodic payment of interest in fixed amounts with principal payments at
maturity or specified call dates. Instead, these securities provide a monthly
payment which consists of both interest and principal payments. In effect, these
payments are a "pass-through" of the monthly payments made by the individual
borrowers on their residential mortgage loans, net of any fees paid to the
issuer or guarantor of such securities. Additional payments are caused by
repayments of principal resulting from the sale of the underlying residential
property, refinancing or foreclosure, net of fees or costs which may be
incurred. Some mortgage-related securities (such as securities issued by the
Government National Mortgage Association) are described as "modified
pass-through." These securities entitle the holder to receive all interest and
principal payments owed on the mortgage pool, net of certain fees, at the
scheduled payment dates regardless of whether or not the mortgagor actually
makes the payment.
The principal governmental guarantor of mortgage-related securities is
the Government National Mortgage Association ("GNMA"). GNMA is a wholly owned
U.S. Government corporation within the Department of Housing and Urban
Development. GNMA is authorized to guarantee, with the full faith and credit of
the U.S. Government, the timely payment of principal and interest on securities
issued by institutions approved by GNMA (such as S&Ls, commercial banks and
mortgage bankers) and backed by pools of Federal Housing Administration-insured
or Veterans Administration-guaranteed mortgages.
Government-related guarantors (i.e., not backed by the full faith and
credit of the U.S. Government) include the Federal National Mortgage Association
("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC"). FNMA is a
government-sponsored
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corporation owned entirely by private stockholders. It is subject to general
regulation by the Secretary of Housing and Urban Development. FNMA purchases
conventional (i.e., not insured or guaranteed by any government agency)
residential mortgages from a list of approved seller/servicers which include
state and federally chartered savings and loan associations, mutual savings
banks, commercial banks, credit unions and mortgage bankers. Pass-through
securities issued by FNMA are guaranteed as to timely payment of principal and
interest by FNMA but are not backed by the full faith and credit of the U.S.
Government.
FHLMC is a corporate instrumentality of the U.S. Government and was
created by Congress in 1970 for the purpose of increasing the availability of
mortgage credit for residential housing. Its stock is owned by the twelve
Federal Home Loan Banks. FHLMC issues Participation Certificates ("PCs") which
represent interests in conventional mortgages from FHLMC's national portfolio.
FHLMC guarantees the timely payment of interest and ultimate collection of
principal, but PCs are not backed by the full faith and credit of the U.S.
Government.
Commercial banks, savings and loan institutions, private mortgage
insurance companies, mortgage bankers and other secondary market issuers also
create pass-through pools of conventional residential mortgage loans. Such
issuers may, in addition, be the originators and/or servicers of the underlying
mortgage loans as well as the guarantors of the mortgage-related securities.
Pools created by such non-governmental issuers generally offer a higher rate of
interest than government and government-related pools because there are no
direct or indirect government or agency guarantees of payments in the former
pools. However, timely payment of interest and principal of these pools may be
supported by various forms of insurance or guarantees, including individual
loan, title, pool and hazard insurance and letters of credit. The insurance and
guarantees are issued by governmental entities, private insurers and the
mortgage poolers. Such insurance and guarantees and the creditworthiness of the
issuers thereof will be considered in determining whether a mortgage-related
security meets the Fund's investment quality standards. There can be no
assurance that the private insurers or guarantors can meet their obligations
under the insurance policies or guarantee arrangements. Although the market for
such securities is becoming increasingly liquid, securities issued by certain
private organizations may not be readily marketable. Early repayment of
principal on mortgage pass-through securities (arising from prepayments of
principal due to sale of the underlying property, refinancing, or foreclosure,
net of fees and costs which may be incurred) may expose the Fund to a lower rate
of return upon reinvestment of principal. Also, if a security
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subject to repayment has been purchased at a premium, in the event of prepayment
the value of the premium would be lost. The Fund will not purchase
mortgage-related securities or any other assets which in the opinion of the
Sub-Adviser are illiquid if, as a result, more than 10% of the value of the
Fund's net assets will be illiquid.
Collateralized Mortgage Obligations ("CMOs"). A CMO is a hybrid between
a mortgage-backed bond and a mortgage pass-through security. Similar to a bond,
interest and prepaid principal is paid, in most cases, semiannually. CMOs may be
collateralized by whole mortgage loans, but are more typically collateralized by
portfolios of mortgage pass-through securities guaranteed by GNMA, FHLMC, or
FNMA, and their income streams.
CMOs are structured into multiple classes, each bearing a different
stated maturity. Actual maturity and average life will depend upon the
prepayment experience of the collateral. CMOs provide for a modified form of
call protection through a de facto breakdown of the underlying pool of mortgages
according to how quickly the loans are repaid. Monthly payment of principal
received from the pool of underlying mortgages, including prepayments, is first
returned to investors holding the shortest maturity class. Investors holding the
longer maturity classes receive principal only after the first class has been
retired. An investor is partially guarded against a sooner than desired return
of principal because of the sequential payments.
In a typical CMO transaction, a corporation ("issuer") issues multiple
series (e.g., A, B, C, Z) of CMO bonds ("Bonds"). Proceeds of the Bond offering
are used to purchase mortgages or mortgage pass-through certificates
("Collateral"). The Collateral is pledged to a third-party trustee as security
for the Bonds. Principal and interest payments from the Collateral are used to
pay principal on the Bonds in the order A, B, C, Z. The Series A, B, and C Bonds
all bear current interest. Interest on the Series Z Bond is accrued and added to
principal and a like amount is paid as principal on the Series A, B, or C Bond
currently being paid off. When the Series A, B, and C Bonds are paid in full,
interest and principal on the Series Z Bond begins to be paid currently. With
some CMOs, the issuer serves as a conduit to allow loan originators (primarily
builders or savings and loan associations) to borrow against their loan
portfolios.
The Fund will not invest in any privately issued CMOs that do not meet
the requirements of Rule 3a-7 under the 1940 Act if, as a result of such
investment, more than 5% of the Fund's net assets would be invested in any one
CMO, more than 10% of the Fund's net assets would be invested in CMOs and other
investment
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company securities in the aggregate, or the Fund would hold more than 3% of any
outstanding issue of CMOs.
FHLMC Collateralized Mortgage Obligations. FHLMC CMOs are debt
obligations of FHLMC issued in multiple classes having different maturity dates
which are secured by the pledge of a pool of conventional mortgage loans
purchased by FHLMC. Unlike FHLMC PCs, payments of principal and interest on the
CMOs are made semiannually, as opposed to monthly. The amount of principal
payable on each semiannual payment date is determined in accordance with FHLMC's
mandatory sinking fund schedule, which, in turn, is equal to approximately 100%
of Federal Housing Administration ("FHA") prepayment experience applied to the
mortgage collateral pool. All sinking fund payments in the CMOs are allocated to
the retirement of the individual classes of bonds in the order of their stated
maturities. Payment of principal on the mortgage loans in the collateral pool in
excess of the amount of FHLMC's minimum sinking fund obligation for any payment
date are paid to the holders of the CMOs as additional sinking fund payments.
Because of the "pass-through" nature of all principal payments received on the
collateral pool in excess of FHLMC's minimum sinking fund requirement, the rate
at which principal of the CMOs is actually repaid is likely to be such that each
class of bonds will be retired in advance of its scheduled maturity date.
If collection of principal (including prepayments) on the mortgage
loans during any semiannual payment period is not sufficient to meet FHLMC's
minimum sinking fund obligation on the next sinking fund payment date, FHLMC
agrees to make up the deficiency from its general funds.
Criteria for the mortgage loans in the pool backing the CMOs are
identical to those of FHLMC Pcs. FHLMC has the right to substitute collateral in
the event of delinquencies and/or defaults.
Other Mortgage-Related Securities. The Sub-Adviser expects that
governmental, government-related or private entities may create mortgage loan
pools and other mortgage-related securities offering mortgage pass-through and
mortgage-collateralized investments in addition to those described above. The
mortgages underlying these securities may include alternative mortgage
instruments, that is, mortgage instruments whose principal or interest payments
may vary or whose terms to maturity may differ from customary long-term fixed
rate mortgages. As new types of mortgage-related securities are developed and
offered to investors, the Sub-Adviser will, consistent with the Fund's
investment objectives, policies and quality standards, consider
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making investments in such new types of mortgage-related securities.
CMO Residuals. CMO residuals are derivative mortgage securities issued
by agencies or instrumentalities of the U.S. Government or by private
originators of, or investors in, mortgage loans, including savings and loan
associations, homebuilders, mortgage banks, commercial banks, investment banks
and special purpose entities of the foregoing.
The cash flow generated by the mortgage assets underlying a series of
CMOs is applied first to make required payments of principal and interest on the
CMOs and second to pay the related administrative expenses of the issuer. The
residual in a CMO structure generally represents the interest in any excess cash
flow remaining after making the foregoing payments. Each payment of such excess
cash flow to a holder of the related CMO residual represents income and/or a
return of capital. The amount of residual cash flow resulting from a CMO will
depend on, among other things, the characteristics of the mortgage assets, the
coupon rate of each class of CMO, prevailing interest rates, the amount of
administrative expenses and the prepayment experience on the mortgage assets. In
particular, the yield to maturity on CMO residuals is extremely sensitive to
prepayments on the related underlying mortgage assets, in the same manner as an
interest-only ("IO") class of stripped mortgage-backed securities. See "Stripped
Mortgage-Backed Securities." In addition, if a series of a CMO includes a class
that bears interest at an adjustable rate, the yield to maturity on the related
CMO residual will also be extremely sensitive to changes in the level of the
index upon which interest rate adjustments are based. As described below with
respect to stripped mortgage-backed securities, in certain circumstances the
Fund may fail to recoup fully its initial investment in a CMO residual.
CMO residuals are generally purchased and sold by institutional
investors through several investment banking firms acting as brokers or dealers.
The CMO residual market has only very recently developed and CMO residuals
currently may not have the liquidity of other more established securities
trading in other markets. Transactions in CMO residuals are generally completed
only after careful review of the characteristics of the securities in question.
In addition, CMO residuals may or, pursuant to an exemption therefrom, may not
have been registered under the Securities Act of 1933, as amended. CMO
residuals, whether or not registered under such Act, may be subject to certain
restrictions on transferability, and may be deemed "illiquid" and subject to a
portfolio's limitations on investment in illiquid securities. The Fund limits
its investment in CMO residuals to less than 5% of its net assets.
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Stripped Mortgage-Backed Securities. Stripped mortgage-backed
securities ("SMBS") are derivative multi-class mortgage securities. SMBS may be
issued by agencies or instrumentalities of the U.S. Government, or by private
originators of, or investors in, mortgage loans, including savings and loan
associations, mortgage banks, commercial banks, investment banks and special
purpose entities of the foregoing.
SMBS are usually structured with two classes that receive different
proportions of the interest and principal distributions on a pool of mortgage
assets. A common type of SMBS will have one class receiving some of the interest
and most of the principal from the mortgage assets, while the other class will
receive most of the interest and the remainder of the principal. In the most
extreme case, one class will receive all of the interest (the IO class), while
the other class will receive all of the principal (the principal-only or "PO"
class). The yield to maturity on an IO class is extremely sensitive to the rate
of principal payments (including prepayments) on the related underlying mortgage
assets, and a rapid rate of principal payments may have a material adverse
effect on the Fund's yield to maturity from these securities. If the underlying
mortgage assets experience greater than anticipated prepayments of principal,
the Fund may fail to fully recoup its initial investment in these securities
even if the security is in one of the highest rating categories.
Although SMBS are purchased and sold by institutional investors through
several investment banking firms acting as brokers or dealers, these securities
were only recently developed. As a result, established trading markets have not
yet developed and, accordingly, these securities may be deemed "illiquid" and
subject to the Fund's limitations on investment in illiquid securities.
Risks Associated with Mortgage-Backed Securities. Like other fixed
income securities, when interest rates rise the value of a mortgage-related
security generally will decline; however, when interest rates are declining, the
value of mortgage-related securities with prepayment features may not increase
as much as other fixed income securities. The value of some mortgage-backed
securities in which the Fund may invest may be particularly sensitive to changes
in prevailing interest rates, and, like the other investments of the Fund, the
ability of the Fund to successfully utilize these instruments may depend in part
upon the ability of the Sub-Adviser to forecast interest rates and other
economic factors correctly. If the Sub-Adviser incorrectly forecasts such
factors and has taken a position in mortgage-backed securities that is or
becomes contrary to
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prevailing market trends, the Fund could be exposed to the risk of a loss.
Investment in mortgage-backed securities poses several risks, including
prepayment, market, and credit risk. Prepayment risk reflects the chance that
borrowers may prepay their mortgages faster than expected, thereby affecting the
investment's average life and perhaps its yield. Whether or not a mortgage loan
is prepaid is almost entirely controlled by the borrower. Borrowers are most
likely to exercise their prepayment options at a time when it is least
advantageous to investors, generally prepaying mortgages as interest rates fall,
and slowing payments as interest rates rise. Besides the effect of prevailing
interest rates, the rate of prepayment and refinancing of mortgages may also be
affected by home value appreciation, ease of the refinancing process and local
economic conditions.
Market risk reflects the chance that the price of the security may
fluctuate over time. The price of mortgage-backed securities may be particularly
sensitive to prevailing interest rates, the length of time the security is
expected to be outstanding, and the liquidity of the issue. In a period of
unstable interest rates, there may be decreased demand for certain types of
mortgage-backed securities, and the Fund invested in such securities wishing to
sell them may find it difficult to find a buyer, which may in turn decrease the
price at which they may be sold.
Credit risk reflects the chance that the Fund may not receive all or
part of its principal because the issuer or credit enhancer has defaulted on its
obligations. Obligations issued by U.S. Government-related entities are
guaranteed as to the payment of principal and interest, but are not backed by
the full faith and credit of the U.S. Government. The performance of private
label mortgage-backed securities, issued by private institutions, is based on
the financial health of those institutions.
Other Asset-Backed Securities. The Sub-Adviser expects that other
asset-backed securities (unrelated to mortgage loans) will be offered to
investors in the future. Several types of asset-backed securities have already
been offered to investors, including Certificates for Automobile Receivables
("CARSs"). CARSs represent undivided fractional interests in a trust ("trust")
whose assets consist of a pool of motor vehicle retail installment sales
contracts and security interests in the vehicles securing the contracts.
Payments of principal and interest on CARSs are passed-through monthly to
certificate holders, and are guaranteed up to certain amounts and for a certain
time period by a letter of credit issued by a financial institution unaffiliated
with the trustee or originator of the
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<PAGE> 39
trust. An investor's return on CARSs may be affected by early prepayment of
principal on the underlying vehicle sales contracts. If the letter of credit is
exhausted, the trust may be prevented from realizing the full amount due on a
sales contract because of state law requirements and restrictions relating to
foreclosure sales of vehicles and the obtaining of deficiency judgments
following such sales or because of depreciation, damage or loss of a vehicle,
the application of Federal and state bankruptcy and insolvency laws, or other
factors. As a result, certificate holders may experience delays in payments or
losses if the letter of credit is exhausted.
Consistent with the Fund's investment objective and policies and the
requirements of Rule 2a-7, the Sub-Adviser also may invest in other types of
asset-backed securities. Certain asset-backed securities may present the same
types of risks that may be associated with mortgage-backed securities.
LOAN PARTICIPATION INTERESTS
The Fund's investment in loan participation interests may take the form
of participation interests in, assignments or novations of a corporate loan
("Participation Interests"). The Participation Interests may be acquired from an
agent bank, co-lenders or other holders of Participation Interests
("Participants"). In a novation, the Fund would assume all of the rights of the
lender in a corporate loan, including the right to receive payments of principal
and interest and other amounts directly from the borrower and to enforce its
rights as a lender directly against the borrower. As an alternative, the Fund
may purchase an assignment of all or a portion of a lender's interest in a
corporate loan, in which case, the Fund may be required generally to rely on the
assigning lender to demand payment and enforce its rights against the borrower,
but would otherwise be entitled to all of such lender's rights in the corporate
loan. The Fund also may purchase a Participation Interest in a portion of the
rights of a lender in a corporate loan. In such a case, the Fund will be
entitled to receive payments of principal, interest and fees, if any, but
generally will not be entitled to enforce its rights directly against the agent
bank or the borrower; rather the Fund must rely on the lending institution for
that purpose. The Fund will not act as an agent bank, a guarantor or sole
negotiator of a structure with respect to a corporate loan.
In a typical corporate loan involving the sale of Participation
Interests, the agent bank administers the terms of the corporate loan agreement
and is responsible for the collection of principal and interest and fee payments
to the credit of all lenders which are parties to the corporate loan
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<PAGE> 40
agreement. The agent bank in such cases will be qualified under the 1940 Act to
serve as a custodian for a registered investment company such as the Company.
The Fund generally will rely on the agent bank or an intermediate Participant to
collect its portion of the payments on the corporate loan. The agent bank
monitors the value of the collateral and, if the value of the collateral
declines, may take certain action, including accelerating the corporate loan,
giving the borrower an opportunity to provide additional collateral or seeking
other protection for the benefit of the Participants in the corporate loan,
depending on the terms of the corporate loan agreement. Furthermore, unless
under the terms of a participation agreement the Fund has direct recourse
against the borrower (which is unlikely), the Fund will rely on the agent bank
to use appropriate creditor remedies against the borrower. The agent bank also
is responsible for monitoring compliance with covenants contained in the
corporate loan agreement and for notifying holders of corporate loans of any
failures of compliance. Typically, under corporate loan agreements, the agent
bank is given broad discretion in enforcing the corporate loan agreement, and is
obligated to use only the same care it would use in the management of its own
property. For these services, the borrower compensates the agent bank. Such
compensation may include special fees paid on structuring and funding the
corporate loan and other fees paid on a continuing basis.
A financial institution's employment as an agent bank may be terminated
in the event that it fails to observe the requisite standard of care or becomes
insolvent, or has a receiver, conservator, or similar official appointed for it
by the appropriate bank regulatory authority or becomes a debtor in a bankruptcy
proceeding. A successor agent bank generally will be appointed to replace the
terminated bank, and assets held by the agent bank under the corporate loan
agreement should remain available to holders of corporate loans. If, however,
assets held by the agent bank for the benefit of the Fund were determined by an
appropriate regulatory authority or court to be subject to the claims of the
agent bank's general or secured creditors, the Fund might incur certain costs
and delays in realizing payment on a corporate loan, or suffer a loss of
principal and/or interest. In situations involving intermediate Participants
similar risks may arise.
When the Fund acts as co-lender in connection with a Participation
Interest or when the Fund acquires a Participation Interest the terms of which
provide that the Fund will be in privity of contract with the corporate
borrower, the Fund will have direct recourse against the borrower in the event
the borrower fails to pay scheduled principal and interest. In all other cases,
the Fund will look to the agent bank to enforce
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<PAGE> 41
appropriate credit remedies against the borrower. In acquiring Participation
Interests the Sub-Adviser will conduct analysis and evaluation of the financial
condition of each such co-lender and participant to ensure that the
Participation Interest meets the Fund's qualitative standards. There is a risk
that there may not be a readily available market for loan Participation
Interests and, in some cases, this could result in the Fund disposing of such
securities at a substantial discount from face value or holding such security
until maturity. When the Fund is required to rely upon a lending institution to
pay the Fund principal, interest, and other amounts received by the lending
institution for the loan participation, the Fund will treat both the borrower
and the lending institution as an "issuer" of the loan participation for
purposes of certain investment restrictions pertaining to the diversification
and concentration of the Fund's portfolio. The Fund considers Participation
Interests not subject to puts to be illiquid.
ZERO COUPON BONDS
Zero coupon bonds are debt obligations issued without any requirement
for the periodic payment of interest. Zero coupon bonds are issued at a
significant discount from the face value. The discount approximates the total
amount of interest the bonds would accrue and compound over the period until
maturity at a rate of interest reflecting the market rate at the time of
issuance. Cash to pay dividends representing unpaid, accrued interest may be
obtained from sales proceeds of portfolio securities and Fund shares and from
loan proceeds. Because interest on zero coupon obligations is not paid to the
Fund on a current basis but is in effect compounded, the value of the securities
of this type is subject to greater fluctuations in response to changing interest
rates than the value of debt obligations which distribute income regularly. Zero
coupon bonds tend to be subject to greater market risk than interest paying
securities of similar maturities. The discount represents income a portion of
which the Fund must accrue and distribute every year even though the Fund
receives no payment on the investment in that year.
INVESTMENT RESTRICTIONS
The Fund's investment restrictions set forth below are fundamental
policies of the Fund; i.e., they may not be changed without a majority vote of
the outstanding shares of the Fund, as defined in the 1940 Act. Except for those
investment policies of the Fund specifically identified as fundamental in the
Prospectus and this Statement of Additional Information, all other investment
policies and practices described may be changed by the Board of Directors
without the approval of shareholders.
- 19 -
<PAGE> 42
Unless otherwise indicated, all of the percentage limitations below,
and in the investment restrictions recited in the Prospectus, apply to the Fund
on an individual basis, and apply only at the time a transaction is entered
into. Accordingly, if a percentage restriction is adhered to at the time of
investment, a later increase or decrease in the percentage which results from a
relative change in values will not be considered a violation.
The Fund has adopted a fundamental restriction that it may not:
(1) invest in a security if, as a result of such investment, 25% or
more of its total assets would be invested in the securities of issuers in any
particular industry, except that this restriction does not apply to securities
issued or guaranteed by the U.S. Government or its agencies or instrumentalities
(or repurchase agreements with respect thereto) and at such time that the 1940
Act is amended to permit a registered investment company to elect to be
"periodically industry concentrated," (i.e., a fund that does not concentrate
its investments in a particular industry would be permitted, but not required,
to invest 25% or more of its assets in a particular industry) the Fund elects to
be so classified and the foregoing limitation shall no longer apply with respect
to the Fund;
(2) invest in a security if, with respect to 75% of its total assets,
more than 5% of its total assets would be invested in the securities of any one
issuer, except that this restriction does not apply to securities issued or
guaranteed by the U.S. Government, its agencies or instrumentalities;
(3) invest in a security if, with respect to 75% of its assets, it
would hold more than 10% of the outstanding voting securities of any one issuer,
except that this restriction does not apply to U.S. Government securities;
(4) borrow money or issue senior securities, except that the Fund may
(i) borrow from banks or enter into reverse repurchase agreements, but only if
immediately after each borrowing there is asset coverage of 300%, and (ii) issue
senior securities to the extent permitted under the 1940 Act;
(5) lend any funds or other assets, except that the Fund may,
consistent with its investment objectives and policies: (i) invest in debt
obligations including bonds, debentures or other debt securities, bankers'
acceptances and commercial paper, even though the purchase of such obligations
may be deemed to be the making of loans; (ii) enter into repurchase agreements;
and (iii) lend its portfolio securities in accordance with applicable
- 20 -
<PAGE> 43
guidelines established by the Securities and Exchange Commission and any
guidelines established by the Company's Directors;
(6) purchase or sell real estate (although it may purchase securities
secured by real estate or interests therein, or securities issued by companies
which invest in real estate, or interests therein);
(7) purchase or sell commodities or commodities contracts, except that,
subject to restrictions described in the Prospectus and in this Statement of
Additional Information, (i) the Fund may enter into futures contracts on
securities, currencies or on indexes of such securities or currencies, or any
other financial instruments and options on such futures contracts; (ii) the Fund
may enter into spot or forward foreign currency contracts and foreign currency
options; or
(8) act as an underwriter of securities of other issuers, except to the
extent that in connection with the disposition of portfolio securities, it may
be deemed to be an underwriter under the Federal securities laws.
ADDITIONAL RESTRICTIONS
The Fund has adopted the following additional restrictions which are
not fundamental and which may be changed without shareholder approval, to the
extent permitted by applicable law, regulation or regulatory policy.
Unless otherwise indicated, all percentage limitations apply to the
Fund on an individual basis, and apply only at the time a transaction is entered
into. Accordingly, if a percentage restriction is adhered to at the time of
investment, a later increase or decrease in the percentage which results from a
relative change in values will not be considered a violation.
Under these restrictions, the Fund may not:
(1) purchase puts, calls, straddles, spreads and any combination
thereof if, as a result, the value of its aggregate investment in such classes
of securities would exceed 5% of its total assets;
(2) purchase securities that may not be sold without first being
registered under the Securities Act of 1933, as amended ("restricted
securities") other than Rule 144A securities and Section 4(2) commercial paper
determined to be liquid pursuant to guidelines adopted by the Company's Board of
Directors; enter into repurchase agreements having a duration of more than seven
days; purchase loan participation interests that are not subject
- 21 -
<PAGE> 44
to puts; purchase instruments lacking readily available market quotations
("illiquid instruments"); or purchase or sell over-the-counter options, if as a
result of the purchase or sale, the Fund's aggregate holdings of restricted
securities, repurchase agreements having a duration of more than seven days,
loan participation interests that are not subject to puts, illiquid instruments,
and over-the-counter options purchased by the Fund and the assets used as cover
for over-the-counter options written by the Fund exceed 10% of the Fund's net
assets;
(3) invest in other companies for the purpose of exercising control;
(4) purchase the securities of other investment companies, except to
the extent permitted by the 1940 Act or in connection with a merger,
consolidation, acquisition or reorganization;
(5) the Fund may not purchase securities on margin, except that the
Fund may obtain such short-term credits as are necessary for the clearance of
transactions, and provided that margin payments in connection with futures
contracts and options on futures contracts shall not constitute the purchase of
securities on margin;
(6) the Fund may not sell securities short, except for covered short
sales or unless it owns or has the right to obtain securities equivalent in kind
and amount to the securities sold short, and provided that transactions in
options, futures and forward contracts are deemed not to constitute short sales
of securities.
The Directors have the ultimate responsibility for determining whether
specific securities are liquid or illiquid. The Directors have delegated the
function of making day-to-day determinations of liquidity to the Sub-Adviser,
pursuant to guidelines approved by the Directors.
The Sub-Adviser takes into account a number of factors in determining
whether a Rule 144A security being considered for purchase by the Fund is
liquid, including at least the following:
(i) the frequency and size of trades and quotes for the Rule 144A
security relative to the size of the Fund's holding;
(ii) the number of dealers willing to purchase or sell the 144A
security and the number of other potential purchasers;
(iii)dealer undertaking to make a market in the 144A security; and
- 22 -
<PAGE> 45
(iv) the nature of the 144A security and the nature of the market for
the 144A security (i.e., the time needed to dispose of the security, the method
of soliciting offers, and the mechanics of transfer).
To make the determination that an issue of 4(2) commercial paper is liquid, the
Sub-Adviser must conclude that the following conditions have been met:
(a) the 4(2) commercial paper is not traded flat or in default
as to principal or interest;
(b) the 4(2) commercial paper is rated:
(i) in one of the two highest rating categories by at least two NRSROs;
or
(ii) if only one NRSRO rates the security, the 4(2) commercial paper is
rated in one of the two highest rating categories by that NRSRO; or
(iii) if the security is unrated, the Sub-Adviser has determined that
the security is of equivalent quality based on factors commonly used by rating
agencies; and
(c) there is a viable trading market for the specific
security, taking into account all relevant factors (e.g., whether the security
is the subject of a commercial paper program that is administered by an issuing
and paying agent bank and for which there exists a dealer willing to make a
market in the security, the size of trades relative to the size of the Fund's
holding or whether the 4(2) commercial paper is administered by a direct issuer
pursuant to a direct placement program).
- 23 -
<PAGE> 46
MANAGEMENT OF THE COMPANY
DIRECTORS AND OFFICERS
The Directors and Officers of the Company, their addresses, ages and
their principal occupations during the past five years are as follows (unless
otherwise indicated, the address of all persons below is 51 Madison Avenue, New
York, NY 10010):
<TABLE>
<CAPTION>
Name Position(s) with Principal Occupation(s)
Address and Age the Company During Past 5 Years
- --------------- ---------------- -----------------------
<S> <C> <C>
Stephen C. Roussin, 35 Director and Chairperson of President, Chief Executive Officer and Trustee, The MainStay
the Board of Directors* Funds, 1997- present; Senior Vice President, New York Life
Insurance Company, 1997 to present; Senior Vice President,
Smith Barney, 1994 to 1997; and Division Sales Manager,
Prudential Securities, 1989 to 1994. Director, New York Life
Trust Company, 1997 to present; Director, New York Life
Benefit Services, Inc., 1997 to present; Director, NYLIFE
Securities, Inc., 1997 to present; Director, MainStay
Shareholder Services Inc., 1997 to present; Director, Eagle
Strategies Corp., 1997 to present; Director, President and
Chief Executive Officer, MainStay Management, Inc., 1997 to
present.
Patrick G. Boyle, 44 Director* Senior Vice President, Pension Department, New York Life
Insurance Company, 1991 to present; Vice President, Pension
Department, New York Life Insurance Company, 1988-1991;
Pension Vice President, Pension Department, New York Life
Insurance Company, 1986-1988; Assistant Vice President,
Pension Department, New York Life Insurance Company,
1985-1986; Director, NYLIFE Distributors Inc., 1993 to 1996;
Chairman, Monitor Capital Advisors, Inc., 1996 to present, and
Director, 1991 to present; Director, New York Life Benefit
Services, Inc., 1994 to present; Director, New York Life
International Investment Inc., 1995 to present; Director, New
York Life Trust Company, 1995 to present; Director, NYL
Capital Management Limited, 1994 to present; Member, American
Council of Life Insurance Pension Committee, 1992 to present.
Lawrence Glacken, 70 Director Retired, 1987 to present; Vice
353 Canterbury Drive President, Investment Banking, The First
Ramsey, NJ 07446 Boston Corporation, 1964-1987.
Robert P. Mulhearn, 51 Director Private Investor, 1987 to present;
60 Twin Brooks Road Managing Director, Morgan Stanley,
Saddle River, NJ 07458 1979-1987.
</TABLE>
- 24 -
<PAGE> 47
<TABLE>
<CAPTION>
Name Position(s) with Principal Occupation(s)
Address and Age the Company During Past 5 Years
- --------------- ---------------- -----------------------
<S> <C> <C>
Susan B. Kerley, 47 Director President, Global Research Associates, 1990 to present;
P.O. 9572 Manager, Special Investments, Rockefeller & Co., 1988-1990;
New Haven, CT 06535 Director of Research, Rogers, Casey and Barksdale, 1983-1988;
Director, Citifunds, 1991 to present.
Linda M. Livornese, 47 President Vice President, Pension Department, New York Life Insurance
Company, 1990 to present; Pension Vice President, Pension
Department, New York Life Insurance Company, 1988-1990;
Assistant Vice President, Pension Department, New York Life
Insurance Company, 1986-1988; Vice President, NYLIFE
Distributors Inc., 1993 to present; Vice President, NYLIFE
Securities Inc., 1992 to present.
Jefferson C. Boyce, 41 Senior Vice President Senior Vice President, New York Life Insurance Company, 1994
to present; Senior Vice President, The MainStay Funds, 1995 to
present; Director, Monitor Capital Advisors, Inc., 1991 to
present and Senior Vice President, 1996 to present; Director,
MSC Holding, Inc., 1992 to present and Secretary, 1994 to
present; Director, Eagle Strategies Corp., 1993 to present;
Director, NYLIFE Equity, Inc., 1993 to present; President and
Chief Executive Officer, NYLIFE Distributors Inc., 1996 to
present and Director, 1993 to present; Director, NYLIFE Inc.,
1993 to present; Director, NYLIFE Structured Asset Management
Company Ltd., 1993 to present; Director, CNP Realty
Investments, Inc., 1994 to present; Director, New York Life
Benefit Services, Inc., 1994 to present; Director, NYLIFE
Depositary Corporation, 1994 to present; Director, NYLIFE
Realty Inc., 1994 to present; Director, NYLIFE SFD Holding
Inc. (formerly NAFCO, Inc.), 1994 to present; Director,
President and Chief Executive Officer, NYLIFE Securities Inc.,
1996 to present; Chairman and Director, MainStay Shareholder
Services Inc., 1997 to present; Chief Administrative Officer,
Pension, Mutual Funds, Structured Finance, Corporate Quality,
Human Resources and Employees' Health Departments, New York
Life Insurance Company, 1992 to 1994; Vice President, Pension
Department, New York Life Insurance Company, 1989 to 1992.
Robert S. Fenster, 48 Vice President Vice President, Pension Department, New York Life Insurance
Company, 1988 to present; Director New York Life Trust
Company, 1995 to present.
</TABLE>
- 25 -
<PAGE> 48
<TABLE>
<CAPTION>
Name Position(s) with Principal Occupation(s)
Address and Age the Company During Past 5 Years
- --------------- ---------------- -----------------------
<S> <C> <C>
Richard W. Zuccaro, 48 Tax Vice President Vice President, New York Life Insurance Company, 1995 to
present; Vice President -- Tax, New York Life Insurance
Company, 1986 to 1995; Tax Vice President, NYLIFE Securities
Inc., 1987 to present; Tax Vice President, NYLIFE SFD Holding
Inc., 1990 to present; Tax Vice President, NYLIFE Depositary
Inc., 1990 to present; Tax Vice President, NYLIFE Inc., 1990
to present; Tax Vice President, NYLIFE Insurance Company of
Arizona, 1990 to present; Tax Vice President, NYLIFE Realty
Inc., 1991 to present; Tax Vice President, NYLICO Inc., 1991
to present; Tax Vice President, New York Life Fund Inc., 1991
to present; Tax Vice President, New York Life International
Investment, Inc., 1991 to present; Tax Vice President NYLIFE
Funding Inc., 1991 to present; Tax Vice President, NYLCO, 1991
to present; Tax Vice President, NYLIFE Equity Inc., 1991 to
present; Tax Vice President, MainStay VP Series Fund, Inc.,
1991 to present; Tax Vice President, CNP Realty Investments,
Inc., 1991 to present; Tax Vice President, New York Life
Worldwide Holding, Inc., 1992 to present; Tax Vice President,
NYLIFE Structured Asset Management Company Ltd., 1992 to
present; Tax Vice President, The MainStay Funds, 1991 to
present; Tax Vice President, Eagle Strategies Corp.
(registered investment adviser), 1993 to present; Tax Vice
President, NYLIFE Distributors Inc., 1993 to present; Vice
President & Assistant Controller, New York Life Insurance and
Annuity Corp., 1995 to present, and Assistant Controller, 1991
to 1995; Vice President, NYLCare Health Plans, Inc., 1995 to
present; Vice President - Tax, New York Life and Health
Insurance Co., 1996 to present; Tax Vice President, New York
Life Trust Company, 1996 to present; Tax Vice President,
Monitor Capital Advisors, Inc., 1996 to present; Tax Vice
President, NYLINK Insurance Agency Incorporated, 1996 to
present; Tax Vice President, MainStay Shareholder Services
Inc., 1997 to present.
</TABLE>
- 26 -
<PAGE> 49
<TABLE>
<CAPTION>
Name Position(s) with Principal Occupation(s)
Address and Age the Company During Past 5 Years
- --------------- ---------------- -----------------------
<S> <C> <C>
Anthony W. Polis, 55 Treasurer (Principal Vice President, New York Life Insurance Company, 1988 to
Financial and Accounting present; Director, Vice President and Chief Financial Officer,
Officer) NYLIFE Securities Inc., 1988 to present; Vice President and
Chief Financial Officer, NYLIFE Distributors Inc., 1993 to
present; Vice President and Chief Financial Officer, Eagle
Strategies Corp., 1993 to present; Vice President and Chief
Financial Officer, MainStay Shareholder Services Inc., 1997 to
present; Vice President and Chief Financial Officer, The
MainStay Funds, 1990 to present; Treasurer, MainStay VP Series
Fund, Inc., 1993 to present; Assistant Treasurer, MainStay VP
Series Fund, Inc., 1992 to 1993; Vice President and Treasurer,
Eclipse Financial Asset Trust, 1992 to present; Vice
President, Drexel Burnham Lambert Incorporated, DBL Tax-Free
Fund Inc., DBL Cash Fund Inc., The Drexel Burnham Fund, Drexel
Series Trust, Fenimore International Fund Inc., BT Investment
Trust and BT Tax Free Investment Trust, 1983 to 1988;
Assistant Treasurer, Drexel Bond-Debenture Trading Fund,
1983-1988.
Sara L. Badler, 38 Secretary Assistant General Counsel, New York Life Insurance Company,
1996 to present; Associate Counsel, New York Life Insurance
Company, 1994 to 1996; Secretary, MainStay VP Series Fund,
Inc., 1997 to present; Assistant Secretary, the MainStay
Funds, 1994 to present; Assistant Secretary, Eclipse Financial
Asset Trust, 1994 to present; Teacher, New York City Board of
Education, 1993 to 1994; and Vice President and Associate
Counsel and Consulting Attorney; Oppenheimer Management
Corporation, 1987 to 1993.
</TABLE>
* Messrs. Boyle and Roussin are Directors who are "interested
persons" of the Company as that term is defined in the 1940 Act.
COMPENSATION TABLE
The following table sets forth information regarding compensation
received by the Directors of the Company for the year ended December 31, 1997.
- 27 -
<PAGE> 50
<TABLE>
<CAPTION>
Aggregate Compensation
Name and Position from Company(1)
----------------- ----------------------
<S> <C>
Lawrence Glacken $ 30,000
Director
Robert P. Mulhearn $ 30,000
Director
Susan B. Kerley $ 30,000
Director
</TABLE>
1 Directors, other than those affiliated with New York Life
Insurance Company, MainStay Management, Inc., MacKay-Shields
Financial Corporation, Monitor Capital Advisors, Inc. or
NYLIFE Distributors Inc. are paid an annual fee of $24,000
and $1,000 for each Board of Directors meeting and Committee
meeting attended plus reimbursement for travel and
out-of-pocket expenses.
As of September 25, 1998, the Directors and Officers of the Company as a group
owned less than 1% of the outstanding shares of any class of the Fund.
MANAGEMENT AGREEMENT
Pursuant to the Management Agreement for the Fund dated November 21,
1997, MainStay Management, Inc. (the "Manager"), subject to the supervision of
the Directors of the Company and in conformity with the stated policies of the
Fund, administers the Fund's business affairs and investment advisory
responsibilities.
The Directors, including the Independent Directors, approved the
Management Agreement at an in-person meeting held on September 9, 1997. On
November 17, 1997, the shareholders of the Fund approved the Management
Agreement. The Management Agreement will remain in effect for two years
following its effective date, and will continue in effect thereafter only if
such continuance is specifically approved at least annually by the Directors or
by a vote of a majority of the outstanding voting securities of the Fund (as
defined in the 1940 Act and the rules thereunder) and, in either case by a
majority of the Directors who are not "interested persons" of the Company or of
the Manager (as the term is defined in the 1940 Act).
The Manager has authorized any of its directors, officers and employees
who have been elected or appointed as Directors of the Company to serve in the
capacities in which they have been elected or appointed.
- 28 -
<PAGE> 51
The Management Agreement provides that the Manager shall not be liable
to the Fund for any error or judgment by the Manager or for any loss sustained
by the Fund except in the case of the Manager's willful misfeasance, bad faith,
gross negligence or reckless disregard of duty. The Management Agreement also
provides that it shall terminate automatically if assigned and that it may be
terminated without penalty by either party upon no more than 60 days' nor less
than 30 days' written notice.
In connection with its administration of the business affairs of the
Fund, and except as indicated in the Prospectus under the heading "Manager and
Sub-Adviser," the Manager bears the following expenses:
(a) the salaries and expenses of all personnel of the Company and the
Manager, except the fees and expenses of the Directors not affiliated with the
Manager or the Sub-Adviser;
(b) the fees to be paid to the Sub-Adviser pursuant to the Sub-Advisory
Agreement; and
(c) all expenses incurred by the Manager in connection with
administering the ordinary course of the Fund's business, other than those
assumed by the Company.
For its services, the Fund pays the Manager a monthly fee. (See the
Prospectus, "Manager and Sub-Adviser.")
Commencing November 21, 1997 through December 31, 1997, the Fund paid
the Manager advisory fees of $142,675. For the six month period ended June 30,
1998, the Fund paid the Manager advisory fees of $678,166.
The Manager has agreed to limit certain Fund expenses as discussed in
the Prospectus. In connection with a voluntary expense limitation, the Manager
assumed expenses in the amount of $37,695 for the period November 21, 1997
through December 31, 1997, and $182,640 for the six month period ended June 30,
1998 for the Fund's other classes of shares.
As long as the expense limitation continues, it may lower the Fund's
expenses and increase its yield. The voluntary expense limitation may be
terminated or revised at any time, at which time the Fund's expenses may
increase and its yield may be reduced, depending on the total assets of the
Fund.
SUB-ADVISORY AGREEMENT
Pursuant to the Sub-Advisory Agreement between the Manager and the
Sub-Adviser on behalf of the Fund, the Sub-Adviser,
- 29 -
<PAGE> 52
subject to the supervision of the Directors of the Company and the Manager in
conformity with the stated policies of the Fund and the Company, manages the
Fund's portfolio, including the purchase, retention, disposition and loan of
securities.
The Directors, including the Independent Directors, approved the
Sub-Advisory Agreement at an in-person meeting held September 9, 1997. On
November 17, 1997, the shareholders of the Fund approved the Sub-Advisory
Agreement with New York Life. The Sub-Advisory Agreement will remain in effect
for two years following its effective date, and will continue in effect
thereafter only if such continuance is specifically approved at least annually
by the Directors or by a vote of a majority of the outstanding voting securities
of the Fund (as defined in the 1940 Act and the rules thereunder) and, in either
case, by a majority of the Directors who are not "interested persons" of the
Company, the Manager, or the Sub-Adviser (as the term is defined in the 1940
Act).
The Sub-Advisory Agreement provides that the Sub-Adviser shall not be
liable to the Fund for any error of judgment by the Sub-Adviser or for any loss
sustained by the Fund except in the case of the Sub-Adviser's willful
misfeasance, bad faith, gross negligence or reckless disregard of duty. The
Sub-Advisory Agreement also provides that it shall terminate automatically if
assigned and that they may be terminated without penalty by either party upon no
more than 60 days' nor less than 30 days' written notice.
In previous years, prior to a change in management structure, the Fund
paid an advisory fee directly to New York Life. For the period January 1, 1997
through November 20, 1997 and the fiscal years ended December 31, 1996 and 1995,
the amount of the advisory fee paid by the Fund to New York Life was $181,674,
$100,230 and $59,918, respectively.
In previous years, prior to a change in management structure, the Fund
paid an administrative fee directly to New York Life as administrator. For the
period January 1, 1997 through November 20, 1997 and the fiscal years ended
December 31, 1996 and 1995, the amount of the administration fee paid by the
Fund to New York Life was $726,696, $400,921 and $239,673, respectively.
Also prior to the above-referenced change in management structure and
in connection with the voluntary expense limitation, New York Life, as
administrator, assumed expenses for the Fund for the period January 1, 1997
through November 20, 1997 and the fiscal years ended December 31, 1996 and 1995
in the amounts of $194,751, $170,221 and $136,576, respectively.
- 30 -
<PAGE> 53
DISTRIBUTOR
NYLIFE Distributors Inc. serves as the Company's distributor and
principal underwriter (the "Distributor") pursuant to a Distribution Agreement,
dated January 1, 1994. Prior to that time, NYLIFE Securities Inc. ("NYLIFE
Securities"), an affiliated company, had acted as principal underwriter. NYLIFE
Securities sells shares of the Fund pursuant to a dealer agreement with the
Distributor. The Distributor is not obligated to sell any specific amount of the
Fund's shares, and receives no compensation from the Company pursuant to the
Distribution Agreement. The Company anticipates making a continuous offering of
the Fund's shares, although it reserves the right to suspend or terminate such
offering at any time. The Distribution Agreement was most recently approved by
the Board of Directors, including a majority of the Directors who are not
"interested persons" (as defined in the 1940 Act) of the Company or the
Distributor, on March 4, 1997. After an initial two-year period, the
Distribution Agreement is subject to annual approval by the Board of Directors.
The Distribution Agreement is terminable with respect to the Fund at any time,
without payment of a penalty, by vote of a majority of the Company's Directors
who are not "interested persons" (as defined in the 1940 Act) of the Company,
upon 60 days' written notice to the Distributor, by vote of a majority of the
outstanding voting securities of the Fund, upon 60 days' written notice to the
Distributor, or by the Distributor, upon 60 days' written notice to the Company.
The Distribution Agreement will terminate in the event of its assignment.
SERVICE FEES
The Company has adopted a Shareholder Services Plan with respect to the
Sweep Shares. Under the terms of the Plan, the Company is permitted to pay, out
of the Sweep Shares assets of the Fund, a fee in the amount of 0.25% on an
annualized basis of the average daily net assets attributable to the Sweep
Shares, to New York Life Insurance Company, its affiliates or independent third
party service providers, for providing services in connection with the
administration of plans or programs that use Fund shares as their funding
medium.
Under the terms of the Shareholder Services Plan, the Fund may pay to
service agents "service fees" as that term is defined in the rules of the
National Association of Securities Dealers for services provided to shareholders
of the Sweep Shares. These fees are for personal services, including assistance
in establishing and maintaining shareholder accounts and assisting shareholders
that have questions or other needs relating to their accounts.
- 31 -
<PAGE> 54
The Plan provides that it may not be amended to materially increase the
costs which holders of Sweep Shares may bear under the Plan without the approval
of a majority of both (i) the Directors of the Company and (ii) those Directors
who are not "interested persons" of the Company (as defined in the 1940 Act) and
who have no direct or indirect financial interest in the operation of the Plan
or any agreements related to it (the "Independent Directors"), cast in person at
a meeting called for the purpose of voting on such amendment, and by a majority
(as defined in the 1940 Act) of the outstanding voting securities of the Sweep
Shares.
The Plan provides that it may not take effect until approved by vote of
a majority of both (i) the Directors of the Company and (ii) the Independent
Directors. The Plan was approved by the Directors, including the Independent
Directors, at a meeting held on September 1, 1998.
The Plan provides that it shall continue in effect so long as such
continuance is specifically approved at least annually by the Directors and the
Independent Directors. The Plan provides that New York Life shall provide to the
Directors, and the Board shall review at least quarterly, a written report of
the amounts expended in connection with the performance of service activities,
and the purposes for which such expenditures were made.
DISTRIBUTION FEES
The Company has adopted a Rule 12b-1 Plan of Distribution ("12b-1
Plan") with respect to the Sweep Shares. Under the terms of the 12b-1 Plan, the
Company is permitted to pay, out of the Sweep Shares assets of the Fund, a fee
at the annual rate of 0.25% of the average daily net assets attributable to the
Sweep Shares, to the Distributor, NYLIFE Securities, Inc. or any other
broker-dealer or other financial institution, for account sweep and other
distribution-related services to the Sweep Shares and for services to
shareholders of the Sweep Shares. The amounts payable under the 12b-1 Plan are
used to support the distribution of Sweep Shares, including the establishment
and operation of account sweep services and any other activities or expenses
primarily intended to result in the sale of Sweep Shares.
The 12b-1 Plan provides that it may not be amended to materially
increase the costs which holders of Sweep Shares may bear under the Plan without
the approval of a majority of both (i) the Directors of the Company and (ii) the
Independent Directors, cast in person at a meeting called for the purpose of
voting on such amendment, and by a majority (as defined in the
- 32 -
<PAGE> 55
1940 Act) of the outstanding voting securities of the Sweep Shares.
The 12b-1 Plan provides that it may not take effect until approved by
vote of a majority of both (i) the Directors of the Company and (ii) the
Independent Directors. The 12b-1 Plan was approved by the Directors, including
the Independent Directors, at a meeting held on September 1, 1998.
The 12b-1 Plan provides that it shall continue in effect so long as
such continuance is specifically approved at least annually by the Directors and
the Independent Directors. The Plan provides that NYLIFE Distributors, Inc.
and/or NYLIFE Securities, Inc. shall provide to the Directors, and the Board
shall review at least quarterly, a written report of the amounts expended under
the 12b-1 Plan and the purposes for which such expenditures were made.
ADDITIONAL INFORMATION
Shareholders maintaining Fund accounts through brokerage firms and
other institutions should be aware that such institutions necessarily set
deadlines for receipt of transaction orders from their clients that are earlier
than the transaction times of the Fund itself so that the institutions may
properly process such orders prior to their transmittal to MainStay Shareholder
Services Inc. Should an investor place a transaction order with such an
institution after its deadline, the institution may not effect the order with
the Fund until the next business day. Accordingly, an investor should
familiarize himself or herself with the deadlines set by his or her institution.
(For example, the Fund's Distributor accepts purchase orders from its customers
up to 2:15 p.m. for issuance at the 4:00 p.m. transaction time and price.) A
brokerage firm acting on behalf of a customer in connection with transactions in
Fund shares is subject to the same legal obligations imposed on it generally in
connection with transactions in securities for a customer, including the
obligation to act promptly and accurately.
Orders for the purchase of Fund shares become effective at the next
transaction time after Federal funds or bank wire monies become available to
MainStay Shareholder Services for a shareholder's investment. Federal funds are
a bank's deposits in a Federal Reserve Bank. These funds can be transferred by
Federal Reserve wire from the account of one member bank to that of another
member bank on the same day and are considered to be immediately available
funds; similar immediate availability is accorded monies received at MainStay
Shareholder Services by bank wire. Money transmitted by a check drawn on a
member of the
- 33 -
<PAGE> 56
Federal Reserve System is converted to Federal funds in one business day
following receipt. Checks drawn on banks which are not members of the Federal
Reserve System may take longer. All payments (including checks from individual
investors) must be in United States dollars.
PURCHASES AND REDEMPTIONS
Purchases and redemptions are discussed in the Prospectus under the
headings "Tell Me The Key Facts -- Open an Account and Buy Shares", and "Know
How to Sell Shares", and that information is incorporated herein by reference.
The Company determines the net asset value per share of the Fund on
each day the New York Stock Exchange is open for trading.
The Company reserves the right to suspend or postpone redemptions
during any period when: (a) trading on the New York Stock Exchange is
restricted, as determined by the SEC, or that Exchange is closed for other than
customary weekend and holiday closings; (b) the SEC has by order permitted such
suspension; or (c) an emergency, as determined by the SEC, exists, making
disposal of portfolio securities or valuation of net assets of the Fund not
reasonably practicable.
For shares of the Fund redeemed within any 90-day period, the Fund
reserves the right to pay the shareholder a maximum of $250,000 in cash, or cash
equal to 1% of the Fund's net assets, whichever is less. To protect the
remaining shareholders in the Fund, anything redeemed above this amount may not
be paid in cash, but could be paid entirely, or in part, in the same kinds of
securities held by the Fund. These securities would be valued at the same value
that was assigned to them in calculating the net asset value of the shares
redeemed. Even though it is highly unlikely that shares would ever actually be
redeemed in kind, shareholders would probably have to pay transaction costs to
sell the securities distributed in kind, should such a distribution occur.
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<PAGE> 57
PORTFOLIO TRANSACTIONS AND BROKERAGE
Purchases and sales of securities on a securities exchange are effected
by brokers, and the Fund pays a brokerage commission for this service. In
transactions on stock exchanges in the United States, these commissions are
negotiated, whereas on many foreign stock exchanges these commissions are fixed.
In the over-the-counter markets, securities (i.e., municipal bonds and other
debt securities) are generally traded on a "net" basis with dealers acting as
principal for their own accounts without a stated commission, although the price
of the security usually includes a profit to the dealer. Transactions in certain
over-the-counter securities also may be effected on an agency basis when the
total price paid (including commission) is equal to or better than the best
total prices available from other sources. In underwritten offerings, securities
are purchased at a fixed price which includes an amount of compensation to the
underwriter, generally referred to as the underwriter's concession or discount.
On occasion, certain money market instruments may be purchased directly from an
issuer, in which case no commissions or discounts are paid.
In effecting purchases and sales of portfolio securities for the
account of the Fund, the Sub-Adviser will seek the best execution of the Fund's
orders. The Sub-Adviser attempts to achieve this result by selecting
broker-dealers to execute portfolio transactions on behalf of the Fund and its
other clients on the basis of the broker-dealers' professional capability, the
value and quality of their brokerage services and the level of their brokerage
commissions.
NYLIFE Securities (the "Affiliated Broker") may act as broker for the
Fund. In order for the Affiliated Broker to effect any portfolio transactions
for the Fund on an exchange, the commissions, fees or other remuneration
received by the Affiliated Broker must be reasonable and fair compared to the
commissions, fees or other remuneration paid to other brokers in connection with
comparable transactions involving similar securities being purchased or sold on
an exchange during a comparable period of time. This standard would allow the
Affiliated Broker to receive no more than the remuneration which would be
expected to be received by an unaffiliated broker in a commensurate arms-length
transaction. The Fund will not deal with the Affiliated Broker in any portfolio
transaction in which the Affiliated Broker acts as principal.
Some securities considered for investment by the Fund may also be
appropriate for other clients served by the Sub-Adviser. If a purchase or sale
of securities consistent with the investment policies of the Fund and one or
more of the clients
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<PAGE> 58
served by the Sub-Adviser is considered at or about the same time, transactions
in such securities will, to the extent practicable, be allocated among the Fund
and clients in a manner deemed equitable to the Fund and the clients by the
Sub-Adviser. Although there is no specified formula for allocating such
transactions, the various allocation methods used by the Sub-Adviser, and the
results of such allocations, are subject to periodic review by the Company's
Directors.
It has for many years been a common practice in the investment advisory
business for advisers (or sub-advisers) of investment companies and other
institutional investors to receive research services from broker-dealers which
execute portfolio transactions for the clients of such advisers. Consistent with
this practice, the Sub-Adviser may receive research services from many
broker-dealers with which the Sub-Adviser places the Fund's portfolio
transactions. These services, which in some cases may also be purchased for
cash, include such matters as general economic and security market reviews,
industry and company reviews, evaluations of securities and recommendations as
to the purchase and sale of securities. Some of these services may be of value
to the Sub-Adviser in advising its various clients (including the Fund),
although not all of these services are necessarily useful and of value in
managing the Fund. The management fee paid by the Fund and the sub-advisory fee
paid by the Manager are not reduced because the Sub-Adviser and its affiliates
receive such services.
As permitted by Section 28(e) of the Securities Exchange Act of 1934,
an investment adviser (or sub-adviser) may cause a fund to pay a broker-dealer
which provides "brokerage and research services" (as defined in that Act) to the
investment adviser (or sub-adviser) an amount of disclosed commission for
effecting a securities transaction for the Fund in excess of the commission
which another broker-dealer would have charged for effecting that transaction.
For the years ended December 31, 1997, 1996 and 1995 the Fund paid no
brokerage commissions on portfolio transactions for the Institutional Class and
the Institutional Service Class.
As of December 31, 1997, the Fund held commercial paper of the
following issuers with whose broker-dealer subsidiaries or affiliates the Fund
regularly conducts business:
<TABLE>
<CAPTION>
Broker-Dealer Market Value
- ------------- ------------
<S> <C>
Goldman, Sachs & Co. $9,838,360
Morgan (J.P.) & Co. Inc. $4,957,747
Morgan Stanley, Dean Witter, Discover & Company $7,928,105
</TABLE>
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<PAGE> 59
NET ASSET VALUE
The Company determines the net asset value per share of each class of
the Fund on each day the New York Stock Exchange is open for trading. Net asset
value per share is calculated as of noon (Eastern time) for the Sweep
Shares of the Fund, by dividing the amortized cost of the total assets
attributable to a class, less liabilities attributable to that class, by the
total number of outstanding shares of that class.
Portfolio securities of the Fund are valued at their amortized cost,
which does not take into account unrealized securities gains or losses. This
method involves initially valuing an instrument at its cost and thereafter
assuming a constant amortization to maturity of any premium paid or discount
received. While this method provides certainty in valuation, it may result in
periods during which value, as determined by amortized cost, is higher or lower
than the price the Fund would receive if it sold the instrument. During such
periods, the yield to an investor in the Fund may differ somewhat than that
obtained in a similar investment company which uses available market quotations
to value all of its portfolio securities.
To the extent that any newly organized class of shares receives, on or
before December 31, any seed capital, the net asset value of such class(es) will
be calculated as of December 31.
TAX INFORMATION
The discussion herein relating to taxes is presented for general
informational purposes only. Since the tax laws are complex and tax results can
vary depending upon specific circumstances, investors should consult tax
advisers regarding investment in the Fund.
The Fund intends to qualify annually and elect to be treated as a
regulated investment company under Subchapter M of the Internal Revenue Code of
1986, as amended (the "Code"). If the Fund so qualifies and elects, it generally
will not be subject to Federal income tax on its investment company taxable
income (which includes, among other items, dividends, interest, and the excess,
if any, of net short-term capital gains over net long-term capital losses) and
its net capital gains (net
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<PAGE> 60
long-term capital gains in excess of net short-term capital losses) that it
distributes to its shareholders.
To qualify for treatment as a regulated investment company, the Fund
generally must, among other things: (a) derive in each taxable year at least 90%
of its gross income from dividends, interest, payments with respect to
securities loans, gains from the sale or other disposition of securities or
foreign currencies, and other income (including gains from certain options,
futures, and forward contracts) derived with respect to its business of
investing in securities or foreign currencies; (b) diversify its holdings so
that at the end of each quarter of the taxable year, (i) at least 50% of the
market value of the Fund's assets is represented by cash, cash items, U.S.
Government securities, the securities of other regulated investment companies
and other securities, with such other securities of any one issuer limited for
the purposes of this calculation to an amount not greater than 5% of the value
of the Fund's total assets and 10% of the outstanding voting securities of such
issuer, and (ii) not more than 25% of the value of its total assets is invested
in the securities of any one issuer (other than U.S. Government securities or
the securities of other regulated investment companies), or of two or more
issuers which the Fund controls and which are engaged in the same or similar
trades or businesses or related trades or businesses; and (c) distribute in each
taxable year at least 90% of the sum of its investment company taxable income
and its net tax-exempt interest income. If the Fund does not meet all of these
Code requirements, it will be taxed as an ordinary corporation and its
distributions (to the extent of available earnings and profits) will be taxed to
shareholders as ordinary income (except to the extent a shareholder is exempt
from tax).
Amounts not distributed on a timely basis in accordance with a calendar
year distribution requirement are subject to a nondeductible 4% excise tax. To
prevent imposition of the excise tax, the Fund must distribute for the calendar
year an amount equal to the sum of (1) at least 98% of its ordinary taxable
income (excluding any capital gains or losses) for the calendar year, (2) at
least 98% of the excess of its capital gains over capital losses (adjusted for
certain ordinary losses) for the one-year period ending October 31 of such year,
and (3) all ordinary taxable income and capital gain net income (adjusted for
certain ordinary losses) for previous years that were not distributed during
such years. A distribution will be treated as paid on December 31 of the
calendar year if it is declared by the Fund in October, November or December of
that year to shareholders on a record date in such a month and paid by the Fund
during January of the following calendar year. Such a distribution will be
includable in the gross income of
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<PAGE> 61
shareholders in the calendar year in which it is declared, rather than the
calendar year in which it is received.
The Fund's deduction for interest expense may be restricted where the
Fund invests in obligations the interest on which is exempt in whole or in part
from Federal income tax.
Distributions of net capital gains, if any, designated by the Fund as
capital gain dividends, will generally be taxable to shareholders as either "20%
Rate Gain" or "28% Rate Gain", depending upon the Fund's holding period for the
assets sold. "20% Rate Gains" arise from sales of assets held by the Fund for
more than 18 months and are subject to a maximum tax rate of 20%; "28% Rate
Gains" arise from sales of assets held by the Fund for more than one year but
not more than 18 months and are subject to a maximum tax rate of 28%. Net
capital gains from assets held for one year or less will be taxed as ordinary
income. Distributions will be subject to these capital gains rates regardless of
the length of time the Fund's shares have been held by a shareholder and will
not be eligible for the dividends-received deduction. All distributions are
includable in the gross income of a shareholder whether reinvested in additional
shares or received in cash. Shareholders will be notified annually as to the
Federal tax status of distributions.
The Fund's distributions with respect to a given taxable year may
exceed its current and accumulated earnings and profits available for
distribution. In that event, distributions in excess of such earnings and
profits would be characterized as a return of capital to shareholders for
Federal income tax purposes, thus reducing each shareholder's cost basis in his
Fund shares. Distributions in excess of a shareholder's cost basis in his shares
would be treated as a gain realized from a sale of such shares.
Upon the taxable disposition (including a sale or redemption) of shares
of the Fund, a shareholder may realize a gain or loss depending generally upon
his basis in his shares. Such gain or loss will be treated as capital gain or
loss if the shares are capital assets in the shareholder's hands and will be
long-term or short-term, generally depending upon the shareholder's holding
period for the shares. However, a loss realized by a shareholder on the
disposition of shares of the Fund with respect to which capital gain dividends
have been paid will, to the extent of such capital gain dividends, be treated as
long-term capital loss if such shares have been held by the shareholder for six
months or less. Further, a loss realized on a disposition will be disallowed to
the extent the shares disposed of are replaced (whether by reinvestment of
distributions or otherwise) within a period of 61 days beginning
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<PAGE> 62
30 days before and ending 30 days after the shares are disposed of. In such a
case, the basis of the shares acquired will be adjusted to reflect the
disallowed loss. Shareholders receiving distributions in the form of additional
shares will have a cost basis for Federal income tax purposes in each share
received equal to the net asset value of a share of the Fund on the reinvestment
date.
Foreign investing involves the possibility of confiscatory taxation,
foreign taxation of income earned in the foreign nation (including withholding
taxes on interest and dividends) or other foreign taxes imposed with respect to
investments in the foreign nation.
Some of the debt securities that may be acquired by the Fund may be
treated as debt securities that are originally issued at a discount. Original
issue discount can generally be defined as the difference between the price at
which a security was issued and its stated redemption price at maturity.
Although no cash income is actually received by the Fund, original issue
discount on a taxable debt security earned in a given year generally is treated
for Federal income tax purposes as interest and, therefore, such income would be
subject to the distribution requirements of the Code.
Some of the debt securities may be purchased by the Fund at a discount
which exceeds the original issue discount on such debt securities, if any. This
additional discount represents market discount for Federal income tax purposes.
The gain realized on the disposition of any debt security acquired after April
30, 1993 or any taxable debt security acquired prior to May 1, 1993 having
market discount will be treated as ordinary income to the extent it does not
exceed the accrued market discount on such debt security. Generally, market
discount accrues on a daily basis for each day the debt security is held by the
Fund at a constant rate over the time remaining to the debt security's maturity
or, at the election of the Fund, at a constant yield to maturity which takes
into account the semi-annual compounding of interest.
If the Fund holds zero coupons bonds in its portfolio it will recognize
income currently for Federal tax purposes in the amount of the unpaid, accrued
interest (determined under tax rules) and generally will be required to
distribute dividends representing such income to shareholders currently, even
through funds representing such income have not been received by the Fund.
The Fund is required to report to the IRS all distributions
except in the case of certain exempt shareholders. All such
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<PAGE> 63
distribution and redemption proceeds generally are subject to withholding of
Federal income tax at a rate of 31% ("backup withholding") in the case of
non-exempt shareholders if (1) the shareholder fails to furnish the Fund with
and to certify the shareholder's correct taxpayer identification number, (2) the
IRS notifies the Fund or shareholder that the shareholder has failed to report
properly certain interest and dividend income to the IRS and to respond to
notices to that effect, or (3) when required to do so, the shareholder fails to
certify that he is not subject to backup withholding. If the withholding
provisions are applicable, any such distributions, whether reinvested in
additional shares or taken in cash, will be reduced by the amounts required to
be withheld. Backup withholding is not an additional tax and any amounts
withheld may be credited against the shareholder's U.S. Federal income tax
liability. Investors may wish to consult their tax advisers about the
applicability of the backup withholding provisions.
The foregoing discussion relates only to Federal income tax law as
applicable to U.S. persons (i.e., U.S. citizens and residents and U.S. domestic
corporations, partnerships, trusts and estates). Distributions by the Fund also
may be subject to state and local taxes and their treatment under state and
local income tax laws may differ from the Federal income tax treatment.
Shareholders should consult their tax advisers with respect to particular
questions of Federal, state and local taxation. Shareholders who are not U.S.
persons should consult their tax advisers regarding U.S. and foreign tax
consequences of ownership of shares of the Fund including the likelihood that
distributions to them would be subject to withholding of U.S. tax at a rate of
30% (or at a lower rate under a tax treaty).
PERFORMANCE INFORMATION
The Company may, from time to time, include the yield and effective
yield and total return of the Fund in advertisements, sales literature, or
reports to shareholders or prospective investors.
Current yield for the Fund will be based on the change in the value of
a hypothetical investment (exclusive of capital charges) over a particular
seven-day period, less a pro rata share of Fund expenses accrued over that
period (the "base period"), and stated as a percentage of the investment at the
start of the base period (the "base period return"). The base period return is
then annualized by multiplying by 365/7, with the resulting yield figure carried
to at least the nearest hundredth of one percent. "Effective yield" for the Fund
assumes that all dividends received during an annual period have been
reinvested. Calculation of "effective yield" begins with the
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<PAGE> 64
same "base period return" used in the calculation of yield, which is then
annualized to reflect weekly compounding pursuant to the following formula:
Effective Yield = [(Base Period Return + 1)365/7] - 1
Quotations of average annual total return for the Fund will be
expressed in terms of the average annual compounded rate of return of a
hypothetical investment in the Fund or Class over certain periods that will
include a period of one year (or, if less, up to the life of the Fund),
calculated pursuant to the following formula: P(1 + T)n = ERV (where P = a
hypothetical initial payment of $1,000, T = the total return for the period, n =
the number of periods, and ERV = the ending redeemable value of a hypothetical
$1,000 payment made at the beginning of the period). Quotations of total return
may also be shown for other periods. All total return figures reflect the
deduction of a proportional share of Fund or Class expenses on an annual basis,
reflect fee waivers or reimbursements in effect for each period and assume that
all dividends and distributions are reinvested when paid. Quotations of total
return may also be shown for other periods.
In addition, advertising for the Fund may indicate that investors may
consider diversifying their investment portfolios in order to seek protection of
the value of their assets against inflation. From time to time, advertising
materials for the Fund may refer to or discuss current or past business,
political, economic or financial conditions, including events as they relate to
those conditions, such as any U.S. monetary or fiscal policies and the current
rate of inflation. In addition, from time to time, advertising materials for the
Fund may include information concerning retirement and investing for retirement
and may refer to the approximate number of then-current Fund shareholders,
shareholder accounts and Fund assets.
From time to time, advertising and sales literature for the Fund may
discuss the investment philosophy, personnel and assets under management of the
Sub-Adviser, and other pertinent facts relating to the management of the Fund by
the Sub-Adviser.
From time to time the Fund may publish an indication of its past
performance as measured by independent sources such as Lipper Analytical
Services, Incorporated, Weisenberger Investment Companies Service, Donoghue's
Money Fund Report, Spot Market Prices, Barron's, BusinessWeek, Kiplinger's
Personal Finance, Financial World, Forbes, Money, Morningstar, Personal
Investor, Sylvia Porter's Personal Finance, and The Wall Street Journal.
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<PAGE> 65
In addition, performance information for the Fund may be compared, in
advertisements, sales literature, and reports to shareholders, to: (i) unmanaged
indexes, such as the Standard & Poor's 500 Composite Stock Price Index, the
Salomon Brothers Broad Investment Grade Bond Index, the Morgan Stanley Capital
International indexes; the Dow Jones Industrial Average, Donoghue Money Market
Institutional Averages, the Merrill Lynch 1 to 3 Year Treasury Index, the
Salomon Brothers World Government Benchmark Bond Index, the Salomon Brothers
non-U.S. Dollar World Government Bond Index, the Lehman Brothers Municipal Bond
Index and the Lehman Brothers Government Corporate Index; (ii) other groups of
mutual funds tracked by Morningstar Inc. or Lipper Analytical Services, widely
used independent research firms which rank mutual funds by overall performance,
investment objectives and assets, or tracked by other services, companies,
publications or persons who rank mutual funds on overall performance or other
criteria; and (iii) the Consumer Price Index (measure for inflation) and other
measures of the performance of the economy to assess the real rate of return
from an investment in the Fund. Unmanaged indexes may assume the reinvestment of
dividends but generally do not reflect deductions for administrative and
management costs and expenses.
From time to time, advertisements for the Fund may include general
information about the services and products offered by the Fund, The MainStay
Funds and New York Life Insurance Company and its subsidiaries. For example,
such advertisements may include statistical information about those entities
including, but not limited to, the number of current shareholder accounts, the
amount of assets under management, sales information, the distribution channels
through which the entities' products are available, marketing efforts and
statements about this information by the entities' officers, directors and
employees.
OTHER INFORMATION
CAPITALIZATION
The Fund is a separate portfolio of the Company, an open-end management
investment company, incorporated under the laws of Maryland on September 21,
1990. The Company was formerly known as New York Life Institutional Funds Inc.
On January 3, 1995 the name of the Company was changed to its present form. In
addition to the Sweep Shares, the Fund offers two other classes of shares, the
Institutional Class and the Institutional Service Class. The Company also offers
ten other portfolios, each of which has two classes of shares. The Board of
Directors may
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<PAGE> 66
establish additional portfolios (with different investment objectives and
fundamental policies), and classes thereof, at any time in the future.
Establishment and offering of additional portfolios or classes will not alter
the rights of the Company's shareholders. When issued, shares are fully paid,
non-assessable, redeemable, and freely transferable.
BENEFICIAL OWNERSHIP OF SHARES
As of the date of this Statement of Additional Information, NYLIFE
Distributors owned all of the outstanding Sweep Shares.
CODE OF ETHICS
The Company has adopted a Code of Ethics governing personal trading
activities of all Directors, officers of the Company and persons who, in
connection with their regular functions, play a role in the recommendation of
any purchase or sale of a security by the Company or obtain information
pertaining to such purchase or sale or who have the power to influence the
management or policies of the Company or the Manager or a Sub-Adviser unless
such power is the result of their position with the Company or Manager or
Sub-Adviser. Such persons are generally required to preclear all security
transactions with the Company's Compliance Officer or his designee and to report
all transactions on a regular basis. The Company has developed procedures for
administration of the Code of Ethics.
INDEPENDENT ACCOUNTANTS
Pricewaterhouse Coopers LLP, 1177 Avenue of the Americas, New York, New
York 10036, has been selected as independent accountants of the Company.
LEGAL COUNSEL
Dechert Price & Rhoads, 1775 Eye Street, N.W., Washington, D.C. 20006,
passes upon certain legal matters in connection with the shares offered by the
Company, and also acts as counsel to the Company.
FINANCIAL STATEMENTS
The Company will furnish to Sweep Shares shareholders annual reports
containing financial statements audited by independent public accountants and
semi-annual reports containing unaudited financial statements.
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<PAGE> 67
REGISTRATION STATEMENT
This Statement of Additional Information and the Prospectus do not
contain all the information included in the Company's registration statement
filed with the SEC under the Securities Act of 1933 with respect to the
securities offered hereby, certain portions of which have been omitted pursuant
to the rules and regulations of the SEC. The registration statement, including
the exhibits filed therewith, may be examined at the offices of the SEC in
Washington, D.C.
Statements contained herein and in the Prospectus as to the contents of
any contract or other documents referred to are not necessarily complete, and,
in each instance, reference is made to the copy of such contract or other
documents filed as an exhibit to the registration statement, each such statement
being qualified in all respects by such reference.
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