<PAGE>
As filed with the Securities and Exchange Commission on April 30, 1998
File No. 33-36962
File No. 811-6175
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933 /X/
Post-Effective Amendment No. 18 /X/
and
REGISTRATION STATEMENT UNDER THE INVESTMENT
COMPANY ACT OF 1940 /X/
Amendment No. 20 /X/
MAINSTAY INSTITUTIONAL FUNDS INC.
---------------------------------
(Exact name of Registrant as Specified in Charter)
51 Madison Avenue
New York, New York 10010
------------------------
(Address of Principal Executive Offices)
(212) 576-8149
--------------
(Registrant's Telephone Number, including Area Code)
Sara L. Badler, Esq.
--------------------
MainStay Institutional Funds Inc.
51 Madison Avenue
New York, New York 10010
------------------------
(Name and Address of Agent for Service)
with a copy to:
Jeffrey L. Steele, Esq.
Dechert Price & Rhoads
1775 Eye Street, N.W.
Washington, D.C. 20006
/X/ It is proposed that this filing will become effective on May 1, 1998
pursuant to paragraph (b) of Rule 485 under the Securities Act of 1933.
<PAGE>
MAINSTAY INSTITUTIONAL FUNDS INC.
CROSS REFERENCE SHEET
This Registration Statement contains a separate Prospectus for each of the
Institutional Class and the Institutional Service Class of the Registrant's
shares. These Prospectuses contain information about each of the Registrant's
eleven separately managed series. In addition, this Registration Statement
contains a separate Prospectus for the Money Market Fund's Institutional Service
Class of shares. Information regarding both Classes, and the Money Market Fund,
is included in a combined Statement of Additional Information. The
cross-references listed below are applicable to the Prospectuses of the
Institutional Class and the Institutional Service Class of shares and the
separate Prospectus of the Money Market Fund's Institutional Service Class of
shares, as applicable.
Items Required by Form N-1A
Item Number in Part A Prospectus Caption
--------------------- ------------------
1. Cover Page Cover Page
2. Synopsis Tell Me The Key Facts -
Analyze the Costs of
Investing: Ongoing Fees;
If you Invest $1,000 You
Might Pay
3. Condensed Financial Information Financial Highlights
4. General Description of Tell Me The Key Facts -
Registrant Descriptions of Each
Fund; General Investment
Considerations; Tell Me
The Details - The
Company; Other
Information About the
Funds; Description of
Investments and
Investment Practices
5. Management of the Fund Tell Me The Key Facts -
Know Who You're Investing
With; Tell Me The Details
- The Company; Manager
and Sub-Advisers
5A. Management's Discussion of Information Contained in
Fund Performance Registrant's Annual
Report
<PAGE>
6. Capital Stock and Other Tell Me The Key Facts -
Securities Understand the Tax
Consequences; Tell Me The
Details - The Company;
Portfolio Transactions
7. Purchase of Securities Tell Me The Key Facts -
Being Offered Open an Account and Buy
Shares
8. Redemption or Repurchase Tell Me The Key Facts -
Know How to Sell and
Exchange Shares
9. Pending Legal Proceedings Not Applicable
Statement of Additional
Item Number in Part B Information Caption
--------------------- -------------------
10. Cover Page Cover Page
11. Table of Contents Table of Contents
12. General Information and Management of the Company
History
13. Investment Objectives and Additional Investment
Policies of the Money
Market Fund; Investment
Objectives and Policies;
Investment Restrictions
14. Management of the Fund Management of the Company
15. Control Persons and Principal Management of the
Holders of Securities Company; Other
Information
16. Investment Advisory and Management of the Company
Other Services
17. Brokerage Allocation and Portfolio Transactions
Other Practices and Brokerage
18. Capital Stock and Other Other Information
Securities
19. Purchase, Redemption and Purchases and Redemptions
Pricing of Securities Being
Offered
- 2 -
<PAGE>
20. Tax Status Tax Information
21. Underwriters Management of the Company
22. Calculations of Performance Performance Information
Data
23. Financial Statements Other Information -
Financial Statements
- 3 -
<PAGE>
- --------------------------------------------------------------------------------
MainStay Institutional Funds Inc. Prospectus May 1, 1998
- --------------------------------------------------------------------------------
Institutional Class
================================================================================
Read This!
================================================================================
These Funds aren't federally insured or guaranteed by the U.S. government.
Shares of these Funds 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 Funds are subject to investment risks, including possible
loss of principal (see "Description of Investments and Investment Practices" on
page 43).
No guarantees. There can be no assurance that the investment objective of any
Fund will be achieved. All mutual funds involve risk, including the potential to
lose some or all of your original investment. Except for money market funds, the
price of a mutual fund share will fluctuate, and, when sold, may be higher or
lower than your original purchase price. Furthermore, although the Money Market
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; but if you have any
questions, please call 1-800-695-2126, or write to us at:
MainStay Institutional Funds Inc.
Box 461
Parsippany, NJ 07054-0461
For even more details, write to NYLIFE Distributors Inc., 300 Interpace Parkway,
Parsippany, NJ 07054 or call the above number for a free copy of the Statement
of Additional Information (SAI) dated May 1, 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.
- --------------------------------------------------------------------------------
MainStay Institutional Funds offers 11 no-load mutual funds with a broad range
of investment choices.
<TABLE>
<CAPTION>
================================================================================
Equity Page
================================================================================
<S> <C>
EAFE Index Fund ........................................................... 19
Growth Equity Fund ........................................................ 20
Indexed Equity Fund ....................................................... 21
International Equity Fund ................................................. 22
Multi-Asset Fund .......................................................... 23
Value Equity Fund ......................................................... 24
================================================================================
Fixed Income
================================================================================
Bond Fund ................................................................. 25
Indexed Bond Fund ......................................................... 26
International Bond Fund ................................................... 27
Money Market Fund ......................................................... 28
Short-Term Bond Fund ...................................................... 29
</TABLE>
[LOGO]
MAINSTAY(R)
INSTITUTIONAL
FUNDS INC.
<PAGE>
This page intentionally left blank
2
<PAGE>
- --------------------------------------------------------------------------------
What's Inside?
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
================================================================================
Tell Me Quickly Page
================================================================================
<S> <C>
The Funds; The Number to Call for Help .......................................1
A Quick Overview: Understanding MainStay Institutional Funds ...............4-5
================================================================================
Tell Me The Key Facts
================================================================================
Analyze the Costs of Investing: Ongoing Fees .................................6
If You Invest $1,000 You Might Pay ...........................................6
Financial Highlights .....................................................11-16
Historical Performance ...................................................17-18
Descriptions of Each Fund ................................................19-29
General Investment Considerations ........................................30-31
Open an Account and Buy Shares ...........................................32-33
Know How to Sell and Exchange Shares .....................................34-35
Decide How to Receive Your Earnings .........................................36
Understand the Tax Consequences .............................................36
Know Who You're Investing With ...........................................37-38
Know Your Rights as a Shareholder ...........................................39
================================================================================
Tell Me The Details
================================================================================
The Company .................................................................40
Other Information About the Funds ...........................................40
Description of Investments and Investment Practices .........................43
Manager and Sub-Advisers ....................................................47
Portfolio Transactions ......................................................48
Other Information ...........................................................48
Appendix A: Description of Securities Ratings ..............................49
</TABLE>
3
<PAGE>
- --------------------------------------------------------------------------------
A Quick Overview
- --------------------------------------------------------------------------------
- -----
1
- -----
================================================================================
Set your investment priorities
================================================================================
Decide if they are:
o protecting what you have
o receiving income from dividends
o participating in the potential for greater investment returns
o diversifying your current investment portfolio
o a combination of any of the above
How much risk of losing money are you willing to take; how aggressive are you
willing to be to make money? This two-part question may be the most difficult
question in the world of investing. If you are not a professional investor, you
should talk it over with your service agent or registered representative. He or
she may have some ideas you hadn't considered.
- --------------------------------------------------------------------------------
- -----
2
- -----
================================================================================
Study the Funds' objectives, policies and risks
================================================================================
Focus on the Funds that seem to be seeking your objectives. Read about the
people who manage each Fund. Understand the types of securities in which each
Fund invests and the risks associated with those investments.
If you have a registered representative or service agent, discuss the Funds with
him or her or call 1-800-695-2126.
For key facts about, and risks associated with, the Funds, see pgs. 19-29.
(For more detailed information, see "Tell Me The Details" in this Prospectus and
the Statement of Additional Information (SAI).)
- --------------------------------------------------------------------------------
- -----
3
- -----
================================================================================
Evaluate each Fund's track record, fees and expenses
================================================================================
Turn to pgs. 11-16 for Financial Highlights. Read down the columns (by year) and
find, in particular, the beginning and ending share prices, the amount of income
produced, and the "total investment return" figures, to see how each Fund has
done in the past.
Don't just look at recent performance, which may or may not be repeated. Read
the "total investment return" for each year to look for a performance pattern.
Remember, though, no fund can ever guarantee it will continue to perform at the
same levels.
Understand the ongoing fees.
(See "Analyze the Costs of Investing: Ongoing Fees"; "If You Invest $1000 You
Might Pay ..."; and the Examples beginning on pg. 7 for your Fund's ongoing fees
and the impact of those costs on a $1,000 investment.)
- --------------------------------------------------------------------------------
- -----
7
- -----
================================================================================
Ongoing fees
================================================================================
Every mutual fund pays fees for services. These may include distribution,
marketing, investment management and shareholder services. Fees are generally
charged on a regular schedule. You're not charged directly; the Fund pays the
fees to the firms who provide the services and then deducts the amounts from the
Fund's assets. This, consequently, reduces the NAV of your shares.
(To learn more, see pg. 47, "Manager and Sub-Advisers.")
- --------------------------------------------------------------------------------
- -----
8
- -----
================================================================================
Earn dividends and capital gains
================================================================================
Your Fund may earn money through interest payments, dividend payments or through
capital appreciation of the securities it owns. The Fund periodically
distributes these earnings to you based on the number of shares you own. For tax
qualified plans, distributions are reinvested in additional shares. You should
check how often a Fund makes distributions, especially if current income is
important to you.
You may elect to have earnings sent to you or have them automatically reinvested
in more shares.
(To learn more, see pg. 36, "Decide How To Receive Your Earnings.")
- --------------------------------------------------------------------------------
- -----
9
- -----
================================================================================
Exchange shares/Redeem shares
================================================================================
You generally may redeem your shares on any business day, or transfer them to
another Fund by exchanging shares. The Fund will redeem shares at the current
net asset value and send you a check, or, if you wish, exchange shares of one
Fund for shares of another. An exchange is considered a sale of shares of one
Fund and a purchase of another and may have tax consequences. You can only
exchange shares of the same class. Participation in a systematic withdrawal and
exchange plan may be available for Group IRA or Group Account investors.
(To learn more, see pgs. 34-35, "Know How to Sell and Exchange Shares.")
- --------------------------------------------------------------------------------
4
<PAGE>
- --------------------------------------------------------------------------------
...Understanding MainStay Institutional Funds
- --------------------------------------------------------------------------------
- -----
4
- -----
================================================================================
Decide how much to invest in each Fund
================================================================================
You may split your investment among as many MainStay Institutional Funds as you
desire. If you are an institutional investor, your initial investment must be at
least $250,000 over the first 13 months. There are also minimum requirements for
subsequent investments.
(See pgs. 32-33, "Open an Account and Buy Shares," for the amounts.)
- --------------------------------------------------------------------------------
- -----
5
- -----
================================================================================
Open an account/Buy shares
================================================================================
To open an account, fill out an application and place the order directly or
through your registered representative or service agent.
Make sure you provide complete information, including who will own the account,
and especially your Social Security number or Taxpayer ID. If you're
participating through an employer sponsored plan, your employer will complete
the application.
This is also the time to decide how to make other choices that will affect how
you manage your investments including how to receive earnings.
(For more on opening an account see pgs. 32-33, "Open an Account and Buy
Shares.")
- --------------------------------------------------------------------------------
- -----
6
- -----
================================================================================
See how many shares your money will buy
================================================================================
You can calculate the number of shares of a Fund your money buys by dividing the
amount of your investment by the price of one share ("net asset value" or "NAV")
of the Fund.
Each Fund's net asset value is calculated at the close of business of the New
York Stock Exchange, normally 4:00 p.m. Eastern time each business day (noon for
the Money Market Fund). The number of shares you receive is based on the NAV
next calculated after your order is received. You'll receive written
confirmation of your purchase.
(To learn more, see pgs. 32-33, "Open an Account and Buy Shares.")
- --------------------------------------------------------------------------------
- -----
10
- -----
================================================================================
Manage your taxes/
Align your goals
================================================================================
If you've made a profit on your investment either through dividends,
distributions or capital gains, you may have to pay taxes at tax time.
Generally, taxes are deferred if you're investing through a "tax-exempt" plan,
such as a 401(k) or IRA. Distributions from tax-exempt plans may be taxable.
Consult your tax adviser.
Be aware that your Fund may earn 1998 income that will be paid to you in January
1999, but will apply to your 1998 tax return.
(See pg. 36, "Understand the Tax Consequences," for an explanation.)
- -----
11
- -----
================================================================================
Know your rights/
Stay informed
================================================================================
Most of all, you have the right to ask questions--and have them answered
intelligently. You may call your registered representative or service agent, or
call us directly at 1-800-695-2126.
(See pg. 39, "Know Your Rights as a Shareholder," to learn more.)
5
<PAGE>
- --------------------------------------------------------------------------------
Tell Me The Key Facts
- --------------------------------------------------------------------------------
================================================================================
Analyze the Costs of Investing: Ongoing Fees
================================================================================
To help you understand the costs of investing in a MainStay Institutional Fund,
we've provided expense information based on expenses paid by the Institutional
Class of each Fund for the most recent fiscal year. Because some expenses are
based on the value of the Fund's assets, which fluctuates daily, you should only
use these figures as estimates of what you might actually pay.
Ongoing fees
Each Fund pays ongoing operating fees to the manager, custodian 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 value of each share you own. (See pg. 47,
"Manager and Sub-Advisers," for further details.)
Expenses have been capped
The Funds' manager has voluntarily agreed to limit total expenses on all Funds
(except the Growth Equity Fund, Multi-Asset Fund, and Value Equity Fund). (See
pg. 48, "Voluntary Expense Limitation," for full details.) Where these limits
apply, they have the effect of lowering a Fund's total operating expenses and
increasing its earnings.
The manager may end or revise the voluntary expense limitations at any time
after December 31, 1998. If this occurs, the Funds' expenses may increase and
their earnings may be reduced, depending on each Fund's total assets. (See pg.
48, "Voluntary Expense Limitation," for more on the limitation for each
Fund.)
Service agents
You may buy shares of a Fund through a service agent: broker-dealers, financial
institutions or others having a shareholder servicing relationship with the
Funds on your behalf. Service agents 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 service agent, if you have one, 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 "Examples" on the following pages are provided to help you understand the
various costs and expenses that an investor in the Institutional Class of each
Fund will bear directly or indirectly.
The examples on pgs. 7-10 are 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. Each 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 charts, therefore, do not necessarily represent how your investment
will perform, nor do they show how the Funds have actually performed in the
past. They are strictly hypothetical examples.
================================================================================
- --------------------------------------------------------------------------------
Take note:
- --------------------------------------------------------------------------------
We have also assumed that total Fund operating expenses remain the same each
year, and that the 1998 voluntary expense limitation would apply for all
periods. Without the limitation, your expenses would generally be higher. The
Funds' manager may end or revise these limitations at any time after December
31, 1998.
================================================================================
6
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Operating Expenses Examples
- ------------------------------------------------------------------------------------------------------------------------------------
====================================================================================================================================
EAFE INDEX FUND
====================================================================================================================================
<S> <C> <C> <C> <C>
Shareholder Transaction Expenses None After 1 year $ 10
After 3 years $ 30
After 5 years $ 52(a)
Annual Fund Operating Expenses After 10 years $115
(as a percentage of average daily net assets)
If you invest $1,000 today, 5 years from now you would have paid:
Management Fees [THE FOLLOWING TABLE WAS REPRESENTED BY A
(reflecting expense limitations) .63% PIE CHART IN THE PRINTED MATERIAL.]
Other Expenses .31
---- $35 management fees
Total Fund Operating Expenses* .94% 17 other
==== ------------------------
$52 total fund operating
expenses
<CAPTION>
====================================================================================================================================
GROWTH EQUITY FUND
====================================================================================================================================
<S> <C> <C> <C> <C>
Shareholder Transaction Expenses None After 1 year $ 9
After 3 years $ 30
After 5 years $ 51
Annual Fund Operating Expenses After 10 years $114
(as a percentage of average daily net assets)
If you invest $1,000 today, 5 years from now you would have paid:
Management Fees .85% [THE FOLLOWING TABLE WAS REPRESENTED BY A
Other Expenses .08 PIE CHART IN THE PRINTED MATERIAL.]
----
Total Fund Operating Expenses .93% $47 management fees
==== 4 other
------------------------
$51 total fund operating
expenses
<CAPTION>
====================================================================================================================================
INDEXED EQUITY FUND
====================================================================================================================================
<S> <C> <C> <C> <C>
Shareholder Transaction Expenses None After 1 year $ 3
After 3 years $10
After 5 years $17(a)
Annual Fund Operating Expenses After 10 years $38
(as a percentage of average daily net assets)
If you invest $1,000 today, 5 years from now you would have paid:
Management Fees [THE FOLLOWING TABLE WAS REPRESENTED BY A
(reflecting expense limitations) .24% PIE CHART IN THE PRINTED MATERIAL.]
Other Expenses .06
---- $13 management fees
Total Fund Operating Expenses* .30% 4 other
==== ------------------------
$17 total fund operating
expenses
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Operating Expenses Examples
- ------------------------------------------------------------------------------------------------------------------------------------
====================================================================================================================================
INTERNATIONAL EQUITY FUND
====================================================================================================================================
<S> <C> <C> <C> <C>
Shareholder Transaction Expenses None After 1 year $ 10
After 3 years $ 32
After 5 years $ 55(a)
Annual Fund Operating Expenses After 10 years $122
(as a percentage of average daily net assets)
If you invest $1,000 today, 5 years from now you would have paid:
Management Fees [THE FOLLOWING TABLE WAS REPRESENTED BY A
(reflecting expense limitations) .81% PIE CHART IN THE PRINTED MATERIAL.]
Other Expenses .19
----- $45 management fees
Total Fund Operating Expenses* 1.00% 10 other
===== ------------------------
$55 total fund operating
expenses
<CAPTION>
====================================================================================================================================
MULTI-ASSET FUND
====================================================================================================================================
<S> <C> <C> <C> <C>
Shareholder Transaction Expenses None After 1 year $ 8
After 3 years $24
After 5 years $42
Annual Fund Operating Expenses After 10 years $94
(as a percentage of average daily net assets)
If you invest $1,000 today, 5 years from now you would have paid:
Management Fees .65% [THE FOLLOWING TABLE WAS REPRESENTED BY A
Other Expenses .11 PIE CHART IN THE PRINTED MATERIAL.]
----
Total Fund Operating Expenses .76% $36 management fees
==== 6 other
------------------------
$42 total fund operating
expenses
<CAPTION>
====================================================================================================================================
VALUE EQUITY FUND
====================================================================================================================================
<S> <C> <C> <C> <C>
Shareholder Transaction Expenses None After 1 year $ 9
After 3 years $ 30
After 5 years $ 51
Annual Fund Operating Expenses After 10 years $114
(as a percentage of average daily net assets)
If you invest $1,000 today, 5 years from now you would have paid:
Management Fees .85% [THE FOLLOWING TABLE WAS REPRESENTED BY A
Other Expenses .08 PIE CHART IN THE PRINTED MATERIAL.]
----
Total Fund Operating Expenses .93% $47 management fees
==== 4 other
------------------------
$51 total fund operating
expenses
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Operating Expenses Examples
- ------------------------------------------------------------------------------------------------------------------------------------
====================================================================================================================================
BOND FUND
====================================================================================================================================
<S> <C> <C> <C> <C>
Shareholder Transaction Expenses None After 1 year $ 8
After 3 years $24
After 5 years $42(a)
Annual Fund Operating Expenses After 10 years $93
(as a percentage of average daily net assets)
If you invest $1,000 today, 5 years from now you would have paid:
Management Fees [THE FOLLOWING TABLE WAS REPRESENTED BY A
(reflecting expense limitations) .65% PIE CHART IN THE PRINTED MATERIAL.]
Other Expenses .10
---- $36 management fees
Total Fund Operating Expenses* .75% 6 other
==== ------------------------
$42 total fund operating
expenses
<CAPTION>
====================================================================================================================================
INDEXED BOND FUND
====================================================================================================================================
<S> <C> <C> <C> <C>
Shareholder Transaction Expenses None After 1 year $ 5
After 3 years $16
After 5 years $28(a)
Annual Fund Operating Expenses After 10 years $63
(as a percentage of average daily net assets)
If you invest $1,000 today, 5 years from now you would have paid:
Management Fees [THE FOLLOWING TABLE WAS REPRESENTED BY A
(reflecting expense limitations) .35% PIE CHART IN THE PRINTED MATERIAL.]
Other Expenses .15
---- $20 management fees
Total Fund Operating Expenses* .50% 8 other
==== ------------------------
$28 total fund operating
expenses
<CAPTION>
====================================================================================================================================
INTERNATIONAL BOND FUND
====================================================================================================================================
<S> <C> <C> <C> <C>
Shareholder Transaction Expenses None After 1 year $ 10
After 3 years $ 30
After 5 years $ 53(a)
Annual Fund Operating Expenses After 10 years $117
(as a percentage of average daily net assets)
If you invest $1,000 today, 5 years from now you would have paid:
Management Fees [THE FOLLOWING TABLE WAS REPRESENTED BY A
(reflecting expense limitations) .65% PIE CHART IN THE PRINTED MATERIAL.]
Other Expenses .30
---- $36 management fees
Total Fund Operating Expenses* .95% 17 other
==== ------------------------
$53 total fund operating
expenses
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Operating Expenses Examples
- ------------------------------------------------------------------------------------------------------------------------------------
====================================================================================================================================
MONEY MARKET FUND
====================================================================================================================================
<S> <C> <C> <C> <C>
Shareholder Transaction Expenses None After 1 year $ 5
After 3 years $16
After 5 years $28(a)
Annual Fund Operating Expenses After 10 years $63
(as a percentage of average daily net assets)
If you invest $1,000 today, 5 years from now you would have paid:
Management Fees .39% [THE FOLLOWING TABLE WAS REPRESENTED BY A
(reflecting expense limitations) PIE CHART IN THE PRINTED MATERIAL.]
Other Expenses .11
---- $22 management fees
Total Fund Operating Expenses* .50% 6 other
==== ------------------------
$28 total fund operating
expenses
<CAPTION>
====================================================================================================================================
SHORT-TERM BOND FUND
====================================================================================================================================
<S> <C> <C> <C> <C>
Shareholder Transaction Expenses None After 1 year $ 6
After 3 years $19
After 5 years $33(a)
Annual Fund Operating Expenses After 10 years $75
(as a percentage of average daily net assets)
If you invest $1,000 today, 5 years from now you would have paid:
Management Fees [THE FOLLOWING TABLE WAS REPRESENTED BY A
(reflecting expense limitations) .38% PIE CHART IN THE PRINTED MATERIAL.]
Other Expenses .22
---- $21 management fees
Total Fund Operating Expenses* .60% 12 other
==== ------------------------
$33 total fund operating
expenses
</TABLE>
* MainStay Management, Inc., as the Funds' manager, has voluntarily agreed for
1998 to waive a portion of the fees otherwise payable to it under the terms of
the Funds' Management Agreements (up to the amount of such fees) to the extent
necessary to limit the total operating expenses for the Institutional Class of
the Funds, other than the Growth Equity Fund, Multi-Asset Fund and Value Equity
Fund, to the amounts shown above. These expenses are described under "Tell Me
The Details--Manager and Sub-Advisers." Absent voluntary expense limitations,
estimated total Fund operating expenses for the Institutional Class would have
been as follows: EAFE Index Fund--1.26%; Indexed Equity Fund--.56%;
International Equity Fund--1.04%; Bond Fund--.85%; Indexed Bond Fund--.65%;
International Bond Fund--1.10%; Money Market Fund--.61%; and Short-Term Bond
Fund--.82%. Absent voluntary expense limitations, Fund management fees would
have been as follows: EAFE Index Fund--.95%; Indexed Equity Fund--.50%;
International Equity Fund--.85%; Bond Fund--.75%; Indexed Bond Fund--.50%;
International Bond Fund--.80%; Money Market Fund--.50%; and Short-Term Bond
Fund--.60%.
(a) If the voluntary expense limitations were not applied, the expenses for each
period would generally be higher. For example, the expenses for the five-year
period would be as follows: EAFE Index Fund--$70; Indexed Equity Fund--$31;
International Equity Fund--$58; Bond Fund--$47; Indexed Bond Fund--$36;
International Bond Fund--$61; Money Market Fund--$34; and Short-Term Bond
Fund--$46.
10
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
Here are the financial highlights for the Institutional Class of shares of each
of the eleven MainStay Institutional Funds.
The information for each of the seven years (three years with respect to the
International Equity and International Bond Funds) in the period ended December
31, 1997 has been audited by Price Waterhouse LLP, independent accountants to
the Funds. You should read the related financial statements and notes and, in
the case of the Annual Report, the unqualified report on the financial
statements of each Fund contained in the Company's 1997 Annual Report, which is
incorporated by reference in the SAI.
Additional performance information is included in the Funds' Annual and
Semi-Annual Reports to Shareholders.
For a free copy of the SAI or the Annual Report, call us at 1-800-695-2126 or
write to: MainStay Institutional Funds Inc., P.O. Box 461, Parsippany, NJ
07054-0461.
EAFE INDEX FUND
<TABLE>
<CAPTION>
Year Ended December 31 January 2, 1991(a)
------------------------------------------------------------------ through
1997 1996 1995 1994 1993 1992 December 31, 1991
------ ------ ------ ------ ------ ------ -----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value at beginning of period .... $14.00 $13.56 $12.63 $12.03 $9.60 $11.01 $10.00
------ ------ ------ ------ ------ ------ ------
Net investment income ..................... 0.22 0.16 0.13 0.10 0.06 0.08 0.08
Net realized and unrealized gain (loss) on
investments ............................. (0.28) 0.71 1.11 0.70 2.71 (1.41) 0.93
Net realized and unrealized gain (loss) on
foreign currency transactions ........... (0.00)(b) (0.00)(b) (0.10) 0.03 (0.01) (0.01) --
------ ------ ------ ------ ------ ------ ------
Total from investment operations .......... (0.06) 0.87 1.14 0.83 2.76 (1.34) 1.01
------ ------ ------ ------ ------ ------ ------
Less dividends and distributions:
From net investment income ................ (0.22) (0.16) (0.04) (0.09) (0.14) (0.07) --
From net realized gain on investments and
foreign currency transactions ........... (3.39) (0.25) (0.14) (0.14) (0.19) -- --
In excess of net investment income ........ (0.09) (0.02) (0.03) -- -- -- --
------ ------ ------ ------ ------ ------ ------
Total dividends and distributions ......... (3.70) (0.43) (0.21) (0.23) (0.33) (0.07) --
------ ------ ------ ------ ------ ------ ------
Net asset value at end of period .......... $10.24 $14.00 $13.56 $12.63 $12.03 $9.60 $11.01
====== ====== ====== ====== ====== ====== ======
Total investment return ................... 0.40% 6.45% 9.03% 6.83% 28.97% (12.22%) 10.10%
Ratios (to average net assets)/
Supplemental Data:
Net investment income ................... 1.04% 1.11% 1.01% 0.57% 0.53% 0.76% 0.71%
Net expenses ............................ 0.94% 0.94% 1.03% 1.26% 1.27% 1.32% 1.40%
Expenses (before reimbursement) ......... 1.26% 1.23% 1.24% 1.26% 1.27% 1.32% 1.40%
Portfolio turnover rate ................... 6% 4% 6% 7% 16% 1% 1%
Average commission rate paid .............. $0.0205 $0.0097 (c) (c) (c) (c) (c)
Net assets at end of period (in 000's) .... $55,177 $89,029 $80,087 $72,265 $53,714 $40,531 $45,160
</TABLE>
- ----------
(a) Commencement of operations.
(b) Less than one cent per share.
(c) Disclosure of amount required for fiscal years beginning on or after
September 1, 1995.
11
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
GROWTH EQUITY FUND
<TABLE>
<CAPTION>
Year Ended December 31 January 2, 1991(a)
------------------------------------------------------------------ through
1997 1996 1995 1994 1993 1992 December 31, 1991
------ ------ ------ ------ ------ ------ -----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value at beginning of period ... $21.99 $18.84 $13.68 $14.40 $14.71 $16.70 $10.00
------ ------ ------ ------ ------ ------ ------
Net investment income (loss) ............. (0.08)(b) (0.06)(b) 0.02 0.01 (0.01) (0.03) 0.01
Net realized and unrealized gain (loss) on
investments ............................ 5.45 4.14 5.16 (0.33) 1.41 0.80 6.69
------ ------ ------ ------ ------ ------ ------
Total from investment operations ......... 5.37 4.08 5.18 (0.32) 1.40 0.77 6.70
------ ------ ------ ------ ------ ------ ------
Less dividends and distributions:
From net investment income ............... -- -- (0.02) (0.01) -- (0.02) --
From net realized gain on investments .... (1.93) (0.93) -- (0.39) (1.68) (2.74) --
In excess of net investment income ....... -- -- (0.00)(c) -- -- -- --
In excess of net realized gain on
investments ............................ -- -- (0.00)(c) (0.00)(c) (0.03) -- --
------ ------ ------ ------ ------ ------ ------
Total dividends and distributions ........ (1.93) (0.93) (0.02) (0.40) (1.71) (2.76) --
------ ------ ------ ------ ------ ------ ------
Net asset value at end of period ......... $25.43 $21.99 $18.84 $13.68 $14.40 $14.71 $16.70
====== ====== ====== ====== ====== ====== ======
Total investment return .................. 24.73% 21.62% 37.88% (2.23%) 9.59% 5.63% 67.00%
Ratios (to average net assets)/
Supplemental Data:
Net investment income (loss) ........... (0.31%) (0.27%) 0.12% 0.04% (0.07%) (0.19%) 0.13%
Net expenses ........................... 0.93% 0.92% 0.93% 0.92% 0.90% 0.90% 0.90%
Expenses (before reimbursement) ........ 0.93% 0.92% 0.93% 0.92% 0.93% 0.95% 0.99%
Portfolio turnover rate .................. 36% 22% 33% 37% 81% 121% 225%
Average commission rate paid ............. $0.0596 $0.0604 (d) (d) (d) (d) (d)
Net assets at end of period (in 000's) ... $700,070 $541,212 $412,129 $284,388 $258,751 $212,619 $191,495
</TABLE>
- ----------
(a) Commencement of operations.
(b) Per share data based on average shares outstanding during the year.
(c) Less than one cent per share.
(d) Disclosure of amount required for fiscal years beginning on or after
September 1, 1995.
INDEXED EQUITY FUND
<TABLE>
<CAPTION>
Year Ended December 31 January 2, 1991(a)
------------------------------------------------------------------- through
1997 1996 1995 1994 1993 1992 December 31, 1991
------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value at beginning of period ... $21.05 $17.82 $13.53 $13.86 $13.50 $12.98 $10.00
------ ------ ------ ------ ------ ------ ------
Net investment income .................... 0.37 0.34 0.35 0.33 0.30 0.30 0.32
Net realized and unrealized gain (loss) on
investments ............................ 6.54 3.69 4.64 (0.20) 0.93 0.61 2.66
------ ------ ------ ------ ------ ------ ------
Total from investment operations ......... 6.91 4.03 4.99 0.13 1.23 0.91 2.98
------ ------ ------ ------ ------ ------ ------
Less dividends and distributions:
From net investment income ............... (0.37) (0.34) (0.34) (0.33) (0.61) (0.32) --
From net realized gain on investments .... (0.54) (0.46) (0.36) (0.13) (0.25) (0.07) --
In excess of net realized gain on
investments ............................ -- -- -- 0.00(b) (0.01) -- --
------ ------ ------ ------ ------ ------ ------
Total dividends and distributions ........ (0.91) (0.80) (0.70) (0.46) (0.87) (0.39) --
------ ------ ------ ------ ------ ------ ------
Net asset value at end of period ......... $27.05 $21.05 $17.82 $13.53 $13.86 $13.50 $12.98
====== ====== ====== ====== ====== ====== ======
Total investment return .................. 32.88% 22.57% 36.88% 0.90% 9.41% 7.19% 29.80%
Ratios (to average net assets)/
Supplemental Data:
Net investment income .................. 1.56% 1.96% 2.21% 2.43% 2.39% 2.52% 2.78%
Net expenses ........................... 0.30% 0.44% 0.50% 0.50% 0.45% 0.45% 0.45%
Expenses (before reimbursement) ........ 0.56% 0.59% 0.59% 0.58% 0.60% 0.62% 0.68%
Portfolio turnover rate .................. 3% 8% 4% 5% 5% 4% 4%
Average commission rate paid ............. $0.0500 $0.0498 (c) (c) (c) (c) (c)
Net assets at end of period (in 000's) ... $966,217 $617,716 $354,420 $244,685 $219,351 $164,858 $144,055
</TABLE>
- ----------
(a) Commencement of operations.
(b) Less than one cent per share.
(c) Disclosure of amount required for fiscal years beginning on or after
September 1, 1995.
12
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
INTERNATIONAL EQUITY FUND
<TABLE>
<CAPTION>
January 1, 1995(a)
Year Ended Year Ended through
December 31, 1997 December 31, 1996 December 31, 1995
----------------- ----------------- ------------------
<S> <C> <C> <C>
Net asset value at beginning of period .......................... $10.63 $10.35 $10.00
------ ------ ------
Net investment income ........................................... 1.14 0.64 0.36
Net realized and unrealized gain on investments ................. (0.10) 0.09 0.17
Net realized and unrealized gain on foreign currency
transactions .................................................. (0.49) 0.51 0.18
------ ------ ------
Total from investment operations ................................ 0.55 1.24 0.71
------ ------ ------
Less dividends and distributions:
From net investment income ...................................... (0.96) (0.84) (0.10)
From net realized gain on investments and foreign currency
transactions .................................................. (0.29) (0.12) (0.26)
In excess of net investment income .............................. -- -- (0.00)(b)
------ ------ ------
Total dividends and distributions ............................... (1.25) (0.96) (0.36)
------ ------ ------
Net asset value at end of period ................................ $9.93 $10.63 $10.35
===== ====== ======
Total investment return ......................................... 5.44% 12.09% 7.17%
Ratios (to average net assets)/Supplemental Data:
Net investment income ......................................... 1.23% 0.83% 1.05%
Net expenses .................................................. 1.00% 1.00% 1.00%
Expenses (before reimbursement) ............................... 1.04% 1.07% 1.07%
Portfolio turnover rate ......................................... 37% 23% 26%
Average commission rate paid .................................... $0.0302 $0.0349 (c)
Net assets at end of period (in 000's) .......................... $113,774 $126,280 $96,714
</TABLE>
- ----------
(a) Commencement of operations.
(b) Less than one cent per share.
(c) Disclosure of amount required for fiscal years beginning on or after
September 1, 1995.
MULTI-ASSET FUND
<TABLE>
<CAPTION>
Year Ended December 31 January 2, 1991(a)
------------------------------------------------------------------ through
1997 1996 1995 1994 1993 1992 December 31, 1991
------ ------ ------ ------ ------ ------ -----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value at beginning of period .... $13.19 $11.79 $10.67 $11.67 $12.02 $11.79 $10.00
------ ------ ------ ------ ------ ------ ------
Net investment income ..................... 0.34 0.38 0.48 0.45 0.39 0.50 0.51
Net realized and unrealized gain (loss) on
investments ............................. 3.15 1.53 2.39 (0.55) 0.59 0.29 1.28
Net realized and unrealized loss on foreign
currency transactions ................... 0.00(b) (0.00)(b) (0.01) -- -- -- --
------ ------ ------ ------ ------ ------ ------
Total from investment operations .......... 3.49 1.91 2.86 (0.10) 0.98 0.79 1.79
------ ------ ------ ------ ------ ------ ------
Less dividends and distributions:
From net investment income ................ (0.34) (0.38) (0.48) (0.45) (0.88) (0.51) --
From net realized gain on investments ..... (1.51) (0.13) (1.18) (0.42) (0.44) (0.05) --
In excess of net realized gain on
investments ............................. -- -- (0.08) (0.03) (0.01) -- --
------ ------ ------ ------ ------ ------ ------
Total dividends and distributions ......... (1.85) (0.51) (1.74) (0.90) (1.33) (0.56) --
------ ------ ------ ------ ------ ------ ------
Net asset value at end of period .......... $14.83 $13.19 $11.79 $10.67 $11.67 $12.02 $11.79
====== ====== ====== ====== ====== ====== ======
Total investment return ................... 26.69% 16.16% 26.81% (0.86%) 8.79% 7.09% 17.90%
Ratios (to average net assets)/
Supplemental Data:
Net investment income ................... 2.27% 2.99% 4.03% 3.63% 3.55% 4.65% 5.87%
Net expenses ............................ 0.76% 0.70% 0.70% 0.70% 0.60% 0.60% 0.60%
Expenses (before reimbursement) ......... 0.76% 0.75% 0.77% 0.75% 0.75% 0.79% 0.88%
Portfolio turnover rate ................... 19% 103% 261% 128% 101% 89% 22%
Average commission rate paid .............. $0.0499 $0.0498 (c) (c) (c) (c) (c)
Net assets at end of period (in 000's) .... $414,824 $323,790 $273,351 $229,079 $258,345 $190,899 $139,449
</TABLE>
- ----------
(a) Commencement of operations.
(b) Less than one cent per share.
(c) Disclosure of amount required for fiscal years beginning on or after
September 1, 1995.
13
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
VALUE EQUITY FUND
<TABLE>
<CAPTION>
Year Ended December 31 January 2, 1991(a)
------------------------------------------------------------------ through
1997 1996 1995 1994 1993 1992 December 31, 1991
------ ------ ------ ------ ------ ------ -----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value at beginning of period ... $15.87 $14.43 $11.58 $12.40 $14.16 $13.66 $10.00
------ ------ ------ ------ ------ ------ ------
Net investment income .................... 0.23 0.25 0.21 0.17 0.16 0.21 0.28
Net realized and unrealized gain (loss) on
investments ............................ 3.31 2.98 3.20 (0.02) 1.63 2.22 3.38
------ ------ ------ ------ ------ ------ ------
Total from investment operations ......... 3.54 3.23 3.41 0.15 1.79 2.43 3.66
------ ------ ------ ------ ------ ------ ------
Less dividends and distributions:
From net investment income ............... (0.23) (0.25) (0.21) (0.17) (0.37) (0.28) --
From net realized gain on investments .... (2.82) (1.54) (0.35) (0.80) (3.18) (1.65) --
------ ------ ------ ------ ------ ------ ------
Total dividends and distributions ........ (3.05) (1.79) (0.56) (0.97) (3.55) (1.93) --
------ ------ ------ ------ ------ ------ ------
Net asset value at end of period ......... $16.36 $15.87 $14.43 $11.58 $12.40 $14.16 $13.66
====== ====== ====== ====== ====== ====== ======
Total investment return .................. 22.63% 22.41% 29.42% 1.22% 14.90% 20.71% 36.60%
Ratios (to average net assets)/
Supplemental Data:
Net investment income .................. 1.30% 1.70% 1.64% 1.50% 1.38% 1.67% 2.33%
Net expenses ........................... 0.93% 0.92% 0.93% 0.92% 0.90% 0.90% 0.90%
Expenses (before reimbursement) ........ 0.93% 0.92% 0.93% 0.92% 0.93% 0.95% 0.99%
Portfolio turnover rate .................. 66% 50% 51% 43% 83% 133% 142%
Average commission rate paid ............. $0.0592 $0.0594 (b) (b) (b) (b) (b)
Net assets at end of period (in 000's) ... $984,220 $821,725 $603,749 $396,537 $305,060 $230,836 $182,627
</TABLE>
- ----------
(a) Commencement of operations.
(b) Disclosure of amount required for fiscal years beginning on or after
September 1, 1995.
BOND FUND
<TABLE>
<CAPTION>
Year Ended December 31 January 2, 1991(a)
----------------------------------------------------------------- through
1997 1996 1995 1994 1993 1992 December 31, 1991
----- ----- ----- ----- ------ ------ -----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value at beginning of period .... $9.51 $9.85 $8.93 $9.98 $11.08 $11.40 $10.00
----- ----- ----- ----- ------ ------ ------
Net investment income ..................... 0.61 0.62 0.68 0.72 0.74 0.61 0.70
Net realized and unrealized gain (loss)
on investments .......................... 0.20 (0.34) 0.92 (1.05) 0.26 0.05 0.70
----- ----- ----- ----- ------ ------ ------
Total from investment operations .......... 0.81 0.28 1.60 (0.33) 1.00 0.66 1.40
----- ----- ----- ----- ------ ------ ------
Less dividends and distributions:
From net investment income ................ (0.61) (0.62) (0.68) (0.72) (1.35) (0.70) --
From net realized gain on investments ..... -- -- -- -- (0.65) (0.28) --
In excess of net realized gain on
investments ............................. -- -- -- -- (0.10) -- --
----- ----- ----- ----- ------ ------ ------
Total dividends and distributions ......... (0.61) (0.62) (0.68) (0.72) (2.10) (0.98) --
----- ----- ----- ----- ------ ------ ------
Net asset value at end of period .......... $9.71 $9.51 $9.85 $8.93 $9.98 $11.08 $11.40
===== ===== ===== ===== ===== ====== ======
Total investment return ................... 8.57% 2.80% 17.88% (3.31%) 9.74% 6.39% 14.00%
Ratios (to average net assets)/
Supplemental Data:
Net investment income ................... 6.21% 6.10% 6.62% 7.13% 6.86% 6.02% 7.05%
Net expenses ............................ 0.75% 0.75% 0.75% 0.75% 0.70% 0.70% 0.70%
Expenses (before reimbursement) ......... 0.85% 0.86% 0.86% 0.82% 0.84% 0.85% 0.90%
Portfolio turnover rate ................... 338% 398% 470% 478% 567% 609% 301%
Net assets at end of period (in 000's) .... $183,846 $177,009 $193,518 $202,970 $219,834 $203,531 $186,253
</TABLE>
- ----------
(a) Commencement of operations.
14
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
INDEXED BOND FUND
<TABLE>
<CAPTION>
Year Ended December 31 January 2, 1991(a)
----------------------------------------------------------------- through
1997 1996 1995 1994 1993 1992 December 31, 1991
------ ------ ------ ------ ------ ------ -----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value at beginning of period ... $10.52 $10.99 $10.06 $11.08 $11.65 $11.47 $10.00
------ ------ ------ ------ ------ ------ ------
Net investment income .................... 0.73 0.76 0.82 0.65 0.67 0.79 0.56
Net realized and unrealized gain (loss) on
investments ............................ 0.22 (0.48) 1.00 (1.03) 0.38 (0.02) 0.91
------ ------ ------ ------ ------ ------ ------
Total from investment operations ......... 0.95 0.28 1.82 (0.38) 1.05 0.77 1.47
------ ------ ------ ------ ------ ------ ------
Less dividends and distributions:
From net investment income ............... (0.73) (0.75) (0.82) (0.64) (1.46) (0.56) --
From net realized gain on investments .... -- -- (0.07) -- (0.15) (0.03) --
In excess of net realized gain on
investments ............................ -- -- -- -- (0.01) -- --
------ ------ ------ ------ ------ ------ ------
Total dividends and distributions ........ (0.73) (0.75) (0.89) (0.64) (1.62) (0.59)
------ ------ ------ ------ ------ ------ ------
Net asset value at end of period ......... $10.74 $10.52 $10.99 $10.06 $11.08 $11.65 $11.47
====== ====== ====== ====== ====== ====== ======
Total investment return .................. 9.01% 2.55% 18.07% (3.44%) 9.64% 7.09% 14.70%
Ratios (to average net assets)/
Supplemental Data:
Net investment income .................. 6.60% 6.21% 6.38% 6.13% 6.19% 7.30% 7.80%
Net expenses ........................... 0.50% 0.50% 0.50% 0.50% 0.45% 0.45% 0.45%
Expenses (before reimbursement) ........ 0.65% 0.65% 0.63% 0.61% 0.61% 0.61% 0.73%
Portfolio turnover rate .................. 32% 312% 284% 274% 213% 78% 34%
Net assets at end of period (in 000's) ... $117,922 $109,482 $163,219 $169,404 $159,792 $125,003 $109,744
</TABLE>
- ----------
(a) Commencement of operations.
INTERNATIONAL BOND FUND
<TABLE>
<CAPTION>
January 1, 1995(a)
Year Ended Year Ended through
December 31, 1997 December 31, 1996 December 31, 1995
----------------- ----------------- -----------------
<S> <C> <C> <C>
Net asset value at beginning of period ...................... $11.10 $11.16 $10.00
------ ------ ------
Net investment income ....................................... 1.01 1.21 0.70
Net realized and unrealized gain on investments ............. (1.11) 0.11 1.12
Net realized and unrealized gain on foreign currency
transactions .............................................. 0.40 0.27 0.02
------ ------ ------
Total from investment operations ............................ 0.30 1.59 1.84
------ ------ ------
Less dividends and distributions:
From net investment income and net realized gain on
foreign currency transactions ............................. (0.99) (1.37) (0.55)
From net realized gain on investments ....................... (0.36) (0.28) (0.13)
------ ------ ------
Total dividends and distributions ........................... (1.35) (1.65) (0.68)
------ ------ ------
Net asset value at end of period ............................ $10.05 $11.10 $11.16
====== ====== ======
Total investment return ..................................... 2.62% 14.32% 18.46%
Ratios (to average net assets)/Supplemental Data:
Net investment income ..................................... 5.86% 6.02% 6.61%
Net expenses .............................................. 0.95% 0.95% 0.95%
Expenses (before reimbursement) ........................... 1.10% 1.08% 1.03%
Portfolio turnover rate ..................................... 186% 57% 92%
Net assets at end of period (in 000's) ...................... $48,613 $51,980 $44,388
</TABLE>
- ----------
(a) Commencement of operations.
15
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
MONEY MARKET FUND
<TABLE>
<CAPTION>
Year Ended December 31 January 2, 1991(a)
----------------------------------------------------------------- through
1997 1996 1995 1994 1993 1992 December 31, 1991
----- ----- ----- ----- ----- ----- ------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value at beginning of period $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
----- ----- ----- ----- ----- ----- -----
Net investment income ................ 0.05 0.05 0.05 0.04 0.03 0.03 0.06
----- ----- ----- ----- ----- ----- -----
Less dividends and distributions:
From net investment income ........... (0.05) (0.05) (0.05) (0.04) (0.03) (0.03) (0.06)
From net realized gain on investments (0.00)(b) -- -- -- -- -- --
----- ----- ----- ----- ----- ----- -----
Total dividends and distributions .... (0.05) (0.05) (0.05) (0.04) (0.03) (0.03) (0.06)
----- ----- ----- ----- ----- ----- -----
Net asset value at end of period ..... $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
===== ===== ===== ===== ===== ===== =====
Total investment return .............. 5.27% 5.11% 5.63% 3.88% 2.89% 3.66% 5.95%
Ratios (to average net assets)
Supplemental Data:
Net investment income .............. 5.18% 5.00% 5.48% 3.89% 2.85% 3.64% 5.84%
Net expenses ....................... 0.50% 0.50% 0.50% 0.50% 0.45% 0.45% 0.45%
Expenses (before reimbursement) .... 0.61% 0.67% 0.73% 0.68% 0.67% 0.65% 0.65%
Net assets at end of period (in 000's) $190,319 $110,760 $67,869 $65,106 $75,832 $71,573 $126,690
</TABLE>
- ----------
(a) Commencement of operations.
(b) Less than one cent per share.
SHORT-TERM BOND FUND
<TABLE>
<CAPTION>
Year Ended December 31 January 2, 1991(a)
-------------------------------------------------------------- through
1997 1996 1995 1994 1993 1992 December 31, 1991
----- ----- ----- ------ ------ ------ ------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value at beginning of period ... $9.48 $9.68 $9.37 $10.33 $11.23 $11.13 $10.00
----- ----- ----- ------ ------ ------ ------
Net investment income .................... 0.67 0.66 0.65 0.97 0.72 0.66 0.48
Net realized and unrealized gain (loss) on
investments ............................ (0.09) (0.20) 0.31 (0.96) (0.12) (0.03) 0.65
----- ----- ----- ------ ------ ------ ------
Total from investment operations ......... 0.58 0.46 0.96 0.01 0.60 0.63 1.13
----- ----- ----- ------ ------ ------ ------
Less dividends and distributions:
From net investment income ............... (0.67) (0.66) (0.65) (0.97) (1.36) (0.48) --
From net realized gain on investments .... -- -- -- -- (0.04) (0.05) --
In excess of net investment income ....... -- -- -- -- (0.02) -- --
In excess of net realized gain on
investments ............................ -- -- -- -- (0.08) -- --
----- ----- ----- ------ ------ ------ ------
Total dividends and distributions ........ (0.67) (0.66) (0.65) (0.97) (1.50) (0.53) --
----- ----- ----- ------ ------ ------ ------
Net asset value at end of period ......... $9.39 $9.48 $9.68 $9.37 $10.33 $11.23 $11.13
===== ===== ===== ===== ====== ====== ======
Total investment return .................. 6.13% 4.81% 10.27% 0.11% 5.67% 5.94% 11.30%
Ratios (to average net assets)/
Supplemental Data:
Net investment income .................. 6.24% 5.85% 6.38% 5.90% 6.32% 6.64% 7.33%
Net expenses ........................... 0.60% 0.60% 0.60% 0.60% 0.55% 0.55% 0.55%
Expenses (before reimbursement) ........ 0.82% 0.79% 0.82% 0.72% 0.68% 0.72% 0.81%
Portfolio turnover rate .................. 153% 195% 171% 269% 232% 270% 151%
Net assets at end of period (in 000's) ... $46,674 $57,805 $50,902 $62,340 $148,846 $161,499 $130,141
</TABLE>
- ----------
(a) Commencement of operations.
16
<PAGE>
- --------------------------------------------------------------------------------
Historical Performance
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
EQUITY FUNDS
Institutional Class
Average Annual Total Returns for Periods Ended December 31, 1997(1)
-------------------------------------------------------------------
One Three Five Since
Year Years Years Inception(2)
------ ------ ------ ------------
<S> <C> <C> <C> <C>
EAFE Index Fund ........................................ 0.40% 5.23% 9.93% 6.47%
Growth Equity Fund ..................................... 24.73% 27.89% 17.52% 21.68%
Indexed Equity Fund .................................... 32.88% 30.64% 19.74% 19.21%
International Equity Fund(3) ........................... 5.44% 8.20% 11.41% 9.35%
Multi-Asset Fund ....................................... 26.69% 23.12% 15.02% 14.24%
Value Equity Fund ...................................... 22.63% 24.78% 17.71% 20.65%
</TABLE>
- ----------
(1) Past performance is no guarantee of future results. The performance results
shown above reflect performance as of December 31, 1997. Performance
results change over time. For performance results as of more current dates,
call 1-800-695-2126.
(2) January 2, 1991 for each of the Funds other than the International Equity
Fund (July 31, 1992 for the International Equity Fund's predecessor
separate account ("Separate Account")).
(3) Performance figures include the historical performance of the Separate
Account for the period prior to the International Equity Fund's
commencement of operations on January 1, 1995. MacKay-Shields Financial
Corporation, the International Equity Fund's sub-adviser, served as
investment adviser to the Separate Account, and the investment objective,
policies, restrictions, guidelines and management style of the Separate
Account were materially equivalent to those of the International Equity
Fund. Performance figures for the period prior to January 1, 1995 have been
calculated by measuring the change in value of a unit in the Separate
Account from the time period specified to January 1, 1995, using the
Separate Account's expense structure, which generally was higher than the
expense structure of the International Equity Fund. The Separate Account
was not registered under the Investment Company Act of 1940 ("1940 Act")
and therefore was not subject to certain investment restrictions imposed
under the 1940 Act. If the Separate Account had been registered under the
1940 Act, the Separate Account's performance may have been adversely
affected.
17
<PAGE>
- --------------------------------------------------------------------------------
Historical Performance
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FIXED INCOME FUNDS
Institutional Class
Average Annual Total Returns for Periods Ended December 31, 1997(1)
----------------------------------------------------------------------
One Three Five Since
Year Years Years Inception(2)
---- ----- ----- ------------
<S> <C> <C> <C> <C>
Bond Fund ............................................ 8.57% 9.57% 6.90% 7.81%
Indexed Bond Fund .................................... 9.01% 9.70% 6.92% 8.02%
International Bond Fund(3) ........................... 2.62% 11.60% 10.42% 9.80%
Money Market Fund .................................... 5.27% 5.34% 4.55% 4.62%
Short-Term Bond Fund ................................. 6.13% 7.05% 5.35% 6.26%
</TABLE>
- ----------
(1) Past performance is no guarantee of future results. The performance results
shown above reflect performance as of December 31, 1997. Performance
results change over time. For performance results as of more current dates,
call 1-800-695-2126.
(2) January 2, 1991 for each of the Funds other than the International Bond
Fund (January 31, 1990 for the International Bond Fund's predecessor
separate account ("Separate Account")).
(3) Performance figures include the historical performance of the Separate
Account for the period prior to the International Bond Fund's commencement
of operations on January 1, 1995. MacKay-Shields Financial Corporation, the
International Bond Fund's sub-adviser, served as investment adviser to the
Separate Account, and the investment objective, policies, restrictions,
guidelines and management style of the Separate Account were materially
equivalent to those of the International Bond Fund. Performance figures for
the period prior to January 1, 1995 have been calculated by measuring the
change in value of a unit in the Separate Account from the time period
specified to January 1, 1995, using the Separate Account's expense
structure, which generally was higher than the expense structure of the
International Bond Fund. The Separate Account was not registered under the
Investment Company Act of 1940 ("1940 Act") and therefore was not subject
to certain investment restrictions imposed under the 1940 Act. If the
Separate Account had been registered under the 1940 Act, the Separate
Account's performance may have been adversely affected.
18
<PAGE>
================================================================================
EAFE Index Fund
The Fund's objective is:
================================================================================
to seek to provide investment results that correspond to the total return
performance (reflecting reinvestment of dividends) of common stocks in the
aggregate, as represented by the Morgan Stanley Capital International Europe,
Australia and Far East ("EAFE") Index.
- --------------------------------------------------------------------------------
The EAFE Index is a capitalization-weighted index of approximately 1,200
equities (stocks and stock-related securities) from countries outside the United
States.
Many funds generally seek to beat market averages, often with unpredictable
results. Index funds, like this one, seek to match the market average
represented by the index they are trying to mirror. No attempt is made to manage
the Fund in the traditional sense using economic, financial or market analysis.
It's expected that there will be a close correlation (about 95%) between the
Fund's performance and the EAFE Index in both rising and falling markets.
- --------------------------------------------------------------------------------
================================================================================
The Fund invests in:
================================================================================
... a statistically selected sample of approximately 350 securities included in
the EAFE Index.
... at least 80% of total assets, under normal market conditions, in stocks in
the EAFE Index.
... the Fund may also invest in:
... up to 20% of total assets in stock index options, futures contracts and
options on futures to maintain cash reserves while fully invested, to
facilitate trading, or to reduce transaction costs.
... up to 10% of total assets in index and currency exchange rate swap
agreements.
... foreign currency exchange transactions using currencies, options, futures
or options on futures, or forward contracts for any legally permissible
purpose, including to protect against foreign currency exchange risks
involving securities the Fund owns or plans to own. (See pg. 46, "Risk
Management Techniques.")
The Fund will attempt to remain fully invested at all times; however, to keep
money working or to keep cash available for shareholder redemptions, the Fund
may invest temporarily in:
... other investments suitable for most or all MainStay Institutional Funds.
(See pgs. 30-31, "General Investment Considerations"; and pg. 43,
"Description of Investments and Investment Practices.")
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Risks? The Fund's ability to mirror the EAFE Index may be affected by, among
other things, transaction costs, changes in either the makeup of the Index or
number of shares outstanding for the components of the Index, and the timing and
amount of contributions to and redemptions from the Fund by shareholders.
Investments in foreign securities could be more volatile and more difficult to
sell than U.S. investments, and involve additional risks. (For more on risks of
investing in foreign securities, see pg. 44, "Description of Investments and
Investment Practices"--"Foreign Securities.")
Some options on foreign currencies could force the sub-adviser to buy or sell
foreign currencies at unfavorable exchange rates, creating losses. It is also
possible that the Fund could forfeit the entire amount of the premium paid for
the purchased options plus transaction costs.
A lack of market activity may keep the sub-adviser from closing out a futures
contract or a futures option position when it wants to. The Fund would remain
obligated to make margin deposits until it could close the position.
There are no guarantees that hedging transactions or the use of options and
futures will successfully protect investments, or lead to better Fund
performance. In some instances, the Fund may lose money.
- --------------------------------------------------------------------------------
WHO'S MANAGING YOUR MONEY?
JAMES A. MEHLING OF MONITOR
CAPITAL ADVISORS, INC.
Mr. Mehling is President and Chief Investment Officer of Monitor Capital. He
joined Monitor Capital in October 1991 after serving as director of risk
management in the Investment Department of New York Life Insurance Company from
1989-1991. He has served as portfolio manager of the Fund since 1991.
19
<PAGE>
================================================================================
Growth Equity Fund
The Fund's objective is:
================================================================================
to seek long-term growth of capital. Dividend income, if any, is a consideration
incidental to the Fund's objective of growth of capital.
- --------------------------------------------------------------------------------
This Fund is not for investors who need current income but is for investors who
are in a financial position to take above-average risks in search of long-term
growth.
- --------------------------------------------------------------------------------
================================================================================
The Fund invests in:
================================================================================
... a variety of companies and securities. The sub-adviser selects investments
according to the economic environment and the attractiveness of particular
markets.
... securities of companies with these characteristics:
o participation in expanding markets
o increasing return on investment
o increasing unit sales volume, and
o revenue growth and earnings per share superior to the average of common
stocks included in indices such as the S&P 500 Composite Stock Price Index.
...securities of companies without some or all of those characteristics, if the
sub-adviser considers them to be ready for a rise in price; for example,
companies expected to have accelerated growth in earnings due to special factors
like new management, new products, changes in consumer demand or changes in the
economy.
... at least 65% of its total assets, under normal market conditions, in equity
securities including common stocks, nonconvertible preferred stocks, securities
convertible into or exchangeable for common stocks (e.g., convertible preferred
stocks and convertible debentures) and warrants. Convertible preferred stocks
and debentures must be rated when purchased Baa or better by Moody's Investors
Service Inc. ("Moody's") or BBB or better by Standard & Poor's ("S&P" or
"Standard & Poor's"), or if unrated, considered by the sub-adviser to be of
comparable quality. (See "Appendix A-- Description of Securities Ratings.")
...the Fund may also invest in:
...options on common stocks and stock indices, futures contracts and related
options, stocks represented by American Depositary Receipts ("ADRs") or European
Depositary Receipts ("EDRs"), foreign equity securities, obligations issued or
guaranteed by the U.S. Government or any of its agencies or instrumentalities or
by any of the states, cash equivalents, or cash.
...foreign currency exchange transactions using currencies, options, futures or
options on futures, or forward contracts to help protect against foreign
currency exchange risks involving foreign securities the Fund owns or plans to
own. (See pg. 46, "Risk Management Techniques.")
...other investments suitable for most or all MainStay Institutional Funds. (See
pgs. 30-31, "General Investment Considerations"; and pg. 43, "Description of
Investments and Investment Practices.")
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Risks? Opportunities for greater gains often come with greater risks of loss.
Some of the securities held by the Fund may have high price-earnings ratios and
carry an above-average risk of price deterioration.
- --------------------------------------------------------------------------------
WHO'S MANAGING YOUR MONEY?
EDMUND C. SPELMAN AND
RUDOLPH C. CARRYL OF
MACKAY-SHIELDS
FINANCIAL CORPORATION.
Mr. Spelman is a Managing Director of MacKay-Shields, and specializes in equity
securities. He joined MacKay-Shields in 1991 after working as a securities
analyst at Oppenheimer & Co., Inc. (1984-1991), and has been a portfolio manager
for the Fund since February 1991.
Mr. Carryl is a Managing Director of MacKay-Shields. He joined MacKay-Shields as
a Director in 1992 with twelve years of investment management and research
experience. Mr. Carryl was Research Director and Senior Portfolio Manager at
Value Line, Inc. from 1978 to 1992. Mr. Carryl has acted as a portfolio manager
of the Fund since August 1992.
20
<PAGE>
================================================================================
Indexed Equity Fund
The Fund's objective is:
================================================================================
to seek to provide investment results that correspond to the total return
performance (reflecting reinvestment of dividends) of common stocks in the
aggregate, as represented by the S&P 500 Composite Stock Price Index.
- --------------------------------------------------------------------------------
The S&P 500 Composite Stock Price Index (the "Index") is capitalization-weighted
and includes 500 different industrial, utility, financial and transportation
sector companies selected by Standard & Poor's. The Index is used as the
standard for performance comparison because it represents about two-thirds of
the total market value of all U.S. common stocks and is well known to investors.
Typically, companies included in the Index are the largest and most dominant
firms in their respective industries.
Unlike other funds which generally seek to beat market averages often with
unpredictable results, index funds seek to match their respective indices. No
attempt is made to manage the portfolio in the traditional sense using economic,
financial and market analysis. This Fund attempts to achieve its objective by
using a "full replication method" in which the Fund attempts to "mirror" the
performance of the Index by investing in all 500 stocks in the same proportion
as they are represented in the Index.
- --------------------------------------------------------------------------------
================================================================================
The Fund invests in:
================================================================================
...all 500 stocks, in the same proportion as they are represented in the Index,
to the extent feasible.
...at least 80% of total assets, under normal market conditions, in stocks in
the Index.
...the Fund may also invest in:
...up to 20% of total assets in options and futures contracts to maintain cash
reserves while fully invested, to facilitate trading or to reduce
transaction costs.
... up to 10% of total assets in index swap agreements. (For a description of
"Swap Agreements," see pg. 47.)
The Fund will attempt to remain fully invested at all times; however, to keep
money working or to keep cash available for shareholder redemptions, the Fund
may invest in:
... other investments suitable for most or all MainStay Institutional Funds.
(See pgs.30-31, "General Investment Considerations," for details; and pg.
43, "Description of Investments and Investment Practices.")
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Risks? The Fund's ability to mirror the Index may be affected by, among other
things, transaction costs, changes in either the makeup of the Index or number
of shares outstanding for the components of the Index, and the timing and amount
of contributions to and redemptions from the Fund by shareholders.
The values of common stocks of major U.S. corporations tend to fluctuate based
on a variety of market and general economic conditions.
- --------------------------------------------------------------------------------
WHO'S MANAGING YOUR MONEY?
JAMES A. MEHLING OF MONITOR
CAPITAL ADVISORS, INC.
Mr. Mehling is President and Chief Investment Officer of Monitor Capital. He
joined Monitor Capital in October 1991 after serving as director of risk
management in the Investment Department of New York Life Insurance Company from
1989-1991. He has served as portfolio manager of the Fund since 1991.
21
<PAGE>
================================================================================
International Equity Fund
The Fund's objective is:
================================================================================
to seek long-term growth of capital by investing in a portfolio consisting
primarily of non-U.S. equity securities. Current income is a secondary
objective.
- --------------------------------------------------------------------------------
================================================================================
The Fund invests in:
================================================================================
...at least 65% of total assets, under normal market conditions, in equity
securities of foreign corporations wherever organized, which do business mainly
outside the U.S.
...a diversified portfolio of securities, including common stocks, preferred
stocks, warrants and other comparable equity securities.
...a variety of countries, with a minimum of 5 countries other than the U.S.
This includes countries with established economies as well as emerging market
countries, including, among others, those in Latin America and Asia, that the
Fund's sub-adviser believes present favorable opportunities.
...ADRs (American Depositary Receipts); EDRs (European Depositary Receipts);
GDRs (Global Depositary Receipts); IDRs (International Depositary Receipts) or
other similar securities convertible into securities of foreign issuers.
...to enhance returns, manage risk more efficiently and protect against price
changes in securities, currency on a spot or forward basis, securities and
securities index options, foreign currency options, futures contracts and
related options, and may enter into swap agreements. Futures and related options
may be used for any legal purpose including to reduce trading costs.
... the Fund may also invest in:
... U.S. equity securities.
... notes and bonds which, when purchased are rated in one of the top four
categories by Moody's or Standard & Poor's. (See "Appendix A--Description
of Securities Ratings.")
... cash, including foreign currency, or cash equivalents such as obligations
of banks, commercial paper and short-term obligations of U.S. or foreign
issuers.
... in unusual market conditions, the Fund may invest all or a portion of its
assets in equity securities of U.S. issuers, investment grade notes and
bonds and cash equivalents or cash.
... other investments suitable for most or all MainStay Institutional Funds.
(See pgs. 30-31, "General Investment Considerations"; and pg. 43, "Description
of Investments and Investment Practices.")
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Risks? Alone, this Fund is not a balanced investment plan. It is intended for
long-term investors who seek growth over current income. It is appropriate for
investors wanting investments in markets outside the U.S. who are willing to
accept the risks of foreign investing. The Fund's orientation is in avoiding
excessive risk, although there are risks associated with any kind of investment.
Due to this philosophy, the Fund may not attain as high a level of return as
more aggressively managed international funds, although there may be times when
the Fund outperforms some funds in down markets.
Investments in foreign securities could be more volatile and more difficult to
sell than U.S. investments, and involve additional risks. (For more on risks of
investing in foreign securities, see pg. 44, "Description of Investments and
Investment Practices" "Foreign Securities.")
- --------------------------------------------------------------------------------
WHO'S MANAGING
YOUR MONEY?
SHIGEMI TAKAGI OF
MACKAY-SHIELDS
FINANCIAL CORPORATION.
Mr. Takagi is a Director specializing in international equities at
MacKay-Shields. He joined MacKay-Shields in 1989 after working at First Boston
Corp. as an international equity analyst. He has served as a portfolio manager
for the Fund since its inception in January 1995.
22
<PAGE>
================================================================================
Multi-Asset Fund
The Fund's objective is:
================================================================================
to seek to maximize total return, consistent with certain percentage constraints
on amounts allocated to each asset class, from a combination of common stocks,
fixed income securities, and money market investments.
- --------------------------------------------------------------------------------
The Fund attempts to achieve this objective through active management and
allocation of investments among three asset classes. The presence of the
constraints, however, may restrict the investment adviser's ability to fully
maximize total return.
The allocations of the Fund's net assets reflect the anticipated risks and
returns of each asset class. Although these levels maintain the balanced nature
of the overall investments, they are not intended to act as a fully balanced
investment program. (For a full explanation of the investment method, see pg.
41, "Multi-Asset Fund.")
- --------------------------------------------------------------------------------
================================================================================
The Fund invests in:
================================================================================
...three asset classes, limited by the following constraints:
...30% to 80% of net assets in common stocks selected to parallel the
performance of the S&P 500 Composite Stock Price Index for the domestic common
stock portion of the Fund.
...10% to 60% of net assets in fixed income securities selected to parallel the
performance of the Salomon Brothers Broad Investment Grade Bond Index (although
the securities don't have to be in the Index). These debt securities may have
fixed, variable, or floating rates of interest.
...10% to 60% of net assets in selected money market instruments.
Within these constraints, the Fund may also invest:
... up to 20% of total assets in foreign securities (defined as "traded
primarily in a market outside the U.S.") of developed and emerging market
countries.
... up to 10% of total assets in interest rate, index, and currency exchange
rate swap agreements.
... in futures transactions to rebalance or alter its portfolio composition and
risk profile and to diversify the Fund's holdings where futures
transactions are more efficient than direct investment transactions. (See
pg. 46, "Risk Management Techniques.")
... in foreign currency exchange transactions using currencies, options,
futures or options on futures, or forward contracts for any legally
permissible purpose, including to protect against foreign currency exchange
risks involving securities the Fund owns or plans to own. (See pg. 46,
"Risk Management Techniques.")
... in other investments suitable for most or all MainStay Institutional Funds.
(See pgs. 30-31, "General Investment Considerations"; and pg. 43,
"Description of Investments and Investment Practices.")
At times, the actual allocation for each asset class may differ from the
constraints, due to market fluctuations or cash entering or leaving the Fund.
This could happen for instance, if the sub-adviser has positioned the assets
close to a minimum or maximum for one or more asset classes, and the Fund's cash
position changes because of investors buying or selling the Fund's shares. To
correct the situation, the sub-adviser will move cash or reallocate assets
within seven days.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Risks? The Fund's performance depends on the sub-adviser's ability to
consistently and correctly determine the relative attractiveness of the asset
classes. However, prices change not only in response to economic factors but to
psychological factors as well. These factors are difficult to interpret and
quantify. It is therefore possible for the Fund to have a small investment in
stocks during a period of rising stock prices, or a small investment in bonds
during a period of rising bond prices.
Investments in foreign securities could be more volatile and more difficult to
sell than U.S. investments, and involve additional risks. (For more on risks of
investing in foreign securities, see pg. 44, "Description of Investments and
Investment Practices"--"Foreign Securities.")
- --------------------------------------------------------------------------------
WHO'S MANAGING
YOUR MONEY?
JAMES A. MEHLING OF MONITOR
CAPITAL ADVISORS, INC.
Mr. Mehling is President and Chief Investment Officer of Monitor Capital. He
joined Monitor Capital in October 1991 after serving as director of risk
management in the Investment Department of New York Life Insurance Company from
1989-1991. He has served as portfolio manager of the Fund since 1991.
23
<PAGE>
================================================================================
Value Equity Fund
The Fund's objective is:
================================================================================
to seek maximum long-term total return from a combination of capital growth and
income. The Fund is not designed or managed primarily to produce current income.
- --------------------------------------------------------------------------------
The Fund takes a flexible approach, emphasizing investments in common stocks
which are, in the opinion of the Fund's sub-adviser, undervalued at the time of
purchase. If, in the sub-adviser's opinion, a stock has reached its full value,
it will usually be sold and replaced by securities considered to be undervalued.
- --------------------------------------------------------------------------------
================================================================================
The Fund invests in:
================================================================================
...at least 65% of total assets, under normal market conditions, in equity
securities, including common stocks and securities that can be exchanged for or
converted into common stocks (e.g., convertible preferred stocks and convertible
debentures), nonconvertible preferred stocks and warrants.
...dividend-paying common stocks listed on a national securities exchange or
traded in the over-the-counter market (although the Fund may invest in
non-dividend paying stock, based on the sub-adviser's judgment).
...the Fund may also invest in:
...up to 35% of total assets in options on common stocks and stock indices,
stocks represented by American Depositary Receipts ("ADRs") or European
Depositary Receipts ("EDRs"), foreign equity securities, zero coupon bonds,
obligations issued or guaranteed by the U.S. Government or any of its agencies
or instrumentalities or by any of the states, cash equivalents or cash.
... convertible preferred stocks, debentures and zero coupon bonds must be,
when purchased rated Baa or better by Moody's or BBB or better by Standard
& Poor's; or unrated but judged by the sub-adviser to be of comparable
quality. (See "Appendix A--Description of Securities Ratings.")
...stock index futures contracts and related options to protect against changes
in stock prices.
...foreign currency exchange transactions using currencies, options, futures or
options on futures, or forward contracts to help protect against foreign
currency exchange risks involving foreign securities the Fund owns or plans to
own. (See pg. 46, "Risk Management Techniques.")
...other investments suitable for most or all MainStay Institutional Funds. (See
pgs. 30-31, "General Investment Considerations"; and pg. 43, "Description of
Investments and Investment Practices.")
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Risks? The Fund's share price, like the price of other equity-oriented funds,
isn't always stable. The value of the securities in the Fund--and the net asset
value of the Fund--will fluctuate in the marketplace. It is possible that the
sub-adviser's decisions will not produce the growth you anticipate.
- --------------------------------------------------------------------------------
WHO'S MANAGING YOUR MONEY?
DENIS P. LAPLAIGE AND
JEFFREY A. SIMON OF
MACKAY-SHIELDS FINANCIAL
CORPORATION.
Mr. Laplaige is President, Senior Managing Director and Chief Investment Officer
of MacKay-Shields. He joined the firm in 1982 as a research analyst, became a
Director in 1988, Managing Director in 1991, a member of its Board of Directors
in 1993, President in 1994, and Senior Managing Director and Chief Investment
Officer in 1996. Prior to that, he was a portfolio manager and research analyst
with Value Line Inc. Mr. Laplaige has been a portfolio manager of the Value
Equity Fund since the Fund's inception in January 1991.
Mr. Simon is a Managing Director of MacKay-Shields and specializes in equity
securities. He joined MacKay-Shields in 1993 after working as a senior equity
research analyst and portfolio manager at National Securities and Research
Corporation (1991-1992) and Neuberger & Berman (1987-1991).
24
<PAGE>
================================================================================
Bond Fund
The Fund's objective is:
================================================================================
to seek to maximize total return, consistent with liquidity, low risk to
principal and investment in debt securities.
- --------------------------------------------------------------------------------
================================================================================
The Fund invests in:
================================================================================
...normally at least 70% of total assets in:
o obligations issued or guaranteed by the U.S. or foreign governments, their
agencies or instrumentalities; obligations of international or
supranational entities;
o debt securities issued by domestic or foreign corporate entities, zero
coupon bonds, and municipal bonds;
o mortgage-related and other asset-backed securities; and
o loan participation interests.
The effective maturity of this portion of the Fund's portfolio will usually be
in the intermediate range (i.e., three to ten years), although it may vary
depending on the sub-adviser's judgment of market conditions.
The Fund may use, under normal market conditions, up to 30% of its total assets
to shorten or lengthen the portfolio's effective maturity. This portion of the
Fund's assets may be invested in:
o long-term U.S. Treasuries (i.e., ten to thirty years); and
o cash equivalent short-term obligations including certificates of deposit,
time deposits, bankers' acceptances issued by domestic or foreign banks;
certificates of deposit and time deposits issued by savings and loan
associations, commercial paper, repurchase agreements and reverse
repurchase agreements.
...at least 65% of total assets, under normal market conditions, in debt
obligations as described above rated Baa or better by Moody's or BBB or better
by Standard & Poor's when purchased; or, if unrated, determined by the
sub-adviser to be of comparable quality. (See "Appendix A--Description of
Securities Ratings.")
...corporate commercial paper only if rated, when purchased, Prime-1 by Moody's
or A-1 by Standard & Poor's; or if unrated, determined by the sub-adviser to be
of comparable quality. (See "Appendix A--Description of Securities Ratings.")
...up to 20% of total assets in securities denominated in foreign currencies. To
the extent possible, the Fund will attempt to protect these investments against
risks stemming from differences in foreign exchange rates.
...foreign currency exchange transactions using currencies, options, futures or
options on futures, or forward contracts to protect against foreign exchange
risks involving securities the Fund owns or plans to own. (See pg. 46, "Risk
Management Techniques.")
...interest rate and bond index futures contracts, and options on these
contracts; and options on debt securities.
...other investments suitable for most or all MainStay Institutional Funds. (See
pgs. 30-31, "General Investment Considerations"; and pg. 43, "Description of
Investments and Investment Practices.")
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Risks? Generally, when interest rates fall, the net asset value of a bond fund
rises, and when rates rise, the net asset value of a bond fund generally falls.
Principal and interest payments on some mortgage-related securities may be
guaranteed by the U.S. Government, government agencies or other guarantors. But
there is no guarantee that these securities won't lose value. When people prepay
their mortgage loans, the Fund's return from mortgage-related securities may be
reduced.
The value of some mortgage-related or asset-backed securities may be
particularly sensitive to changes in prevailing interest rates. 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.
- --------------------------------------------------------------------------------
WHO'S MANAGING
YOUR MONEY?
RAVI AKHOURY AND
EDWARD J. MUNSHOWER OF
MACKAY-SHIELDS FINANCIAL
CORPORATION.
Mr. Akhoury joined MacKay-Shields as a Director in 1984, became a Managing
Director in 1988, President and a member of the Board of Directors in 1989 and
Chairman and CEO in 1992. Previously, he worked for four years as a fixed income
manager for Fischer Francis Trees & Watts and for seven years as a fixed income
manager of the Equitable Life Assurance Society. Mr. Akhoury has served as a
portfolio manager of the Bond Fund and the Short-Term Bond Fund since their
inception in January 1991.
Mr. Munshower, a Director of MacKay-Shields, has been a portfolio manager of the
Bond Fund since its inception and the Short-Term Bond Fund since 1993. His
biography appears on pg. 29.
25
<PAGE>
================================================================================
Indexed Bond Fund
The Fund's objective is:
================================================================================
to seek to provide investment results that correspond to the total return
performance of fixed income securities in the aggregate, as represented by the
Salomon Brothers Broad Investment Grade Bond Index (the "Index").
- --------------------------------------------------------------------------------
The Fund attempts to achieve its objective by investing in a diversified
portfolio of U.S. Government and corporate bonds, as well as mortgage-backed and
asset-backed securities.
The Index is capitalization-weighted and contains about 5500 individually priced
fixed income securities, which include "investment grade" corporate bonds
including U.S. dollar-denominated securities of foreign issuers (rated BBB by
Standard & Poor's or Baa by Moody's, or better), U.S. Treasury/agency issues,
and mortgage pass-through (mortgage-backed) securities, and other securities.
(See "Appendix A--Description of Securities Ratings" for bond ratings.)
As of March 31, 1998, the approximate weighting in the Index of these classes
was as follows: U.S. Treasury and agency securities 50%, corporate debt
securities 20%, mortgage-backed securities 30%.
Unlike other funds which generally seek to beat market averages often with
unpredictable results, index funds seek to match their respective indices. No
attempt is made to manage the portfolio in the traditional sense using economic,
financial and market analysis. The Fund expects to invest in approximately 50 or
more securities so that the results fall within the target tracking error of the
Index. It's expected that there will be a close correlation (about 95%) between
the Fund's performance and the Index in both rising and falling markets.
- --------------------------------------------------------------------------------
================================================================================
The Fund invests in:
================================================================================
...at least 80% of total assets, under normal market conditions, in fixed income
securities in the Index.
...up to 20% of total assets in bond and interest rate index options and futures
and options on these futures to maintain cash reserves while fully invested,
facilitate trading, or reduce transaction costs.
The Fund will attempt to remain fully invested at all times; however, to keep
money working or to keep cash available for shareholder redemptions, the Fund
may invest in:
...other investments suitable for most or all MainStay Institutional Funds. (See
pgs. 30-31, "General Investment Considerations"; and pg. 43, "Description of
Investments and Investment Practices.")
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Risks? Generally, when interest rates fall, the net asset value of a bond fund
rises, and when rates rise, the net asset value of a bond fund generally falls.
The Fund's ability to track the Index may be affected by, among other things,
transaction costs, changes in either the composition of the Index or number of
bonds outstanding for the components of the Index, and the timing and amount of
contributions to and redemptions from the Fund by shareholders.
Principal and interest payments on some mortgage-related securities may be
guaranteed by the U.S. Government, government agencies or other guarantors. But
there is no guarantee that these securities won't lose value. When people prepay
their mortgage loans, the Fund's return from mortgage-related securities may be
reduced.
- --------------------------------------------------------------------------------
WHO'S MANAGING
YOUR MONEY?
JAMES A. MEHLING OF
MONITOR CAPITAL
ADVISORS, INC.
Mr. Mehling is President and Chief Investment Officer of Monitor Capital. He
joined Monitor Capital in October 1991 after serving as director of risk
management in the Investment Department of New York Life Insurance Company from
1989-1991. He has served as portfolio manager of the Fund since 1991.
26
<PAGE>
================================================================================
International Bond Fund
The Fund's objective is:
================================================================================
to seek to provide total return by investing primarily in a portfolio of
non-U.S. (primarily government) debt securities.
- --------------------------------------------------------------------------------
================================================================================
The Fund invests in:
================================================================================
...any debt or debt-related investment, domestic or foreign, denominated in
foreign or U.S. currency.
...at least 65% of total assets, under normal market conditions, in foreign
bonds which include debt securities of foreign governments, agencies and
supranational organizations denominated in foreign currencies or U.S. dollars.
These could have fixed, variable, floating or inverse floating rates of
interest. The Fund may also purchase debt securities of corporate issuers. Some
of these securities may be privately issued and/or convertible into common stock
or they may be traded together with warrants for the purchase of common
stock.
...a variety of countries, with a minimum of 5 countries other than the U.S.
This includes countries with established economies as well as emerging market
countries, including, among others, those in Latin America and Asia, that the
sub-adviser believes present favorable opportunities.
... the Fund may also invest in:
... up to 25% of net assets in lower-rated debt securities, including
short-term instruments. Lower rated securities are rated below BBB by S&P
or Baa by Moody's. (See "Appendix A--Description of Securities Ratings.")
... to enhance returns, manage risk more efficiently and help protect against
price changes in securities the Fund owns or may own, currency on a spot or
forward basis, securities or securities index options, foreign currency
options, futures contracts and related options on futures contracts; and
may enter into swap agreements. Futures and related options may be used for
any legal purpose including to reduce trading costs.
... other investments suitable for most or all MainStay Institutional Funds.
(See pgs. 30-31, "General Investment Considerations"; and pg. 43,
"Description of Investments and Investment Practices.")
In unusual market conditions, the Fund may invest all or a portion of its assets
in U.S. dollars or foreign currencies or in U.S.-denominated or foreign
currency-denominated money market instruments of U.S. or foreign issuers.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Risks? Generally, when interest rates fall, the net asset value of a bond fund
rises, and when rates rise, the net asset value of a bond fund generally falls.
Alone, this Fund is not a balanced investment plan. It is intended for long-term
investors. It may be appropriate for investors wanting investments in markets
outside the U.S. who are willing to accept the risks of foreign investing
discussed below. The orientation is in avoiding excessive risk, although there
are risks associated with any kind of investment. Due to this philosophy, the
Fund may not attain as high a level of return as more aggressively managed
international funds, although there may be times when the Fund outperforms some
funds in down markets.
Securities rated below BBB or Baa (sometimes called "junk bonds") are not
considered "investment grade" and run greater risks of price fluctuations, loss
of principal and interest, default or bankruptcy by the issuer and other risks,
which is why these securities are considered speculative. (See pg. 45, "High
Yield Securities ("Junk Bonds")," for additional risks.)
Investments in foreign securities could be more volatile and more difficult to
sell than U.S. investments, and involve additional risks. (For more on risks of
investing in foreign securities, see pg. 44, "Description of Investments and
Investment Practices"--"Foreign Securities.")
This Fund is classified as a "non-diversified" investment company. It may,
therefore, invest a greater portion of its assets in a single issuer than the
other Funds, which are "diversified." As a result, this Fund may be more
susceptible to any one economic, political or regulatory event than the other
Funds. Although the Fund is characterized as a non-diversified Fund, it still
must comply with the diversification requirements imposed upon a "regulated
investment company" under federal tax law. (See "Tax Information" in the SAI.)
- --------------------------------------------------------------------------------
WHO'S MANAGING
YOUR MONEY?
JOSEPH PORTERA OF
MACKAY-SHIELDS
FINANCIAL CORPORATION.
Mr. Portera is a Director of MacKay-Shields specializing in international
bonds. He returned to MacKay-Shields in December 1996 after working at Fiduciary
Trust Company International as a portfolio manager in international bonds. Mr.
Portera joined MacKay-Shields in 1991 and was portfolio manager of the
International Bond Fund from its inception in January 1995 to August 1995.
Previously, Mr. Portera was a portfolio manager specializing in international
debt securities at ABN-AMRO Bank, N.V. (from 1988-1991).
27
<PAGE>
================================================================================
Money Market Fund
The Fund's objective is:
================================================================================
to seek to provide a high level of current income while preserving capital and
maintaining liquidity.
- --------------------------------------------------------------------------------
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.
This 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).
- --------------------------------------------------------------------------------
WHO'S MANAGING
YOUR MONEY?
DAVID CLEMENT OF
NEW YORK LIFE
INSURANCE COMPANY.
Mr. Clement has served as portfolio manager for the Fund since its inception in
1991, and is a member of the fixed income portfolio management team. Mr. Clement
joined the Asset Management Group of New York Life in 1990.
28
<PAGE>
================================================================================
Short-Term Bond Fund
The Fund's objective is:
================================================================================
to seek to maximize total return, consistent with liquidity, preservation of
capital and investment in short-term debt securities.
- --------------------------------------------------------------------------------
================================================================================
The Fund invests in:
================================================================================
...at least 65% of total assets, under normal market conditions, in a
diversified portfolio of actively managed short-term debt securities, including
securities with special features (e.g., puts, variable or floating coupon rates
and mortgage pass-throughs) which have price characteristics similar to
short-term debt securities. These include:
...obligations issued or guaranteed by the U.S. government, its agencies or
instrumentalities; mortgage-related and other asset-backed securities;
certificates of deposit, time deposits and bankers' acceptances issued by
domestic or foreign banks or savings and loan associations and denominated in
U.S. dollars or foreign currencies.
...domestic and foreign corporate debt securities, municipal bonds, zero coupon
bonds and variable or floating rate securities rated Baa or better by Moody's or
BBB or better by S&P when purchased; or, if unrated, determined by the
sub-adviser to be of comparable quality. (See "Appendix A--Description of
Securities Ratings.")
...corporate commercial paper only if rated, when purchased, Prime-1 by Moody's
or A-1 by S&P; or if unrated, determined by the sub-adviser to be of comparable
quality. (See "Appendix A--Description of Securities Ratings.")
...the Fund may also invest in:
...up to 20% of total assets in securities denominated in foreign currencies. To
the extent possible, the sub-adviser will attempt to protect against risks
stemming from differences in foreign exchange rates.
...foreign currency exchange transactions using currencies, options, futures or
options on futures, or forward contracts to protect against foreign currency
exchange risks involving securities the Fund owns or plans to own. (See pg. 46,
"Risk Management Techniques.")
...interest rate and bond index futures contracts and options on these
contracts; and options on debt securities.
...U.S. dollar- or foreign currency-denominated obligations of foreign
governments or their subdivisions, agencies or instrumentalities, international
agencies or supranational entities.
...other investments suitable for most or all MainStay Institutional Funds. (See
pgs. 30-31, "General Investment Considerations"; and pg. 43, "Description of
Investments and Investment Practices.")
The effective maturity of the Fund's portfolio will be less than three years.
- --------------------------------------------------------------------------------
Risks? Generally, when interest rates fall, the net asset value of a bond fund
rises, and when rates rise, the net asset value of a bond fund generally falls.
Because of the comparatively short term of most of the Fund's investments, the
net asset value is expected to be relatively stable.
Principal and interest payments on some mortgage-related securities may be
guaranteed by the U.S. Government, government agencies or other guarantors. But
there is no guarantee that these securities won't lose value. When people prepay
their mortgage loans, the Fund's return from mortgage-related securities may be
reduced.
- --------------------------------------------------------------------------------
WHO'S MANAGING
YOUR MONEY?
RAVI AKHOURY AND
EDWARD J. MUNSHOWER OF MACKAY-
SHIELDS FINANCIAL CORPORATION.
Mr. Akhoury joined MacKay-Shields as a Director in 1984, became a Managing
Director in 1988, President and a member of the Board of Directors in 1989 and
Chairman and CEO in 1992. Previously, he worked for four years as a fixed income
manager for Fischer Francis Trees & Watts and for seven years as a fixed income
manager of the Equitable Life Assurance Society. Mr. Akhoury has served as a
portfolio manager of the Short-Term Bond Fund and the Bond Fund since their
inception in January 1991.
Mr. Munshower is a Director of MacKay-Shields. He joined MacKay-Shields as a
fixed income investment specialist in 1985 with more than 5 years of prior
investment management and research experience, after having been an investment
analyst for New York Life. Mr. Munshower has been a portfolio manager of the
Short-Term Bond Fund since 1993 and the Bond Fund since its inception in 1991.
29
<PAGE>
- --------------------------------------------------------------------------------
General Investment Considerations
- --------------------------------------------------------------------------------
================================================================================
SOME IMPORTANT POINTS TO UNDERSTAND ABOUT INVESTING IN MAINSTAY INSTITUTIONAL
FUNDS.
================================================================================
================================================================================
- --------------------------------------------------------------------------------
Investment objectives
- --------------------------------------------------------------------------------
There cannot be any assurance that each Fund will achieve its investment
objective. The investment objective of each 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 share price of a Fund will fluctuate
- --------------------------------------------------------------------------------
The value of the securities in a Fund and the share price (NAV) of that Fund
(other than the Money Market Fund) will fluctuate in response to factors such
as:
o conditions in the securities markets;
o business success of the companies that issued the securities;
o creditworthiness of the companies that issued the securities;
o interest rates;
o average maturity of a Fund's non-equity or debt investments;
o foreign currency exchange rates (where applicable); and
o other factors.
================================================================================
THE EFFECTS OF TRADING COSTS ON YOUR
TOTAL RETURN
Each Fund's sub-adviser places orders to purchase and sell portfolio investments
for the Fund. This is reflected in the Fund's portfolio turnover rate. Funds
with high turnover rates (over 100%) often have higher transaction costs which
are paid by the Funds and may generate more short-term capital gains on which
you'll pay taxes (except that investors in tax qualified plans, where earnings
are generally tax deferred, will not pay these taxes).
You can find the turnover rate for any Fund in the "Financial Highlights" table
for that Fund.
In unusual or adverse market conditions, for temporary defensive purposes, each
Fund (except the Money Market Fund) may invest all or a portion of its assets in
cash or cash equivalent short-term obligations such as obligations issued or
guaranteed by the U.S. Government or any of its agencies or instrumentalities or
by any of the states; or in money market funds, repurchase and reverse
repurchase agreements, time deposits, certificates of deposit, bankers'
acceptances and commercial paper (the Growth Equity Fund and Value Equity Fund
may only invest up to 50% of total assets). In addition, the International
Equity Fund may invest up to 5% of its assets in debt instruments rated below
investment grade.
Each Fund may also:
o borrow up to 15% of total assets;
o lend its securities to brokers, dealers and other financial institutions to
earn income;
o 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;
o invest in high quality commercial paper; and
o invest in repurchase agreements, and enter into reverse repurchase
agreements, which can create leverage and increase a Fund's investment
risk.
The Bond Fund, Indexed Bond Fund, International Bond Fund, International Equity
Fund, Multi-Asset Fund and Short-Term Bond Fund may purchase and sell interest
rate and bond index futures contracts, options on interest rate and bond index
futures contracts and options and futures on debt securities.
30
<PAGE>
The EAFE Index Fund, Growth Equity Fund, Indexed Equity Fund, International
Equity Fund, Multi-Asset Fund and Value Equity Fund may purchase and sell stock
index options, futures and options on futures.
With the exception of the Money Market Fund, all Funds may enter into futures
contracts and related options. Futures and options transactions may be used for
any legally permissible purpose, such as to protect against anticipated changes
in interest rates that could affect the value of securities which the Fund owns
or plans on buying. The use of futures, options and options on futures may
involve certain costs and risks. For example, there is no assurance that a Fund
will be able to close out a futures contract or a futures option position when
the sub-adviser considers it appropriate. (See pg. 46, "Risk Management
Techniques" for additional information.)
The EAFE Index Fund, International Bond Fund and International Equity Fund will
(and the Bond Fund, Growth Equity Fund, Multi-Asset Fund, Short-Term Bond Fund
and Value Equity Fund may), invest in foreign securities. The Indexed Equity
Fund and Indexed Bond Fund will invest in foreign securities to the extent such
securities are included in securities that comprise the Standard & Poor's 500
Composite Stock Price Index and the Salomon Brothers Broad Investment Grade Bond
Index, respectively. These securities may have additional risks not applicable
to U.S. securities.
Investments in foreign securities could be more volatile and more difficult to
sell than U.S. investments. They involve risks of currency controls by
governments, changes in currency rates and interest rates, difficulties in
receiving or interpreting financial and economic information, the imposition of
taxes and brokerage and custodian fees, and changes in political and economic
conditions. The Funds may also have difficulty invoking legal protections in
other countries. Many of these factors are worse in emerging markets.
Issuers of foreign debt, or their governments, may be unable or unwilling to
make payments, and the Funds may have limited legal recourse should there be a
default.
The Bond Fund, Indexed Bond Fund, International Bond Fund, Money Market Fund,
Multi-Asset Fund and Short-Term Bond Fund, may invest in loan participation
interests which involve certain risks, including credit and liquidity risks.
(See pg. 45, "Loan Participation Interests" for further details.)
INVESTMENTS IN ILLIQUID AND RESTRICTED SECURITIES
Each Fund has a nonfundamental policy that it will not invest more than 10% of
its net assets (15% for the International Bond and International Equity Funds)
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 applicable sub-adviser are deemed illiquid.
There may be undesirable delays and added costs in selling restricted
securities.
INDEX FUNDS
The inclusion of a security in the MSCI EAFE Index, Standard & Poor's 500
Composite Stock Price Index or the Salomon Brothers Broad Investment Grade Bond
Index in no way implies an opinion by the index sponsors, Morgan Stanley,
Standard & Poor's or Salomon Brothers, as to the attractiveness of that security
as an investment. The MainStay Institutional Funds that are managed as index
funds (EAFE Index Fund, Indexed Equity Fund and Indexed Bond Fund) are not
sponsored by or affiliated with the sponsors of their respective indexes.
================================================================================
- --------------------------------------------------------------------------------
Take note:
- --------------------------------------------------------------------------------
Each of the Bond Fund, Indexed Bond Fund, International Bond Fund and Short-Term
Bond Fund must normally invest at least 65% of its total assets in "bonds". For
this purpose, each of these Funds considers the various types of debt or fixed
income securities in which it invests, as specifically described elsewhere in
this prospectus, to be "bonds" as referenced in that Fund's name. The use of
this name is not meant to restrict a Fund's investments to a narrow category of
debt securities that are formally called "bonds". (For additional investment
limitations, see the Funds' descriptions on pgs. 25, 26, 27, and 29.)
Features of debt securities
Debt securities may have fixed, variable, or floating (including inverse
floating) rates of interest.
================================================================================
31
<PAGE>
- --------------------------------------------------------------------------------
Open an Account...
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Who should read this section
If you are participating in a company savings plan, such as a 401(k), profit
sharing plan, defined benefit plan or other employee-directed plan, your company
will provide you with the information you need to open an account and buy shares
in the Funds.
If you are investing through a Group IRA or Group Account, the following
information will help you buy shares:
- --------------------------------------------------------------------------------
WHO MAY BUY INSTITUTIONAL CLASS SHARES
You are eligible to buy Institutional Class shares if you are:
o an institutional investor investing as an employer, association or other
group retirement plan, employee benefit trust, financial institution,
endowment, foundation or corporation; or
o in a Group IRA or Group Account and you bought shares before January 1,
1995.
HOW TO OPEN AN ACCOUNT
A plan sponsor can open an account, and you (or your sponsor, if you are
investing through a group or plan) can make an investment by calling NYLIFE
Distributors at 1-800-695-2126 between 8:30 AM and 4:00 PM Eastern time on any
day the New York Stock Exchange is open. You'll be given an account number and
wire or mail instructions for sending payment. All calls are recorded.
NYLIFE Distributors must receive your money (and the application, if it's your
first investment) within the next 3 business days of placing your order.
PLEASE FILL OUT THE APPLICATION COMPLETELY AND CORRECTLY
MainStay Institutional Funds and NYLIFE Distributors each reserves the right to
reject your application or redeem your Fund shares if significant information is
incomplete or incorrect (for example, if you leave off your Taxpayer I.D.).
TAKE CARE, BE ACCURATE
Make sure you are using the proper forms. Your order to buy is only accepted
when received by MainStay Shareholder Services Inc. (the transfer agent) with
all information, signatures, documents and payments required to carry it out.
Federal law requires you to provide a certified tax identification number when
you open an account.
Your investments should be sent to MainStay Institutional Funds Inc., Box 8407,
Boston, MA 02266-8407.
================================================================================
BUY SHARES
You may buy shares (and fractions of shares) 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 will be the next NAV that is set after your order is received in
proper form. (All MainStay Institutional Funds are no load funds and are sold
without a sales charge at the net asset value (NAV) per share. There are ongoing
fees, however, as well as minimum investment amounts.)
The NAV--the price of a share that is used for buying and selling--is determined
once each day at the close of the New York Stock Exchange (4:00 p.m. Eastern
time) for each Fund except for the Money Market Fund, which is determined at
noon.
NAV is calculated by:
o taking the current market value of the Fund's total assets for the
Institutional Class of shares or, in the case of the Money Market Fund,
using the amortized cost method of valuation;
o subtracting the liabilities; and
o dividing the remainder by the total number of Institutional Class shares of
the Fund. (See the SAI for the full details on calculating NAV.)
32
<PAGE>
- --------------------------------------------------------------------------------
...and Buy Shares
- --------------------------------------------------------------------------------
YOU MUST INVEST AT LEAST THE MINIMUM AMOUNT
One of the following minimums will apply to you, depending upon how you are
investing:
For institutional investors:
o Initial combined investment--at least $250,000, which may be spread over a
thirteen-month period after opening the account.
o Each investment after that--at least $1,000.
For a Group IRA:
If you are invested in an IRA offered through a group:
o Each additional investment--at least $100.
For a Group Account:
If you are a member of a group that participates in our Group IRA program:
o Each additional investment--at least $1,000.
MainStay Institutional Funds Inc. may also accept investments of smaller amounts
at its discretion.
- --------------------------------------------------------------------------------
For your convenience and to save money, certificates for shares will usually not
be issued.
- --------------------------------------------------------------------------------
================================================================================
- --------------------------------------------------------------------------------
Take note:
- --------------------------------------------------------------------------------
Tax deductible contributions to a regular IRA generally are limited to $2,000 a
year ($4,000 in the case of a spousal IRA). An investor in certain qualified
retirement plans may be able to open an account with a smaller minimum
investment.
================================================================================
================================================================================
- --------------------------------------------------------------------------------
Take note:
- --------------------------------------------------------------------------------
MainStay Institutional Funds and NYLIFE Distributors also have sole discretion
to reject your application or order if your application is incomplete or
incorrect (particularly if you have failed to include your Taxpayer I.D.
Information). MainStay Institutional Funds also has sole discretion to suspend
offering shares or reject purchase orders when, in the management's judgment, it
is in a Fund's best interests.
================================================================================
- --------------------------------------------------------------------------------
What if you buy by check and then sell quickly? We can delay payment until we're
sure your check clears, or for up to 15 days, whichever comes first.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
================================================================================
[GRAPHIC OF A TELEPHONE AND A CHECK PARTIALLY PLACED INTO AN ENVELOPE]
SENDING A CHECK OR MONEY ORDER
First call us at 1-800-695-2126 to place your order. Make your check or money
order payable to MainStay Institutional Funds Inc. (Write your account number
and the name of the appropriate Fund or Funds on the check or money order.) The
check must be in U.S. dollars drawn on a U.S. bank. Mail it directly to:
MainStay Institutional Funds Inc., P.O. Box 8407, Boston, MA 02266-8407.
Mail the application separately to MainStay Institutional Funds Inc., P.O. Box
461, Parsippany, NJ 07054-0461.
[GRAPHIC OF A RADIO TOWER]
WIRING MONEY
You may invest by wiring the money to us. You or your registered representative
should call NYLIFE Distributors at 1-800-695-2126 for an account number and
wiring instructions. Give them to your bank, which may charge a fee for wiring.
The wire must include your name--exactly as it appears on your application--your
account number and the name of the Fund or Funds in which you want to invest.
NYLIFE Distributors must receive your money (and application, if it's your
initial investment) within 3 business days of your placing an order.
33
<PAGE>
- --------------------------------------------------------------------------------
Know How to Sell ...
- --------------------------------------------------------------------------------
Shares may be redeemed (sold) in a number of ways. If you are participating in a
company plan, such as a 401(k), profit sharing, defined benefit or other
employee-directed plan, check with your Human Resources Department for
information on how your shares may be redeemed. For other investors, including
those in a Group IRA or Group Account, shares may be redeemed by written request
to NYLIFE Distributors or you can redeem your shares in any of the following
ways:
OPTION 1 [GRAPHIC OF A TELEPHONE AND A RADIO TOWER]
BY TELEPHONE OR WIRE
Place an order to sell your shares by calling NYLIFE Distributors at
1-800-695-2126. Or, if you prefer, you may wire your order. These options are
not available if your shares are held in certificate form. (Please call us at
the above number for further details.)
The price of each share will be the next NAV determined after receipt of your
redemption request for the class of shares you own. There is no charge for
selling your shares. The shares you sell may be worth more or less than the
price you paid for them, depending on the market value of the investment
securities held by the particular Fund at the time of your sale.
OR, OPTION 2 [GRAPHIC OF A CALENDAR]
USE A SYSTEMATIC WITHDRAWAL PLAN
If you are a shareholder in a Group IRA or a Group Account, with at least
$10,000 (based on the NAV per share) in your account, you may use our systematic
withdrawal plan.
You may arrange to make monthly withdrawals of at least $100 from any Fund. Each
withdrawal will be mailed to you by check or wired directly to your bank
account, whichever you select on your application. These withdrawals, like any
sale, may result in a gain or loss and, therefore, may be subject to taxation.
Consult your tax adviser about possible tax consequences.
Also remember, these withdrawals are not dividends or income. If you withdraw
more than your Fund is earning for you, eventually your account will be worth
less than your original investment, and, ultimately, you will redeem all of your
shares.
MainStay Institutional Funds may end this plan at any time after 30 days'
written notice to you.
================================================================================
- --------------------------------------------------------------------------------
Telephone redemption: convenient, yes... but not risk-free
- --------------------------------------------------------------------------------
Telephone redemption privileges are convenient, but you give up some security.
By making use of this convenience, you agree that neither MainStay Institutional
Funds nor the manager will be liable for following instructions via the phone
that they reasonably believe are genuine. You bear the risk of any loss, unless
MainStay Institutional Funds or the manager fails to use established safeguards
for your protection.
These safeguards are among those currently in place at MainStay Institutional
Funds:
o All phone calls are tape recorded.
o Written confirmation of every transaction is sent to your address of
record.
================================================================================
34
<PAGE>
- --------------------------------------------------------------------------------
...and Exchange Shares
- --------------------------------------------------------------------------------
FOR THE MONEY MARKET FUND
If you exchange all your shares in the Money Market Fund for shares in another
Fund, any dividends that have been declared but not yet distributed will be
credited to the new Fund account. If you exchange all your shares in the Money
Market Fund for shares in more than one Fund, undistributed dividends will be
credited to each of the new Funds according to the number of exchanged shares in
each Fund.
MainStay Institutional Funds reserves the right to amend, restrict or end the
exchange privilege.
HOW YOU WILL RECEIVE YOUR MONEY
Your sales proceeds will normally be wired directly to the bank named on your
application within seven days after your redemption request is received (one
business day for the Money Market Fund).
On days when the New York Stock Exchange is closed, or during other times
specified by Federal securities law, you may not be able to redeem shares or
your payment might be delayed.
- --------------------------------------------------------------------------------
USE THE EXCHANGE PRIVILEGE
Once you open an account, you may exchange shares of the same Class between
MainStay Institutional Funds. An order to exchange shares is treated as a sale
of the old shares followed by a purchase of the new shares. Exchanges will be
based upon each Fund's NAV per share next computed following receipt of a
properly executed exchange request. You may request an exchange by calling
NYLIFE Distributors at 1-800-695-2126.
SET UP A SYSTEMATIC EXCHANGE PLAN
If you've invested through a Group IRA or Group Account, you may establish a
Systematic Exchange Program to have a minimum of $100 exchanged periodically
from any MainStay Institutional Fund to another MainStay Institutional Fund
within the same Class of shares. The Fund from which exchanges are made must
have an account value of at least $10,000 at the time the Systematic Exchange
Program is established. For additional information, call 1-800-695-2126.
- --------------------------------------------------------------------------------
================================================================================
- --------------------------------------------------------------------------------
Take note: Your shares could be sold involuntarily
- --------------------------------------------------------------------------------
To reduce expenses, we may redeem shares in any account valued at less than
$10,000 ($1,000 for Group IRAs and Group Accounts), provided that the value is
not based on fluctuations in market prices. We'll give you at least 30 days
notice to give you time to add to your account and avoid the sale. We may also
redeem your shares if you haven't given us the proper tax information.
================================================================================
35
<PAGE>
- --------------------------------------------------------------------------------
Decide How to Receive 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 mutual fund, however, always pays this income to you as
"dividends."
When the Funds pay
The Money Market Fund declares dividends daily; you're paid monthly. Each of the
other Funds declares and pays you dividends at least once a year.
In the Money Market Fund, you begin earning dividends the business day after the
transfer agent receives your investment in U.S. dollars by 4:00 p.m. Eastern
time.
CAPITAL GAINS
The Funds will distribute all, or almost all, of their net capital gains at
least once a year.
HOW TO TAKE YOUR EARNINGS
Your earnings will automatically be reinvested in the same Class of shares of
the same Fund, unless you choose one of the following options:
REINVEST IN ANOTHER FUND
On the day your Fund pays the dividend, reinvest everything in another Fund of
your choice.
TAKE CASH
Take your earnings in cash.
If you choose to receive your earnings in cash...
a check will be mailed to the address you have given us. If the check is not
accepted and is returned to us, we will reinvest it in your account in the same
Fund at the next net asset value computed after the transfer agent receives the
check. Any additional distributions will automatically be reinvested at net
asset value as of the ex-dividend date.
- --------------------------------------------------------------------------------
Understand the Tax Consequences
- --------------------------------------------------------------------------------
Each Fund intends to be treated as a regulated investment company under
subchapter M of the Internal Revenue Code. As a regulated investment company,
each MainStay Institutional Fund is required to distribute at least 90% of its:
o net taxable income;
o net short-term capital gains; and
o 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. If you are not a tax-exempt
investor, purchasing shares shortly before the record date for dividend
declarations can result in a taxable return to you of a portion of the price you
paid for the shares.
A Fund may pay you in January for dividends declared in October, November, or
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.
TAXES ON FOREIGN INVESTMENT INCOME
A portion of income earned by a Fund from foreign securities may be withheld by
those countries as income taxes. Under certain circumstances, the Fund may elect
to pass along credits to you for foreign income taxes paid, although there are
no assurances that the Fund will be able to do so.
================================================================================
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.
================================================================================
36
<PAGE>
- --------------------------------------------------------------------------------
Know Who You're Investing With
- --------------------------------------------------------------------------------
WHO WORKS TO PROTECT YOUR INTERESTS?
The Board of Directors oversees the Funds. 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 Funds. 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 FUNDS' DAY-TO-DAY BUSINESS?
MainStay Management, Inc., 300 Interpace Parkway, Parsippany, NJ 07054, serves
as manager for the Funds, handling business affairs for each Fund. 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 Funds with office
facilities and with ordinary clerical, bookkeeping and recordkeeping services.
The manager has delegated its portfolio management responsibilities to the
sub-advisers.
The manager pays the salaries and expenses of all personnel affiliated with the
Funds and all the operational expenses that are not the responsibility of the
Funds, including the fees that are paid to the sub-advisers. (See pg. 47,
"Manager and Sub-Advisers", and the SAI for more details.)
For its services, each Fund pays the manager a monthly fee. (See pg. 47,
"Manager and Sub-Advisers".)
================================================================================
WHO MANAGES YOUR MONEY?
================================================================================
Under the supervision of the Company's Directors and in accordance with each
Fund's investment objective and investment policies, the sub-advisers are
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. (See pg. 48, "Manager and
Sub-Advisers"--"The Sub-Advisers" for an explanation of the fees paid to the
sub-advisers by the manager.)
================================================================================
MacKay-Shields
Financial Corporation
9 West 57th Street
New York, New York 10019
MacKay-Shields manages the Bond Fund, Growth Equity Fund, International Bond
Fund, International Equity Fund, Short-Term Bond Fund and Value Equity Fund.
MacKay-Shields, formed in 1938, is an indirect wholly-owned, but autonomously
managed subsidiary of New York Life Insurance Company. As of December 31, 1997,
MacKay-Shields managed approximately $28.8 billion in assets.
================================================================================
================================================================================
New York Life
Insurance Company
51 Madison Avenue
New York, New York, 10010
New York Life Insurance Company manages the Money Market Fund. The 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 December 31, 1997, New York Life had
total assets of approximately $84 billion and managed approximately $24 billion
in assets for qualified retirement plans.
================================================================================
================================================================================
Monitor Capital
Advisors, Inc.
504 Carnegie Center
Princeton, New Jersey 08540
Monitor Capital manages the EAFE Index Fund, Indexed Bond Fund, Indexed Equity
Fund and the Multi-Asset Fund. Monitor Capital, formed in 1988, is a
wholly-owned subsidiary of NYLIFE Inc. and an indirect wholly-owned subsidiary
of New York Life Insurance Company. As of December 31, 1997, Monitor Capital
managed approximately $2.9 billion in assets.
================================================================================
37
<PAGE>
WHO DISTRIBUTES MAINSTAY INSTITUTIONAL FUNDS?
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 Funds'
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 Funds.
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 Funds' investments and has
subcustodial agreements for holding the Funds' foreign investments. BONY is at
90 Washington Street, New York, NY 10286.
38
<PAGE>
- --------------------------------------------------------------------------------
Know Your Rights as a Shareholder
- --------------------------------------------------------------------------------
YOU HAVE THE RIGHT TO ASK ANY QUESTIONS.
If you have a question about your account, you should:
o call 1-800-695-2126 (between 8:30 a.m. and 5:00 p.m. Eastern time), or
o write to:
MainStay Institutional Funds Inc.
Box 461
Parsippany, NJ 07054-0461
THE RIGHT TO RECEIVE INFORMATION ABOUT YOUR INVESTMENT
You will receive periodic statements covering the Funds you own, including the
number and value of shares, dividends declared or paid and other information.
Confirmations.
Every time you buy, sell or exchange shares between Funds, you'll receive a
confirmation in the mail shortly thereafter. It summarizes all the key
information: what you bought and sold, what it cost and other important
information.
Financial reports.
You will receive an annual financial statement for your Fund, audited by the
Funds' independent accountants. You will also receive semiannual statements
which are unaudited.
Each financial report shows:
o the investments owned by the Fund,
o the market value of each investment, and
o other financial information.
================================================================================
- --------------------------------------------------------------------------------
Take note:
- --------------------------------------------------------------------------------
Keep your statements. You may need them for tax reporting purposes.
Be alert: Mistakes can happen. Always review your confirmations and statements
immediately.
================================================================================
THE RIGHT TO HAVE ONE SHARE, ONE VOTE
Every share issued by the Funds carries equal ownership rights. By owning
shares, you're entitled to vote on certain issues and policies regarding the
Fund or class of shares you own. You have one vote per share you own.
You also have a right to approve any changes in fundamental investment
restrictions or objectives of your Funds, and you have the right to approve the
adoption of any new management agreement, sub-advisory agreement or plan of
distribution relating to your Funds.
THE RIGHT TO ATTEND MEETINGS
Although the Company doesn't intend to hold annual shareholder meetings, you
have 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, shareholders
meetings are only held when the Directors recommend an action which requires
shareholder approval.
39
<PAGE>
- --------------------------------------------------------------------------------
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 is a diversified investment company under the 1940 Act (other than the
International Bond Fund) and has a different investment objective which it
pursues through separate investment policies.
The Company offers Institutional Class and Institutional Service Class shares,
which have different expenses that may affect performance. You may obtain a free
copy of the prospectus which contains more information about the Institutional
Service Class of shares 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 April 1, 1998, Trustees of the New York Life Insurance Company Pension
Plan owned a controlling interest (as that term is defined under the 1940 Act)
of the Value Equity, Bond, Indexed Bond and International Bond Funds; New York
Life Insurance Company owned a controlling interest of the Multi-Asset Fund; New
York Life Trust Company owned a controlling interest of the Indexed Bond and
Money Market Funds; Trustees of the NYLIC Retirement Plan owned a controlling
interest of the Multi-Asset Fund and BHC Securities Inc. owned a controlling
interest of the Money Market Fund.
================================================================================
OTHER INFORMATION ABOUT THE FUNDS
================================================================================
This section provides more information about how the Funds are managed. There is
no additional information about the Money Market Fund in this section.
================================================================================
EAFE INDEX FUND
================================================================================
The countries in the EAFE Index include Australia, Austria, Belgium, Denmark,
Finland, France, Germany, Hong Kong, Ireland, Italy, Japan, Malaysia, The
Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden,
Switzerland and the United Kingdom. Not all EAFE Index companies within a
country will be represented in the Fund's portfolio of securities at the same
time. The Fund may not invest in certain stocks (numbering approximately 50)
included in the EAFE Index because corporate charters have provisions
prohibiting ownership by foreign investors.
The Fund is expected to invest in approximately 350 stocks so that the results
fall within the targeted tracking error. Stocks are selected for inclusion in
the Fund based on country of origin, market capitalization, yield, volatility
and industry sector. Monitor Capital will manage the Fund using advanced
statistical techniques to determine which stocks are to be purchased or sold to
replicate the EAFE Index to the extent feasible. From time to time, adjustments
may be made in the Fund's portfolio because of changes in the composition of the
EAFE Index, but such changes should be infrequent.
The Fund believes the indexing approach described above is an effective method
of duplicating percentage changes in the EAFE Index. It is a reasonable
expectation that there will be a close correlation between the Fund's
performance and that of the EAFE Index in both rising and falling markets. The
correlation between the EAFE Index Fund and the EAFE Index is expected to be at
least 0.95. A correlation of 1.00 would indicate perfect correlation, which
would be achieved when the net asset value of the Fund, including the value of
its dividend and capital gains distributions, increases or decreases in exact
proportion to changes in the EAFE Index.
================================================================================
GROWTH EQUITY FUND
================================================================================
Although it is not the Fund's policy generally to invest or trade for short-term
profits, portfolio securities may be disposed of without regard to the length of
time held whenever MacKay-Shields is of the opinion that a security no longer
has an appropriate appreciation potential or has reached its anticipated level
of performance, or when another security
40
<PAGE>
appears to offer relatively greater appreciation potential or a relatively
greater anticipated level of performance. However, certain requirements that
must be satisfied in order for the Fund to qualify as a regulated investment
company for Federal income tax purposes may limit the extent to which the Fund
can sell securities and other assets held for less than three months. (See "Tax
Information" in the SAI.)
================================================================================
INDEXED EQUITY FUND
================================================================================
The Fund will be managed using advanced statistical techniques to determine
which stocks are to be purchased or sold to replicate the S&P 500 to the extent
feasible. From time to time, adjustments may be made in the Fund's portfolio
because of changes in the composition of the S&P 500, but such changes should be
infrequent. The correlation between the performance of the Indexed Equity Fund
and the S&P 500 is expected to be at least 0.95. A correlation of 1.00 would
indicate perfect correlation, which would be achieved when the net asset value
of the Fund, including the value of its dividend and capital gains
distributions, increases or decreases in exact proportion to changes in the S&P
500.
The Fund believes the indexing approach described above is an effective method
of duplicating percentage changes in the S&P 500. It is a reasonable expectation
that there will be a close correlation between the Fund's performance and that
of the S&P 500 in both rising and falling markets.
================================================================================
INTERNATIONAL EQUITY FUND
================================================================================
The Fund is actively managed and invests primarily in international (non-U.S.)
stocks, but the Fund may acquire other securities including cash equivalents.
Eligible investments for the Fund include any equity or equity-related
investment, domestic or foreign, whether denominated in foreign currencies or
U.S. dollars.
MacKay-Shields considers factors such as prospects for currency exchange and
interest rates, and inflation in each country, relative economic growth,
government policies influencing exchange rates and business conditions; and
quality of individual issuers. MacKay-Shields will also determine, using good
faith judgment, (1) country allocation among the international equity markets,
(2) currency exposure (asset allocation across currencies), and (3) diversified
security holdings within each market.
The Fund may use futures and options contracts (1) in an effort to manage cash
flow and remain fully invested in the stock and currency markets, instead of or
in addition to buying and selling stocks and currencies, or (2) in an effort to
hedge against a decline in the value of securities or currencies owned by it or
an increase in the price of securities which it plans to purchase. The Fund may
also purchase and sell foreign currency exchange contracts and foreign currency
options for purposes of seeking to enhance portfolio returns or to manage risk
more efficiently.
MacKay-Shields also believes that active currency management can enhance
portfolio returns through opportunities arising from interest rate differentials
between instruments denominated in different currencies and/or changes in value
between currencies. Moreover, MacKay-Shields believes active currency management
can be employed as an overall portfolio risk management tool. For example, in
its view, foreign currency management can provide overall portfolio risk
diversification when combined with a portfolio of foreign securities, and the
market risks of investing in specific foreign markets can at times be reduced by
currency strategies which may not involve the currency in which the foreign
security is denominated.
================================================================================
MULTI-ASSET FUND
================================================================================
To determine the best investment levels, Monitor Capital estimates risk, return
and correlation for the three asset groups based on a rigorous, disciplined
valuation methodology. Even if this method occasionally indicates that the Fund
should be fully invested in only one asset group, Monitor Capital will still
follow the constraints on the amount of assets which may be allocated to each of
the three asset groups.
In managing the Fund, Monitor Capital uses a proprietary model as well as a
non-proprietary model to estimate ex-pected returns on domestic and foreign
stock markets. The expected return on fixed income securities is the current
yield to maturity of bonds as measured by the Salomon Brothers Broad Investment
Grade Bond Index. The expected return for money market instruments is the
current yield on three-month U.S. Treasury bills.
The Fund's allocation among the three asset groups is then structured to take
advantage of perceived imbalances in relative pricing. Monitor Capital believes
that short-term imbalances occur periodically but tend to be corrected fairly
quickly. The models may from time to time cause significant shifts in the Fund's
allocation among the asset groups which may in turn result in greater portfolio
volatility.
The Fund may buy common stocks that the EAFE Index Fund and Indexed Equity Fund
may buy, fixed income securities that the Indexed Bond Fund may buy and money
market instruments that the Money Market Fund may buy.
================================================================================
VALUE EQUITY FUND
================================================================================
In analyzing different securities to assess their relative attractiveness,
MacKay-Shields' value investment process emphasizes
41
<PAGE>
such factors as low price to earnings and price to cash flow ratios, financial
strength and earnings predictability. The Fund intends to purchase those
securities which it believes to be undervalued in the market relative to
comparable securities based on the foregoing analysis.
In assessing whether a stock is undervalued, MacKay-Shields considers, among
other factors, a company's financial strength and earnings predictability. The
Fund may provide some protection on the downside through its investment in
companies whose current stock prices reflect, in MacKay-Shields' opinion, either
unwarranted pessimism or unrecognized value.
================================================================================
BOND FUND
================================================================================
MacKay-Shields manages the Fund by allocating the Fund's investments among
different types of debt securities. MacKay-Shields conducts a continuing review
of yields and other information derived from a data base which it maintains in
managing fixed-income portfolios. Fundamental economic cycle analysis, credit
quality and interest rate trends are the principal factors considered by
MacKay-Shields in determining whether to increase or decrease the emphasis
placed upon a particular type of security or industry sector within the Fund's
investment portfolio.
Maturity shifts are based on a set of investment decisions that take into
account a broad range of fundamental and technical indicators. More
particularly, MacKay-Shields will alter the average maturity of the portfolio in
accordance with the research and other methods described above.
================================================================================
INDEXED BOND FUND
================================================================================
The correlation between the performance of the Indexed Bond Fund and the Salomon
Brothers Broad Investment Grade Bond Index (the "Index") is expected to be at
least 0.95. A correlation of 1.00 would indicate perfect correlation, which
would be achieved when the net asset value of the Fund, including the value of
its dividend and capital gains distributions, increases or decreases in exact
proportion to changes in the Index. The Fund is expected to invest in
approximately 50 or more securities so that results fall within the targeted
tracking error. Bonds are selected for inclusion in the Fund based on credit
quality, sector, maturity, coupon, current yield, yield to maturity, duration,
and convexity. From time to time, adjustments may be made in the Fund's
portfolio because of changes in the composition of the Index, but such changes
should be infrequent.
Monitor Capital believes the indexing approach described above is an effective
method of simulating percentage changes in the Index. It is a reasonable
expectation that there will be a close correlation between the Fund's
performance and that of the Index in both rising and falling markets. Monitor
Capital employs a stratified sampling method to track index performance. Using
this method, the Fund invests in fixed income securities which in aggregate are
expected to mirror the performance of the Index. The Fund invests primarily in a
representative sample of the securities in the Index.
Monitor Capital may effect certain portfolio transactions involving when-issued,
delayed delivery and other types of securities that may have the effect of
increasing nominal portfolio turnover. (For further discussion of the effect of
portfolio turnover on the Fund, see pg. 30, "General Investment
Considerations--The Effects of Trading Costs on Your Total Return.") For further
information about the Fund's transactions in when-issued securities and related
portfolio practices, see the SAI.
================================================================================
INTERNATIONAL BOND FUND
================================================================================
MacKay-Shields considers factors such as prospects for currency exchange and
interest rates, and inflation in each country, relative economic growth,
government policies influencing exchange rates and business conditions; and
quality of individual issuers. MacKay-Shields will also determine, using good
faith judgment, (1) country allocation, (2) currency exposure (asset allocation
across currencies), and (3) diversified security holdings within each market.
To hedge the market value of securities held, proposed to be held or sold or
relating to foreign currency exchange rates, the Fund may enter into or purchase
securities or securities index options, foreign currency options, and futures
contracts and related options with respect to securities, indexes of securities,
or currencies. The Fund also may buy and sell currencies on a spot or forward
basis. Subject to compliance with applicable rules, futures contracts and
related options may be used for any legally permissible purpose, including as a
substitute for acquiring a basket of securities and to reduce transaction costs.
The Fund may also purchase and sell foreign exchange contracts and foreign
currency options for purposes of seeking to enhance portfolio returns or to
manage portfolio risk more efficiently.
Generally, the Fund's average maturity will be shorter when interest rates
worldwide or in a particular country are expected to rise, and longer when
interest rates are expected to fall. The Fund may use various techniques to
shorten or lengthen the dollar-weighted average maturity of its portfolio,
including transactions in futures and options on futures, interest rate swaps,
caps, floors and short sales against the box.
42
<PAGE>
================================================================================
SHORT-TERM BOND FUND
================================================================================
MacKay-Shields manages the Fund by allocating the Fund's investments among
different types of debt securities. MacKay-Shields conducts a continuing review
of yields and other information derived from data bases which it maintains in
managing fixed-income portfolios. Fundamental economic cycle analysis, credit
quality and interest rate trends are the principal factors considered by
MacKay-Shields in determining whether to increase or decrease the emphasis
placed upon a particular type of security or industry sector within the Fund's
investment portfolio. In seeking to achieve capital appreciation, as an integral
component of total return, the Fund may use, among other research methods,
historical yield spread analysis, economic analysis, fundamental credit analysis
and technical (supply/demand) analysis.
The Fund may, to the extent permitted by law, invest in leveraged inverse
floating rate debt instruments ("inverse floaters"). Certain inverse floaters
may be deemed to be illiquid securities for purposes of the Fund's 10%
limitation on investments in such securities. (See pg. 44, "Floaters and Inverse
Floaters," for details.)
================================================================================
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 a Fund. For more information about each Fund's
investments, investment practices and investment restrictions, including those
described in this section, please see the SAI.
================================================================================
AMERICAN DEPOSITARY RECEIPTS ("ADRS")
================================================================================
ADRs (sponsored or unsponsored) are receipts typically issued by a U.S. bank or
trust company evidencing ownership of the underlying foreign securities.
================================================================================
BANKING INDUSTRY AND SAVINGS AND LOAN OBLIGATIONS
================================================================================
Each Fund may invest in certificates of deposit, time deposits, bankers'
acceptances, and other short-term debt obligations issued by commercial banks
and, with the exception of the Money Market Fund, in certificates of deposit,
time deposits, and other short-term obligations issued by savings and loan
associations.
================================================================================
BORROWING
================================================================================
Each Fund may borrow from a bank up to a limit of 15% of its total assets, but
only for temporary or emergency purposes. Borrowing may exaggerate the effect on
a Fund's net asset value of any increase or decrease in the value of the Fund's
portfolio securities. Money borrowed will be subject to interest costs (which
may include commitment fees and/or the cost of maintaining minimum average
balances). A Fund will repay any money borrowed from a bank in excess of 5% of
its total assets prior to purchasing additional securities.
================================================================================
BRADY BONDS
================================================================================
The International Bond Fund may invest a portion of its assets in Brady Bonds,
which are securities created through the exchange of existing commercial bank
loans to sovereign entities for new obligations in connection with debt
restructurings.
================================================================================
CORPORATE DEBT SECURITIES
================================================================================
A Fund's investments in U.S. dollar- or foreign currency-denominated corporate
debt securities of domestic or foreign issuers are limited to corporate debt
securities (corporate bonds, debentures, notes and other similar corporate debt
instruments) which meet the credit quality and maturity criteria set forth for
the particular Fund. The rate of return or return of principal on some debt
obligations may be linked to indexes or stock prices or indexed to the level of
exchange rates between the U.S. dollar and foreign currency or currencies.
Corporate debt securities with a rating lower than BBB by S&P, and corporate
debt securities rated Baa or lower by Moody's, have speculative characteristics
and changes in economic conditions or individual corporate developments are more
likely to lead to a weakened capacity to make principal and interest payments
than in the case of high grade bonds. Should any individual bond held by a Fund,
other than the International Bond Fund or International Equity Fund, fall below
a rating of BBB by S&P or Baa by Moody's, the Fund's sub-adviser will dispose of
such bond as soon as reasonably practicable in light of then-existing market and
tax considerations. (See "Appendix A--Description of Securities Ratings.") The
International Bond Fund may invest up to 25%, and the International Equity Fund
may, for temporary defensive purposes, invest up to 5%, of its net assets in
debt securities which are rated below investment grade. (See pg. 45, "High Yield
Securities ("Junk Bonds").")
43
<PAGE>
================================================================================
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 a
Fund and not for purposes of leveraging the Fund's assets. However, a Fund will
not accrue any income on these securities prior to delivery. The value of
when-issued securities and firm and standby commitment agreements may vary prior
to and after delivery depending on market conditions and changes in interest
rate levels. There is a risk that a party with whom a Fund has entered into such
transactions will not perform its commitment, which could result in a gain or
loss to the Fund.
================================================================================
FLOATERS AND INVERSE FLOATERS
================================================================================
Each Fund, other than the EAFE Index Fund, Growth Equity Fund, Indexed Equity
Fund and Value Equity 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, such as a money market index or Treasury bill rate. To be
an eligible investment for the Money Market 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.
The Bond Fund, International Bond Fund, International Equity Fund and Short-Term
Bond Fund may invest in leveraged inverse floating rate debt instruments
("inverse floaters"). The interest rate on an inverse floater resets in the
opposite direction from the market rate of interest to which the inverse floater
is indexed. The leverage associated with inverse floaters may result in greater
volatility in their market values.
Certain inverse floaters may be determined to be illiquid securities.
================================================================================
FOREIGN INDEX-LINKED INSTRUMENTS
================================================================================
The EAFE Index Fund, International Equity Fund, Multi-Asset Fund and
International Bond Fund may invest in instruments issued by the U.S. or a
foreign government or by private issuers that return principal and/or pay
interest to investors in amounts which are linked to the level of a particular
foreign index. In the case of foreign index-linked instruments linking the
interest component to a foreign index, the amount of interest payable will
adjust periodically in response to changes in the level of the foreign index
during the term of the foreign index-linked instrument. The risks of such
investments would reflect the risks of investing in the index or other
instrument, the performance of which determines the return for the instrument.
Tax considerations may limit the Funds' ability to invest in foreign
index-linked instruments.
================================================================================
FOREIGN SECURITIES
================================================================================
All Funds may invest in foreign securities, although the Money Market Fund
purchases only dollar-denominated securities. Except for the Growth Equity Fund,
Indexed Bond Fund, International Bond Fund, International Equity Fund,
Multi-Asset Fund and Value Equity Fund, the Funds' investment advisers place the
Funds' investments only in developed countries. The Indexed Equity Fund and
Indexed Bond Fund will invest in foreign securities to the extent such
securities are included in the securities that comprise the Standard & Poor's
500 Composite Stock Price Index, and the Salomon Brothers Broad Investment Grade
Bond Index, respectively.
Foreign investments could be more difficult to sell than U.S. investments and
may involve risks different from investing in domestic securities. Investments
in foreign securities involve risks of currency controls by governments, changes
in currency rates and interest rates, difficulties in receiving or interpreting
financial and economic information, possible imposition of taxes, higher
brokerage and custodian fees, possible exchange controls or other government
restrictions, including possible seizure or nationalization of foreign deposits
or assets. In addition, foreign securities may be less liquid and more volatile
than U.S. securities. There may also be difficulty in invoking legal protections
across borders.
Many of the foreign securities in which the Funds invest will be denominated in
foreign currencies. Changes in foreign exchange rates will affect the value of
securities denominated or quoted in foreign currencies. Exchange rate movements
can be large and can endure for extended periods of time, affecting either
favorably or unfavorably the value of the Funds' assets. A Fund may, however,
engage in foreign currency transactions (see "Risk Management Techniques") to
protect itself against fluctuations in currency exchange rates in relation to
the U.S. dollar. Such foreign currency transactions may include forward foreign
currency contracts, currency exchange transactions on a spot (i.e., cash) basis,
put and call options on foreign currencies, and foreign exchange futures
contracts.
The Growth Equity Fund, Indexed Bond Fund, International Bond Fund,
International Equity Fund, Multi-Asset Fund and Value Equity Fund may invest in
emerging market countries. Investment in emerging market countries generally
presents risks in greater degree than those presented by investment in foreign
issuers in countries with developed securities markets and more advanced
regulatory systems.
44
<PAGE>
================================================================================
GOVERNMENT SECURITIES
================================================================================
Government securities are obligations of, or guaranteed by, the U.S. government
or its agencies or instrumentalities.
================================================================================
HIGH YIELD SECURITIES ("JUNK BONDS")
================================================================================
Securities rated below BBB or Baa (sometimes called "junk bonds") are not
considered "investment grade". There is more price volatility, more risk of
losing your principal and interest, a greater possibility of the issuer going
bankrupt, plus addi-tional risks. These securities are considered speculative.
The International Bond Fund may invest up to 25% of its net assets in debt
securities, including short-term instruments, which are rated below investment
grade (i.e., below BBB by S&P or Baa by Moody's) or, if not rated, determined to
be of equivalent quality by the sub-adviser. Under exceptional market conditions
abroad or when it is believed that economic or market conditions warrant, the
International Equity Fund may, for temporary defensive purposes, invest up to 5%
of its net assets in short-term instruments rated below BBB by S&P or Baa by
Moody's or, if not rated, determined to be of equivalent quality by the
sub-adviser. The lower the ratings of such securities, the greater their risks
render them like equity securities. Moody's considers bonds it rates Baa to have
speculative elements as well as investment grade characteristics. The Funds may
invest in securities which are rated D by S&P or, if unrated, are of equivalent
quality. Securities rated D may be in default with respect to payment of
principal or interest. (See "Appendix A--Description of Securities Ratings.")
Investors should be willing to accept the risks associated with investment in
high yield/high risk securities. Investment in high yield/high risk bonds
involves special risks in addition to the risks associated with investments in
higher rated debt securities. High yield/high risk bonds may be regarded as
predominantly speculative with respect to the issuer's continuing ability to
meet principal and interest payments. Moreover, such securities may under
certain circumstances be less liquid than higher rated debt instruments.
================================================================================
LENDING OF PORTFOLIO SECURITIES
================================================================================
A 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 a 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, a Fund's sub-adviser
will consider all relevant facts and circumstances, including the
creditworthiness of the borrower.
================================================================================
LOAN PARTICIPATION INTERESTS
================================================================================
The Funds 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. A Fund's investments in loan participation interests will be subject
to its limitation on investments in illiquid securities and, to the extent
applicable, its limitation on investments in securities rated below investment
grade.
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. A Fund may incur additional credit risk, however,
when it is in the position of participant rather than a co-lender because the
Fund must assume the risk of insolvency of the co-lender from 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 that may include interests in pools of
lower-rated debt securities, consumer loans or mortgages, or complex instruments
such as collateralized mortgage obligations and stripped mortgage-backed
securities. The value of these securities may be significantly affected by
changes in interest rates, the market's perception of issuers and the
creditworthiness of the parties involved. The ability of a Fund to successfully
utilize these instruments may depend in part upon the ability of the Fund's
sub-adviser to forecast interest rates and other economic factors correctly.
Some securities may have a structure that makes their reaction to interest rate
changes and other factors difficult to predict, making their value highly
volatile. These securities may also be subject to prepayment risk and if the
security has been purchased at a premium the amount of the premium would be lost
in the event of prepayment. The Money Market Fund may only invest in
mortgage-backed and asset-backed securities that meet the requirements of Rule
2a-7 under the 1940 Act.
45
<PAGE>
================================================================================
MORTGAGE DOLLAR ROLLS
================================================================================
A mortgage dollar roll ("MDR") is a transaction in which a Fund sells
mortgage-backed securities ("MBS") from its portfolio to a counterparty from
whom it simultaneously agrees to buy a similar security on a delayed delivery
basis. The Fund maintains a segregated account with its custodian containing
securities from its portfolio having a value not less than the repurchase price,
including accrued interest. MDR transactions involve certain risks, including
the risk that the MBS returned to the Fund at the end of the roll, while
substantially similar, could be inferior to what was initially sold to the
counterparty.
================================================================================
MUNICIPAL BONDS
================================================================================
The Bond Fund and Short-Term Bond Fund may purchase municipal bonds which are
debt obligations of state and local governments, agencies and authorities.
Municipal bonds are issued to obtain funds for various public purposes. The
other Funds may purchase municipal bonds for temporary defensive purposes.
================================================================================
REPURCHASE AGREEMENTS AND
REVERSE REPURCHASE AGREEMENTS
================================================================================
Each 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).
Each Fund may enter into reverse repurchase agreements with banks or
broker-dealers, which involves the sale of a security by a 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. Each 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 a
Fund creates leverage which increases a 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.
The Directors have reviewed and approved certain sellers who they believe to be
creditworthy and have authorized the Funds to enter into repurchase agreements
with such sellers. If the other party to a repurchase agreement were to become
bankrupt, a Fund could experience delays in recovering its investment or losses.
================================================================================
RESTRICTED SECURITIES
================================================================================
To the extent that they invest in restricted securities, the Funds may be
exposed to additional risks. "Restricted" securities are those securities which
have not been registered under the Securities Act of 1933. 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. A Fund 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.
================================================================================
RISK MANAGEMENT TECHNIQUES
================================================================================
The Funds can use various techniques to increase or decrease their exposure to
changing security prices, interest rates, currency exchange rates, commodity
prices or other factors that affect security values. These techniques may
involve derivative transactions such as buying and selling futures contracts and
options on futures contracts, entering into foreign currency transactions (such
as forward foreign currency exchange contracts and options on foreign
currencies) and purchasing or writing put or call options on securities and
securities indexes.
The Funds can use these practices in an attempt to adjust the risk and return
characteristics of their portfolios of investments. When a Fund uses such
techniques in an attempt to reduce risk it is known as "hedging". If a Fund's
sub-adviser judges market conditions incorrectly or employs a strategy that does
not correlate well with the Fund's investments, these techniques could result in
a loss, regardless of whether the intent was to reduce risk or increase return.
These techniques may increase the volatility of a Fund and may involve a small
investment of cash relative to the magnitude of the risk assumed. In addition,
these techniques could result in a loss if the counterparty to the transaction
does not perform as promised. (For more information on risk management
techniques, see the SAI.)
================================================================================
SHORT SALES AGAINST THE BOX
================================================================================
A short sale is a transaction in which a Fund sells through a broker a security
it does not own in anticipation of a decline in market price. A short sale
"against the box" is a short sale in which, at the time of the short sale, a
Fund owns or has the right to obtain securities equivalent in kind and amount. A
Fund may enter into a short sale against the box, among other reasons, to hedge
against a possible market decline in the value of a security owned. To effect a
short sale against the
46
<PAGE>
box, the Fund borrows from a broker the securities which are sold short in the
short sale, and the broker holds the proceeds until the borrowed securities are
replaced. If the value of a security sold short against the box increases, the
Fund would suffer a loss when it purchases or delivers to the selling broker the
security sold short. If a broker, with which the Fund has open short sales, were
to become bankrupt, a Fund could experience losses or delays in recovering gains
on short sales. The Funds will only enter into short sales against the box with
brokers, the sub-advisers believe are creditworthy. Short sales against the box
will be limited to no more than 25% of a Fund's assets.
================================================================================
SWAP AGREEMENTS
================================================================================
The International Bond Fund, International Equity Fund and Multi-Asset Fund may
enter into interest rate, index and currency exchange rate swap agreements for
purposes of attempting to obtain a particular desired return at a lower cost to
the Fund than if the Fund had invested directly in an instrument that yielded
that desired return. The Indexed Bond Fund may enter into index and interest
rate swap agreements, the EAFE Index Fund may enter into index and currency
exchange rate swap agreements, and the Indexed Equity Fund may enter into index
swap agreements. Swap agreements are two-party contracts entered into primarily
by institutional investors for periods ranging from a few weeks to more than one
year.
Whether a Fund's use of swap agreements will be successful in furthering its
investment objective will depend on the sub-adviser's ability to predict
correctly whether certain types of investments are likely to produce greater
returns than other investments. Because they are two-party contracts and because
they may have terms of greater than seven days, swap agreements may be
considered to be illiquid. Moreover, a Fund bears the risk of loss of the amount
expected to be received under a swap agreement in the event of the default or
bankruptcy of a swap agreement counterparty. A sub-adviser will cause a Fund to
enter into swap agreements only with counterparties that would be eligible for
consideration as repurchase agreement counterparties under the Funds' repurchase
agreement guidelines. Certain restrictions imposed on the Funds by the Internal
Revenue Code may limit the Funds' ability to use swap agreements. The swaps
market is a relatively new market and is largely unregulated. It is possible
that developments in the swaps market and the laws relating to swaps, including
potential government regulation, could adversely affect a Fund's ability to
terminate existing swap agreements or to realize amounts to be received under
such agreements, or to enter into swap agreements or could have tax
consequences. (See "Tax Information" in the SAI for information regarding the
tax considerations relating to swap agreements.)
================================================================================
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. Zero coupon bonds tend to be more volatile than
conventional debt securities.
================================================================================
MANAGER AND SUB-ADVISERS
================================================================================
================================================================================
THE MANAGER
================================================================================
MainStay Management, Inc. serves as the Funds' manager pursuant to a Management
Agreement dated November 21, 1997 between MainStay Management, Inc. and the
Company. Under the Management Agreement, the manager is responsible for the
Company's business affairs, subject to the supervision of the Company's
Directors. The manager, among other things, furnishes the Funds with office
facilities and with ordinary clerical, bookkeeping and recordkeeping services.
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.
In connection with its administration of the business affairs of the Funds, 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
Funds' sub-advisers; and
2. all expenses incurred by the manager in connection with administering the
ordinary course of a Fund's business, other than those assumed by the Company.
As compensation for these services, each 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 according to the following
schedule:
<TABLE>
<S> <C>
EAFE Index Fund ....................................................... 0.95%
Growth Equity Fund .................................................... 0.85%
Indexed Equity Fund ................................................... 0.50%
International Equity Fund ............................................. 0.85%
Multi-Asset Fund ...................................................... 0.65%
Value Equity Fund ..................................................... 0.85%
Bond Fund ............................................................. 0.75%
Indexed Bond Fund ..................................................... 0.50%
International Bond Fund ............................................... 0.80%
Money Market Fund ..................................................... 0.50%
Short-Term Bond Fund .................................................. 0.60%
</TABLE>
47
<PAGE>
================================================================================
THE SUB-ADVISERS
================================================================================
As compensation for services, the manager, not the Fund, pays each Fund's
respective 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 according
to the following schedule:
<TABLE>
<S> <C>
EAFE Index Fund ....................................................... 0.15%
Growth Equity Fund .................................................... 0.25%
Indexed Equity Fund ................................................... 0.10%
International Equity Fund ............................................. 0.35%
Multi-Asset Fund ...................................................... 0.15%
Value Equity Fund ..................................................... 0.25%
Bond Fund ............................................................. 0.20%
Indexed Bond Fund ..................................................... 0.10%
International Bond Fund ............................................... 0.30%
Money Market Fund ..................................................... 0.10%
Short-Term Bond Fund .................................................. 0.15%
</TABLE>
================================================================================
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
Institutional Class of shares of certain Funds to an annual rate, as set forth
in the schedule below, of average daily net assets until December 31, 1998. The
Funds listed below are subject to the following voluntary expense limitations:
<TABLE>
<S> <C>
EAFE Index Fund ....................................................... 0.94%
Indexed Equity Fund ................................................... 0.30%
International Equity Fund ............................................. 1.00%
Bond Fund ............................................................. 0.75%
Indexed Bond Fund ..................................................... 0.50%
International Bond Fund ............................................... 0.95%
Money Market Fund ..................................................... 0.50%
Short-Term Bond Fund .................................................. 0.60%
</TABLE>
As long as these temporary expense limitations continue, they may lower the
Funds' expenses and increase their respective yields. The voluntary expense
limitations may be terminated or revised at any time after December 31, 1998, at
which time the Funds' expenses may increase and their respective yields may be
reduced, depending on the total assets of each of the Funds.
================================================================================
PORTFOLIO TRANSACTIONS
================================================================================
Pursuant to each Fund's Sub-Advisory Agreement, a Fund's 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 a Fund, the
Fund's sub-adviser will seek the best price and execution of the 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 National Association of Securities Dealers, Inc. and
such other policies as the Directors may determine, the Funds' sub-advisers may
consider sales of shares of the respective Funds as a factor in the selection of
broker-dealers to execute each Fund's portfolio transactions. NYLIFE Securities
Inc. may act as a broker for the Company in accordance with applicable
regulations.
Some securities considered for investment by the Funds may also be appropriate
for other clients served by the Funds' sub-advisers. If a purchase or sale of
securities consistent with the investment policies of a 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 Funds 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 a 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 Funds by the manager, the sub-advisers and the
Funds' 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-advisers and the
Funds' 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 Funds have no reason to believe these steps will not
be sufficient to avoid any material adverse impact on the Funds,
48
<PAGE>
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-advisers and the Funds' other service providers at this time but could have
a material adverse impact on the operations of the Funds and the manager, the
sub-advisers and the Funds' other service providers.
================================================================================
APPENDIX A
================================================================================
================================================================================
DESCRIPTION OF SECURITIES RATINGS
================================================================================
================================================================================
MOODY'S INVESTORS SERVICE, INC.
================================================================================
Corporate and Municipal Bond Ratings
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high-grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risks appear somewhat larger than the Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper-medium-grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa: Bonds which are rated Baa are considered as medium-grade obligations,
(i.e., they are neither highly protected nor poorly secured). Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca: Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
Moody's applies numerical modifiers, 1, 2, and 3 in each generic rating
classified from Aa through Caa. The modifier 1 indicates that the issue ranks in
the higher end of its generic rating category; the modifier 2 indicates a
mid-range ranking; and the modifier 3 indicates that the issue ranks in the
lower end of its generic rating category.
Advance refunded issues that are secured by escrowed funds held in cash, held in
trust, reinvested in direct non-callable United States government obligations or
non-callable obligations unconditionally guaranteed by the U.S. government are
identified with a hatchmark (#) symbol, i.e., #Aaa.
Moody's assigns conditional ratings to bonds for which the security depends upon
the completion of some act or the fulfillment of some condition. These are bonds
secured by: (a) earnings of projects under construction; (b) earnings of
projects unseasoned in operating experience; (c) rentals that begin when
facilities are completed; or (d) payments to which some other limiting condition
attaches. The parenthetical rating denotes probable credit stature upon
completion of construction or elimination of basis of condition, e.g.,
Con.(Baa).
49
<PAGE>
MIG 1/VMIG 1: This designation denotes best quality. There is present strong
protection by established cash flows, superior liquidity support or demonstrated
broad-based access to the market for refinancing.
MIG 2/VMIG 2: This designation denotes high quality. Margins of protection are
ample although not so large as in the preceding group.
MIG 3/VMIG 3: This designation denotes favorable quality. All security elements
are accounted for but there is lacking the undeniable strength of the preceding
grades. Liquidity and cash flow protection may be narrow and market access for
refinancing is likely to be less well established.
MIG 4/VMIG 4: This designation denotes adequate quality. Protection commonly
regarded as required of an investment security is present and although not
distinctly or predominantly speculative, there is specific risk.
SG: This designation denotes speculative quality. Debt instruments in this
category lack margins of protection.
Corporate Short-Term Debt Ratings
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 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
================================================================================
================================================================================
CORPORATE AND MUNICIPAL DEBT LONG-TERM RATINGS
================================================================================
Investment grade
AAA: Debt rated AAA has the highest rating assigned by Standard & Poor's. The
obligor's capacity to meet its financial commitment on the obligation is
extremely strong.
AA: Debt rated AA differs from the highest rated issues only in small degree.
The obligor's capacity to meet its financial commitment on the obligation is
very strong.
A: Debt rated A is somewhat more susceptible to the adverse effects of changes
in circumstances and economic conditions than debt in higher rated categories.
However, the obligor's capacity to meet its financial commitment on the
obligation is still strong.
BBB: Debt rated BBB exhibits adequate protection parameters. However, adverse
economic conditions or changing circumstances are more likely to lead to a
weakened capacity of the obligor to meet its financial commitment on the
obligation.
Speculative Grade
Debt rated BB, B, CCC, CC, and C is regarded as having significant speculative
characteristics with respect to capacity to pay interest and repay principal. BB
indicates the least degree of speculation and C the highest. While such debt
will likely have some quality and protective characteristics, these may be
outweighed by large uncertainties or major exposures to adverse conditions.
BB: Debt rated BB is less vulnerable to nonpayment than other speculative
issues. However, it faces major ongoing uncertainties or exposure to adverse
business, financial, or economic conditions which could lead to the obligor's
inadequate capacity to meet its financial commitment on the obligation.
B: Debt rated B is more vulnerable to nonpayment than obligations rated BB, but
the obligor currently has the capacity to meet its financial commitment on the
obligation. Adverse business, financial, or economic conditions will likely
impair the obligor's capacity or willingness to meet its financial commitment on
the obligation.
50
<PAGE>
CCC: Debt rated CCC is currently vulnerable to nonpayment and is dependent upon
favorable business, financial, and economic conditions for the obligor to meet
its financial commitment on the obligation. In the event of adverse business,
financial or economic conditions, the obligor is not likely to have the capacity
to meet is financial commitment on the obligation.
CC: An obligation rated CC is currently highly vulnerable to nonpayment.
C: The C rating may be used to cover a situation where a bankruptcy petition has
been filed or similar action has been taken, but debt service payments are
continued.
D: Debt rated D is in payment default. The D rating category is used when
payments on an obligation are not made on the date due even if the applicable
grace period has not expired, unless S&P believes that such payments will be
made during such grace period. The D rating will also be used upon the filing of
a bankruptcy petition, or the taking of similar action, if debt service payments
are jeopardized.
Plus (+) or Minus (-): The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
N.R.: Not rated.
Debt obligations of issuers outside the United States and its territories are
rated on the same basis as domestic corporate and municipal issues. The ratings
measure the creditworthiness of the obligor but do not take into account
currency exchange and related uncertainties.
Short-Term Rating Definitions
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.
51
<PAGE>
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<PAGE>
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.
This prospectus is also available in Spanish. Please call
800.695.2126 to obtain a copy.
[LOGO]
MAINSTAY(R)
INSTITUTIONAL
FUNDS INC.
<PAGE>
- --------------------------------------------------------------------------------
MainStay Institutional Funds Inc. Prospectus May 1, 1998
- --------------------------------------------------------------------------------
Institutional Service Class
================================================================================
Read This!
================================================================================
These Funds aren't federally insured or guaranteed by the U.S. government.
Shares of these Funds 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 Funds are subject to investment risks, including possible
loss of principal (see "Description of Investments and Investment Practices" on
page 43).
No guarantees. There can be no assurance that the investment objective of any
Fund will be achieved. All mutual funds involve risk, including the potential to
lose some or all of your original investment. Except for money market funds, the
price of a mutual fund share will fluctuate, and, when sold, may be higher or
lower than your original purchase price. Furthermore, although the Money Market
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; but if you have any
questions, please call 1-800-695-2126, or write to us at:
MainStay Institutional Funds Inc.
Box 461
Parsippany, NJ 07054-0461
For even more details, write to NYLIFE Distributors Inc., 300 Interpace Parkway,
Parsippany, NJ 07054 or call the above number for a free copy of the Statement
of Additional Information (SAI) dated May 1, 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.
- --------------------------------------------------------------------------------
MainStay Institutional Funds offers 11 no-load mutual funds with a broad range
of investment choices.
<TABLE>
<CAPTION>
================================================================================
Equity Page
================================================================================
<S> <C>
EAFE Index Fund ........................................................... 19
Growth Equity Fund ........................................................ 20
Indexed Equity Fund ....................................................... 21
International Equity Fund ................................................. 22
Multi-Asset Fund .......................................................... 23
Value Equity Fund ......................................................... 24
================================================================================
Fixed Income
================================================================================
Bond Fund ................................................................. 25
Indexed Bond Fund ......................................................... 26
International Bond Fund ................................................... 27
Money Market Fund ......................................................... 28
Short-Term Bond Fund ...................................................... 29
</TABLE>
[LOGO]
MAINSTAY(R)
INSTITUTIONAL
FUNDS INC.
<PAGE>
This page intentionally left blank
2
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
What's Inside?
- --------------------------------------------------------------------------------
================================================================================
Tell Me Quickly Page
================================================================================
<S> <C>
The Funds; The Number to Call for Help ..................................... 1
A Quick Overview: Understanding MainStay Institutional Funds ............. 4-5
================================================================================
Tell Me The Key Facts
================================================================================
Analyze the Costs of Investing: Ongoing Fees .............................. 6
If You Invest $1,000 You Might Pay ........................................ 6
Financial Highlights ................................................... 11-16
Historical Performance ................................................. 17-18
Descriptions of Each Fund .............................................. 19-29
General Investment Considerations ...................................... 30-31
Open an Account and Buy Shares ......................................... 32-33
Know How to Sell and Exchange Shares ................................... 34-35
Decide How to Receive Your Earnings ....................................... 36
Understand the Tax Consequences ........................................... 36
Know Who You're Investing With ......................................... 37-38
Know Your Rights as a Shareholder ......................................... 39
================================================================================
Tell Me The Details
================================================================================
The Company ............................................................... 40
Other Information About the Funds ......................................... 40
Description of Investments and Investment Practices ....................... 43
Manager and Sub-Advisers .................................................. 47
Portfolio Transactions .................................................... 48
Other Information ......................................................... 49
Appendix A: Description of Securities Ratings ............................ 49
</TABLE>
3
<PAGE>
- --------------------------------------------------------------------------------
A Quick Overview ...
- --------------------------------------------------------------------------------
- -----
1
- -----
================================================================================
Set your investment priorities
================================================================================
Decide if they are:
o protecting what you have
o receiving income from dividends
o participating in the potential for greater investment returns o
diversifying your current investment portfolio o a combination of any of
the above
How much risk of losing money are you willing to take; how aggressive are you
willing to be to make money? This two-part question may be the most difficult
question in the world of investing. If you are not a professional investor, you
should talk it over with your service agent or registered representative. He or
she may have some ideas you hadn't considered.
- --------------------------------------------------------------------------------
- -----
2
- -----
================================================================================
Study the Funds' objectives, policies and risks
================================================================================
Focus on the Funds that seem to be seeking your objectives. Read about the
people who manage each Fund. Understand the types of securities in which each
Fund invests and the risks associated with those investments.
If you have a registered representative or service agent, discuss the Funds with
him or her or call 1-800-695-2126.
For key facts about, and risks associated with, the Funds, see pgs. 19-29.
(For more detailed information, see "Tell Me The Details" in this Prospectus and
the Statement of Additional Information (SAI).)
- --------------------------------------------------------------------------------
- -----
3
- -----
================================================================================
Evaluate each Fund's track record, fees and expenses
================================================================================
Turn to pgs. 11-16 for Financial Highlights. Read down the columns (by year) and
find, in particular, the beginning and ending share prices, the amount of income
produced, and the "total investment return" figures, to see how each Fund has
done in the past.
Don't just look at recent performance, which may or may not be repeated. Read
the "total investment return" for each year to look for a performance pattern.
Remember, though, no fund can ever guarantee it will continue to perform at the
same levels.
Understand the ongoing fees.
(See "Analyze the Costs of Investing: Ongoing Fees"; "If you invest $1000 You
Might Pay ..."; and the Examples beginning on pg. 7 for your Fund's ongoing fees
and the impact of those costs on a $1,000 investment.)
- --------------------------------------------------------------------------------
- -----
7
- -----
================================================================================
Ongoing fees
================================================================================
Every mutual fund pays fees for services. These may include distribution,
marketing, investment management and shareholder services. Fees are generally
charged on a regular schedule. You're not charged directly; the Fund pays the
fees to the firms who provide the services and then deducts the amounts from the
Fund's assets. This, consequently, reduces the NAV of your shares.
(To learn more, see pg. 47, "Manager and Sub-Advisers.")
- --------------------------------------------------------------------------------
- -----
8
- -----
================================================================================
Earn dividends and capital gains
================================================================================
Your Fund may earn money through interest payments, dividend payments or through
capital appreciation of the securities it owns. The Fund periodically
distributes these earnings to you based on the number of shares you own. For tax
qualified plans, distributions are reinvested in additional shares. You should
check how often a Fund makes distributions, especially if current income is
important to you.
You may elect to have earnings sent to you or have them automatically reinvested
in more shares.
(To learn more, see pg. 36, "Decide How To Receive Your Earnings.")
- --------------------------------------------------------------------------------
- -----
9
- -----
================================================================================
Exchange shares/Redeem shares
================================================================================
You generally may redeem your shares on any business day, or transfer them to
another Fund by exchanging shares. The Fund will redeem shares at the current
net asset value and send you a check, or, if you wish, exchange shares of one
Fund for shares of another. An exchange is considered a sale of shares of one
Fund and a purchase of another and may have tax consequences. You can only
exchange shares of the same class. Participation in a systematic withdrawal and
exchange plan may be available for Group IRA or Group Account investors.
(To learn more, see pgs. 34-35, "Know How to Sell and Exchange Shares.")
- --------------------------------------------------------------------------------
4
<PAGE>
- --------------------------------------------------------------------------------
...Understanding MainStay Institutional Funds
- --------------------------------------------------------------------------------
- -----
4
- -----
================================================================================
Decide how much to invest in each Fund
================================================================================
You may split your investment among as many MainStay Institutional Funds as you
desire. If you are an institutional investor, your initial investment must be at
least $250,000 over the first 13 months; if investing through a Group IRA, you
must invest at least $5,000 to start; if investing through a Group Account, you
must invest at least $25,000 to start. There are also minimum requirements for
subsequent investments.
(See pgs. 32-33, "Open an Account and Buy Shares," for the amounts.)
- --------------------------------------------------------------------------------
- -----
5
- -----
================================================================================
Open an account/Buy shares
================================================================================
To open an account, fill out an application and place the order directly or
through your registered representative or service agent.
Make sure you provide complete information, including who will own the account,
and especially your Social Security number or Taxpayer ID. If you're
participating through an employer sponsored plan, your employer will complete
the application.
This is also the time to decide how to make other choices that will affect how
you manage your investments including how to receive earnings.
(For more on opening an account see pgs. 32-33, "Open an Account and Buy
Shares.")
- --------------------------------------------------------------------------------
- -----
6
- -----
================================================================================
See how many shares your money will buy
================================================================================
You can calculate the number of shares of a Fund your money buys by dividing the
amount of your investment by the price of one share ("net asset value" or "NAV")
of the Fund.
Each Fund's net asset value is calculated at the close of business of the New
York Stock Exchange, normally 4:00 p.m. Eastern time each business day (noon for
the Money Market Fund). The number of shares you receive is based on the NAV
next calculated after your order is received. You'll receive written
confirmation of your purchase.
(To learn more, see pgs. 32-33, "Open an Account and Buy Shares.")
- --------------------------------------------------------------------------------
- -----
10
- -----
================================================================================
Manage your taxes/ Align your goals
================================================================================
If you've made a profit on your investment either through dividends,
distributions or capital gains, you may have to pay taxes at tax time.
Generally, taxes are deferred if you're investing through a "tax-exempt" plan,
such as a 401(k) or IRA. Distributions from tax-exempt plans may be taxable.
Consult your tax adviser.
Be aware that your Fund may earn 1998 income that will be paid to you in January
1999, but will apply to your 1998 tax return.
(See pg. 36, "Understand the Tax Consequences," for an explanation.)
- --------------------------------------------------------------------------------
- -----
11
- -----
================================================================================
Know your rights/ Stay informed
================================================================================
Most of all, you have the right to ask questions--and have them answered
intelligently. You may call your registered representative or service agent, or
call us directly at 1-800-695-2126.
(See pg. 39, "Know Your Rights as a Shareholder," to learn more.)
- --------------------------------------------------------------------------------
5
<PAGE>
- --------------------------------------------------------------------------------
Tell Me The Key Facts
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Analyze the Costs of Investing: Ongoing Fees
- --------------------------------------------------------------------------------
To help you understand the costs of investing in a MainStay Institutional Fund,
we've provided expense information based on expenses paid by the Institutional
Service Class of each Fund for the most recent fiscal year. Because some
expenses are based on the value of the Fund's assets, which fluctuates daily,
you should only use these figures as estimates of what you might actually pay.
Ongoing fees
Each 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 value of each share you
own. (See pg. 47, "Manager and Sub-Advisers," for further details.)
Expenses have been capped
The Funds' manager has voluntarily agreed to limit total expenses on all Funds
(except the Growth Equity Fund, Multi-Asset Fund, and Value Equity Fund). (See
pg. 48, "Voluntary Expense Limitation," for full details.) Where these limits
apply, they have the effect of lowering a Fund's total operating expenses and
increasing its earnings.
The manager may end or revise the voluntary expense limitations at any time
after December 31, 1998. If this occurs, the Funds' expenses may increase and
their earnings may be reduced, depending on each Fund's total assets. (See pg.
48, "Voluntary Expense Limitation," for more on the limitation for each
Fund.)
Service agents
You may buy shares of a Fund through a service agent: broker-dealers, financial
institutions or others having a shareholder servicing relationship with the
Funds on your behalf. Service agents 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 service agent, if you have one, 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 "Examples" on the following pages are provided to help you understand the
various costs and expenses that an investor in the Institutional Service Class
of each Fund will bear directly or indirectly.
The examples on pgs. 7-10 are 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. Each 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 charts, therefore, do not necessarily represent how your investment
will perform, nor do they show how the Funds have actually performed in the
past. They are strictly hypothetical examples.
================================================================================
- --------------------------------------------------------------------------------
Take note:
- --------------------------------------------------------------------------------
We have also assumed that total Fund operating expenses remain the same each
year, and that the 1998 voluntary expense limitation would apply for all
periods. Without the limitation, your expenses would generally be higher. The
Funds' manager may end or revise these limitations at any time after December
31, 1998.
- --------------------------------------------------------------------------------
6
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
Operating Expenses Examples
- ------------------------------------------------------------------------------------------------------------------------------
==============================================================================================================================
EAFE INDEX FUND
==============================================================================================================================
<S> <C> <C> <C> <C> <C>
Shareholder Transaction Expenses None After 1 year $ 12
After 3 years $ 38
After 5 years $ 66(a)
Annual Fund Operating Expenses After 10 years $144
(as a percentage of average daily net assets)
If you invest $1,000 today, 5 years from now you would have paid:
Management Fees
(reflecting expense limitations) .63% [THE FOLLOWING TABLE WAS REPRESENTED BY
Other Expenses A PIE CHART IN THE PRINTED MATERIAL]
Shareholder Service Fees .25
Other .31 $35 management fees
---- 14 shareholder service fees
Total Other Expenses .56 17 other
---- -----------------------------
Total Fund Operating Expenses* 1.19% $66 total fund operating
==== expenses
<CAPTION>
==============================================================================================================================
GROWTH EQUITY FUND
==============================================================================================================================
<S> <C> <C> <C> <C> <C>
Shareholder Transaction Expenses None After 1 year $ 12
After 3 years $ 37
After 5 years $ 65
Annual Fund Operating Expenses After 10 years $143
(as a percentage of average daily net assets)
If you invest $1,000 today, 5 years from now you would have paid:
Management Fees .85%
Other Expenses [THE FOLLOWING TABLE WAS REPRESENTED BY
Shareholder Service Fees .25 A PIE CHART IN THE PRINTED MATERIAL]
Other .08
---- $47 management fees
Total Other Expenses .33 14 shareholder service fees
---- 4 other
Total Fund Operating Expenses 1.18% -----------------------------
==== $65 total fund operating
expenses
<CAPTION>
==============================================================================================================================
INDEXED EQUITY FUND
==============================================================================================================================
<S> <C> <C> <C> <C> <C>
Shareholder Transaction Expenses None After 1 year $ 6
After 3 years $18
After 5 years $31(a)
Annual Fund Operating Expenses After 10 years $69
(as a percentage of average daily net assets)
If you invest $1,000 today, 5 years from now you would have paid:
Management Fees
(reflecting expense limitations) .24% [THE FOLLOWING TABLE WAS REPRESENTED BY
Other Expenses A PIE CHART IN THE PRINTED MATERIAL]
Shareholder Service Fees .25
Other .06 $13 management fees
---- 14 shareholder service fees
Total Other Expenses .31 4 other
---- -----------------------------
Total Fund Operating Expenses* .55% $31 total fund operating
==== expenses
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
Operating Expenses Examples
- ------------------------------------------------------------------------------------------------------------------------------
==============================================================================================================================
INTERNATIONAL EQUITY FUND
==============================================================================================================================
<S> <C> <C> <C> <C> <C>
Shareholder Transaction Expenses None After 1 year $ 13
After 3 years $ 40
After 5 years $ 69(a)
Annual Fund Operating Expenses After 10 years $151
(as a percentage of average daily net assets)
If you invest $1,000 today, 5 years from now you would have paid:
Management Fees
(reflecting expense limitations) .81% [THE FOLLOWING TABLE WAS REPRESENTED BY
Other Expenses A PIE CHART IN THE PRINTED MATERIAL]
Shareholder Service Fees .25
Other .19 $45 management fees
--- 14 shareholder service fees
Total Other Expenses .44 10 other
---- -----------------------------
Total Fund Operating Expenses* 1.25% $69 total fund operating
==== expenses
<CAPTION>
==============================================================================================================================
MULTI-ASSET FUND
==============================================================================================================================
<S> <C> <C> <C> <C> <C>
Shareholder Transaction Expenses None After 1 year $ 10
After 3 years $ 32
After 5 years $ 56
Annual Fund Operating Expenses After 10 years $124
(as a percentage of average daily net assets)
If you invest $1,000 today, 5 years from now you would have paid:
Management Fees .65%
Other Expenses [THE FOLLOWING TABLE WAS REPRESENTED BY
Shareholder Service Fees .25 A PIE CHART IN THE PRINTED MATERIAL]
Other .11
---- $36 management fees
Total Other Expenses .36 14 shareholder service fees
---- 6 other
Total Fund Operating Expenses 1.01% -----------------------------
==== $56 total fund operating
expenses
<CAPTION>
==============================================================================================================================
VALUE EQUITY FUND
==============================================================================================================================
<S> <C> <C> <C> <C> <C>
Shareholder Transaction Expenses None After 1 year $ 12
After 3 years $ 37
After 5 years $ 65
Annual Fund Operating Expenses After 10 years $143
(as a percentage of average daily net assets)
If you invest$1,000 today, 5 years from now you would have paid:
Management Fees .85%
Other Expenses [THE FOLLOWING TABLE WAS REPRESENTED BY
Shareholder Service Fees .25 A PIE CHART IN THE PRINTED MATERIAL]
Other .08
---- $47 management fees
Total Other Expenses .33 14 shareholder service fees
---- 4 other
Total Fund Operating Expenses 1.18% -----------------------------
==== $65 total fund operating
expenses
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
Operating Expenses Examples
- ------------------------------------------------------------------------------------------------------------------------------
==============================================================================================================================
BOND FUND
==============================================================================================================================
<S> <C> <C> <C> <C> <C>
Shareholder Transaction Expenses None After 1 year $ 10
After 3 years $ 32
After 5 years $ 56(a)
Annual Fund Operating Expenses After 10 years $122
(as a percentage of average daily net assets)
If you invest $1,000 today, 5 years from now you would have paid:
Management Fees
(reflecting expense limitations) .65% [THE FOLLOWING TABLE WAS REPRESENTED BY
Other Expenses A PIE CHART IN THE PRINTED MATERIAL]
Shareholder Service Fees .25
Other .10 $36 management fees
---- 14 shareholder service fees
Total Other Expenses .35 6 other
---- -----------------------------
Total Fund Operating Expenses* 1.00% $56 total fund operating
==== expenses
<CAPTION>
==============================================================================================================================
INDEXED BOND FUND
==============================================================================================================================
<S> <C> <C> <C> <C> <C>
Shareholder Transaction Expenses None After 1 year $ 8
After 3 years $24
After 5 years $42(a)
Annual Fund Operating Expenses After 10 years $93
(as a percentage of average daily net assets)
If you invest $1,000 today, 5 years from now you would have paid:
Management Fees
(reflecting expense limitations) .35% [THE FOLLOWING TABLE WAS REPRESENTED BY
Other Expenses A PIE CHART IN THE PRINTED MATERIAL]
Shareholder Service Fees .25
Other .15 $20 management fees
---- 14 shareholder service fees
Total Other Expenses .40 8 other
---- -----------------------------
Total Fund Operating Expenses* .75% $42 total fund operating
==== expenses
<CAPTION>
==============================================================================================================================
INTERNATIONAL BOND FUND
==============================================================================================================================
<S> <C> <C> <C> <C> <C>
Shareholder Transaction Expenses None After 1 year $ 12
After 3 years $ 38
After 5 years $ 67(a)
Annual Fund Operating Expenses After 10 years $145
(as a percentage of average daily net assets)
If you invest $1,000 today, 5 years from now you would have paid:
Management Fees
(reflecting expense limitations) .65% [THE FOLLOWING TABLE WAS REPRESENTED BY
Other Expenses A PIE CHART IN THE PRINTED MATERIAL]
Shareholder Service Fees .25
Other .30 $36 management fees
---- 14 shareholder service fees
Total Other Expenses .55 17 other
---- -----------------------------
Total Fund Operating Expenses* 1.20% $67 total fund operating
==== expenses
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
Operating Expenses Examples
- ------------------------------------------------------------------------------------------------------------------------------
==============================================================================================================================
MONEY MARKET FUND
==============================================================================================================================
<S> <C> <C> <C> <C> <C>
Shareholder Transaction Expenses None After 1 year $ 8
After 3 years $24
After 5 years $42(a)
Annual Fund Operating Expenses After 10 years $93
(as a percentage of average daily net assets)
If you invest $1,000 today, 5 years from now you would have paid:
Management Fees
(reflecting expense limitations) .39%
Other Expenses [THE FOLLOWING TABLE WAS REPRESENTED BY
Shareholder Service Fees .25 A PIE CHART IN THE PRINTED MATERIAL]
Other .11
---- $22 management fees
Total Other Expenses .36 14 shareholder service fees
---- 6 other
Total Fund Operating Expenses* .75% -------------------------------
==== $42 total fund operating
expenses
<CAPTION>
===========================================================================================================================
SHORT-TERM BOND FUND
===========================================================================================================================
<S> <C> <C> <C> <C> <C>
Shareholder Transaction Expenses None After 1 year $ 9
After 3 years $ 27
After 5 years $ 47(a)
Annual Fund Operating Expenses After 10 years $105
(as a percentage of average daily net assets)
If you invest $1,000 today, 5 years from now you would have paid:
Management Fees
(reflecting expense limitations) .38% [THE FOLLOWING TABLE WAS REPRESENTED BY
Other Expenses A PIE CHART IN THE PRINTED MATERIAL]
Shareholder Service Fees .25
Other .22 $21 management fees
---- 14 shareholder service fees
Total Other Expenses .47 12 other
---- --------------------------------
Total Fund Operating Expenses* .85% $47 total fund operating
==== expenses
</TABLE>
* MainStay Management, Inc., as the Funds' manager, has voluntarily agreed for
1998 to waive a portion of the fees otherwise payable to it under the terms of
the Funds' Management Agreements (up to the amount of such fees) to the extent
necessary to limit the total operating expenses for the Institutional Service
Class of the Funds, other than the Growth Equity Fund, Multi-Asset Fund and
Value Equity Fund, to the amounts shown above. These expenses are described
under "Tell Me The Details--Manager and Sub-Adviser." Absent voluntary expense
limitations, estimated total Fund operating expenses for the Institutional
Service Class would have been as follows: EAFE Index Fund--1.51%; Indexed Equity
Fund--.81%; International Equity Fund--1.29%; Bond Fund--1.10%; Indexed Bond
Fund--.90%; International Bond Fund--1.35%; Money Market Fund--.86%; and
Short-Term Bond Fund--1.07%. Absent voluntary expense limitations, Fund
management fees would have been as follows: EAFE Index Fund--.95%; Indexed
Equity Fund--.50%; International Equity Fund--.85%; Bond Fund--.75%; Indexed
Bond Fund--.50%; International Bond Fund--.80%; Money Market Fund--.50%; and
Short-Term Bond Fund--.60%.
(a) If the voluntary expense limitations were not applied, the expenses for each
period would generally be higher. For example, the expenses for the five-year
period would be as follows: EAFE Index Fund--$83; Indexed Equity Fund--$45;
International Equity Fund--$71; Bond Fund--$61; Indexed Bond Fund--$50;
International Bond Fund--$74; Money Market Fund--$48; and Short-Term Bond
Fund--$59.
10
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
Here are the financial highlights for the Institutional Service Class of shares
of each of the eleven MainStay Institutional Funds. The Institutional Service
Class was not offered before January 1, 1995.
The information for each of the three years in the period ended December 31,
1997 has been audited by Price Waterhouse LLP, independent accountants to the
Funds. You should read the related financial statements and notes and, in the
case of the Annual Report, the unqualified report on the financial statements of
each Fund contained in the Company's 1997 Annual Report which is incorporated by
reference in the SAI.
Additional performance information is included in the Funds' Annual and
Semi-Annual Reports to Shareholders.
For a free copy of the SAI or the Annual Report, call us at 1-800-695-2126 or
write to: MainStay Institutional Funds Inc., P.O. Box 461, Parsippany, NJ
07054-0461.
EAFE INDEX FUND
<TABLE>
<CAPTION>
Year Ended
December 31
-----------------------------------------
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Net asset value at beginning of period ....................................... $13.97 $13.51 $12.63
------- ------- ------
Net investment income ........................................................ 0.19 0.12 0.14
Net realized and unrealized gain (loss) on investments ....................... (0.29) 0.73 1.05
Net realized and unrealized gain (loss) on foreign currency transactions ..... (0.00)(a) (0.00)(a) (0.10)
------- ------- ------
Total from investment operations ............................................. 0.10 0.85 1.09
------- ------- ------
Less dividends and distributions:
From net investment income ................................................... (0.19) (0.12) (0.04)
From net realized gain on investments and foreign currency transactions ...... (3.39) (0.25) (0.14)
In excess of net investment income ........................................... (0.09) (0.02) (0.03)
------- ------- ------
Total dividends and distributions ............................................ (3.67) (0.39) (0.21)
------- ------- ------
Net asset value at end of period ............................................. $10.20 $13.97 $13.51
======= ======= ======
Total investment return ...................................................... 0.08% 6.37% 8.63%
Ratios (to average net assets)/Supplemental Data:
Net investment income ....................................................... 0.79% 0.86% 0.76%
Net expenses ................................................................ 1.19% 1.19% 1.28%
Expenses (before reimbursement) ............................................. 1.51% 1.48% 1.49%
Portfolio turnover rate ...................................................... 6% 4% 6%
Average commission rate paid ................................................. $0.0205 $0.0097 (b)
Net assets at end of period (in 000's) ....................................... $439 $396 $257
</TABLE>
- ----------
(a) Less than one cent per share.
(b) Disclosure of amount required for fiscal years beginning on or after
September 1, 1995.
11
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
GROWTH EQUITY FUND
<TABLE>
<CAPTION>
Year Ended
December 31
---------------------------------------------
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Net asset value at beginning of period ....................................... $21.88 $18.80 $13.68
-------- ------- ------
Net investment income (loss) ................................................. (0.14)(a) (0.11)(a) (0.01)
Net realized and unrealized gain (loss) on investments ....................... 5.43 4.12 5.14
-------- ------- ------
Total from investment operations ............................................. 5.29 4.01 5.13
-------- ------- ------
Less dividends and distributions:
From net investment income ................................................... -- -- (0.01)
From net realized gain on investments ........................................ (1.93) (0.93) --
In excess of net investment income ........................................... -- -- (0.00)(b)
In excess of net realized gain on investments ................................ -- -- (0.00)(b)
-------- ------- ------
Total dividends and distributions ............................................ (1.93) (0.93) (0.01)
-------- ------- ------
Net asset value at end of period ............................................. $25.24 $21.88 $18.80
======== ======= ======
Total investment return ...................................................... 24.50% 21.29% 37.50%
Ratios (to average net assets)/Supplemental Data:
Net investment income (loss) ................................................ (0.56%) (0.52%) (0.13%)
Net expenses ................................................................ 1.18% 1.17% 1.18%
Expenses (before reimbursement) ............................................. 1.18% 1.17% 1.18%
Portfolio turnover rate ...................................................... 36% 22% 33%
Average commission rate paid ................................................. $0.0596 $0.0604 (c)
Net assets at end of period (in 000's) ....................................... $10,668 $6,842 $2,729
- ----------
</TABLE>
(a) Per share data based on average shares outstanding during the year.
(b) Less than one cent per share.
(c) Disclosure of amount required for fiscal years beginning on or after
September 1, 1995.
INDEXED EQUITY FUND
<TABLE>
<CAPTION>
Year Ended
December 31
---------------------------------------------
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Net asset value at beginning of period ....................................... $21.01 $17.81 $13.53
------- ------- ------
Net investment income ........................................................ 0.32 0.31 0.33
Net realized and unrealized gain (loss) on investments ....................... 6.52 3.66 4.64
------- ------- ------
Total from investment operations ............................................. 6.84 3.97 4.97
------- ------- ------
Less dividends and distributions:
From net investment income ................................................... (0.32) (0.31) (0.33)
From net realized gain on investments ........................................ (0.54) (0.46) (0.36)
In excess of net realized gain on investments ................................ -- -- --
------- ------- ------
Total dividends and distributions ............................................ (0.86) (0.77) (0.69)
------- ------- ------
Net asset value at end of period ............................................. $26.99 $21.01 $17.81
======= ======= ======
Total investment return ...................................................... 32.60% 22.21% 36.70%
Ratios (to average net assets)/Supplemental Data:
Net investment income ....................................................... 1.31% 1.71% 1.96%
Net expenses ................................................................ 0.55% 0.69% 0.75%
Expenses (before reimbursement) ............................................. 0.81% 0.84% 0.84%
Portfolio turnover rate ...................................................... 3% 8% 4%
Average commission rate paid ................................................. $0.0500 $0.0498 (a)
Net assets at end of period (in 000's) ....................................... $13,828 $5,865 $969
</TABLE>
- ------------
(a) Disclosure of amount required for fiscal years beginning on or after
September 1, 1995.
12
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
INTERNATIONAL EQUITY FUND
<TABLE>
<CAPTION>
Year Ended
December 31
---------------------------------------------
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Net asset value at beginning of period ....................................... $10.58 $10.33 $10.00
------- ------- ------
Net investment income ........................................................ 1.11 0.62 0.35
Net realized and unrealized gain on investments .............................. (0.10) 0.09 0.16
Net realized and unrealized gain on foreign currency transactions ............ (0.52) 0.48 0.17
------- ------- ------
Total from investment operations ............................................. 0.49 1.19 0.68
------- ------- ------
Less dividends and distributions:
From net investment income ................................................... (0.93) (0.82) (0.09)
From net realized gain on investments and foreign currency transactions ...... (0.29) (0.12) (0.26)
In excess of net investment income ........................................... -- -- (0.00)(a)
------- ------- ------
Total dividends and distributions ............................................ (1.22) (0.94) (0.35)
------- ------- ------
Net asset value at end of period ............................................. $9.85 $10.58 $10.33
======= ======= ======
Total investment return ...................................................... 4.88% 11.59% 6.86%
Ratios (to average net assets)/Supplemental Data:
Net investment income ....................................................... 0.98% 0.58% 0.80%
Net expenses ................................................................ 1.25% 1.25% 1.25%
Expenses (before reimbursement) ............................................. 1.29% 1.32% 1.32%
Portfolio turnover rate ...................................................... 37% 23% 26%
Average commission rate paid ................................................. $0.0302 $0.0349 (b)
Net assets at end of period (in 000's) ....................................... $607 $725 $213
</TABLE>
- ------------
(a) Less than one cent per share.
(b) Disclosure of amount required for fiscal years beginning on or after
September 1, 1995.
MULTI-ASSET FUND
<TABLE>
<CAPTION>
Year Ended
December 31
---------------------------------------------
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Net asset value at beginning of period ....................................... $13.19 $11.79 $10.67
------- ------- ------
Net investment income ........................................................ 0.31 0.34 0.47
Net realized and unrealized gain (loss) on investments ....................... 3.13 1.53 2.39
Net realized and unrealized loss on foreign currency transactions ............ 0.00(a) (0.00)(a) (0.01)
------- ------- ------
Total from investment operations ............................................. 3.44 1.87 2.85
------- ------- ------
Less dividends and distributions:
From net investment income ................................................... (0.31) (0.34) (0.47)
From net realized gain on investments ........................................ (1.51) (0.13) (1.18)
In excess of net realized gain on investments ................................ -- -- (0.08)
------- ------- ------
Total dividends and distributions ............................................ (1.82) (0.47) (1.73)
------- ------- ------
Net asset value at end of period ............................................. $14.81 $13.19 $11.79
======= ======= ======
Total investment return ...................................................... 26.30% 15.89% 26.70%
Ratios (to average net assets)/Supplemental Data:
Net investment income ....................................................... 2.02% 2.74% 3.78%
Net expenses ................................................................ 1.01% 0.95% 0.95%
Expenses (before reimbursement) ............................................. 1.01% 1.00% 1.02%
Portfolio turnover rate ...................................................... 19% 103% 261%
Average commission rate paid ................................................. $0.0499 $0.0498 (b)
Net assets at end of period (in 000's) ....................................... $9,889 $5,508 $3,536
</TABLE>
- ------------
(a) Less than one cent per share.
(b) Disclosure of amount required for fiscal years beginning on or after
September 1, 1995.
13
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
VALUE EQUITY FUND
<TABLE>
<CAPTION>
Year Ended
December 31
---------------------------------------------
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Net asset value at beginning of period ....................................... $15.85 $14.43 $11.58
------- ------- ------
Net investment income ........................................................ 0.16 0.23 0.20
Net realized and unrealized gain (loss) on investments ....................... 3.32 2.96 3.20
------- ------- ------
Total from investment operations ............................................. 3.48 3.19 3.40
------- ------- ------
Less dividends and distributions:
From net investment income ................................................... (0.16) (0.23) (0.20)
From net realized gain on investments ........................................ (2.82) (1.54) (0.35)
------- ------- ------
Total dividends and distributions ............................................ (2.98) (1.77) (0.55)
------- ------- ------
Net asset value at end of period ............................................. $16.35 $15.85 $14.43
======= ======= ======
Total investment return ...................................................... 22.28% 22.10% 29.32%
Ratios (to average net assets)/Supplemental Data:
Net investment income ....................................................... 1.05% 1.45% 1.39%
Net expenses ................................................................ 1.18% 1.17% 1.18%
Expenses (before reimbursement) ............................................. 1.18% 1.17% 1.18%
Portfolio turnover rate ...................................................... 66% 50% 51%
Average commission rate paid ................................................. $0.0592 $0.0594 (a)
Net assets at end of period (in 000's) ....................................... $11,010 $14,752 $3,213
</TABLE>
- -----------
(a) Disclosure of amount required for fiscal years beginning on or after
September 1, 1995.
BOND FUND
<TABLE>
<CAPTION>
Year Ended
December 31
---------------------------------------------
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Net asset value at beginning of period ....................................... $9.49 $9.83 $8.93
------ ------ -----
Net investment income ........................................................ 0.59 0.60 0.67
Net realized and unrealized gain (loss) on investments ....................... 0.19 (0.34) 0.90
------ ------ -----
Total from investment operations ............................................. 0.78 0.26 1.57
------ ------ -----
Less dividends and distributions:
From net investment income ................................................... (0.59) (0.60) (0.67)
From net realized gain on investments ........................................ -- -- --
In excess of net realized gain on investments ................................ -- -- --
------ ------ -----
Total dividends and distributions ............................................ (0.59) (0.60) (0.67)
------ ------ -----
Net asset value at end of period ............................................. $9.68 $9.49 $9.83
====== ====== =====
Total investment return ...................................................... 8.21% 2.62% 17.55%
Ratios (to average net assets)/Supplemental Data:
Net investment income ....................................................... 5.96% 5.85% 6.37%
Net expenses ................................................................ 1.00% 1.00% 1.00%
Expenses (before reimbursement) ............................................. 1.10% 1.11% 1.11%
Portfolio turnover rate ...................................................... 338% 398% 470%
Net assets at end of period (in 000's) ....................................... $1,531 $1,597 $749
</TABLE>
14
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
INDEXED BOND FUND
<TABLE>
<CAPTION>
Year Ended
December 31
---------------------------------------------
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Net asset value at beginning of period ....................................... $10.52 $10.99 $10.06
------ ------ ------
Net investment income ........................................................ 0.70 0.74 0.81
Net realized and unrealized gain (loss) on investments ....................... 0.22 (0.48) 1.00
------ ------ ------
Total from investment operations ............................................. 0.92 0.26 1.81
------ ------ ------
Less dividends and distributions:
From net investment income ................................................... (0.70) (0.73) (0.81)
From net realized gain on investments ........................................ -- -- (0.07)
In excess of net realized gain on investments ................................ -- -- --
------ ------ ------
Total dividends and distributions ............................................ (0.70) (0.73) (0.88)
------ ------ ------
Net asset value at end of period ............................................. $10.74 $10.52 $10.99
====== ====== ======
Total investment return ...................................................... 8.75% 2.34% 17.97%
Ratios (to average net assets)/Supplemental Data:
Net investment income ....................................................... 6.35% 5.96% 6.13%
Net expenses ................................................................ 0.75% 0.75% 0.75%
Expenses (before reimbursement) ............................................. 0.90% 0.90% 0.88%
Portfolio turnover rate ...................................................... 32% 312% 284%
Net assets at end of period (in 000's) ....................................... $3,015 $2,764 $471
</TABLE>
INTERNATIONAL BOND FUND
<TABLE>
<CAPTION>
Year Ended
December 31
---------------------------------------------
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Net asset value at beginning of period ....................................... $11.07 $11.14 $10.00
------ ------- -------
Net investment income ........................................................ 0.98 1.19 0.70
Net realized and unrealized gain on investments .............................. (1.13) 0.11 1.10
Net realized and unrealized gain on foreign currency transactions ............ 0.41 0.26 0.02
------ ------- -------
Total from investment operations ............................................. 0.26 1.56 1.82
------ ------- -------
Less dividends and distributions:
From net investment income and net realized gain on foreign
currency transactions ....................................................... (0.96) (1.35) (0.55)
From net realized gain on investments ........................................ (0.36) (0.28) (0.13)
------ ------- -------
Total dividends and distributions ............................................ (1.32) (1.63) (0.68)
------ ------- -------
Net asset value at end of period ............................................. $10.01 $11.07 $11.14
====== ====== ======
Total investment return ...................................................... 2.27% 14.08% 18.26%
Ratios (to average net assets)/Supplemental Data:
Net investment income ....................................................... 5.61% 5.77% 6.36%
Net expenses ................................................................ 1.20% 1.20% 1.20%
Expenses (before reimbursement) ............................................. 1.35% 1.33% 1.28%
Portfolio turnover rate ...................................................... 186% 57% 92%
Net assets at end of period (in 000's) ....................................... $235 $225 $6
</TABLE>
15
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
MONEY MARKET FUND
<TABLE>
<CAPTION>
Year Ended
December 31
---------------------------------------------
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Net asset value at beginning of period ....................................... $1.00 $1.00 $1.00
------- ------- ------
Net investment income ........................................................ 0.05 0.05 0.05
------- ------- ------
Less dividends and distributions:
From net investment income ................................................... (0.05) (0.05) (0.05)
From net realized gain on investments ........................................ (0.00)(a) -- --
------- ------- ------
Total Dividends and distributions ............................................ (0.05) (0.05) (0.05)
------- ------- ------
Net asset value at end of period ............................................. $1.00 $1.00 1.00
======= ======= ======
Total investment return ...................................................... 5.01% 4.85% 5.46%
Ratios (to average net assets)/Supplemental Data:
Net investment income ....................................................... 4.93% 4.75% 5.23%
Net expenses ................................................................ 0.75% 0.75% 0.75%
Expenses (before reimbursement) ............................................. 0.86% 0.92% 0.98%
Net assets at end of period (in 000's) ....................................... $64,228 $34,664 $2,784
</TABLE>
- ------------
(a) Less than one cent per share.
SHORT-TERM BOND FUND
<TABLE>
<CAPTION>
Year Ended
December 31
---------------------------------------------
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Net asset value at beginning of period ....................................... $9.46 $9.67 $9.37
------ ------ ------
Net investment income ........................................................ 0.64 0.64 0.64
Net realized and unrealized gain (loss) on investments ....................... (0.08) (0.21) 0.30
------ ------ ------
Total from investment operations ............................................. 0.56 0.43 0.94
------ ------ ------
Less dividends and distributions:
From net investment income ................................................... (0.64) (0.64) (0.64)
From net realized gain on investments ........................................ -- -- --
In excess of net investment income ........................................... -- -- --
In excess of net realized gain on investments ................................ -- -- --
------ ------ ------
Total dividends and distributions ............................................ (0.64) (0.64) (0.64)
------ ------ ------
Net asset value at end of period ............................................. $9.38 $9.46 $9.67
====== ====== ======
Total investment return ...................................................... 5.98% 4.46% 10.07%
Ratios (to average net assets)/Supplemental Data:
Net investment income ....................................................... 5.99% 5.60% 6.13%
Net expenses ................................................................ 0.85% 0.85% 0.85%
Expenses (before reimbursement) ............................................. 1.07% 1.04% 1.07%
Portfolio turnover rate ...................................................... 153% 195% 171%
Net assets at end of period (in 000's) ....................................... $1,485 $1,316 $1,128
</TABLE>
16
<PAGE>
- --------------------------------------------------------------------------------
Historical Performance
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
EQUITY FUNDS
Institutional Service Class(1)
Average Annual Total Returns for Periods Ended December 31, 1997(2)
-------------------------------------------------------------------
One Three Five Since
Year Years Years Inception(3)
------- ------- ------- ------------
<S> <C> <C> <C> <C>
EAFE Index Fund ...................................... 0.08% 4.96% 9.76% 6.35%
Growth Equity Fund ................................... 24.50% 27.57% 17.34% 21.55%
Indexed Equity Fund .................................. 32.60% 30.36% 19.58% 19.10%
International Equity Fund(4) ......................... 4.88% 7.74% 11.12% 9.10%
Multi-Asset Fund ..................................... 26.30% 22.86% 14.87% 14.14%
Value Equity Fund .................................... 22.28% 24.52% 17.56% 20.54%
</TABLE>
- ----------
(1) Performance figures of the Institutional Service Class, first offered to
the public on January 1, 1995, include the historical performance of the
Institutional Class from each Fund's inception (January 2, 1991) up to
December 31, 1994. Performance figures for the two Classes after this date
will vary based on differences in their expense structures. The
Institutional Service Class has a Shareholder Services Plan and therefore
incurs the related expenses of the Plan. (See "Manager and
Sub-Advisers"--"Shareholder Services Plan" for more information.)
(2) Past performance is no guarantee of future results. The performance results
shown above reflect performance as of December 31, 1997. Performance
results change over time. For performance results as of more current dates,
call 1-800-695-2126.
(3) January 2, 1991 for each of the Funds other than the International Equity
Fund (July 31, 1992 for the International Equity Fund's predecessor
separate account ("Separate Account")).
(4) Performance figures include the historical performance of the Separate
Account for the period prior to the International Equity Fund's
commencement of operations on January 1, 1995. MacKay-Shields Financial
Corporation, the International Equity Fund's sub-adviser, served as
investment adviser to the Separate Account, and the investment objective,
policies, restrictions, guidelines and management style of the Separate
Account were materially equivalent to those of the International Equity
Fund. Performance figures for the period prior to January 1, 1995 have been
calculated by measuring the change in value of a unit of the Separate
Account from the time period specified to January 1, 1995, using the
Separate Account's expense structure, which generally was higher than the
expense structure of the International Equity Fund. The Separate Account
was not registered under the Investment Company Act of 1940 ("1940 Act")
and therefore was not subject to certain investment restrictions imposed
under the 1940 Act. If the Separate Account had been registered under the
1940 Act, the Separate Account's performance may have been adversely
affected.
17
<PAGE>
- --------------------------------------------------------------------------------
Historical Performance
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FIXED INCOME FUNDS
Institutional Service Class(1)
Average Annual Total Returns for Periods Ended December 31, 1997(2)
-------------------------------------------------------------------
One Three Five Since
Year Years Years Inception(3)
------- ------- ------- ------------
<S> <C> <C> <C> <C>
Bond Fund ............................................ 8.21% 9.29% 6.73% 7.69%
Indexed Bond Fund .................................... 8.75% 9.50% 6.81% 7.93%
International Bond Fund(4) ........................... 2.27% 11.32% 10.26% 9.70%
Money Market Fund .................................... 5.01% 5.11% 4.41% 4.52%
Short-Term Bond Fund ................................. 5.98% 6.81% 5.21% 6.16%
</TABLE>
- ----------
(1) Performance figures of the Institutional Service Class, first offered to
the public on January 1, 1995, include the historical performance of the
Institutional Class from each Fund's inception (January 2, 1991) up to
December 31, 1994. Performance figures for the two Classes after this date
will vary based on differences in their expense structures. The
Institutional Service Class has a Shareholder Services Plan and therefore
incurs the related expenses of the Plan. (See "Manager and
Sub-Advisers"--"Shareholder Services Plan" for more information.)
(2) Past performance is no guarantee of future results. The performance results
shown above reflect performance as of December 31, 1997. Performance
results change over time. For performance results as of more current dates,
call 1-800-695-2126.
(3) January 2, 1991 for each of the Funds other than the International Bond
Fund (January 31, 1990 for the International Bond Fund's predecessor
separate account ("Separate Account")).
(4) Performance figures include the historical performance of the Separate
Account for the period prior to the International Bond Fund's commencement
of operations on January 1, 1995. MacKay-Shields Financial Corporation, the
International Bond Fund's sub-adviser, served as investment adviser to the
Separate Account, and the investment objective, policies, restrictions,
guidelines and management style of the Separate Account were materially
equivalent to those of the International Bond Fund. Performance figures for
the period prior to January 1, 1995 have been calculated by measuring the
change in value of a unit of the Separate Account from the time period
specified to January 1, 1995, using the Separate Account's expense
structure, which generally was higher than the expense structure of the
International Bond Fund. The Separate Account was not registered under the
Investment Company Act of 1940 ("1940 Act") and therefore was not subject
to certain investment restrictions imposed under the 1940 Act. If the
Separate Account had been registered under the 1940 Act, the Separate
Account's performance may have been adversely affected.
18
<PAGE>
================================================================================
EAFE Index Fund
The Fund's objective is:
================================================================================
to seek to provide investment results that correspond to the total return
performance (reflecting reinvestment of dividends) of common stocks in the
aggregate, as represented by the Morgan Stanley Capital International Europe,
Australia and Far East ("EAFE") Index.
- --------------------------------------------------------------------------------
The EAFE Index is a capitalization-weighted index of approximately 1,200
equities (stocks and stock-related securities) from countries outside the United
States.
Many funds generally seek to beat market averages, often with unpredictable
results. Index funds, like this one, seek to match the market average
represented by the index they are trying to mirror. No attempt is made to manage
the Fund in the traditional sense using economic, financial or market analysis.
It's expected that there will be a close correlation (about 95%) between the
Fund's performance and the EAFE Index in both rising and falling markets.
- --------------------------------------------------------------------------------
================================================================================
The Fund invests in:
================================================================================
... a statistically selected sample of approximately 350 securities included in
the EAFE Index.
... at least 80% of total assets, under normal market conditions, in stocks in
the EAFE Index.
... the Fund may also invest in:
... up to 20% of total assets in stock index options, futures contracts and
options on futures to maintain cash reserves while fully invested, to
facilitate trading, or to reduce transaction costs.
... up to 10% of total assets in index and currency exchange rate swap
agreements.
... foreign currency exchange transactions using currencies, options, futures
or options on futures, or forward contracts for any legally permissible
purpose, including to protect against foreign currency exchange risks
involving securities the Fund owns or plans to own. (See pg. 46, "Risk
Management Techniques.")
The Fund will attempt to remain fully invested at all times; however, to keep
money working or to keep cash available for shareholder redemptions, the Fund
may invest temporarily in:
... other investments suitable for most or all MainStay Institutional Funds.
(See pgs. 30-31, "General Investment Considerations"; and pg. 43,
"Description of Investments and Investment Practices.")
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Risks? The Fund's ability to mirror the EAFE Index may be affected by, among
other things, transaction costs, changes in either the makeup of the Index or
number of shares outstanding for the components of the Index, and the timing and
amount of contributions to and redemptions from the Fund by shareholders.
Investments in foreign securities could be more volatile and more difficult to
sell than U.S. investments, and involve additional risks. (For more on risks of
investing in foreign securities, see pg. 44, "Description of Investments and
Investment Practices"--"Foreign Securities.")
Some options on foreign currencies could force the sub-adviser to buy or sell
foreign currencies at unfavorable exchange rates, creating losses. It is also
possible that the Fund could forfeit the entire amount of the premium paid for
the purchased options plus transaction costs.
A lack of market activity may keep the sub-adviser from closing out a futures
contract or a futures option position when it wants to. The Fund would remain
obligated to make margin deposits until it could close the position.
There are no guarantees that hedging transactions or the use of options and
futures will successfully protect investments, or lead to better Fund
performance. In some instances, the Fund may lose money.
- --------------------------------------------------------------------------------
WHO'S MANAGING
YOUR MONEY?
JAMES A. MEHLING OF MONITOR
CAPITAL ADVISORS, INC.
Mr. Mehling is President and Chief Investment Officer of Monitor Capital. He
joined Monitor Capital in October 1991 after serving as director of risk
management in the Investment Department of New York Life Insurance Company from
1989-1991. He has served as portfolio manager of the Fund since 1991.
19
<PAGE>
================================================================================
Growth Equity Fund
The Fund's objective is:
================================================================================
to seek long-term growth of capital. Dividend income, if any, is a consideration
incidental to the Fund's objective of growth of capital.
- --------------------------------------------------------------------------------
This Fund is not for investors who need current income but is for investors who
are in a financial position to take above-average risks in search of long-term
growth.
- --------------------------------------------------------------------------------
================================================================================
The Fund invests in:
================================================================================
... a variety of companies and securities. The sub-adviser selects investments
according to the economic environment and the attractiveness of particular
markets.
... securities of companies with these characteristics:
o participation in expanding markets
o increasing return on investment
o increasing unit sales volume, and
o revenue growth and earnings per share superior to the average of common
stocks included in indices such as the S&P 500 Composite Stock Price Index.
...securities of companies without some or all of those characteristics, if the
sub-adviser considers them to be ready for a rise in price; for example,
companies expected to have accelerated growth in earnings due to special factors
like new management, new products, changes in consumer demand or changes in the
economy.
... at least 65% of its total assets, under normal market conditions, in equity
securities including common stocks, nonconvertible preferred stocks, securities
convertible into or exchangeable for common stocks (e.g., convertible preferred
stocks and convertible debentures) and warrants. Convertible preferred stocks
and debentures must be rated when purchased Baa or better by Moody's Investors
Service Inc. ("Moody's") or BBB or better by Standard & Poor's ("S&P" or
"Standard & Poor's"), or if unrated, considered by the sub-adviser to be of
comparable quality. (See "Appendix A-- Description of Securities Ratings.")
...the Fund may also invest in:
...options on common stocks and stock indices, futures contracts and related
options, stocks represented by American Depositary Receipts ("ADRs") or European
Depositary Receipts ("EDRs"), foreign equity securities, obligations issued or
guaranteed by the U.S. Government or any of its agencies or instrumentalities or
by any of the states, cash equivalents, or cash.
...foreign currency exchange transactions using currencies, options, futures or
options on futures, or forward contracts to help protect against foreign
currency exchange risks involving foreign securities the Fund owns or plans to
own. (See pg. 46, "Risk Management Techniques.")
...other investments suitable for most or all MainStay Institutional Funds. (See
pgs. 30-31, "General Investment Considerations"; and pg. 43, "Description of
Investments and Investment Practices.")
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Risks? Opportunities for greater gains often come with greater risks of loss.
Some of the securities held by the Fund may have high price-earnings ratios and
carry an above-average risk of price deterioration.
- --------------------------------------------------------------------------------
WHO'S MANAGING
YOUR MONEY?
EDMUND C. SPELMAN AND
RUDOLPH C. CARRYL OF
MACKAY-SHIELDS
FINANCIAL CORPORATION.
Mr. Spelman is a Managing Director of MacKay-Shields, and specializes in equity
securities. He joined MacKay-Shields in 1991 after working as a securities
analyst at Oppenheimer & Co., Inc. (1984-1991), and has been a portfolio manager
for the Fund since February 1991.
Mr. Carryl is a Managing Director of MacKay-Shields. He joined MacKay-Shields as
a Director in 1992 with twelve years of investment management and research
experience. Mr. Carryl was Research Director and Senior Portfolio Manager at
Value Line, Inc. from 1978 to 1992. Mr. Carryl has acted as a portfolio manager
of the Fund since August 1992.
20
<PAGE>
================================================================================
Indexed Equity Fund
The Fund's objective is:
================================================================================
to seek to provide investment results that correspond to the total return
performance (reflecting reinvestment of dividends) of common stocks in the
aggregate, as represented by the S&P 500 Composite Stock Price Index.
- --------------------------------------------------------------------------------
The S&P 500 Composite Stock Price Index (the "Index") is capitalization-weighted
and includes 500 different industrial, utility, financial and transportation
sector companies selected by Standard & Poor's. The Index is used as the
standard for performance comparison because it represents about two-thirds of
the total market value of all U.S. common stocks and is well known to investors.
Typically, companies included in the Index are the largest and most dominant
firms in their respective industries.
Unlike other funds which generally seek to beat market averages often with
unpredictable results, index funds seek to match their respective indices. No
attempt is made to manage the portfolio in the traditional sense using economic,
financial and market analysis. This Fund attempts to achieve its objective by
using a "full replication method" in which the Fund attempts to "mirror" the
performance of the Index by investing in all 500 stocks in the same proportion
as they are represented in the Index.
- --------------------------------------------------------------------------------
================================================================================
The Fund invests in:
================================================================================
...all 500 stocks, in the same proportion as they are represented in the Index,
to the extent feasible.
...at least 80% of total assets, under normal market conditions, in stocks in
the Index.
...the Fund may also invest in:
... up to 20% of total assets in options and futures contracts to maintain cash
reserves while fully invested, to facilitate trading or to reduce transaction
costs.
... up to 10% of total assets in index swap agreements. (For a description of
"Swap Agreements," see pg. 47.)
The Fund will attempt to remain fully invested at all times; however, to keep
money working or to keep cash available for shareholder redemptions, the Fund
may invest in:
... other investments suitable for most or all MainStay Institutional Funds.
(See pgs. 30-31, "General Investment Considerations," for details; and pg. 43,
"Description of Investments and Investment Practices.")
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Risks? The Fund's ability to mirror the Index may be affected by, among other
things, transaction costs, changes in either the makeup of the Index or number
of shares outstanding for the components of the Index, and the timing and amount
of contributions to and redemptions from the Fund by shareholders.
The values of common stocks of major U.S. corporations tend to fluctuate based
on a variety of market and general economic conditions.
- --------------------------------------------------------------------------------
WHO'S MANAGING
YOUR MONEY?
JAMES A. MEHLING OF MONITOR
CAPITAL ADVISORS, INC.
Mr. Mehling is President and Chief Investment Officer of Monitor Capital. He
joined Monitor Capital in October 1991 after serving as director of risk
management in the Investment Department of New York Life Insurance Company from
1989-1991. He has served as portfolio manager of the Fund since 1991.
21
<PAGE>
================================================================================
International Equity Fund
The Fund's objective is:
================================================================================
to seek long-term growth of capital by investing in a portfolio consisting
primarily of non-U.S. equity securities. Current income is a secondary
objective.
================================================================================
The Fund invests in:
================================================================================
...at least 65% of total assets, under normal market conditions, in equity
securities of foreign corporations wherever organized, which do business mainly
outside the U.S.
...a diversified portfolio of securities, including common stocks, preferred
stocks, warrants and other comparable equity securities.
...a variety of countries, with a minimum of 5 countries other than the U.S.
This includes countries with established economies as well as emerging market
countries, including, among others, those in Latin America and Asia, that the
Fund's sub-adviser believes present favorable opportunities.
...ADRs (American Depositary Receipts); EDRs (European Depositary Receipts);
GDRs (Global Depositary Receipts); IDRs (International Depositary Receipts) or
other similar securities convertible into securities of foreign issuers.
...to enhance returns, manage risk more efficiently and protect against price
changes in securities, currency on a spot or forward basis, securities and
securities index options, foreign currency options, futures contracts and
related options, and may enter into swap agreements. Futures and related options
may be used for any legal purpose including to reduce trading costs.
...the Fund may also invest in:
... U.S. equity securities.
... notes and bonds which, when purchased are rated in one of the top four
categories by Moody's or Standard & Poor's. (See "Appendix A--Description
of Securities Ratings.")
... cash, including foreign currency, or cash equivalents such as obligations
of banks, commercial paper and short-term obligations of U.S. or foreign
issuers.
.... in unusual market conditions, the Fund may invest all or a portion of its
assets in equity securities of U.S. issuers, investment grade notes and
bonds and cash equivalents or cash.
... other investments suitable for most or all MainStay Institutional Funds.
(See pgs. 30-31, "General Investment Considerations"; and pg. 43, "Description
of Investments and Investment Practices.")
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Risks? Alone, this Fund is not a balanced investment plan. It is intended for
long-term investors who seek growth over current income. It is appropriate for
investors wanting investments in markets outside the U.S. who are willing to
accept the risks of foreign investing. The Fund's orientation is in avoiding
excessive risk, although there are risks associated with any kind of investment.
Due to this philosophy, the Fund may not attain as high a level of return as
more aggressively managed international funds, although there may be times when
the Fund outperforms some funds in down markets.
Investments in foreign securities could be more volatile and more difficult to
sell than U.S. investments, and involve additional risks. (For more on risks of
investing in foreign securities, see pg. 44, "Description of Investments and
Investment Practices" "Foreign Securities.")
- --------------------------------------------------------------------------------
WHO'S MANAGING
YOUR MONEY?
SHIGEMI TAKAGI OF
MACKAY-SHIELDS
FINANCIAL CORPORATION.
Mr. Takagi is a Director specializing in international equities at
MacKay-Shields. He joined MacKay-Shields in 1989 after working at First Boston
Corp. as an international equity analyst. He has served as a portfolio manager
for the Fund since its inception in January 1995.
22
<PAGE>
================================================================================
Multi-Asset Fund
The Fund's objective is:
================================================================================
to seek to maximize total return, consistent with certain percentage constraints
on amounts allocated to each asset class, from a combination of common stocks,
fixed income securities, and money market investments.
- --------------------------------------------------------------------------------
The Fund attempts to achieve this objective through active management and
allocation of investments among three asset classes. The presence of the
constraints, however, may restrict the investment adviser's ability to fully
maximize total return.
The allocations of the Fund's net assets reflect the anticipated risks and
returns of each asset class. Although these levels maintain the balanced nature
of the overall investments, they are not intended to act as a fully balanced
investment program. (For a full explanation of the investment method, see pg.
41, "Multi-Asset Fund.")
- --------------------------------------------------------------------------------
================================================================================
The Fund invests in:
================================================================================
...three asset classes, limited by the following constraints
...30% to 80% of net assets in common stock selected to parallel the performance
of the S&P 500 Composite Stock Price Index for the domestic common stock portion
of the Fund.
...10% to 60% of net assets in fixed income securities selected to parallel the
performance of the Salomon Brothers Broad Investment Grade Bond Index (although
the securities don't have to be in the Index). These debt securities may have
fixed, variable, or floating rates of interest.
...10% to 60% of net assets in selected money market instruments.
Within these constraints, the Fund may also invest:
... up to 20% of total assets in foreign securities (defined as "traded
primarily in a market outside the U.S.") of developed and emerging market
countries.
... up to 10% of total assets in interest rate, index, and currency exchange
rate swap agreements.
... in futures transactions to rebalance or alter its portfolio composition and
risk profile and to diversify the Fund's holdings where futures
transactions are more efficient than direct investment transactions. (See
pg. 46,"Risk Management Techniques.")
... in foreign currency exchange transactions using currencies, options,
futures or options on futures, or forward contracts for any legally
permissible purpose, including to protect against foreign currency exchange
risks involving securities the Fund owns or plans to own. (See pg. 46,
"Risk Management Techniques.")
... in other investments suitable for most or all MainStay Institutional Funds.
(See pgs. 30-31, "General Investment Considerations"; and pg. 43,
"Description of Investments and Investment Practices.")
At times, the actual allocation for each asset class may differ from the
constraints, due to market fluctuations or cash entering or leaving the Fund.
This could happen for instance, if the sub-adviser has positioned the assets
close to a minimum or maximum for one or more asset classes, and the Fund's cash
position changes because of investors buying or selling the Fund's shares. To
correct the situation, the sub-adviser will move cash or reallocate assets
within seven days.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Risks? The Fund's performance depends on the sub-adviser's ability to
consistently and correctly determine the relative attractiveness of the asset
classes. However, prices change not only in response to economic factors but to
psychological factors as well. These factors are difficult to interpret and
quantify. It is therefore possible for the Fund to have a small investment in
stocks during a period of rising stock prices, or a small investment in bonds
during a period of rising bond prices.
Investments in foreign securities could be more volatile and more difficult to
sell than U.S. investments, and involve additional risks. (For more on risks of
investing in foreign securities, see pg. 44, "Description of Investments and
Investment Practices"--"Foreign Securities.")
- --------------------------------------------------------------------------------
WHO'S MANAGING YOUR MONEY?
JAMES A. MEHLING OF
MONITOR CAPITAL ADVISORS, INC.
Mr. Mehling is President and Chief Investment Officer of Monitor Capital. He
joined Monitor Capital in October 1991 after serving as director of risk
management in the Investment Department of New York Life Insurance Company from
1989-1991. He has served as portfolio manager of the Fund since 1991.
23
<PAGE>
================================================================================
Value Equity Fund
The Fund's objective is:
================================================================================
to seek maximum long-term total return from a combination of capital growth and
income. The Fund is not designed or managed primarily to produce current income.
- --------------------------------------------------------------------------------
The Fund takes a flexible approach, emphasizing investments in common stocks
which are, in the opinion of the Fund's sub-adviser, undervalued at the time of
purchase. If, in the sub-adviser's opinion, a stock has reached its full value,
it will usually be sold and replaced by securities considered to be undervalued.
- --------------------------------------------------------------------------------
================================================================================
The Fund invests in:
================================================================================
...at least 65% of total assets, under normal market conditions, in equity
securities, including common stocks and securities that can be exchanged for or
converted into common stocks (e.g., convertible preferred stocks and convertible
debentures), nonconvertible preferred stocks and warrants.
...dividend-paying common stocks listed on a national securities exchange or
traded in the over-the-counter market (although the Fund may invest in
non-dividend paying stock, based on the sub-adviser's judgment).
...the Fund may also invest in:
... up to 35% of total assets in options on common stocks and stock indices,
stocks represented by American Depositary Receipts ("ADRs") or European
Depositary Receipts ("EDRs"), foreign equity securities, zero coupon bonds,
obligations issued or guaranteed by the U.S. Government or any of its
agencies or instrumentalities or by any of the states, cash equivalents or
cash.
... convertible preferred stocks, debentures and zero coupon bonds must be,
when purchased rated Baa or better by Moody's or BBB or better by Standard
& Poor's; or unrated but judged by the sub-adviser to be of comparable
quality. (See "Appendix A--Description of Securities Ratings.")
... stock index futures contracts and related options to protect against
changes in stock prices.
... foreign currency exchange transactions using currencies, options, futures
or options on futures, or forward contracts to help protect against foreign
currency exchange risks involving foreign securities the Fund owns or plans
to own. (See pg. 46, "Risk Management Techniques.")
... other investments suitable for most or all MainStay Institutional Funds.
(See pgs. 30-31, "General Investment Considerations"; and pg. 43,
"Description of Investments and Investment Practices.")
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Risks? The Fund's share price, like the price of other equity-oriented funds,
isn't always stable. The value of the securities in the Fund--and the net asset
value of the Fund--will fluctuate in the marketplace. It is possible that the
sub-adviser's decisions will not produce the growth you anticipate.
- --------------------------------------------------------------------------------
WHO'S MANAGING
YOUR MONEY?
DENIS P. LAPLAIGE AND
JEFFREY A. SIMON OF
MACKAY-SHIELDS FINANCIAL
CORPORATION.
Mr. Laplaige is President, Senior Managing Director and Chief Investment Officer
of MacKay-Shields. He joined the firm in 1982 as a research analyst, became a
Director in 1988, Managing Director in 1991, a member of its Board of Directors
in 1993, President in 1994, and Senior Managing Director and Chief Investment
Officer in 1996. Prior to that, he was a portfolio manager and research analyst
with Value Line Inc. Mr. Laplaige has been a portfolio manager of the Value
Equity Fund since the Fund's inception in January 1991.
Mr. Simon is a Managing Director of MacKay-Shields and specializes in equity
securities. He joined MacKay-Shields in 1993 after working as a senior equity
research analyst and portfolio manager at National Securities and Research
Corporation (1991-1992) and Neuberger & Berman (1987-1991).
24
<PAGE>
================================================================================
Bond Fund
The Fund's objective is:
================================================================================
to seek to maximize total return, consistent with liquidity, low risk to
principal and investment in debt securities.
- --------------------------------------------------------------------------------
================================================================================
The Fund invests in:
================================================================================
...normally at least 70% of total assets in:
o obligations issued or guaranteed by the U.S. or foreign governments, their
agencies or instrumentalities; obligations of international or
supranational entities;
o debt securities issued by domestic or foreign corporate entities, zero
coupon bonds, and municipal bonds;
o mortgage-related and other asset-backed securities; and
o loan participation interests.
The effective maturity of this portion of the Fund's portfolio will usually be
in the intermediate range (i.e., three to ten years), although it may vary
depending on the sub-adviser's judgment of market conditions.
The Fund may use, under normal market conditions, up to 30% of its total assets
to shorten or lengthen the portfolio's effective maturity. This portion of the
Fund's assets may be invested in:
o long-term U.S. Treasuries (i.e., ten to thirty years); and
o cash equivalent short-term obligations including certificates of deposit,
time deposits, bankers' acceptances issued by domestic or foreign banks;
certificates of deposit and time deposits issued by savings and loan
associations, commercial paper, repurchase agreements and reverse
repurchase agreements.
...at least 65% of total assets, under normal market conditions, in debt
obligations as described above rated Baa or better by Moody's or BBB or better
by Standard & Poor's when purchased; or, if unrated, determined by the
sub-adviser to be of comparable quality. (See "Appendix A--Description of
Securities Ratings.")
...corporate commercial paper only if rated, when purchased, Prime-1 by Moody's
or A-1 by Standard & Poor's; or if unrated, determined by the sub-adviser to be
of comparable quality. (See "Appendix A--Description of Securities Ratings.")
...up to 20% of total assets in securities denominated in foreign currencies. To
the extent possible, the Fund will attempt to protect these investments against
risks stemming from differences in foreign exchange rates.
...foreign currency exchange transactions using currencies, options, futures or
options on futures, or forward contracts to protect against foreign exchange
risks involving securities the Fund owns or plans to own. (See pg. 46, "Risk
Management Techniques.")
...interest rate and bond index futures contracts, and options on these
contracts; and options on debt securities.
...other investments suitable for most or all MainStay Institutional Funds. (See
pgs. 30-31, "General Investment Considerations"; and pg. 43, "Description of
Investments and Investment Practices.")
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Risks? Generally, when interest rates fall, the net asset value of a bond fund
rises, and when rates rise, the net asset value of a bond fund generally falls.
Principal and interest payments on some mortgage-related securities may be
guaranteed by the U.S. Government, government agencies or other guarantors. But
there is no guarantee that these securities won't lose value. When people prepay
their mortgage loans, the Fund's return from mortgage-related securities may be
reduced.
The value of some mortgage-related or asset-backed securities may be
particularly sensitive to changes in prevailing interest rates. 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.
- --------------------------------------------------------------------------------
WHO'S MANAGING
YOUR MONEY?
RAVI AKHOURY AND
EDWARD J. MUNSHOWER OF
MACKAY-SHIELDS FINANCIAL
CORPORATION.
Mr. Akhoury joined MacKay-Shields as a Director in 1984, became a Managing
Director in 1988, President and a member of the Board of Directors in 1989 and
Chairman and CEO in 1992. Previously, he worked for four years as a fixed income
manager for Fischer Francis Trees & Watts and for seven years as a fixed income
manager of the Equitable Life Assurance Society. Mr. Akhoury has served as a
portfolio manager of the Bond Fund and the Short-Term Bond Fund since their
inception in January 1991.
Mr. Munshower, a Director of MacKay-Shields, has been a portfolio manager of the
Bond Fund since its inception and the Short-Term Bond Fund since 1993. His
biography appears on pg. 29.
25
<PAGE>
================================================================================
Indexed Bond Fund
The Fund's objective is:
================================================================================
to seek to provide investment results that correspond to the total return
performance of fixed income securities in the aggregate, as represented by the
Salomon Brothers Broad Investment Grade Bond Index (the "Index").
- --------------------------------------------------------------------------------
The Fund attempts to achieve its objective by investing in a diversified
portfolio of U.S. Government and corporate bonds, as well as mortgage-backed and
asset-backed securities.
The Index is capitalization-weighted and contains about 5500 individually priced
fixed income securities, which include "investment grade" corporate bonds
including U.S. dollar-denominated securities of foreign issuers (rated BBB by
Standard & Poor's or Baa by Moody's, or better), U.S. Treasury/agency issues,
and mortgage pass-through (mortgage-backed) securities, and other securities.
(See "Appendix A--Description of Securities Ratings" for bond ratings.)
As of March 31, 1998, the approximate weighting in the Index of these classes
was as follows: U.S. Treasury and agency securities 50%, corporate debt
securities 20%, mortgage-backed securities 30%.
Unlike other funds which generally seek to beat market averages often with
unpredictable results, index funds seek to match their respective indices. No
attempt is made to manage the portfolio in the traditional sense using economic,
financial and market analysis. The Fund expects to invest in approximately 50 or
more securities so that the results fall within the target tracking error of the
Index. It's expected that there will be a close correlation (about 95%) between
the Fund's performance and the Index in both rising and falling markets.
- --------------------------------------------------------------------------------
================================================================================
The Fund invests in:
================================================================================
...at least 80% of total assets, under normal market conditions, in fixed income
securities in the Index.
...up to 20% of total assets in bond and interest rate index options and futures
and options on these futures to maintain cash reserves while fully invested,
facilitate trading, or reduce transaction costs.
The Fund will attempt to remain fully invested at all times; however, to keep
money working or to keep cash available for shareholder redemptions, the Fund
may invest in:
...other investments suitable for most or all MainStay Institutional Funds. (See
pgs. 30-31, "General Investment Considerations"; and pg. 43, "Description of
Investments and Investment Practices.")
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Risks? Generally, when interest rates fall, the net asset value of a bond fund
rises, and when rates rise, the net asset value of a bond fund generally falls.
The Fund's ability to track the Index may be affected by, among other things,
transaction costs, changes in either the composition of the Index or number of
bonds outstanding for the components of the Index, and the timing and amount of
contributions to and redemptions from the Fund by shareholders.
Principal and interest payments on some mortgage-related securities may be
guaranteed by the U.S. Government, government agencies or other guarantors. But
there is no guarantee that these securities won't lose value. When people prepay
their mortgage loans, the Fund's return from mortgage-related securities may be
reduced.
- --------------------------------------------------------------------------------
WHO'S MANAGING
YOUR MONEY?
JAMES A. MEHLING OF
MONITOR CAPITAL
ADVISORS, INC.
Mr. Mehling is President and Chief Investment Officer of Monitor Captial. He
joined Monitor Capital in October 1991 after serving as director of risk
management in the Investment Department of New York Life Insurance Company from
1989-1991. He has served as portfolio manager of the Fund since 1991.
26
<PAGE>
================================================================================
International Bond Fund
The Fund's objective is:
================================================================================
to seek to provide total return by investing primarily in a portfolio of
non-U.S. (primarily government) debt securities.
- --------------------------------------------------------------------------------
================================================================================
The Fund invests in:
================================================================================
...any debt or debt-related investment, domestic or foreign, denominated in
foreign or U.S. currency.
...at least 65% of total assets, under normal market conditions, in foreign
bonds which include debt securities of foreign governments, agencies and
supranational organizations denominated in foreign currencies or U.S. dollars.
These could have fixed, variable, floating or inverse floating rates of
interest. The Fund may also purchase debt securities of corporate issuers. Some
of these securities may be privately issued and/or convertible into common stock
or they may be traded together with warrants for the purchase of common stock.
...a variety of countries, with a minimum of 5 countries other than the U.S.
This includes countries with established economies as well as emerging market
countries, including, among others, those in Latin America and Asia, that the
sub-adviser believes present favorable opportunities.
...the Fund may also invest in:
... up to 25% of net assets in lower-rated debt securities, including
short-term instruments. Lower rated securities are rated below BBB by S&P
or Baa by Moody's. (See "Appendix A--Description of Securities Ratings.")
... to enhance returns, manage risk more efficiently and help protect against
price changes in securities the Fund owns or may own, currency on a spot or
forward basis, securities or securities index options, foreign currency
options, futures contracts and related options on futures contracts; and
may enter into swap agreements. Futures and related options may be used for
any legal purpose including to reduce trading costs.
... other investments suitable for most or all MainStay Institutional Funds.
(See pgs. 30-31, "General Investment Considerations"; and pg. 43,
"Description of Investments and Investment Practices.") In unusual market
conditions, the Fund may invest all or a portion of its assets in U.S.
dollars or foreign currencies or in U.S.-denominated or foreign
currency-denominated money market instruments of U.S. or foreign issuers.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Risks? Generally, when interest rates fall, the net asset value of a bond fund
rises, and when rates rise, the net asset value of a bond fund generally falls.
Alone, this Fund is not a balanced investment plan. It is intended for long-term
investors. It may be appropriate for investors wanting investments in markets
outside the U.S. who are willing to accept the risks of foreign investing
discussed below. The orientation is in avoiding excessive risk, although there
are risks associated with any kind of investment. Due to this philosophy, the
Fund may not attain as high a level of return as more aggressively managed
international funds, although there may be times when the Fund outperforms some
funds in down markets.
Securities rated below BBB or Baa (sometimes called "junk bonds") are not
considered "investment grade" and run greater risks of price fluctuations, loss
of principal and interest, default or bankruptcy by the issuer and other risks,
which is why these securities are considered speculative. (See pg. 45, "High
Yield Securities ("Junk Bonds")," for additional risks.)
Investments in foreign securities could be more volatile and more difficult to
sell than U.S. investments, and involve additional risks. (For more on risks of
investing in foreign securities, see pg. 44, "Description of Investments and
Investment Practices"-- "Foreign Securities.")
This Fund is classified as a "non-diversified" investment company. It may,
therefore, invest a greater portion of its assets in a single issuer than the
other Funds, which are "diversified." As a result, this Fund may be more
susceptible to any one economic, political or regulatory event than the other
Funds. Although the Fund is characterized as a non-diversified Fund, it still
must comply with the diversification requirements imposed upon a "regulated
investment company" under federal tax law. (See "Tax Information" in the SAI.)
- --------------------------------------------------------------------------------
WHO'S MANAGING
YOUR MONEY?
JOSEPH PORTERA OF
MACKAY-SHIELDS
FINANCIAL CORPORATION.
Mr. Portera is a Director of MacKay-Shields specializing in international bonds.
He returned to MacKay-Shields in December 1996 after working at Fiduciary Trust
Company International as a portfolio manager in international bonds. Mr. Portera
joined MacKay-Shields in 1991 and was portfolio manager of the International
Bond Fund from its inception in January 1995 to August 1995. Previously, Mr.
Portera was a portfolio manager specializing in international debt securities at
ABN-AMRO Bank, N.V. (from 1988-1991).
27
<PAGE>
================================================================================
Money Market Fund
The Fund's objective is:
================================================================================
to seek to provide a high level of current income while preserving capital and
maintaining liquidity.
- --------------------------------------------------------------------------------
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.
This 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).
- --------------------------------------------------------------------------------
WHO'S MANAGING
YOUR MONEY?
DAVID CLEMENT OF
NEW YORK LIFE
INSURANCE COMPANY.
Mr. Clement has served as portfolio manager for the Fund since its inception in
1991, and is a member of the fixed income portfolio management team. Mr. Clement
joined the Asset Management Group of New York Life in 1990.
28
<PAGE>
================================================================================
Short-Term Bond Fund
The Fund's objective is:
================================================================================
to seek to maximize total return, consistent with liquidity, preservation of
capital and investment in short-term debt securities.
- --------------------------------------------------------------------------------
================================================================================
The Fund invests in:
================================================================================
...at least 65% of total assets, under normal market conditions, in a
diversified portfolio of actively managed short-term debt securities, including
securities with special features (e.g., puts, variable or floating coupon rates
and mortgage pass-throughs) which have price characteristics similar to
short-term debt securities. These include:
...obligations issued or guaranteed by the U.S. government, its agencies or
instrumentalities; mortgage-related and other asset-backed securities;
certificates of deposit, time deposits and bankers' acceptances issued by
domestic or foreign banks or savings and loan associations and denominated in
U.S. dollars or foreign currencies.
...domestic and foreign corporate debt securities, municipal bonds, zero coupon
bonds and variable or floating rate securities rated Baa or better by Moody's or
BBB or better by S&P when purchased; or, if unrated, determined by the
sub-adviser to be of comparable quality. (See "Appendix A--Description of
Securities Ratings.")
...corporate commercial paper only if rated, when purchased, Prime-1 by Moody's
or A-1 by S&P; or if unrated, determined by the sub-adviser to be of comparable
quality. (See "Appendix A--Description of Securities Ratings.")
...the Fund may also invest in:
... up to 20% of total assets in securities denominated in foreign currencies.
To the extent possible, the sub-adviser will attempt to protect against risks
stemming from differences in foreign exchange rates.
... foreign currency exchange transactions using currencies, options, futures or
options on futures, or forward contracts to protect against foreign currency
exchange risks involving securities the Fund owns or plans to own. (See pg. 46,
"Risk Management Techniques.")
... interest rate and bond index futures contracts and options on these
contracts; and options on debt securities.
... U.S. dollar- or foreign currency-denominated obligations of foreign
governments or their subdivisions, agencies or instrumentalities, international
agencies or supranational entities.
...other investments suitable for most or all MainStay Institutional Funds. (See
pgs. 30-31, "General Investment Considerations"; and pg. 43, "Description of
Investments and Investment Practices.")
The effective maturity of the Fund's portfolio will be less than three years.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Risks? Generally, when interest rates fall, the net asset value of a bond fund
rises, and when rates rise, the net asset value of a bond fund generally falls.
Because of the comparatively short term of most of the Fund's investments, the
net asset value is expected to be relatively stable.
Principal and interest payments on some mortgage-related securities may be
guaranteed by the U.S. Government, government agencies or other guarantors. But
there is no guarantee that these securities won't lose value. When people prepay
their mortgage loans, the Fund's return from mortgage-related securities may be
reduced.
- --------------------------------------------------------------------------------
WHO'S MANAGING YOUR MONEY?
RAVI AKHOURY AND
EDWARD J. MUNSHOWER OF MACKAY-
SHIELDS FINANCIAL CORPORATION.
Mr. Akhoury joined MacKay-Shields as a Director in 1984, became a Managing
Director in 1988, President and a member of the Board of Directors in 1989 and
Chairman and CEO in 1992. Previously, he worked for four years as a fixed income
manager for Fischer Francis Trees & Watts and for seven years as a fixed income
manager of the Equitable Life Assurance Society. Mr. Akhoury has served as a
portfolio manager of the Short-Term Bond Fund and the Bond Fund since their
inception in January 1991.
Mr. Munshower is a Director of MacKay-Shields. He joined MacKay-Shields as a
fixed income investment specialist in 1985 with more than 5 years of prior
investment management and research experience, after having been an investment
analyst for New York Life. Mr. Munshower has been a portfolio manager of the
Short-Term Bond Fund since 1993 and the Bond Fund since its inception in 1991.
29
<PAGE>
- --------------------------------------------------------------------------------
General Investment Considerations
- --------------------------------------------------------------------------------
================================================================================
SOME IMPORTANT POINTS TO UNDERSTAND ABOUT INVESTING IN MAINSTAY INSTITUTIONAL
FUNDS.
================================================================================
================================================================================
- --------------------------------------------------------------------------------
Investment objectives
- --------------------------------------------------------------------------------
There cannot be any assurance that each Fund will achieve its investment
objective. The investment objective of each 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 share price of a Fund will fluctuate
- --------------------------------------------------------------------------------
The value of the securities in a Fund and the share price (NAV) of that Fund
(other than the Money Market Fund) will fluctuate in response to factors such
as:
o conditions in the securities markets;
o business success of the companies that issued the securities;
o creditworthiness of the companies that issued the securities; o interest
rates;
o average maturity of a Fund's non-equity or debt investments;
o foreign currency exchange rates (where applicable); and
o other factors.
================================================================================
THE EFFECTS OF TRADING COSTS ON YOUR
TOTAL RETURN
Each Fund's sub-adviser places orders to purchase and sell portfolio investments
for the Fund. This is reflected in the Fund's portfolio turnover rate. Funds
with high turnover rates (over 100%) often have higher transaction costs which
are paid by the Funds and may generate more short-term capital gains on which
you'll pay taxes (except that investors in tax qualified plans, where earnings
are generally tax deferred, will not pay these taxes).
You can find the turnover rate for any Fund in the "Financial Highlights" table
for that Fund.
In unusual or adverse market conditions, for temporary defensive purposes, each
Fund (except the Money Market Fund) may invest all or a portion of its assets in
cash or cash equivalent short-term obligations such as obligations issued or
guaranteed by the U.S. Government or any of its agencies or instrumentalities or
by any of the states; or in money market funds, repurchase and reverse
repurchase agreements, time deposits, certificates of deposit, bankers'
acceptances and commercial paper (the Growth Equity Fund and Value Equity Fund
may only invest up to 50% of total assets). In addition, the International
Equity Fund may invest up to 5% of its assets in debt instruments rated below
investment grade.
Each Fund may also:
o borrow up to 15% of total assets;
o lend its securities to brokers, dealers and other financial institutions to
earn income;
o 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;
o invest in high quality commercial paper; and
o invest in repurchase agreements, and enter into reverse repurchase
agreements, which can create leverage and increase a Fund's investment
risk.
The Bond Fund, Indexed Bond Fund, International Bond Fund, International Equity
Fund, Multi-Asset Fund and Short-Term Bond Fund may purchase and sell interest
rate and bond index futures contracts, options on interest rate and bond index
futures contracts and options and futures on debt securities.
30
<PAGE>
The EAFE Index Fund, Growth Equity Fund, Indexed Equity Fund, International
Equity Fund, Multi-Asset Fund and Value Equity Fund may purchase and sell stock
index options, futures and options on futures.
With the exception of the Money Market Fund, all Funds may enter into futures
contracts and related options. Futures and options transactions may be used for
any legally permissible purpose, such as to protect against anticipated changes
in interest rates that could affect the value of securities which the Fund owns
or plans on buying. The use of futures, options and options on futures may
involve certain costs and risks. For example, there is no assurance that a Fund
will be able to close out a futures contract or a futures option position when
the sub-adviser considers it appropriate. (See pg. 46, "Risk Management
Techniques" for additional information.)
The EAFE Index Fund, International Bond Fund and International Equity Fund will
(and the Bond Fund, Growth Equity Fund, Multi-Asset Fund, Short-Term Bond Fund
and Value Equity Fund may), invest in foreign securities. The Indexed Equity
Fund and Indexed Bond Fund will invest in foreign securities to the extent such
securities are included in securities that comprise the Standard & Poor's 500
Composite Stock Price Index and the Salomon Brothers Broad Investment Grade Bond
Index, respectively. These securities may have additional risks not applicable
to U.S. securities.
Investments in foreign securities could be more volatile and more difficult to
sell than U.S. investments. They involve risks of currency controls by
governments, changes in currency rates and interest rates, difficulties in
receiving or interpreting financial and economic information, the imposition of
taxes and brokerage and custodian fees, and changes in political and economic
conditions. The Funds may also have difficulty invoking legal protections in
other countries. Many of these factors are worse in emerging markets.
Issuers of foreign debt, or their governments, may be unable or unwilling to
make payments, and the Funds may have limited legal recourse should there be a
default.
The Bond Fund, Indexed Bond Fund, International Bond Fund, Money Market Fund,
Multi-Asset Fund and Short-Term Bond Fund, may invest in loan participation
interests which involve certain risks, including credit and liquidity risks.
(See pg. 45, "Loan Participation Interests" for further details.)
INVESTMENTS IN ILLIQUID AND RESTRICTED SECURITIES
Each Fund has a nonfundamental policy that it will not invest more than 10% of
its net assets (15% for the International Bond and International Equity Funds)
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 applicable sub-adviser are deemed illiquid.
There may be undesirable delays and added costs in selling restricted
securities.
INDEX FUNDS
The inclusion of a security in the MSCI EAFE Index, Standard & Poor's 500
Composite Stock Price Index or the Salomon Brothers Broad Investment Grade Bond
Index in no way implies an opinion by the index sponsors, Morgan Stanley,
Standard & Poor's or Salomon Brothers, as to the attractiveness of that security
as an investment. The MainStay Institutional Funds that are managed as index
funds (EAFE Index Fund, Indexed Equity Fund and Indexed Bond Fund) are not
sponsored by or affiliated with the sponsors of their respective indexes.
================================================================================
- --------------------------------------------------------------------------------
Take note:
- --------------------------------------------------------------------------------
Each of the Bond Fund, Indexed Bond Fund, International Bond Fund and Short-Term
Bond Fund must normally invest at least 65% of its total assets in "bonds". For
this purpose, each of these Funds considers the various types of debt or fixed
income securities in which it invests, as specifically described elsewhere in
this prospectus, to be "bonds" as referenced in that Fund's name. The use of
this name is not meant to restrict a Fund's investments to a narrow category of
debt securities that are formally called "bonds". (For additional investment
limitations, see the Funds' descriptions on pgs. 25, 26, 27, and 29.)
Features of debt securities
Debt securities may have fixed, variable, or floating (including inverse
floating) rates of interest.
================================================================================
31
<PAGE>
- --------------------------------------------------------------------------------
Open an Account...
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Who should read this section
If you are participating in a company savings plan, such as a 401(k), profit
sharing plan, defined benefit plan or other employee-directed plan, your company
will provide you with the information you need to open an account and buy shares
in the Funds.
If you are investing through a Group IRA or Group Account, the following
information will help you open an account and buy shares:
- --------------------------------------------------------------------------------
WHO MAY BUY INSTITUTIONAL SERVICE CLASS SHARES
You are eligible to buy Institutional Service Class shares if you are in a Group
Account or Group IRA or you are a plan sponsor.
HOW TO OPEN AN ACCOUNT
You (or your sponsor, if you are investing through a group or plan) can open an
account or make an investment by calling NYLIFE Distributors at 1-800-695-2126
between 8:30 AM and 4:00 PM Eastern time on any day the New York Stock Exchange
is open. You'll be given an account number and wire or mail instructions for
sending payment. All calls are recorded.
NYLIFE Distributors must receive your money (and the application, if it's your
first investment) within the next 3 business days of placing your order.
PLEASE FILL OUT THE APPLICATION COMPLETELY
AND CORRECTLY
MainStay Institutional Funds and NYLIFE Distributors each reserves the right to
reject your application or redeem your Fund shares if significant information is
incomplete or incorrect (for example, if you leave off your Taxpayer I.D.).
TAKE CARE, BE ACCURATE
Make sure you are using the proper forms. Your order to buy is only accepted
when received by MainStay Shareholder Services Inc. (the transfer agent) with
all information, signatures, documents and payments required to carry it out.
Federal law requires you to provide a certified tax identification number when
you open an account.
If you are investing through a Group IRA or Group Account, applications should
be mailed to: MainStay Institutional Funds Inc., Box 461, Parsippany, NJ
07054-0461.
Initial and subsequent investments should be sent to MainStay Institutional
Funds Inc., Box 8407, Boston, MA 02266-8407.
================================================================================
BUY SHARES
You may buy shares (and fractions of shares) 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 will be the next NAV that is set after your order is received in
proper form. (All MainStay Institutional Funds are no load funds and are sold
without a sales charge at the net asset value (NAV) per share. There are ongoing
fees, however, as well as minimum investment amounts.)
The NAV--the price of a share that is used for buying and selling--is determined
once each day at the close of the New York Stock Exchange (4:00 p.m. Eastern
time) for each Fund except for the Money Market Fund, which is determined at
noon.
NAV is calculated by:
o taking the current market value of the Fund's total assets for the
Institutional Service Class of shares or, in the case of the Money Market
Fund, using the amortized cost method of valuation;
o subtracting the liabilities; and
o dividing the remainder by the total number of Institutional Service Class
shares of the Fund. (See the SAI for the full details on calculating NAV.)
32
<PAGE>
- --------------------------------------------------------------------------------
...and Buy Shares
- --------------------------------------------------------------------------------
YOU MUST INVEST AT LEAST THE MINIMUM AMOUNT
One of the following minimums will apply to you, depending upon how you are
investing:
For institutional investors:
o Initial combined investment--at least $250,000, which may be spread over a
thirteen-month period after opening the account.
o Each investment after that--at least $1,000.
For a Group IRA:
If you are investing in an IRA offered through a group:
o First investment--at least $5,000 (at least $1,000 in each Fund in which
you are investing)
o Each investment after that--at least $100.
For a Group Account:
If you are a member of a group that participates in our Group IRA program:
o First investment--at least $25,000 (at least $1,000 in each Fund in which
you are investing)
o Each investment after that--at least $1,000.
o Each investment after that--at least $1,000.
MainStay Institutional Funds Inc. may also accept investments of smaller amounts
at its discretion.
- --------------------------------------------------------------------------------
For your convenience and to save money, certificates for shares will usually not
be issued.
- --------------------------------------------------------------------------------
================================================================================
- --------------------------------------------------------------------------------
Take note:
- --------------------------------------------------------------------------------
Tax deductible contributions to a regular IRA generally are limited to $2,000 a
year ($4,000 in the case of a spousal IRA). An investor in certain qualified
retirement plans may be able to open an account with a smaller minimum
investment.
================================================================================
================================================================================
- --------------------------------------------------------------------------------
Take note:
- --------------------------------------------------------------------------------
MainStay Institutional Funds and NYLIFE Distributors also have sole discretion
to reject your application or order if your application is incomplete or
incorrect (particularly if you have failed to include your Taxpayer I.D.
Information). MainStay Institutional Funds also has sole discretion to suspend
offering shares or reject purchase orders when, in the management's judgment, it
is in a Fund's best interests.
================================================================================
- --------------------------------------------------------------------------------
What if you buy by check and then sell quickly? We can delay payment until we're
sure your check clears, or for up to 15 days, whichever comes first.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
================================================================================
[GRAPHIC OF A TELEPHONE AND A CHECK PARTIALLY PLACED INTO AN ENVELOPE]
SENDING A CHECK OR MONEY ORDER
First call us at 1-800-695-2126 to place your order. Make your check or money
order payable to MainStay Institutional Funds Inc. (Write your account number
and the name of the appropriate Fund or Funds on the check or money order.) The
check must be in U.S. dollars drawn on a U.S. bank. Mail it directly to:
MainStay Institutional Funds Inc., P.O. Box 8407, Boston, MA 02266-8407.
Mail the application separately to MainStay Institutional Funds Inc., P.O. Box
461, Parsippany, NJ 07054-0461.
[GRAPHIC OF A RADIO TOWER]
WIRING MONEY
You may invest by wiring the money to us. You or your registered representative
should call NYLIFE Distributors at 1-800-695-2126 for an account number and
wiring instructions. Give them to your bank, which may charge a fee for wiring.
The wire must include your name--exactly as it appears on your application--your
account number and the name of the Fund or Funds in which you want to invest.
NYLIFE Distributors must receive your money (and application, if it's your
initial investment) within 3 business days of your placing an order.
33
<PAGE>
- --------------------------------------------------------------------------------
Know How to Sell ...
- --------------------------------------------------------------------------------
Shares may be redeemed (sold) in a number of ways. If you are participating in a
company plan, such as a 401(k), profit sharing, defined benefit or other
employee-directed plan, check with your Human Resources Department for
information on how your shares may be redeemed. For other investors, including
those in a Group IRA or Group Account, shares may be redeemed by written request
to NYLIFE Distributors or you can redeem your shares in any of the following
ways:
OPTION 1 [GRAPHIC OF A TELEPHONE AND A RADIO TOWER]
BY TELEPHONE OR WIRE
Place an order to sell your shares by calling NYLIFE Distributors at
1-800-695-2126. Or, if you prefer, you may wire your order. These options are
not available if your shares are held in certificate form. (Please call us at
the above number for further details.)
The price of each share will be the next NAV determined after receipt of your
redemption request for the class of shares you own. There is no charge for
selling your shares. The shares you sell may be worth more or less than the
price you paid for them, depending on the market value of the investment
securities held by the particular Fund at the time of your sale.
================================================================================
- --------------------------------------------------------------------------------
Telephone redemption: convenient, yes...
but not risk-free
- --------------------------------------------------------------------------------
Telephone redemption privileges are convenient, but you give up some security.
By making use of this convenience, you agree that neither MainStay Institutional
Funds nor the manager will be liable for following instructions via the phone
that they reasonably believe are genuine. You bear the risk of any loss, unless
MainStay Institutional Funds or the manager fails to use established safeguards
for your protection.
These safeguards are among those currently in place at MainStay Institutional
Funds:
o All phone calls are tape recorded.
o Written confirmation of every transaction is sent to your address of
record.
================================================================================
OR, OPTION 2 [GRAPHIC OF A CALENDAR]
USE A SYSTEMATIC WITHDRAWAL PLAN
If you are a shareholder in a Group IRA or a Group Account, with at least
$10,000 (based on the NAV per share) in your account, you may use our systematic
withdrawal plan.
You may arrange to make monthly withdrawals of at least $100 from any Fund. Each
withdrawal will be mailed to you by check or wired directly to your bank
account, whichever you select on your application. These withdrawals, like any
sale, may result in a gain or loss and, therefore, may be subject to taxation.
Consult your tax adviser about possible tax consequences.
Also remember, these withdrawals are not dividends or income. If you withdraw
more than your Fund is earning for you, eventually your account will be worth
less than your original investment, and, ultimately, you will redeem all of your
shares.
MainStay Institutional Funds may end this plan at any time after 30 days'
written notice to you.
34
<PAGE>
- --------------------------------------------------------------------------------
...and Exchange Shares
- --------------------------------------------------------------------------------
FOR THE MONEY MARKET FUND
If you exchange all your shares in the Money Market Fund for shares in another
Fund, any dividends that have been declared but not yet distributed will be
credited to the new Fund account. If you exchange all your shares in the Money
Market Fund for shares in more than one Fund, undistributed dividends will be
credited to each of the new Funds according to the number of exchanged shares in
each Fund.
MainStay Institutional Funds reserves the right to amend, restrict or end the
exchange privilege.
HOW YOU WILL RECEIVE YOUR MONEY
Your sales proceeds will normally be wired directly to the bank named on your
application within seven days after your redemption request is received (one
business day for the Money Market Fund).
On days when the New York Stock Exchange is closed, or during other times
specified by Federal securities law, you may not be able to redeem shares or
your payment might be delayed.
- --------------------------------------------------------------------------------
USE THE EXCHANGE PRIVILEGE
Once you open an account, you may exchange shares of the same Class between
MainStay Institutional Funds. An order to exchange shares is treated as a sale
of the old shares followed by a purchase of the new shares. Exchanges will be
based upon each Fund's NAV per share next computed following receipt of a
properly executed exchange request. You may request an exchange by calling
NYLIFE Distributors at 1-800-695-2126.
SET UP A SYSTEMATIC EXCHANGE PLAN
If you've invested through a Group IRA or Group Account, you may establish a
Systematic Exchange Program to have a minimum of $100 exchanged periodically
from any MainStay Institutional Fund to another MainStay Institutional Fund
within the same Class of shares. The Fund from which exchanges are made must
have an account value of at least $10,000 at the time the Systematic Exchange
Program is established. For additional information, call 1-800-695-2126.
- --------------------------------------------------------------------------------
================================================================================
- --------------------------------------------------------------------------------
Take note: Your shares could be sold involuntarily
- --------------------------------------------------------------------------------
To reduce expenses, we may redeem shares in any account valued at less than
$10,000 ($1,000 for Group IRAs and Group Accounts), provided that the value is
not based on fluctuations in market prices. We'll give you at least 30 days
notice to give you time to add to your account and avoid the sale. We may also
redeem your shares if you haven't given us the proper tax information.
================================================================================
35
<PAGE>
- --------------------------------------------------------------------------------
Decide How to Receive 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 mutual fund, however, always pays this income to you as
"dividends."
When the Funds pay
The Money Market Fund declares dividends daily; you're paid monthly. Each of the
other Funds declares and pays you dividends at least once a year.
In the Money Market Fund, you begin earning dividends the business day after the
transfer agent receives your investment in U.S. dollars by 4:00 p.m. Eastern
time.
CAPITAL GAINS
The Funds will distribute all, or almost all, of their net capital gains at
least once a year.
HOW TO TAKE YOUR EARNINGS
Your earnings will automatically be reinvested in the same Class of shares of
the same Fund, unless you choose one of the following options:
REINVEST IN ANOTHER FUND
On the day your Fund pays the dividend, reinvest everything in another Fund of
your choice.
TAKE CASH
Take your earnings in cash.
If you choose to receive your earnings in cash...
a check will be mailed to the address you have given us. If the check is not
accepted and is returned to us, we will reinvest it in your account in the same
Fund at the next net asset value computed after the transfer agent receives the
check. Any additional distributions will automatically be reinvested at net
asset value as of the ex-dividend date.
- --------------------------------------------------------------------------------
Understand the Tax Consequences
- --------------------------------------------------------------------------------
Each Fund intends to be treated as a regulated investment company under
subchapter M of the Internal Revenue Code. As a regulated investment company,
each MainStay Institutional Fund is required to distribute at least 90% of its:
o net taxable income;
o net short-term capital gains; and
o 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. If you are not a tax-exempt
investor, purchasing shares shortly before the record date for dividend
declarations can result in a taxable return to you of a portion of the price you
paid for the shares.
A Fund may pay you in January for dividends declared in October, November, or
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.
TAXES ON FOREIGN INVESTMENT INCOME
A portion of income earned by a Fund from foreign securities may be withheld by
those countries as income taxes. Under certain circumstances, the Fund may elect
to pass along credits to you for foreign income taxes paid, although there are
no assurances that the Fund will be able to do so.
================================================================================
- --------------------------------------------------------------------------------
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.
================================================================================
36
<PAGE>
- --------------------------------------------------------------------------------
Know Who You're Investing With
- --------------------------------------------------------------------------------
WHO WORKS TO PROTECT YOUR INTERESTS?
The Board of Directors oversees the Funds. 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 Funds. 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 Funds, handling business affairs for each Fund. 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 Funds with office
facilities and with ordinary clerical, bookkeeping and recordkeeping services.
The manager has delegated its portfolio management responsibilities to the
sub-advisers.
The manager pays the salaries and expenses of all personnel affiliated with the
Funds and all the operational expenses that are not the responsibility of the
Funds, including the fees that are paid to the sub-advisers. (See pg. 47,
"Manager and Sub-Advisers", and the SAI for more details.)
For its services, each Fund pays the manager a monthly fee. (See pg. 47,
"Manager and Sub-Advisers".)
================================================================================
WHO MANAGES YOUR MONEY?
================================================================================
Under the supervision of the Company's Directors and in accordance with each
Fund's investment objective and investment policies, the sub-advisers are
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. (See pg. 48, "Manager and
Sub-Advisers"--"The Sub-Advisers" for an explanation of the fees paid to the
sub-advisers by the manager.)
================================================================================
MacKay-Shields Financial Corporation
9 West 57th Street
New York, New York 10019
MacKay-Shields manages the Bond Fund, Growth Equity Fund, International Bond
Fund, International Equity Fund, Short-Term Bond Fund and Value Equity Fund.
MacKay-Shields, formed in 1938, is an indirect wholly-owned, but autonomously
managed subsidiary of New York Life Insurance Company. As of December 31, 1997,
MacKay-Shields managed approximately $28.8 billion in assets.
================================================================================
================================================================================
New York Life Insurance Company
51 Madison Avenue
New York, New York, 10010
New York Life Insurance Company manages the Money Market Fund. The 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 December 31, 1997, New York Life had
total assets of approximately $84 billion and managed approximately $24 billion
in assets for qualified retirement plans.
================================================================================
================================================================================
Monitor Capital Advisors, Inc.
504 Carnegie Center
Princeton, New Jersey 08540
Monitor Capital manages the EAFE Index Fund, Indexed Bond Fund, Indexed Equity
Fund and the Multi-Asset Fund. Monitor Capital, formed in 1988, is a
wholly-owned subsidiary of NYLIFE Inc. and an indirect wholly-owned subsidiary
of New York Life Insurance Company. As of December 31, 1997, Monitor Capital
managed approximately $2.9 billion in assets.
================================================================================
37
<PAGE>
WHO DISTRIBUTES MAINSTAY INSTITUTIONAL FUNDS?
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 Funds'
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 Funds.
WHO PROVIDES CUSTOMER SERVICE AND MAINTAINS FINANCIAL RECORDS?
MainStay Shareholder Services Inc. (MSS) is the Funds' 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 Funds' investments and has
subcustodial agreements for holding the Funds' foreign investments. BONY is at
90 Washington Street, New York, NY 10286.
38
<PAGE>
- --------------------------------------------------------------------------------
Know Your Rights as a Shareholder
- --------------------------------------------------------------------------------
YOU HAVE THE RIGHT TO ASK ANY QUESTIONS.
If you have a question about your account, you should:
o call 1-800-695-2126 (between 8:30 a.m. and 5:00 p.m. Eastern time), or
o write to:
MainStay Institutional Funds Inc.
Box 461
Parsippany, NJ 07054-0461
THE RIGHT TO RECEIVE INFORMATION ABOUT YOUR INVESTMENT
You will receive periodic statements covering the Funds you own, including the
number and value of shares, dividends declared or paid and other information.
Confirmations.
Every time you buy, sell or exchange shares between Funds, you'll receive a
confirmation in the mail shortly thereafter. It summarizes all the key
information: what you bought and sold, what it cost and other important
information.
Financial reports.
You will receive an annual financial statement for your Fund, audited by the
Funds' independent accountants. You will also receive semiannual statements
which are unaudited.
Each financial report shows: o the investments owned by the Fund, o the market
value of each investment, and o other financial information.
================================================================================
- --------------------------------------------------------------------------------
Take note:
- --------------------------------------------------------------------------------
Keep your statements. You may need them for tax reporting purposes.
Be alert: Mistakes can happen. Always review your confirmations and statements
immediately.
================================================================================
THE RIGHT TO HAVE ONE SHARE, ONE VOTE
Every share issued by the Funds carries equal ownership rights. By owning
shares, you're entitled to vote on certain issues and policies regarding the
Fund or class of shares you own. You have one vote per share you own.
You also have a right to approve any changes in fundamental investment
restrictions or objectives of your Funds, and you have the right to approve the
adoption of any new management agreement, sub-advisory agreement or plan of
distribution relating to your Funds.
THE RIGHT TO ATTEND MEETINGS
Although the Company doesn't intend to hold annual shareholder meetings, you
have 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.
39
<PAGE>
- --------------------------------------------------------------------------------
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 is a diversified investment company under the 1940 Act (other than the
International Bond Fund) and has a different investment objective which it
pursues through separate investment policies.
The Company offers Institutional Class and Institutional Service Class shares,
which have different expenses that may affect performance. You may obtain a free
copy of the prospectus which contains more information about the Institutional
Class of shares by calling NYLIFE Distributors at 1-800-695-2126. (See pg. 48,
"Manager and Sub-Advisers"--"Shareholder Services Plan" for more information.)
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 April 1, 1998, Trustees of the New York Life Insurance Company Pension
Plan owned a controlling interest (as that term is defined under the 1940 Act)
of the Value Equity, Bond, Indexed Bond and International Bond Funds; New York
Life Insurance Company owned a controlling interest of the Multi-Asset Fund; New
York Life Trust Company owned a controlling interest of the Indexed Bond and
Money Market Funds; Trustees of the NYLIC Retirement Plan owned a controlling
interest of the Multi-Asset Fund and BHC Securities Inc. owned a controlling
interest of the Money Market Fund.
================================================================================
OTHER INFORMATION ABOUT THE FUNDS
================================================================================
This section provides more information about how the Funds are managed. There is
no additional information about the Money Market Fund in this section.
================================================================================
EAFE INDEX FUND
================================================================================
The countries in the EAFE Index include Australia, Austria, Belgium, Denmark,
Finland, France, Germany, Hong Kong, Ireland, Italy, Japan, Malaysia, The
Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden,
Switzerland and the United Kingdom. Not all EAFE Index companies within a
country will be represented in the Fund's portfolio of securities at the same
time. The Fund may not invest in certain stocks (numbering approximately 50)
included in the EAFE Index because corporate charters have provisions
prohibiting ownership by foreign investors.
The Fund is expected to invest in approximately 350 stocks so that the results
fall within the targeted tracking error. Stocks are selected for inclusion in
the Fund based on country of origin, market capitalization, yield, volatility
and industry sector. Monitor Capital will manage the Fund using advanced
statistical techniques to determine which stocks are to be purchased or sold to
replicate the EAFE Index to the extent feasible. From time to time, adjustments
may be made in the Fund's portfolio because of changes in the composition of the
EAFE Index, but such changes should be infrequent.
The Fund believes the indexing approach described above is an effective method
of duplicating percentage changes in the EAFE Index. It is a reasonable
expectation that there will be a close correlation between the Fund's
performance and that of the EAFE Index in both rising and falling markets. The
correlation between the EAFE Index Fund and the EAFE Index is expected to be at
least 0.95. A correlation of 1.00 would indicate perfect correlation, which
would be achieved when the net asset value of the Fund, including the value of
its dividend and capital gains distributions, increases or decreases in exact
proportion to changes in the EAFE Index.
================================================================================
GROWTH EQUITY FUND
================================================================================
Although it is not the Fund's policy generally to invest or trade for short-term
profits, portfolio securities may be disposed of without regard to the length of
time held whenever MacKay-Shields is of the opinion that a security no longer
has an appropriate appreciation potential or has reached its anticipated level
of performance, or when another security
40
<PAGE>
appears to offer relatively greater appreciation potential or a relatively
greater anticipated level of performance. However, certain requirements that
must be satisfied in order for the Fund to qualify as a regulated investment
company for Federal income tax purposes may limit the extent to which the Fund
can sell securities and other assets held for less than three months. (See "Tax
Information" in the SAI.)
================================================================================
INDEXED EQUITY FUND
================================================================================
The Fund will be managed using advanced statistical techniques to determine
which stocks are to be purchased or sold to replicate the S&P 500 to the extent
feasible. From time to time, adjustments may be made in the Fund's portfolio
because of changes in the composition of the S&P 500, but such changes should be
infrequent. The correlation between the performance of the Indexed Equity Fund
and the S&P 500 is expected to be at least 0.95. A correlation of 1.00 would
indicate perfect correlation, which would be achieved when the net asset value
of the Fund, including the value of its dividend and capital gains
distributions, increases or decreases in exact proportion to changes in the S&P
500.
The Fund believes the indexing approach described above is an effective method
of duplicating percentage changes in the S&P 500. It is a reasonable expectation
that there will be a close correlation between the Fund's performance and that
of the S&P 500 in both rising and falling markets.
================================================================================
INTERNATIONAL EQUITY FUND
================================================================================
The Fund is actively managed and invests primarily in international (non-U.S.)
stocks, but the Fund may acquire other securities including cash equivalents.
Eligible investments for the Fund include any equity or equity-related
investment, domestic or foreign, whether denominated in foreign currencies or
U.S. dollars.
MacKay-Shields considers factors such as prospects for currency exchange and
interest rates, and inflation in each country, relative economic growth,
government policies influencing exchange rates and business conditions; and
quality of individual issuers. MacKay-Shields will also determine, using good
faith judgment, (1) country allocation among the international equity markets,
(2) currency exposure (asset allocation across currencies), and (3) diversified
security holdings within each market.
The Fund may use futures and options contracts (1) in an effort to manage cash
flow and remain fully invested in the stock and currency markets, instead of or
in addition to buying and selling stocks and currencies, or (2) in an effort to
hedge against a decline in the value of securities or currencies owned by it or
an increase in the price of securities which it plans to purchase. The Fund may
also purchase and sell foreign currency exchange contracts and foreign currency
options for purposes of seeking to enhance portfolio returns or to manage risk
more efficiently.
MacKay-Shields also believes that active currency management can enhance
portfolio returns through opportunities arising from interest rate differentials
between instruments denominated in different currencies and/or changes in value
between currencies. Moreover, MacKay-Shields believes active currency management
can be employed as an overall portfolio risk management tool. For example, in
its view, foreign currency management can provide overall portfolio risk
diversification when combined with a portfolio of foreign securities, and the
market risks of investing in specific foreign markets can at times be reduced by
currency strategies which may not involve the currency in which the foreign
security is denominated.
================================================================================
MULTI-ASSET FUND
================================================================================
To determine the best investment levels, Monitor Capital estimates risk, return
and correlation for the three asset groups based on a rigorous, disciplined
valuation methodology. Even if this method occasionally indicates that the Fund
should be fully invested in only one asset group, Monitor Capital will still
follow the constraints on the amount of assets which may be allocated to each of
the three asset groups.
In managing the Fund, Monitor Capital uses a proprietary model as well as a
non-proprietary model to estimate ex-pected returns on domestic and foreign
stock markets. The expected return on fixed income securities is the current
yield to maturity of bonds as measured by the Salomon Brothers Broad Investment
Grade Bond Index. The expected return for money market instruments is the
current yield on three-month U.S. Treasury bills.
The Fund's allocation among the three asset groups is then structured to take
advantage of perceived imbalances in relative pricing. Monitor Capital believes
that short-term imbalances occur periodically but tend to be corrected fairly
quickly. The models may from time to time cause significant shifts in the Fund's
allocation among the asset groups which may in turn result in greater portfolio
volatility.
The Fund may buy common stocks that the EAFE Index Fund and Indexed Equity Fund
may buy, fixed income securities that the Indexed Bond Fund may buy and money
market instruments that the Money Market Fund may buy.
================================================================================
VALUE EQUITY FUND
================================================================================
In analyzing different securities to assess their relative attractiveness,
MacKay-Shields' value investment process empha-
41
<PAGE>
sizes such factors as low price to earnings and price to cash flow ratios,
financial strength and earnings predictability. The Fund intends to purchase
those securities which it believes to be undervalued in the market relative to
comparable securities based on the foregoing analysis.
In assessing whether a stock is undervalued, MacKay-Shields considers, among
other factors, a company's financial strength and earnings predictability. The
Fund may provide some protection on the downside through its investment in
companies whose current stock prices reflect, in MacKay-Shields' opinion, either
unwarranted pessimism or unrecognized value.
================================================================================
BOND FUND
================================================================================
MacKay-Shields manages the Fund by allocating the Fund's investments among
different types of debt securities. MacKay-Shields conducts a continuing review
of yields and other information derived from a data base which it maintains in
managing fixed-income portfolios. Fundamental economic cycle analysis, credit
quality and interest rate trends are the principal factors considered by
MacKay-Shields in determining whether to increase or decrease the emphasis
placed upon a particular type of security or industry sector within the Fund's
investment portfolio.
Maturity shifts are based on a set of investment decisions that take into
account a broad range of fundamental and technical indicators. More
particularly, MacKay-Shields will alter the average maturity of the portfolio in
accordance with the research and other methods described above.
================================================================================
INDEXED BOND FUND
================================================================================
The correlation between the performance of the Indexed Bond Fund and the Salomon
Brothers Broad Investment Grade Bond Index (the "Index") is expected to be at
least 0.95. A correlation of 1.00 would indicate perfect correlation, which
would be achieved when the net asset value of the Fund, including the value of
its dividend and capital gains distributions, increases or decreases in exact
proportion to changes in the Index. The Fund is expected to invest in
approximately 50 or more securities so that results fall within the targeted
tracking error. Bonds are selected for inclusion in the Fund based on credit
quality, sector, maturity, coupon, current yield, yield to maturity, duration,
and convexity. From time to time, adjustments may be made in the Fund's
portfolio because of changes in the composition of the Index, but such changes
should be infrequent.
Monitor Capital believes the indexing approach described above is an effective
method of simulating percentage changes in the Index. It is a reasonable
expectation that there will be a close correlation between the Fund's
performance and that of the Index in both rising and falling markets. Monitor
Capital employs a stratified sampling method to track index performance. Using
this method, the Fund invests in fixed income securities which in aggregate are
expected to mirror the performance of the Index. The Fund invests primarily in a
representative sample of the securities in the Index.
Monitor Capital may effect certain portfolio transactions involving when-issued,
delayed delivery and other types of securities that may have the effect of
increasing nominal portfolio turnover. (For further discussion of the effect of
portfolio turnover on the Fund, see pg. 30, "General Investment
Considerations--The Effects of Trading Costs on Your Total Return.") For further
information about the Fund's transactions in when-issued securities and related
portfolio practices, see the SAI.
================================================================================
INTERNATIONAL BOND FUND
================================================================================
MacKay-Shields considers factors such as prospects for currency exchange and
interest rates, and inflation in each country, relative economic growth,
government policies influencing exchange rates and business conditions; and
quality of individual issuers. MacKay-Shields will also determine, using good
faith judgment, (1) country allocation, (2) currency exposure (asset allocation
across currencies), and (3) diversified security holdings within each market.
To hedge the market value of securities held, proposed to be held or sold or
relating to foreign currency exchange rates, the Fund may enter into or purchase
securities or securities index options, foreign currency options, and futures
contracts and related options with respect to securities, indexes of securities,
or currencies. The Fund also may buy and sell currencies on a spot or forward
basis. Subject to compliance with applicable rules, futures contracts and
related options may be used for any legally permissible purpose, including as a
substitute for acquiring a basket of securities and to reduce transaction costs.
The Fund may also purchase and sell foreign exchange contracts and foreign
currency options for purposes of seeking to enhance portfolio returns or to
manage portfolio risk more efficiently.
Generally, the Fund's average maturity will be shorter when interest rates
worldwide or in a particular country are expected to rise, and longer when
interest rates are expected to fall. The Fund may use various techniques to
shorten or lengthen the dollar-weighted average maturity of its portfolio,
including transactions in futures and options on futures, interest rate swaps,
caps, floors and short sales against the box.
42
<PAGE>
================================================================================
SHORT-TERM BOND FUND
================================================================================
MacKay-Shields manages the Fund by allocating the Fund's investments among
different types of debt securities. MacKay-Shields conducts a continuing review
of yields and other information derived from data bases which it maintains in
managing fixed-income portfolios. Fundamental economic cycle analysis, credit
quality and interest rate trends are the principal factors considered by
MacKay-Shields in determining whether to increase or decrease the emphasis
placed upon a particular type of security or industry sector within the Fund's
investment portfolio. In seeking to achieve capital appreciation, as an integral
component of total return, the Fund may use, among other research methods,
historical yield spread analysis, economic analysis, fundamental credit analysis
and technical (supply/demand) analysis.
The Fund may, to the extent permitted by law, invest in leveraged inverse
floating rate debt instruments ("inverse floaters"). Certain inverse floaters
may be deemed to be illiquid securities for purposes of the Fund's 10%
limitation on investments in such securities. (See pg. 44, "Floaters and Inverse
Floaters," for details.)
================================================================================
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 a Fund. For more information about each Fund's
investments, investment practices and investment restrictions, including those
described in this section, please see the SAI.
================================================================================
AMERICAN DEPOSITARY RECEIPTS ("ADRS")
================================================================================
ADRs (sponsored or unsponsored) are receipts typically issued by a U.S. bank or
trust company evidencing ownership of the underlying foreign securities.
================================================================================
BANKING INDUSTRY AND SAVINGS AND LOAN OBLIGATIONS
================================================================================
Each Fund may invest in certificates of deposit, time deposits, bankers'
acceptances, and other short-term debt obligations issued by commercial banks
and, with the exception of the Money Market Fund, in certificates of deposit,
time deposits, and other short-term obligations issued by savings and loan
associations.
================================================================================
BORROWING
================================================================================
Each Fund may borrow from a bank up to a limit of 15% of its total assets, but
only for temporary or emergency purposes. Borrowing may exaggerate the effect on
a Fund's net asset value of any increase or decrease in the value of the Fund's
portfolio securities. Money borrowed will be subject to interest costs (which
may include commitment fees and/or the cost of maintaining minimum average
balances). A Fund will repay any money borrowed from a bank in excess of 5% of
its total assets prior to purchasing additional securities.
================================================================================
BRADY BONDS
================================================================================
The International Bond Fund may invest a portion of its assets in Brady Bonds,
which are securities created through the exchange of existing commercial bank
loans to sovereign entities for new obligations in connection with debt
restructurings.
================================================================================
CORPORATE DEBT SECURITIES
================================================================================
A Fund's investments in U.S. dollar- or foreign currency-denominated corporate
debt securities of domestic or foreign issuers are limited to corporate debt
securities (corporate bonds, debentures, notes and other similar corporate debt
instruments) which meet the credit quality and maturity criteria set forth for
the particular Fund. The rate of return or return of principal on some debt
obligations may be linked to indexes or stock prices or indexed to the level of
exchange rates between the U.S. dollar and foreign currency or currencies.
Corporate debt securities with a rating lower than BBB by S&P, and corporate
debt securities rated Baa or lower by Moody's, have speculative characteristics
and changes in economic conditions or individual corporate developments are more
likely to lead to a weakened capacity to make principal and interest payments
than in the case of high grade bonds. Should any individual bond held by a Fund,
other than the International Bond Fund or International Equity Fund, fall below
a rating of BBB by S&P or Baa by Moody's, the Fund's sub-adviser will dispose of
such bond as soon as reasonably practicable in light of then-existing market and
tax considerations. (See "Appendix A--Description of Securities Ratings.") The
International Bond Fund may invest up to 25%, and the International Equity Fund
may, for temporary defensive purposes, invest up to 5%, of its net assets in
debt securities which are rated below investment grade. (See pg. 45, "High Yield
Securities ("Junk Bonds").")
43
<PAGE>
================================================================================
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 a
Fund and not for purposes of leveraging the Fund's assets. However, a Fund will
not accrue any income on these securities prior to delivery. The value of
when-issued securities and firm and standby commitment agreements may vary prior
to and after delivery depending on market conditions and changes in interest
rate levels. There is a risk that a party with whom a Fund has entered into such
transactions will not perform its commitment, which could result in a gain or
loss to the Fund.
================================================================================
FLOATERS AND INVERSE FLOATERS
================================================================================
Each Fund, other than the EAFE Index Fund, Growth Equity Fund, Indexed Equity
Fund and Value Equity 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, such as a money market index or Treasury bill rate. To be
an eligible investment for the Money Market 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.
The Bond Fund, International Bond Fund, International Equity Fund and Short-Term
Bond Fund may invest in leveraged inverse floating rate debt instruments
("inverse floaters"). The interest rate on an inverse floater resets in the
opposite direction from the market rate of interest to which the inverse floater
is indexed. The leverage associated with inverse floaters may result in greater
volatility in their market values. Certain inverse floaters may be determined to
be illiquid securities.
================================================================================
FOREIGN INDEX-LINKED INSTRUMENTS
================================================================================
The EAFE Index Fund, International Equity Fund, Multi-Asset Fund and
International Bond Fund may invest in instruments issued by the U.S. or a
foreign government or by private issuers that return principal and/or pay
interest to investors in amounts which are linked to the level of a particular
foreign index. In the case of foreign index-linked instruments linking the
interest component to a foreign index, the amount of interest payable will
adjust periodically in response to changes in the level of the foreign index
during the term of the foreign index-linked instrument. The risks of such
investments would reflect the risks of investing in the index or other
instrument, the performance of which determines the return for the instrument.
Tax considerations may limit the Funds' ability to invest in foreign
index-linked instruments.
================================================================================
FOREIGN SECURITIES
================================================================================
All Funds may invest in foreign securities, although the Money Market Fund
purchases only dollar-denominated securities. Except for the Growth Equity Fund,
Indexed Bond Fund, International Bond Fund, International Equity Fund,
Multi-Asset Fund and Value Equity Fund, the Funds' investment advisers place the
Funds' investments only in developed countries. The Indexed Equity Fund and
Indexed Bond Fund will invest in foreign securities to the extent such
securities are included in the securities that comprise the Standard & Poor's
500 Composite Stock Price Index, and the Salomon Brothers Broad Investment Grade
Bond Index, respectively.
Foreign investments could be more difficult to sell than U.S. investments and
may involve risks different from investing in domestic securities. Investments
in foreign securities involve risks of currency controls by governments, changes
in currency rates and interest rates, difficulties in receiving or interpreting
financial and economic information, possible imposition of taxes, higher
brokerage and custodian fees, possible exchange controls or other government
restrictions, including possible seizure or nationalization of foreign deposits
or assets. In addition, foreign securities may be less liquid and more volatile
than U.S. securities. There may also be difficulty in invoking legal protections
across borders.
Many of the foreign securities in which the Funds invest will be denominated in
foreign currencies. Changes in foreign exchange rates will affect the value of
securities denominated or quoted in foreign currencies. Exchange rate movements
can be large and can endure for extended periods of time, affecting either
favorably or unfavorably the value of the Funds' assets. A Fund may, however,
engage in foreign currency transactions (see "Risk Management Techniques") to
protect itself against fluctuations in currency exchange rates in relation to
the U.S. dollar. Such foreign currency transactions may include forward foreign
currency contracts, currency exchange transactions on a spot (i.e., cash) basis,
put and call options on foreign currencies, and foreign exchange futures
contracts.
The Growth Equity Fund, Indexed Bond Fund, International Bond Fund,
International Equity Fund, Multi-Asset Fund and Value Equity Fund may invest in
emerging market countries. Investment in emerging market countries generally
presents risks in greater degree than those presented by investment in foreign
issuers in countries with developed securities markets and more advanced
regulatory systems.
44
<PAGE>
================================================================================
GOVERNMENT SECURITIES
================================================================================
Government securities are obligations of, or guaranteed by, the U.S. government
or its agencies or instrumentalities.
================================================================================
HIGH YIELD SECURITIES ("JUNK BONDS")
================================================================================
Securities rated below BBB or Baa (sometimes called "junk bonds") are not
considered "investment grade". There is more price volatility, more risk of
losing your principal and interest, a greater possibility of the issuer going
bankrupt, plus additional risks. These securities are considered speculative.
The International Bond Fund may invest up to 25% of its net assets in debt
securities, including short-term instruments, which are rated below investment
grade (i.e., below BBB by S&P or Baa by Moody's) or, if not rated, determined to
be of equivalent quality by the sub-adviser. Under exceptional market conditions
abroad or when it is believed that economic or market conditions warrant, the
International Equity Fund may, for temporary defensive purposes, invest up to 5%
of its net assets in short-term instruments rated below BBB by S&P or Baa by
Moody's or, if not rated, determined to be of equivalent quality by the
sub-adviser. The lower the ratings of such securities, the greater their risks
render them like equity securities. Moody's considers bonds it rates Baa to have
speculative elements as well as investment grade characteristics. The Funds may
invest in securities which are rated D by S&P or, if unrated, are of equivalent
quality. Securities rated D may be in default with respect to payment of
principal or interest. (See "Appendix A--Description of Securities Ratings.")
Investors should be willing to accept the risks associated with investment in
high yield/high risk securities. Investment in high yield/high risk bonds
involves special risks in addition to the risks associated with investments in
higher rated debt securities. High yield/high risk bonds may be regarded as
predominantly speculative with respect to the issuer's continuing ability to
meet principal and interest payments. Moreover, such securities may under
certain circumstances be less liquid than higher rated debt instruments.
================================================================================
LENDING OF PORTFOLIO SECURITIES
================================================================================
A 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 a 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, a Fund's sub-adviser
will consider all relevant facts and circumstances, including the
creditworthiness of the borrower.
================================================================================
LOAN PARTICIPATION INTERESTS
================================================================================
The Funds 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. A Fund's investments in loan participation interests will be subject
to its limitation on investments in illiquid securities and, to the extent
applicable, its limitation on investments in securities rated below investment
grade.
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. A Fund may incur additional credit risk, however,
when it is in the position of participant rather than a co-lender because the
Fund must assume the risk of insolvency of the co-lender from 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 that may include interests in pools of
lower-rated debt securities, consumer loans or mortgages, or complex instruments
such as collateralized mortgage obligations and stripped mortgage-backed
securities. The value of these securities may be significantly affected by
changes in interest rates, the market's perception of issuers and the
creditworthiness of the parties involved. The ability of a Fund to successfully
utilize these instruments may depend in part upon the ability of the Fund's
sub-adviser to forecast interest rates and other economic factors correctly.
Some securities may have a structure that makes their reaction to interest rate
changes and other factors difficult to predict, making their value highly
volatile. These securities may also be subject to prepayment risk and if the
security has been purchased at a premium the amount of the premium would be lost
in the event of prepayment. The Money Market Fund may only invest in
mortgage-backed and asset-backed securities that meet the requirements of Rule
2a-7 under the 1940 Act.
45
<PAGE>
================================================================================
MORTGAGE DOLLAR ROLLS
================================================================================
A mortgage dollar roll ("MDR") is a transaction in which a Fund sells
mortgage-backed securities ("MBS") from its portfolio to a counterparty from
whom it simultaneously agrees to buy a similar security on a delayed delivery
basis. The Fund maintains a segregated account with its custodian containing
securities from its portfolio having a value not less than the repurchase price,
including accrued interest. MDR transactions involve certain risks, including
the risk that the MBS returned to the Fund at the end of the roll, while
substantially similar, could be inferior to what was initially sold to the
counterparty.
================================================================================
MUNICIPAL BONDS
================================================================================
The Bond Fund and Short-Term Bond Fund may purchase municipal bonds which are
debt obligations of state and local governments, agencies and authorities.
Municipal bonds are issued to obtain funds for various public purposes. The
other Funds may purchase municipal bonds for temporary defensive purposes.
================================================================================
REPURCHASE AGREEMENTS AND
REVERSE REPURCHASE AGREEMENTS
================================================================================
Each 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).
Each Fund may enter into reverse repurchase agreements with banks or
broker-dealers, which involves the sale of a security by a 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. Each 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 a
Fund creates leverage which increases a 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.
The Directors have reviewed and approved certain sellers who they believe to be
creditworthy and have authorized the Funds to enter into repurchase agreements
with such sellers. If the other party to a repurchase agreement were to become
bankrupt, a Fund could experience delays in recovering its investment or losses.
================================================================================
RESTRICTED SECURITIES
================================================================================
To the extent that they invest in restricted securities, the Funds may be
exposed to additional risks. "Restricted" securities are those securities which
have not been registered under the Securities Act of 1933. 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. A Fund 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.
================================================================================
RISK MANAGEMENT TECHNIQUES
================================================================================
The Funds can use various techniques to increase or decrease their exposure to
changing security prices, interest rates, currency exchange rates, commodity
prices or other factors that affect security values. These techniques may
involve derivative transactions such as buying and selling futures contracts and
options on futures contracts, entering into foreign currency transactions (such
as forward foreign currency exchange contracts and options on foreign
currencies) and purchasing or writing put or call options on securities and
securities indexes.
The Funds can use these practices in an attempt to adjust the risk and return
characteristics of their portfolios of investments. When a Fund uses such
techniques in an attempt to reduce risk it is known as "hedging". If a Fund's
sub-adviser judges market conditions incorrectly or employs a strategy that does
not correlate well with the Fund's investments, these techniques could result in
a loss, regardless of whether the intent was to reduce risk or increase return.
These techniques may increase the volatility of a Fund and may involve a small
investment of cash relative to the magnitude of the risk assumed. In addition,
these techniques could result in a loss if the counterparty to the transaction
does not perform as promised. (For more information on risk management
techniques, see the SAI.)
================================================================================
SHORT SALES AGAINST THE BOX
================================================================================
A short sale is a transaction in which a Fund sells through a broker a security
it does not own in anticipation of a decline in market price. A short sale
"against the box" is a short sale in which, at the time of the short sale, a
Fund owns or has the right to obtain securities equivalent in kind and amount. A
Fund may enter into a short sale against the box, among other reasons, to hedge
against a possible market decline in the value of a security owned. To effect a
short sale against
46
<PAGE>
the box, the Fund borrows from a broker the securities which
are sold short in the short sale, and the broker holds the proceeds until the
borrowed securities are replaced. If the value of a security sold short against
the box increases, the Fund would suffer a loss when it purchases or delivers to
the selling broker the security sold short. If a broker, with which the Fund has
open short sales, were to become bankrupt, a Fund could experience losses or
delays in recovering gains on short sales. The Funds will only enter into short
sales against the box with brokers the investment advisers believe are
creditworthy. Short sales against the box will be limited to no more than 25% of
a Fund's assets.
================================================================================
SWAP AGREEMENTS
================================================================================
The International Bond Fund, International Equity Fund and Multi-Asset Fund may
enter into interest rate, index and currency exchange rate swap agreements for
purposes of attempting to obtain a particular desired return at a lower cost to
the Fund than if the Fund had invested directly in an instrument that yielded
that desired return. The Indexed Bond Fund may enter into index and interest
rate swap agreements, the EAFE Index Fund may enter into index and currency
exchange rate swap agreements, and the Indexed Equity Fund may enter into index
swap agreements. Swap agreements are two-party contracts entered into primarily
by institutional investors for periods ranging from a few weeks to more than one
year.
Whether a Fund's use of swap agreements will be successful in furthering its
investment objective will depend on the sub-adviser's ability to predict
correctly whether certain types of investments are likely to produce greater
returns than other investments. Because they are two-party contracts and because
they may have terms of greater than seven days, swap agreements may be
considered to be illiquid. Moreover, a Fund bears the risk of loss of the amount
expected to be received under a swap agreement in the event of the default or
bankruptcy of a swap agreement counterparty. A sub-adviser will cause a Fund to
enter into swap agreements only with counterparties that would be eligible for
consideration as repurchase agreement counterparties under the Funds' repurchase
agreement guidelines. Certain restrictions imposed on the Funds by the Internal
Revenue Code may limit the Funds' ability to use swap agreements. The swaps
market is a relatively new market and is largely unregulated. It is possible
that developments in the swaps market and the laws relating to swaps, including
potential government regulation, could adversely affect a Fund's ability to
terminate existing swap agreements or to realize amounts to be received under
such agreements, or to enter into swap agreements or could have tax
consequences. (See "Tax Information" in the SAI for information regarding the
tax considerations relating to swap agreements.)
================================================================================
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. Zero coupon bonds tend to be more volatile than
conventional debt securities.
================================================================================
MANAGER AND SUB-ADVISERS
================================================================================
================================================================================
THE MANAGER
================================================================================
MainStay Management, Inc. serves as the Funds' manager pursuant to a Management
Agreement dated November 21, 1997 between MainStay Management, Inc. and the
Company. Under the Management Agreement, the manager is responsible for the
Company's business affairs, subject to the supervision of the Company's
Directors. The manager, among other things, furnishes the Funds with office
facilities and with ordinary clerical, bookkeeping and recordkeeping services.
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.
In connection with its administration of the business affairs of the Funds, 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
Funds' sub-advisers; and
2. all expenses incurred by the manager in connection with administering the
ordinary course of a Fund's business, other than those assumed by the Company.
As compensation for these services, each 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 according to the following
schedule:
<TABLE>
<S> <C>
EAFE Index Fund ............................................. 0.95%
Growth Equity Fund .......................................... 0.85%
Indexed Equity Fund ......................................... 0.50%
International Equity Fund ................................... 0.85%
Multi-Asset Fund ............................................ 0.65%
Value Equity Fund ........................................... 0.85%
Bond Fund ................................................... 0.75%
Indexed Bond Fund ........................................... 0.50%
International Bond Fund ..................................... 0.80%
Money Market Fund ........................................... 0.50%
Short-Term Bond Fund ........................................ 0.60%
</TABLE>
47
<PAGE>
================================================================================
THE SUB-ADVISERS
================================================================================
As compensation for services, the manager, not the Fund, pays each Fund's
respective 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 according
to the following schedule:
<TABLE>
<S> <C>
EAFE Index Fund ............................................. 0.15%
Growth Equity Fund .......................................... 0.25%
Indexed Equity Fund ......................................... 0.10%
International Equity Fund ................................... 0.35%
Multi-Asset Fund ............................................ 0.15%
Value Equity Fund ........................................... 0.25%
Bond Fund ................................................... 0.20%
Indexed Bond Fund ........................................... 0.10%
International Bond Fund ..................................... 0.30%
Money Market Fund ........................................... 0.10%
Short-Term Bond Fund ........................................ 0.15%
</TABLE>
================================================================================
SHAREHOLDER SERVICES PLAN
================================================================================
The Company has adopted a Shareholder Services Plan with respect to the
Institutional Service Class of shares of each Fund. Under the terms of the Plan,
each 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 Institutional Service Class of a
Fund, a shareholder services fee at the rate of 0.25% on an annualized basis of
the average daily net asset value of the Institutional Service Class of the
Fund.
Each 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 Institutional Service Class of the
Fund. 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 Plan and its 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
Institutional Service Class of shares of certain Funds to an annual rate, as set
forth in the schedule below, of average daily net assets until December 31,
1998.
The Funds listed below are subject to the following voluntary expense
limitations:
<TABLE>
<S> <C>
EAFE Index Fund ............................................. 1.19%
Indexed Equity Fund ......................................... 0.55%
International Equity Fund ................................... 1.25%
Bond Fund ................................................... 1.00%
Indexed Bond Fund ........................................... 0.75%
International Bond Fund ..................................... 1.20%
Money Market Fund ........................................... 0.75%
Short-Term Bond Fund ........................................ 0.85%
</TABLE>
As long as these temporary expense limitations continue, they may lower the
Funds' expenses and increase their respective yields. The voluntary expense
limitations may be terminated or revised at any time after December 31, 1998, at
which time the Funds' expenses may increase and their respective yields may be
reduced, depending on the total assets of each of the Funds.
================================================================================
PORTFOLIO TRANSACTIONS
================================================================================
Pursuant to each Fund's Sub-Advisory Agreement, a Fund's 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 a Fund, the
Fund's sub-adviser will seek the best price and execution of the 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 Funds' sub-advisers may consider sales of shares of the
respective Funds as a factor in the selection of broker-dealers to execute each
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 Funds may also be appropriate
for other clients served by the Funds' sub-advisers. If a purchase or sale of
securities consistent with the investment policies of a 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 Funds and the clients by the Fund's sub-adviser. Although there
is no specified formula for allocating such transactions,
48
<PAGE>
the various allocation methods used by a 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 Funds by the manager, the sub-advisers and the
Funds' 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-advisers and the
Funds' 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 Funds have no reason to believe these steps will not
be sufficient to avoid any material adverse impact on the Funds, 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-advisers
and the Funds' other service providers at this time but could have a material
adverse impact on the operations of the Funds and the manager, the sub-advisers
and the Funds' other service providers.
================================================================================
APPENDIX A
================================================================================
================================================================================
DESCRIPTION OF SECURITIES RATINGS
================================================================================
================================================================================
MOODY'S INVESTORS SERVICE, INC.
================================================================================
Corporate and Municipal Bond Ratings
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high-grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risks appear somewhat larger than the Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper-medium-grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa: Bonds which are rated Baa are considered as medium-grade obligations,
(i.e., they are neither highly protected nor poorly secured). Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca: Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
Moody's applies numerical modifiers, 1, 2, and 3 in each generic rating
classified from Aa through Caa. The modifier 1 indicates that the issue ranks in
the higher end of its generic rating category; the modifier 2 indicates a
mid-range ranking; and the modifier 3 indicates that the issue ranks in the
lower end of its generic rating category.
49
<PAGE>
Advance refunded issues that are secured by escrowed funds held in cash, held in
trust, reinvested in direct non-callable United States government obligations or
non-callable obligations unconditionally guaranteed by the U.S. government are
identified with a hatchmark (#) symbol, i.e., #Aaa.
Moody's assigns conditional ratings to bonds for which the security depends upon
the completion of some act or the fulfillment of some condition. These are bonds
secured by: (a) earnings of projects under construction; (b) earnings of
projects unseasoned in operating experience; (c) rentals that begin when
facilities are completed; or (d) payments to which some other limiting condition
attaches. The parenthetical rating denotes probable credit stature upon
completion of construction or elimination of basis of condition, e.g.,
Con.(Baa).
MIG 1/VMIG 1: This designation denotes best quality. There is present strong
protection by established cash flows, superior liquidity support or demonstrated
broad-based access to the market for refinancing.
MIG 2/VMIG 2: This designation denotes high quality. Margins of protection are
ample although not so large as in the preceding group.
MIG 3/VMIG 3: This designation denotes favorable quality. All security elements
are accounted for but there is lacking the undeniable strength of the preceding
grades. Liquidity and cash flow protection may be narrow and market access for
refinancing is likely to be less well established.
MIG 4/VMIG 4: This designation denotes adequate quality. Protection commonly
regarded as required of an investment security is present and although not
distinctly or predominantly speculative, there is specific risk.
SG: This designation denotes speculative quality. Debt instruments in this
category lack margins of protection.
Corporate Short-Term Debt Ratings
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 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
================================================================================
================================================================================
CORPORATE AND MUNICIPAL LONG-TERM DEBT RATINGS
================================================================================
Investment grade
AAA: Debt rated AAA has the highest rating assigned by Standard & Poor's. The
obligor's capacity to meet its financial commitment on the obligation is
extremely strong.
AA: Debt rated AA differs from the highest rated issues only in small degree.
The obligor's capacity to meet its financial commitment on the obligation is
very strong.
A: Debt rated A is somewhat more susceptible to the adverse effects of changes
in circumstances and economic conditions than debt in higher rated categories.
However, the obligor's capacity to meet its financial commitment on the
obligation is still strong.
BBB: Debt rated BBB exhibits adequate protection parameters, 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.
Speculative Grade
Debt rated BB, B, CCC, CC, and C is regarded as having significant speculative
characteristics with respect to capacity to pay interest and repay principal. BB
indicates the least degree of speculation and C the highest. While such debt
50
<PAGE>
will likely have some quality and protective characteristics, these may be
outweighed by large uncertainties or major exposures to adverse conditions.
BB: Debt rated BB is less vulnerable to nonpayment than other speculative
issues. However, it faces major ongoing uncertainties or exposure to adverse
business, financial, or economic conditions which could lead to the obligor's
inadequate capacity to meet its financial commitment on the obligation.
B: Debt rated B is more vulnerable to nonpayment than obligation rated BB, but
the obligor currently has the capacity to meet its financial commitment on the
obligation. Adverse business, financial, or economic conditions will likely
impair the obligor's capacity or willingness to meet its financial commitment on
the obligation. The B rating category is also used for debt subordinated to
senior debt that is assigned an actual or implied BB or BB- rating.
CCC: Debt rated CCC is currently vulnerable to nonpayment and is dependent upon
favorable business, financial, and economic conditions. In the event of adverse
business, financial or economic conditions, the obligor is not likely to have
the capacity to meet its financial commitment on the obligation.
CC: An obligation rated CC is currently highly vulnerable to nonpayment.
C: The C rating may be used to cover a situation where a bankruptcy petition has
been filed, or similar action has been taken, but debt service payments are
continued.
D: Debt rated D is in payment default. The D rating category is used when
payments on an obligation are not made on the date due even if the applicable
grace period has not expired, unless S&P believes that such payments will be
made during such grace period. The D rating will also be used upon the filing of
a bankruptcy petition, or the taking of similar action, if debt service payments
are jeopardized.
Plus (+) or Minus (-): The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
Debt obligations of issuers outside the United States and its territories are
rated on the same basis as domestic corporate and municipal issues. The ratings
measure the creditworthiness of the obligor but do not take into account
currency exchange and related uncertainties.
Short-Term Rating Definitions
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.
51
<PAGE>
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<PAGE>
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.
This prospectus is also available in Spanish.
Please call 800.695.2126 to obtain a copy.
[LOGO]
MAINSTAY(R)
INSTITUTIONAL
FUNDS INC.
<PAGE>
- --------------------------------------------------------------------------------
MainStay Institutional Money Market Fund Prospectus May 1, 1998
- --------------------------------------------------------------------------------
Institutional Service Class
MainStay Institutional Money Market Fund, a separate series of MainStay
Institutional Funds Inc., 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. Shares
of this Fund 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 20).
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; but if you have any
questions, please call 1-800-695-2126, or write to us at:
MainStay Institutional Funds Inc.
Box 461
Parsippany, NJ 07054-0461
For even more details, write to NYLIFE Distributors Inc., 300 Interpace Parkway,
Parsippany, NJ 07054 or call the above number for a free copy of the Statement
of Additional Information (SAI) dated May 1, 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.
- --------------------------------------------------------------------------------
MainStay Institutional Funds Inc. offers 10 additional
no-load mutual funds with a broad range of investment choices.
================================================================================
Equity
================================================================================
EAFE Index Fund
Growth Equity Fund
Indexed Equity Fund
International Equity Fund
Multi-Asset Fund
Value Equity Fund
================================================================================
Fixed Income
================================================================================
Bond Fund
Indexed Bond Fund
International Bond Fund
Short-Term Bond Fund
[LOGO]
MAINSTAY(R)
INSTITUTIONAL
FUNDS INC.
<PAGE>
This page intentionally left blank
2
<PAGE>
- --------------------------------------------------------------------------------
What's Inside?
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
================================================================================
Tell Me Quickly Page
================================================================================
<S> <C>
The Fund; The Number to Call for Help ..................................... 1
A Quick Overview: Understanding MainStay Institutional Funds ............. 4-5
================================================================================
Tell Me The Key Facts
================================================================================
Analyze the Costs of Investing: Ongoing Fees .............................. 6
If You Invest $1,000 You Might Pay ........................................ 6
Financial Highlights ...................................................... 8
Historical Performance .................................................... 9
Description of the Fund ................................................... 10
General Investment Considerations ......................................... 11
Open an Account and Buy Shares ......................................... 12-13
Know How to Sell and Exchange Shares ................................... 14-15
Decide How to Receive Your Earnings ....................................... 16
Understand the Tax Consequences ........................................... 16
Know Who You're Investing With ......................................... 17-18
Know Your Rights as a Shareholder ......................................... 19
================================================================================
Tell Me The Details
================================================================================
The Company ............................................................... 20
Description of Investments and Investment Practices ....................... 20
Manager and Sub-Adviser ................................................... 22
Portfolio Transactions .................................................... 23
Other Information ......................................................... 23
Appendix A: Description of Securities Ratings ............................ 23
</TABLE>
3
<PAGE>
- --------------------------------------------------------------------------------
A Quick Overview ...
- --------------------------------------------------------------------------------
- -----
1
- -----
================================================================================
Set your investment priorities
================================================================================
Decide if they are:
o protecting what you have
o receiving income from dividends
o participating in the potential for greater investment returns
o diversifying your current investment portfolio
o a combination of any of the above
How much risk of losing money are you willing to take; how aggressive are you
willing to be to make money? This two-part question may be the most difficult
question in the world of investing. If you are not a professional investor, you
should talk it over with your service agent or registered representative. He or
she may have some ideas you hadn't considered.
- --------------------------------------------------------------------------------
- -----
2
- -----
================================================================================
Study the Fund's objectives, policies and risks
================================================================================
Focus on the Fund in relation to your objectives. Read about the people who
manage the Fund. Understand the types of securities in which the Fund invests
and the risks associated with those investments.
If you have a registered representative or service agent, discuss the Fund with
him or her or call 1-800-695-2126.
For key facts about, and risks associated with, the Fund, see pg. 10.
(For more detailed information, see "Tell Me The Details" in this Prospectus and
the Statement of Additional Information (SAI).)
- --------------------------------------------------------------------------------
- -----
3
- -----
================================================================================
Evaluate the Fund's track record, fees and expenses
================================================================================
Turn to pg. 8 for Financial Highlights. Read down the columns (by year) and
find, in particular, the beginning and ending share prices, the amount of income
produced, and the "total investment return" figures, to see how the Fund has
done in the past.
Don't just look at recent performance, which may or may not be repeated. Read
the "total investment return" for each year to look for a performance pattern.
Remember, though, no fund can ever guarantee it will continue to perform at the
same levels. Understand the ongoing fees.
(See "Analyze the Costs of Investing: Ongoing Fees"; "If you invest $1000 You
Might Pay ..."; and the Example on pg. 7 for the Fund's ongoing fees and the
impact of those costs on a $1,000 investment.)
- --------------------------------------------------------------------------------
- -----
7
- -----
================================================================================
Ongoing fees
================================================================================
Every mutual fund pays fees for services. These may include distribution,
marketing, investment management and shareholder services. Fees are generally
charged on a regular schedule. You're not charged directly; the Fund pays the
fees to the firms who provide the services and then deducts the amounts from the
Fund's assets. This, consequently, reduces the NAV of your shares.
(To learn more, see pg. 22, "Manager and Sub-Adviser.")
- --------------------------------------------------------------------------------
- -----
8
- -----
================================================================================
Earn dividends and capital gains
================================================================================
Your Fund may earn money primarily through interest payments on the securities
it owns. The Fund distributes these earnings to you monthly. For tax qualified
plans, distributions are reinvested in additional shares.
Other investors may elect to have earnings sent to them or have them
automatically reinvested in more shares.
(To learn more, see pg. 16, "Decide How To Receive Your Earnings.")
- --------------------------------------------------------------------------------
- -----
9
- -----
================================================================================
Exchange shares/Redeem shares
================================================================================
You generally may redeem your shares on any business day, or transfer them to
another Fund by exchanging shares. The Fund will redeem shares and send you a
check, or, if you wish, exchange shares of one Fund for shares of another
MainStay Institutional Fund. An exchange is considered a sale of shares of one
Fund and a purchase of another and may have tax consequences. You can only
exchange shares of the same class. Participation in a systematic withdrawal and
exchange plan may be available for Group IRA or Group Account investors.
(To learn more, see pgs. 14-15, "Know How to Sell and Exchange Shares.")
- --------------------------------------------------------------------------------
4
<PAGE>
- --------------------------------------------------------------------------------
...Understanding MainStay Institutional Funds
- --------------------------------------------------------------------------------
- -----
4
- -----
================================================================================
Decide how much to invest in each Fund
================================================================================
You may split your investment among as many MainStay Institutional Funds as you
desire. If you are an institutional investor, your initial investment must be at
least $250,000 over the first 13 months; if investing through a Group IRA, you
must invest at least $5,000 to start; if investing through a Group Account, you
must invest at least $25,000 to start. There are also minimum requirements for
subsequent investments.
(See pgs. 12-13, "Open an Account and Buy Shares," for the amounts.)
- --------------------------------------------------------------------------------
- -----
5
- -----
================================================================================
Open an account/Buy shares
================================================================================
To open an account, fill out an application and place the order directly or
through your registered representative or service agent.
Make sure you provide complete information, including who will own the account,
and especially your Social Security number or Taxpayer ID. If you're
participating through an employer sponsored plan, your employer will complete
the application.
This is also the time to decide how to make other choices that will affect how
you manage your investments including how to receive earnings.
(For more on opening an account see pgs. 12-13, "Open an Account and Buy
Shares.")
- --------------------------------------------------------------------------------
- -----
6
- -----
================================================================================
See how many shares your money will buy
================================================================================
The Money Market Fund intends to maintain a stable net asset value ("NAV") of
$1.00, in which case the price of each share will be $1.00. Thus, the number of
shares of the Fund you purchase will be equal to the dollar amount of your
investment.
The Fund's net asset value is calculated at noon. You'll receive written
confirmation of your purchase.
(To learn more, see pgs. 12-13, "Open an Account and Buy Shares.")
- --------------------------------------------------------------------------------
- -----
10
- -----
================================================================================
Manage your taxes/ Align your goals
================================================================================
If you've made a profit on your investment either through dividends,
distributions or capital gains, you may have to pay taxes at tax time.
Generally, taxes are deferred if you're investing through a "tax-exempt" plan,
such as a 401(k) or IRA. Distributions from tax-exempt plans may be taxable.
Consult your tax adviser.
Be aware that the Fund may earn 1998 income that will be paid to you in January
1999, but will apply to your 1998 tax return.
(See pg. 16, "Understand the Tax Consequences," for an explanation.)
- --------------------------------------------------------------------------------
- -----
11
- -----
================================================================================
Know your rights/ Stay informed
================================================================================
Most of all, you have the right to ask questions--and have them answered
intelligently. You may call your registered representative or service agent, or
call us directly at 1-800-695-2126.
(See pg. 19, "Know Your Rights as a Shareholder," to learn more.)
- --------------------------------------------------------------------------------
5
<PAGE>
================================================================================
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 expenses paid by the Institutional Service Class of
the Fund for the most recent 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. 22, "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
through December 31, 1998. (See pg. 22, "Voluntary Expense Limitation," for full
details.) This expense limitation has the effect of lowering a Fund's total
operating expenses and increasing its earnings. (See pg. 22, "Voluntary Expense
Limitation," for more on the limitation for the Fund.)
The manager may end or revise the voluntary expense limitations at any time
after December 31, 1998. If this occurs, the Fund's expenses may increase and
its earnings may be reduced, depending on its total assets. (See pg. 22,
"Voluntary Expense Limitation," for more on the limitation for the Fund.)
Service agents
You may buy shares of the Fund through a service agent: broker-dealers,
financial institutions or others having a shareholder servicing relationship
with the Fund on your behalf. Service agents 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 service agent, if you have one, 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 Institutional Service Class
of the Fund will bear directly or indirectly.
The example on page 7 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, nor do they show how the Fund has actually performed in the past.
They are strictly hypothetical examples.
================================================================================
- --------------------------------------------------------------------------------
Take note:
- --------------------------------------------------------------------------------
We have also assumed that total Fund operating expenses remain the same each
year, and that the 1998 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 after December
31, 1998.
================================================================================
6
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
Operating Expenses Example
- -------------------------------------------------------------------------------------------------------------------------------
===============================================================================================================================
MONEY MARKET FUND
===============================================================================================================================
<S> <C> <C> <C>
Shareholder Transaction Expenses None After 1 year $8
After 3 years $24
After 5 years $42(a)
Annual Fund Operating Expenses After 10 years $93
(as a percentage of average daily net assets)
If you invest $1,000 today, 5 years from now you would have paid:
Management Fees .39%
(reflecting expense limitations) [THE FOLLOWING TABLE IS REPRESENTED BY
Other Expenses A PIE CHART IN THE PRINTED MATERIAL]
Shareholder Service Fees .25
Other .11 $22 management fees
--- 14 shareholder service fees
Total Other Expenses .36 6 other
--- -----------------------------
Total Fund Operating Expenses* .75% $42 total fund operating
=== expenses
</TABLE>
*MainStay Management, Inc., as the Fund's manager, has voluntarily agreed for
1998 to waive a portion of the fees otherwise payble 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 Institutional Service
Class of the Fund to the amount shown above. These expenses are described under
"Tell Me The Details--Manager and Sub-Adviser." Absent the voluntary expense
limitation, estimated total Fund operating expenses for the Institutional
Service Class of the Fund would have been .86%. Absent the voluntary expense
limitation, Fund management fees would have been .50%.
(a) If the voluntary expense limitation 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 $48.
7
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
Here are the financial highlights for the Institutional Service Class of shares
of the Fund. The Institutional Service Class was not offered before January 1,
1995.
The information for each of the three years in the period ended December 31,
1997 has been audited by Price Waterhouse LLP, independent accountants to the
Fund. You should read the related financial statements and notes and, in the
case of the Annual Report, the unqualified report on the financial statements of
the Fund contained in the Company's 1997 Annual Report which is incorporated by
reference in the SAI.
Additional performance information is included in the Fund's Annual Report to
Shareholders.
For a free copy of the SAI or the Annual Report, call us at 1-800-695-2126 or
write to: MainStay Institutional Funds Inc., P.O. Box 461, Parsippany, NJ
07054-0461.
<TABLE>
<CAPTION>
MONEY MARKET FUND
Year Ended
December 31
-------------------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Net asset value at beginning of period .......... $1.00 $1.00 $1.00
---------- ---------- ----------
Net investment income ........................... 0.05 0.05 0.05
---------- ---------- ----------
Less dividends and distributions:
From net investment income ...................... (0.05) (0.05) (0.05)
From net realized gain on investments ........... (0.00)(a) -- --
---------- ---------- ----------
Total dividends and distributions ............... (0.05) (0.05) (0.05)
---------- ---------- ----------
Net asset value at end of period ................ $1.00 $1.00 $1.00
========== ========== ==========
Total investment return ......................... 5.01% 4.85% 5.46%
Ratios (to average net assets)/Supplemental Data:
Net investment income ........................ 4.93% 4.75% 5.23%
Net expenses ................................. 0.75% 0.75% 0.75%
Expenses (before reimbursement) .............. 0.86% 0.92% 0.98%
Net assets at end of period (in 000's) .......... $64,228 $34,664 $2,784
</TABLE>
(a) Less than one cent per share.
8
<PAGE>
- --------------------------------------------------------------------------------
Historical Performance
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Institutional Service Class(1)
Average Annual Total Returns for Periods Ended December 31, 1997 (2)
--------------------------------------------------------------------
One Three Five Since
Year Years Years Inception(3)
---- ----- ----- ------------
<S> <C> <C> <C> <C>
Money Market Fund .............. 5.01% 5.11% 4.41% 4.52%
</TABLE>
- ----------
(1) Performance figures of the Institutional Service Class, first offered to
the public on January 1, 1995, include the historical performance of the
Institutional Class from the Fund's inception (January 2, 1991) up to
December 31, 1994. Performance figures for the two Classes after this date
will vary based on differences in their expense structures. The
Institutional Service Class has a Shareholder Services Plan and therefore
incurs the related expenses of the Plan. (See "Manager and
Sub-Advisers"--"Shareholder Services Plan" for more information.)
(2) Past performance is no guarantee of future results. The performance results
shown above reflect performance as of December 31, 1997. Performance
results change over time. For performance results as of more current dates,
call 1-800-695-2126.
(3) January 2, 1991.
9
<PAGE>
================================================================================
Money Market Fund
The Fund's objective is:
================================================================================
to seek to provide a high level of current income while preserving capital and
maintaining liquidity.
- --------------------------------------------------------------------------------
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.
This 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).
- --------------------------------------------------------------------------------
WHO'S MANAGING YOUR MONEY?
DAVID CLEMENT OF
NEW YORK LIFE
INSURANCE COMPANY.
Mr. Clement has served as portfolio manager for the Fund since its inception in
1991, and is a member of the fixed income portfolio management team. Mr. Clement
joined the Asset Management Group of New York Life in 1990.
- --------------------------------------------------------------------------------
10
<PAGE>
- --------------------------------------------------------------------------------
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:
o borrow up to 15% of total assets;
o lend its securities to brokers, dealers and other financial institutions to
earn income;
o 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;
o invest in high quality commercial paper; and
o invest in repurchase agreements, and enter into reverse repurchase
agreements, which can create leverage and increase a Fund's investment
risk.
The Money Market Fund may invest in loan participation interests which involve
certain risks, including credit and liquidity risks. (See pg. 21, "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.
11
<PAGE>
- --------------------------------------------------------------------------------
Open an Account...
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Who should read this section
If you are participating in a company savings plan, such as a 401(k), profit
sharing plan, defined benefit plan or other employee-directed plan, your company
will provide you with the information you need to open an account and buy shares
in the Fund.
If you are investing through a Group IRA or Group Account, the following
information will help you open an account and buy shares:
- --------------------------------------------------------------------------------
WHO MAY BUY INSTITUTIONAL SERVICE CLASS SHARES
You are eligible to buy Institutional Service Class shares if you are in a Group
Account or Group IRA or you are a plan sponsor.
HOW TO OPEN AN ACCOUNT
You (or your sponsor, if you are investing through a group or plan) can open an
account or make an investment by calling NYLIFE Distributors at 1-800-695-2126
between 8:30 AM and 4:00 PM Eastern time on any day the New York Stock Exchange
is open. You'll be given an account number and wire or mail instructions for
sending payment. All calls are recorded.
NYLIFE Distributors must receive your money (and the application, if it's your
first investment) within the next 3 business days of placing your order.
PLEASE FILL OUT THE APPLICATION COMPLETELY AND CORRECTLY
MainStay Institutional Funds and NYLIFE Distributors each reserves the right to
reject your application or redeem your Fund shares if significant information is
incomplete or incorrect (for example, if you leave off your Taxpayer I.D.).
TAKE CARE, BE ACCURATE
Make sure you are using the proper forms. Your order to buy is only accepted
when received by MainStay Shareholder Services Inc. (the transfer agent) with
all information, signatures, documents and payments required to carry it out.
Federal law requires you to provide a certified tax identification number when
you open an account.
If you are investing through a Group IRA or Group Account, applications should
be mailed to: MainStay Institutional Funds Inc., Box 461, Parsippany, NJ
07054-0461.
Initial and subsequent investments should be sent to MainStay Institutional
Funds Inc., Box 8407, Boston, MA 02266-8407.
- --------------------------------------------------------------------------------
================================================================================
BUY SHARES
You may buy shares (and fractions of shares) 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 will be the next NAV that is set after your order is received in
proper form, generally $1.00. (All MainStay Institutional Funds are no load
funds and are sold without a sales charge at the net asset value (NAV) per
share. There are ongoing fees, however, as well as minimum investment
amounts.)
The NAV--the price of a share that is used for buying and selling--is determined
once each day at noon. 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.)
12
<PAGE>
- --------------------------------------------------------------------------------
...and Buy Shares
- --------------------------------------------------------------------------------
YOU MUST INVEST AT LEAST THE MINIMUM AMOUNT
One of the following minimums will apply to you, depending upon how you are
investing:
For institutional investors:
o Initial combined investment--at least $250,000, which may be spread over a
thirteen-month period after opening the account.
o Each investment after that--at least $1,000.
For a Group IRA:
If you are investing in an IRA offered through a group:
o First investment--at least $5,000 (at least $1,000 in each MainStay
Institutional Fund in which you are investing)
o Each investment after that--at least $100.
For a Group Account:
If you are a member of a group that participates in our Group IRA program:
o First investment--at least $25,000 (at least $1,000 in each MainStay
Institutional Fund in which you are investing)
o Each investment after that--at least $1,000.
MainStay Institutional Funds Inc. may also accept investments of smaller amounts
at its discretion.
- --------------------------------------------------------------------------------
For your convenience and to save money, certificates for shares will usually not
be issued.
- --------------------------------------------------------------------------------
================================================================================
- --------------------------------------------------------------------------------
Take note:
- --------------------------------------------------------------------------------
Tax deductible contributions to a regular IRA generally are limited to $2,000 a
year ($4,000 in the case of a spousal IRA). An investor in certain qualified
retirement plans may be able to open an account with a smaller minimum
investment.
================================================================================
================================================================================
- --------------------------------------------------------------------------------
Take note:
- --------------------------------------------------------------------------------
MainStay Institutional Funds and NYLIFE Distributors also have sole discretion
to reject your application or order if your application is incomplete or
incorrect (particularly if you have failed to include your Taxpayer I.D.
Information). MainStay Institutional Funds also has sole discretion to suspend
offering shares or reject purchase orders when, in the management's judgment, it
is in a Fund's best interests.
================================================================================
- --------------------------------------------------------------------------------
What if you buy by check and then sell quickly? We can delay payment until we're
sure your check clears, or for up to 15 days, whichever comes first.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
================================================================================
[GRAPHIC OF A TELEPHONE AND A CHECK PARTIALLY PLACED INTO AN ENVELOPE]
SENDING A CHECK OR MONEY ORDER
First call us at 1-800-695-2126 to place your order. Make your check or money
order payable to MainStay Institutional Funds Inc. (Write your account number
and the name of the Money Market Fund on the check or money order.) The check
must be in U.S. dollars drawn on a U.S. bank. Mail it directly to: MainStay
Institutional Funds Inc., P.O. Box 8407, Boston, MA 02266-8407.
Mail the application separately to MainStay Institutional Funds Inc., P.O. Box
461, Parsippany, NJ 07054-0461.
[GRAPHIC OF A RADIO TOWER]
WIRING MONEY
You may invest by wiring the money to us. You or your registered representative
should call NYLIFE Distributors at 1-800-695-2126 for an account number and
wiring instructions. Give them to your bank, which may charge a fee for wiring.
The wire must include your name--exactly as it appears on your application--your
account number and the name of the Fund. NYLIFE Distributors must receive your
money (and application, if it's your initial investment) within 3 business days
of your placing an order.
13
<PAGE>
- --------------------------------------------------------------------------------
Know How to Sell ...
- --------------------------------------------------------------------------------
Shares may be redeemed (sold) in a number of ways. If you are participating in a
company plan, such as a 401(k), profit sharing, defined benefit or other
employee-directed plan, check with your Human Resources Department for
information on how your shares may be redeemed. For other investors, including
those in a Group IRA or Group Account, shares may be redeemed by written request
to NYLIFE Distributors or you can redeem your shares in any of the following
ways:
OPTION 1 [GRAPHIC OF A TELEPHONE AND A RADIO TOWER]
BY TELEPHONE OR WIRE
Place an order to sell your shares by calling NYLIFE Distributors at
1-800-695-2126. Or, if you prefer, you may wire your order. These options are
not available if your shares are held in certificate form. (Please call us at
the above number for further details.)
The price of each share will be the next NAV determined after receipt of your
redemption request for the class of shares you own. There is no charge for
selling your shares. The shares you sell may be worth more or less than the
price you paid for them, depending on the market value of the investment
securities held by the particular Fund at the time of your sale.
- --------------------------------------------------------------------------------
Telephone redemption: convenient, yes...but not risk-free
- --------------------------------------------------------------------------------
Telephone redemption privileges are convenient, but you give up some security.
By making use of this convenience, you agree that neither MainStay Institutional
Funds nor the manager will be liable for following instructions via the phone
that they reasonably believe are genuine. You bear the risk of any loss, unless
MainStay Institutional Funds or the manager fails to use established safeguards
for your protection.
These safeguards are among those currently in place at MainStay Institutional
Funds:
o All phone calls are tape recorded.
o Written confirmation of every transaction is sent to your address of
record.
================================================================================
OR, OPTION 2 [GRAPHIC OF A CALENDAR]
USE A SYSTEMATIC WITHDRAWAL PLAN
If you are a shareholder in a Group IRA or a Group Account, with at least
$10,000 (based on the NAV per share) in your account, you may use our systematic
withdrawal plan.
You may arrange to make monthly withdrawals of at least $100 from the Fund. Each
withdrawal will be mailed to you by check or wired directly to your bank
account, whichever you select on your application. These withdrawals, like any
sale, may result in a gain or loss and, therefore, may be subject to taxation.
Consult your tax adviser about possible tax consequences.
Also remember, these withdrawals are not dividends or income. If you withdraw
more than your Fund is earning for you, eventually your account will be worth
less than your original investment, and, ultimately, you will redeem all of your
shares.
MainStay Institutional Funds may end this plan at any time after 30 days'
written notice to you.
================================================================================
14
<PAGE>
- --------------------------------------------------------------------------------
...and Exchange Shares
- --------------------------------------------------------------------------------
If you exchange all your shares in the Money Market Fund for shares in another
Fund, any dividends that have been declared but not yet distributed will be
credited to the new Fund account. If you exchange all your shares in the Money
Market Fund for shares in more than one Fund, undistributed dividends will be
credited to each of the new Funds according to the number of exchanged shares in
each Fund.
MainStay Institutional Funds reserves the right to amend, restrict or end the
exchange privilege.
HOW YOU WILL RECEIVE YOUR MONEY
Your sales proceeds will normally be wired directly to the bank named on your
application within one business day after your redemption request is received.
On days when the New York Stock Exchange is closed, or during other times
specified by Federal securities law, you may not be able to redeem shares or
your payment might be delayed.
- --------------------------------------------------------------------------------
USE THE EXCHANGE PRIVILEGE
Once you open an account, you may exchange shares of the same Class between
MainStay Institutional Funds. An order to exchange shares is treated as a sale
of the old shares followed by a purchase of the new shares. Exchanges will be
based upon each Fund's NAV per share next computed following receipt of a
properly executed exchange request. You may request an exchange by calling
NYLIFE Distributors at 1-800-695-2126.
SET UP A SYSTEMATIC EXCHANGE PLAN
If you've invested through a Group IRA or Group Account, you may establish a
Systematic Exchange Program to have a minimum of $100 exchanged periodically
from any MainStay Institutional Fund to another MainStay Institutional Fund
within the same Class of shares. The Fund from which exchanges are made must
have an account value of at least $10,000 at the time the Systematic Exchange
Program is established. For additional information, call 1-800-695-2126.
- --------------------------------------------------------------------------------
================================================================================
- --------------------------------------------------------------------------------
Take note: Your shares could be sold involuntarily
- --------------------------------------------------------------------------------
To reduce expenses, we may redeem shares in any account valued at less than
$10,000 ($1,000 for Group IRAs and Group Accounts), provided that the value is
not based on fluctuations in market prices. We'll give you at least 30 days
notice to give you time to add to your account and avoid the sale. We may also
redeem your shares if you haven't given us the proper tax information.
================================================================================
15
<PAGE>
- --------------------------------------------------------------------------------
Decide How to Receive 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 mutual fund, however, always pays this income to you as
"dividends." A money market fund generally earns interest from its investments.
When the Fund pays
The Money Market Fund declares dividends daily and you're paid monthly.
You begin earning dividends the business day after the transfer agent receives
your investment in U.S. dollars 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.
HOW TO TAKE YOUR EARNINGS
Your earnings will automatically be reinvested in the same Class of shares of
the Fund, unless you choose one of the following options:
REINVEST IN ANOTHER FUND
On the day the Fund pays the dividend, reinvest everything in another MainStay
Institutional Fund of your choice.
TAKE CASH
Take your earnings in cash.
If you choose to receive your earnings in cash... a check will be mailed to the
address you have given us. If the check is not accepted and is returned to us,
we will reinvest it in your account in the Fund at the next net asset value
computed after the transfer agent receives the check. Any additional
distributions will automatically be reinvested at net asset value as of the
ex-dividend date.
- --------------------------------------------------------------------------------
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:
o net taxable income;
o net short-term capital gains; and
o 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. If you are not a tax-exempt
investor, purchasing shares shortly before the record date for dividend
declarations can result in a taxable return to you of a portion of the price you
paid for the shares.
The Fund may pay you in January for dividends 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.
================================================================================
16
<PAGE>
- --------------------------------------------------------------------------------
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. 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. (See pg. 22, "Manager
and Sub-Adviser", and the SAIfor more details.)
For its services, the Fund pays the manager a monthly fee. (See pg. 22, "Manager
and Sub-Adviser".)
================================================================================
WHO MANAGES YOUR MONEY?
================================================================================
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. (See pg. 22, "Manager and
Sub-Adviser"--"The Sub-Adviser" for an explanation of the fees paid to the
sub-adviser by the manager.)
====================================
New York Life
Insurance Company
51 Madison Avenue
New York, New York, 10010
New York Life Insurance
Company manages the Money
Market Fund. The 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 December 31,
1997, New York Life had total
assets of approximately $84
billion and managed
approximately $24 billion in
assets for qualified
retirement plans.
====================================
17
<PAGE>
WHO DISTRIBUTES MAINSTAY INSTITUTIONAL FUNDS?
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.
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.
18
<PAGE>
- --------------------------------------------------------------------------------
Know Your Rights as a Shareholder
- --------------------------------------------------------------------------------
YOU HAVE THE RIGHT TO ASK ANY QUESTIONS.
If you have a question about your account, you should:
o call 1-800-695-2126 (between 8:30 a.m. and 5:00 p.m. Eastern time), or
o write to:
MainStay Institutional Funds Inc.
Box 461
Parsippany, NJ 07054-0461
THE RIGHT TO RECEIVE INFORMATION ABOUT YOUR INVESTMENT
You will receive periodic statements covering the Fund, including the number and
value of shares, dividends declared or paid and other information.
Confirmations.
Every time you buy, sell or exchange shares between Funds, you'll receive a
confirmation in the mail shortly thereafter. It summarizes all the key
information: what you bought and sold, what it cost and other important
information.
Financial reports.
You will receive an annual financial statement for the Fund, audited by the
Fund's independent accountants. You will also receive semiannual statements
which are unaudited.
Each financial report shows:
o the investments owned by the Fund,
o the market value of each investment, and
o other financial information.
================================================================================
- --------------------------------------------------------------------------------
Take note:
- --------------------------------------------------------------------------------
Keep your statements. You may need them for tax reporting purposes.
Be alert: Mistakes can happen. Always review your confirmations and statements
immediately.
================================================================================
THE RIGHT TO HAVE ONE SHARE, ONE VOTE
Every share issued by the Fund carries equal ownership rights. By owning shares,
you're entitled to vote on certain issues and policies regarding the Fund or
class of shares you own. You have one vote per share you own.
You also 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, you
have 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.
19
<PAGE>
- --------------------------------------------------------------------------------
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 Fund is a diversified investment company under the 1940 Act.
The Company offers Institutional Class and Institutional Service Class shares,
which have different expenses that may affect performance. You may obtain a free
copy of the prospectus which contains more information about the Institutional
Class of shares of the Fund by calling NYLIFE Distributors at 1-800-695-2126.
(See pg. 22, "Manager and Sub-Adviser"--"Shareholder Services Plan" for more
information.)
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 April 1, 1998, New York Life Trust Company and BHC Securities Inc. owned a
controlling interest (as that term is defined under the 1940 Act) of the Money
Market 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.
================================================================================
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.
20
<PAGE>
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 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.
21
<PAGE>
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 Securities Act of 1933. 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. Under the Management Agreement, the manager is responsible for the
Company's business affairs, subject to the supervision of the Company's
Directors. The manager, among other things, furnishes the Fund with office
facilities and with ordinary clerical, bookkeeping and recordkeeping services.
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.
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%.
================================================================================
SHAREHOLDER SERVICES PLAN
================================================================================
The Company has adopted a Shareholder Services Plan with respect to the
Institutional Service Class of shares. 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 Institutional Service Class of the Fund, a
shareholder services fee at the rate of 0.25% on an annualized basis of the
average daily net asset value of the Institutional Service Class of the
Fund.
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 Institutional Service Class of the
Fund. 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 Plan and its 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
Institutional Service Class of shares of the Fund to an annual rate of 0.75% of
average daily net assets through December 31, 1998. As long as this temporary
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
after December 31, 1998, at which time the Fund's expenses may increase and its
yield may be reduced, depending on the total assets of the Fund.
22
<PAGE>
================================================================================
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 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 SECURITIES RATINGS
================================================================================
================================================================================
MOODY'S INVESTORS SERVICE, INC.
================================================================================
Corporate and Municipal Bond Ratings
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high-grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risks appear somewhat larger than the Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper-medium-grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa: Bonds which are rated Baa are considered as medium-grade obligations,
(i.e., they are neither highly protected nor poorly secured). Interest payments
and principal security
23
<PAGE>
appear adequate for the present but certain protective elements may be lacking
or may be characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have speculative
characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca: Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
Moody's applies numerical modifiers, 1, 2, and 3 in each generic rating
classified from Aa through Caa. The modifier 1 indicates that the issue ranks in
the higher end of its generic rating category; the modifier 2 indicates a
mid-range ranking; and the modifier 3 indicates that the issue ranks in the
lower end of its generic rating category.
Advance refunded issues that are secured by escrowed funds held in cash, held in
trust, reinvested in direct non-callable United States government obligations or
non-callable obligations unconditionally guaranteed by the U.S. government are
identified with a hatchmark (#) symbol, i.e., #Aaa.
Moody's assigns conditional ratings to bonds for which the security depends upon
the completion of some act or the fulfillment of some condition. These are bonds
secured by: (a) earnings of projects under construction; (b) earnings of
projects unseasoned in operating experience; (c) rentals that begin when
facilities are completed; or (d) payments to which some other limiting condition
attaches. The parenthetical rating denotes probable credit stature upon
completion of construction or elimination of basis of condition, e.g.,
Con.(Baa).
Municipal Short-Term Loan Ratings
MIG 1/VMIG 1: This designation denotes best quality. There is present strong
protection by established cash flows, superior liquidity support or demonstrated
broad-based access to the market for refinancing.
MIG 2/VMIG 2: This designation denotes high quality. Margins of protection are
ample although not so large as in the preceding group.
MIG 3/VMIG 3: This designation denotes favorable quality. All security elements
are accounted for but there is lacking the undeniable strength of the preceding
grades. Liquidity and cash flow protection may be narrow and market access for
refinancing is likely to be less well established.
MIG 4/VMIG 4: This designation denotes adequate quality. Protection commonly
regarded as required of an investment security is present and although not
distinctly or predominantly speculative, there is specific risk.
SG: This designation denotes speculative quality. Debt instruments in this
category lack margins of protection.
Corporate Short-Term Debt Ratings
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 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.
24
<PAGE>
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
================================================================================
================================================================================
CORPORATE AND MUNICIPAL LONG TERM DEBT RATINGS
================================================================================
Investment grade
AAA: Debt rated AAA has the highest rating assigned by Standard & Poor's. The
obligor's capacity to meet its financial commitment on the obligation is
extremely strong.
AA: Debt rated AA differs from the highest rated issues only in small degree.
The obligor's capacity to meet its financial commitment on the obligation is
very strong.
A: Debt rated A is somewhat more susceptible to the adverse effects of changes
in circumstances and economic conditions than debt in higher rated categories.
However, the obligor's capacity to meet its financial commitment on the
obligation is still strong.
BBB: Debt rated BBB exhibits adequate protection parameters. However, adverse
economic conditions or changing circumstances are more likely to lead to a
weakened capacity of the obligor to meet its financial commitment on the
obligation.
Speculative Grade
Debt rated BB, B, CCC, CC, and C is regarded as having significant speculative
characteristics with respect to capacity to pay interest and repay principal. BB
indicates the least degree of speculation and C the highest. While such debt
will likely have some quality and protective characteristics, these may be
outweighed by large uncertainties or major exposures to adverse conditions.
BB: Debt rated BB is less vulnerable to nonpayment than other speculative
issues. However, it faces major ongoing uncertainties or exposure to adverse
business, financial, or economic conditions which could lead to the obligor's
inadequate capacity.
B: Debt rated B is more vulnerable to nonpayment than obligations rated BB, but
the obligor currently has the capacity to meet its financial commitment on the
obligation. Adverse business, financial, or economic conditions will likely
impair the obligor's capacity or willingness to meet its financial commitment on
the obligation.
CCC: Debt rated CCC is currently vulnerable to nonpayment and is dependent upon
favorable business, financial, and economic conditions. In the event of adverse
business, financial or economic conditions, the obligor is not likely to have
the capacity to meet its financial commitment on the obligation.
CC: An obligation rated CC is currently highly vulnerable to nonpayment.
C: The C rating may be used to cover a situation where a bankruptcy petition has
been filed, or similar action has been taken, but debt service payments are
continued.
D: Debt rated D is in payment default. The D rating category is used when
payments on an obligation are not made on the date due even if the applicable
grace period has not expired, unless S&P believes that such payments will be
made during such grace period. The D rating will also be used upon the filing of
a bankruptcy petition, or the taking of similar action, if debt service payments
are jeopardized.
Plus (+) or Minus (-): The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
Debt obligations of issuers outside the United States and its territories are
rated on the same basis as domestic corporate and municipal issues. The ratings
measure the creditworthiness of the obligor but do not take into account
currency exchange and related uncertainties.
Short-Term Rating Definitions
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.
25
<PAGE>
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.
26
<PAGE>
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.
[LOGO]
MAINSTAY(R)
INSTITUTIONAL
FUNDS INC.
<PAGE>
MAINSTAY INSTITUTIONAL FUNDS INC.
51 Madison Avenue
New York, New York 10010
STATEMENT OF ADDITIONAL INFORMATION
Date: May 1, 1998
MainStay Institutional Funds Inc. (the "Company") is an open-end
management investment company currently consisting of eleven separate investment
portfolios: EAFE Index Fund, Growth Equity Fund, Indexed Equity Fund,
International Equity Fund, Multi-Asset Fund, Value Equity Fund, Bond Fund,
Indexed Bond Fund, International Bond Fund, Money Market Fund, and Short-Term
Bond Fund (individually or collectively referred to as a "Fund" or the "Funds").
This Statement of Additional Information supplements the information
contained in the Company's Institutional Class, Institutional Service Class and
Money Market Fund-Institutional Service Class Prospectuses dated May 1, 1998
(collectively, 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 each Class' Prospectuses.
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 related 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
Funds or the Distributor. This Statement of Additional Information and the
related 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>
TABLE OF CONTENTS
<TABLE>
<S> <C>
ADDITIONAL INVESTMENT POLICIES OF THE MONEY MARKET FUND..................... 1
INVESTMENT OBJECTIVES AND POLICIES.......................................... 3
Arbitrage.......................................................... 3
Borrowing.......................................................... 4
Commercial Paper................................................... 4
Repurchase Agreements and Reverse Repurchase
Agreements....................................................... 5
Government Securities.............................................. 6
Lending of Portfolio Securities.................................... 6
Municipal Bonds.................................................... 7
Banking Industry and Savings and Loan Industry
Obligations...................................................... 8
Floating and Variable Rate Securities.............................. 8
Foreign Securities................................................. 9
American Depositary Receipts ("ADRs").............................. 11
When-Issued and Firm or Standby Commitment Agreements.............. 11
Mortgage-Related and Other Asset-Backed Securities................. 12
Brady Bonds........................................................ 19
Loan Participation Interests....................................... 20
Options on Securities.............................................. 22
Options on Foreign Currencies...................................... 26
Futures Transactions............................................... 28
Swap Agreements.................................................... 38
Forward Foreign Currency Contracts................................. 40
Foreign Index-Linked Instruments................................... 44
Warrants........................................................... 45
Short Sales Against the Box........................................ 45
High Yield/High Risk Securities.................................... 46
Zero Coupon Bonds.................................................. 47
INDEXED EQUITY FUND SPECIAL CONSIDERATIONS.................................. 47
INVESTMENT RESTRICTIONS..................................................... 48
MANAGEMENT OF THE COMPANY................................................... 52
Directors and Officers............................................. 52
Compensation Table................................................. 55
Management Agreement............................................... 56
Sub-Advisory Agreements............................................ 58
Distributor........................................................ 60
Service Fees....................................................... 61
PURCHASES AND REDEMPTIONS................................................... 62
PORTFOLIO TRANSACTIONS AND BROKERAGE........................................ 63
NET ASSET VALUE............................................................. 68
</TABLE>
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<TABLE>
<S> <C>
TAX INFORMATION............................................................. 70
PERFORMANCE INFORMATION..................................................... 79
OTHER INFORMATION........................................................... 84
Capitalization..................................................... 84
Effective Maturity................................................. 84
Beneficial Ownership of the Funds.................................. 85
Code of Ethics..................................................... 87
Independent Accountants............................................ 88
Legal Counsel...................................................... 88
Financial Statements............................................... 88
Registration Statement............................................. 88
</TABLE>
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<PAGE>
ADDITIONAL INVESTMENT POLICIES OF THE MONEY MARKET FUND
Each Fund has a separate investment objective or objectives which it
pursues through separate investment policies, as described in the Prospectus.
The following discussion elaborates on the presentation of the Money Market
Fund's investment policies contained in the Prospectus.
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 a rule of the Securities and Exchange Commission ("SEC"), 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
Sub-Adviser 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 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 Gurantee is substituted with another Demand
Feature or Guarantee; (5) if it is a security issued by a money market fund
registered with the 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
<PAGE>
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 seventy five percent of its total assets, shall not have
invested more than ten percent 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 five
percent 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 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
- 2 -
<PAGE>
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 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.
INVESTMENT OBJECTIVES AND POLICIES
The Prospectus discusses the investment objectives of the Funds and the
policies to be employed to achieve those objectives. This section contains
supplemental information concerning certain of the securities and other
instruments in which the Funds may invest, the investment policies and portfolio
strategies the Funds may utilize, and certain risks involved with those
investments, policies and strategies.
Arbitrage
Each Fund may sell in one market a security which it owns and
simultaneously purchase the same security in another market, or it may buy a
security in one market and simultaneously sell it in another market, in order to
take advantage of differences in the price of the security in the different
markets. The Funds do not actively engage in arbitrage. Such transactions may be
entered into only with respect to debt securities and will occur only in a
dealer's market where the buying and selling dealers involved confirm their
prices to the Fund at the time of the
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<PAGE>
transaction, thus eliminating any risk to the assets of a Fund. Such
transactions, which involve costs to a Fund, may be limited by the requirements
imposed on each Fund to qualify as a "regulated investment company" under the
Internal Revenue Code of 1986, as amended (the "Code").
Borrowing
A 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 Investment Company Act of 1940, as amended (the "1940 Act") requires a 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, a 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 a Fund's
borrowings, a 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 a 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. A 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
Each Fund may invest in commercial paper. Each 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 Fund's Sub-Adviser
determines that the commercial 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
Securities Ratings" in the Prospectus.)
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<PAGE>
Repurchase Agreements and Reverse Repurchase Agreements
The Funds 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 a 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-Advisers seek 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. No
Fund will invest more than 10% of its net assets (taken at current market value)
(15% in the case of the International Equity and International Bond Funds) in
repurchase agreements maturing in more than seven days.
Each Fund may enter into reverse repurchase agreements with banks or
broker-dealers, which involves the sale of a security by a 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. Each 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
- 5 -
<PAGE>
reverse repurchase agreements by a Fund creates leverage which increases a
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.
Standard & Poor's 500 Composite Stock Price Index
The Indexed Equity Fund and the Multi-Asset Fund are managed in part to
replicate the Standard & Poor's 500 Composite Stock Price Index (the "S&P 500").
Because of the market-value weighing, the 20 largest companies in the S&P 500
currently account for approximately 29.32% of the Index. As of December 31,
1997, the five largest weightings in the S&P 500 as a percentage of net assets
were: General Electric Company (3.18%); Coca Cola Co. (2.18%); Microsoft
Corporation (2.06%); Exxon Corporation (2.00%); and Merck & Co. (1.68%).
Lending of Portfolio Securities
In accordance with guidelines adopted by the Board of Directors, each 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.
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<PAGE>
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 certain of the Funds, has entered into an
agency agreement with Merrill Lynch Portfolio Services, Inc. which acts as the
Funds' 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 Funds' Sub-Advisers.
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 a Sub-Adviser, the consideration which can be earned
currently from securities loans of this type justifies the attendant risk. If a
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 lending Fund. Under the guidelines adopted by the Board of Directors, a
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.
Municipal Bonds
Municipal bonds are debt obligations of state and local governments,
agencies and authorities, which are issued to obtain funds for various public
purposes. Two principal classifications of municipal bonds are "general
obligation" and "revenue" bonds. General obligation bonds are secured by the
issuer's pledge of its full faith, credit and taxing power for the payment of
principal and interest. Revenue bonds are payable only from the revenues derived
from a particular facility or class of facilities, or, in some cases, from the
proceeds of a special excise or specific revenue source. Industrial development
bonds or private activity bonds are issued by or on behalf of public authorities
to obtain funds for privately operated facilities and are, in most cases,
revenue bonds which do not generally carry the pledge of the full faith and
credit of the issuer of such bonds, but depend for payment on the ability of the
industrial user to meet its obligations (or any property pledged as security).
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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. Each Fund may not invest in time deposits
maturing in more than seven days which are subject to withdrawal penalties. Each
Fund will limit it investment in time deposits for which there is a penalty for
early withdrawal to 10% of its net assets.
Each 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 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 a Fund with a certain degree of protection against rises in
interest rates, a 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
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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 a Fund's limitation on investments in such securities.
Foreign Securities
The EAFE Index Fund, International Bond Fund and International Equity Fund
will, and the Bond Fund, Growth Equity Fund, Multi-Asset Fund, Short-Term Bond
Fund and Value Equity Fund may invest in securities of foreign issuers. The
Money Market Fund may purchase U.S. dollar-denominated securities of foreign
issuers. The Indexed Equity Fund and Indexed Bond Fund will invest in foreign
securities to the extent such securities are included in the securities that
comprise the Standard & Poor's 500 Composite Stock Price Index and the Salomon
Brothers Broad Investment Grade Bond Index, respectively. The International Bond
Fund and International Equity Fund may invest, without limit, subject to the
other investment policies applicable to the Fund, in U.S. dollar-denominated and
non-dollar denominated foreign debt securities and in certificates of deposit
issued by foreign banks and foreign branches of United States banks, to any
extent deemed appropriate by MacKay-Shields. Securities acquired by the
International Bond Fund may be denominated in multinational currency units such
as the European Currency Unit ("ECU"). Securities of issuers within a given
country may be denominated in the currency of another country.
Foreign investing involves the possibility of expropriation,
nationalization or 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
custodial costs than domestic securities transactions. In addition, the foreign
securities
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markets of many of the countries in which the Funds may invest may also be
smaller, less liquid and subject to greater price volatility than those in the
United States.
The Growth Equity Fund, Indexed Bond Fund, International Bond Fund,
International Equity Fund, Multi-Asset Fund and Value Equity Fund may invest in
emerging market countries, which presents risks in greater degree than, and in
addition to, those presented by investment in foreign issuers in general. A
number of emerging market countries restrict, to varying degrees, foreign
investment in stocks. Repatriation of investment income, capital and the
proceeds of sales by foreign investors may require governmental registration
and/or approval in some emerging market countries. A number of the currencies of
developing countries have experienced significant declines against the U.S.
dollar in recent years and devaluation may occur subsequent to investments in
these currencies by the Funds. Inflation and rapid fluctuations in inflation
rates have had and may continue to have negative effects on the economies and
securities markets of certain emerging market countries.
Many of the emerging securities markets are relatively small, have low
trading volumes, suffer periods of relative illiquidity, and are characterized
by significant price volatility. There is a risk in emerging market countries
that a future economic or political crisis could lead to price controls, forced
mergers of companies, expropriation or confiscatory taxation, seizure,
nationalization or creation of government monopolies, any of which may have a
detrimental effect on the Funds' investments.
To different degrees, the Bond Fund, Indexed Bond Fund, International Bond
Fund, International Equity Fund and Short-Term Bond Fund are permitted to invest
in debt securities or obligations of foreign governments, agencies, and
supranational organizations ("Sovereign Debt"). Investments in Sovereign Debt
can involve greater risks than investing in U.S. Government Securities. The
issuer of the debt or the governmental authorities that control the repayment of
the debt may be unable or unwilling to repay principal or interest when due in
accordance with the terms of such debt, and a Fund may have limited legal
recourse in the event of default.
The occurrence of political, social or diplomatic changes in one or more
of the countries issuing Sovereign Debt could adversely affect a Fund's
investments. Political changes or a deterioration of a country's domestic
economy or balance of trade may affect the willingness of countries to service
their Sovereign Debt. While the investment advisers intend to manage the Funds'
portfolios in a manner that will minimize the exposure
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to such risks, there can be no assurance that adverse political changes will not
cause a Fund to suffer a loss of interest or principal on any of its holdings.
American Depositary Receipts ("ADRs")
ADRs (sponsored or unsponsored) are receipts typically issued by a U.S.
bank or trust company evidencing ownership of the underlying foreign securities.
Most ADRs are traded on a U.S. stock exchange. Issuers of unsponsored ADRs are
not contractually obligated to disclose material information in the U.S. and,
therefore, there may not be a correlation between such information and the
market value of the unsponsored ADR. European Depositary Receipts and
International Depositary Receipts are receipts typically issued by a European
bank or trust company evidencing ownership of the underlying foreign securities.
Global Depositary Receipts are receipts issued by either a U.S. or non-U.S.
banking institution evidencing ownership of the underlying foreign securities.
When-Issued and Firm or Standby Commitment Agreements
Each 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 a Fund are held in cash pending the settlement of a purchase of
securities, that Fund would earn no income; however, it is the Company's
intention that each 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 a 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 a Fund's net asset value or income will be exposed to additional risk by
the purchase of securities on a
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when-issued or firm commitment basis. Each 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
Funds invest may be particularly sensitive to changes in prevailing interest
rates, and, like the other investments of the Funds, the ability of a Fund to
successfully utilize these instruments may depend in part upon 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.
A Fund will invest only in mortgage-related (or other asset-backed)
securities either (i) issued by U.S. government-sponsored corporations
(currently GNMA, FHLMC and FNMA), or (ii) privately issued securities rated Baa
or better by Moody's or BBB by S&P or, if not rated, of comparable investment
quality as determined by the Fund's investment adviser. In addition, if any such
security is determined to be illiquid, a Fund will limit its investments in
these and other illiquid instruments to not more than 10% of its net assets (15%
in the case of the International Bond Fund and International Equity Fund).
Mortgage Pass-Through Securities. Mortgage pass-through securities, which
are securities 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
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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 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.
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<PAGE>
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 a 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 a Fund to a lower rate of return upon
reinvestment of principal. Also, if a security subject to repayment has been
purchased at a premium, in the event of prepayment the value of the premium
would be lost. No Fund will purchase mortgage-related securities or any other
assets which in the opinion of the Fund's Sub-Adviser are illiquid if, as a
result, more than 10% of the value of the Fund's net assets will be illiquid
(15% in the case of the International Bond or International Equity Funds).
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
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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 Funds 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 a Fund's net assets would be invested in any one
CMO, more than 10% of a Fund's net assets would be invested in CMOs and other
investment company securities in the aggregate, or a 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.
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<PAGE>
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 Funds' Sub-Advisers expect 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, a Fund's Sub-Adviser will, consistent with the Fund's
investment objectives, policies and quality standards, consider 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 a
portfolio
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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. Each of the Funds limits its
investment in CMO residuals to less than 5% of its net assets.
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 a Fund's yield to maturity from these securities. If the underlying
mortgage assets experience greater than anticipated prepayments of principal, a
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
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developed and, accordingly, these securities may be deemed "illiquid" and
subject to a 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 Funds may invest may be particularly sensitive to changes in
prevailing interest rates, and, like the other investments of the Funds, the
ability of a Fund to successfully utilize these instruments may depend in part
upon the ability of a Sub-Adviser to forecast interest rates and other economic
factors correctly. If a Sub-Adviser incorrectly forecasts such factors and has
taken a position in mortgage-backed securities that is or becomes contrary to
prevailing market trends, the Funds 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 a 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 a 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
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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 Funds' Sub-Advisers expect 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 Receivabless
("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 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 a Fund's investment objective and policies, a Fund's
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.
Brady Bonds
The International Bond Fund may invest a portion of its assets in Brady
Bonds, which are securities created through the exchange of existing commercial
bank loans to sovereign entities for new obligations in connection with debt
restructurings. Brady Bonds are not considered U.S. Government securities.
Brady Bonds may be collateralized or uncollateralized and are issued in
various currencies (primarily the U.S. dollar). U.S. dollar-denominated,
collateralized Brady Bonds, which may be fixed rate par bonds or floating rate
discount bonds, are generally collateralized in full as to principal by U.S.
Treasury zero coupon bonds having the same maturity as the Brady Bonds.
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Interest payments on these Brady Bonds generally are collateralized on a
one-year or longer rolling-forward basis by cash or securities in an amount
that, in the case of fixed rate bonds, is equal to at least one year of interest
payments or, in the case of floating rate bonds, initially is equal to at least
one year's interest payments based on the applicable interest rate at that time
and is adjusted at regular intervals thereafter. Certain Brady Bonds are
entitled to "value recovery payments" in certain circumstances, which in effect
constitute supplemental interest payments but generally are not collateralized.
Brady Bonds are often viewed as having three or four valuation components: (i)
the collateralized repayment of principal at final maturity; (ii) the
collateralized interest payments; (iii) the uncollateralized interest payments;
and (iv) any uncollateralized repayment of principal at maturity (these
uncollateralized amounts constitute the "residual risk").
Brady Bonds involve various risk factors, including the history of
defaults with respect to commercial bank loans by public and private entities of
countries issuing Brady Bonds. Investments in Brady Bonds are to be viewed as
speculative. There can be no assurance that Brady Bonds in which the Fund may
invest will not be subject to restructuring arrangements or to requests for new
credit, which may cause the Fund to suffer a loss of interest or principal on
any of its holdings.
Loan Participation Interests
A 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, a 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, a 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. A
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. A Fund
will not act as an agent bank, a guarantor or
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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 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. A 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 a 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 a 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.
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When a Fund acts as co-lender in connection with a Participation Interest
or when a 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 appropriate credit remedies against the borrower.
In acquiring Participation Interests a Fund 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 a Fund disposing of such
securities at a substantial discount from face value or holding such security
until maturity. When a 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 Funds consider Participation
Interests not subject to puts to be illiquid.
Options on Securities
Writing Call Options. Each Fund, as specified for that Fund in the
Prospectus, may sell ("write") covered call options on its portfolio securities
in an attempt to enhance investment performance. A call option sold by a Fund is
a short-term contract, having a duration of nine months or less, which gives the
purchaser of the option the right to buy, and the writer of the option--in
return for a premium received--the obligation to sell, the underlying security
at the exercise price upon the exercise of the option at any time prior to the
expiration date, regardless of the market price of the security during the
option period. A call option on a stock or bond index gives the purchaser of the
option, in return for the premium paid, the right to receive from the seller
cash equal to the difference between the closing price of the index and the
exercise price of the option. A call option may be covered by, among other
things, the writer's owning the underlying security throughout the option
period, or by holding, on a share-for-share basis, a call on the same security
as the call written, where the exercise price of the call held is equal to or
less than the price of the call written, or greater than the exercise price of a
call written if the difference is maintained by the Fund in liquid assets in a
segregated account with its custodian.
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A Fund will write covered call options both to reduce the risks associated
with certain of its investments and to increase total investment return through
the receipt of premiums. In return for the premium income, the Fund will give up
the opportunity to profit from an increase in the market price of the underlying
security above the exercise price so long as its obligations under the contract
continue, except insofar as the premium represents a profit. Moreover, in
writing the call option, the Fund will retain the risk of loss should the price
of the security decline, which loss the premium is intended to offset in whole
or in part. A Fund, in writing "American Style" call options, must assume that
the call may be exercised at any time prior to the expiration of its obligations
as a writer, and that in such circumstances the net proceeds realized from the
sale of the underlying securities pursuant to the call may be substantially
below the prevailing market price. In contrast, "European Style" options may
only be exercised on the expiration date of the option. Covered call options and
the securities underlying such options will be listed on national securities
exchanges, except for certain transactions in options on debt securities and
foreign securities.
A Fund may protect itself from further losses due to a decline in value of
the underlying security or from the loss of ability to profit from appreciation
by buying an identical option, in which case the purchase cost may offset the
premium. In order to do this, the Fund makes a "closing purchase
transaction"--the purchase of a call option on the same security with the same
exercise price and expiration date as the covered call option which it has
previously written on any particular security. The Fund will realize a gain or
loss from a closing purchase transaction if the amount paid to purchase a call
option in a closing transaction is less or more than the amount received from
the sale of the covered call option. Also, because increases in the market price
of a call option will generally reflect increases in the market price of the
underlying security, any loss resulting from the closing out of a call option is
likely to be offset in whole or in part by unrealized appreciation of the
underlying security owned by the Fund. When a security is to be sold from the
Fund's portfolio, the Fund will first effect a closing purchase transaction so
as to close out any existing covered call option on that security.
A closing purchase transaction may be made only on a national or foreign
securities exchange (an "Exchange") which provides a secondary market for an
option with the same exercise price and expiration date. There is no assurance
that a liquid secondary market on an Exchange or otherwise will exist for any
particular option, or at any particular time, and for some options no secondary
market on an Exchange or otherwise may
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exist. If a Fund is unable to effect a closing purchase transaction involving an
exchange-traded option, the Fund will not sell the underlying security until the
option expires or the Fund delivers the underlying security upon exercise.
Over-the-counter options differ from exchange-traded options in that they are
two-party contracts with price and other terms negotiated between buyer and
seller, and generally do not have as much market liquidity as exchange-traded
options. Therefore, a closing purchase transaction for an over-the-counter
option may in many cases only be made with the other party to the option.
Each Fund pays brokerage commissions and dealer spreads in connection with
writing covered call options and effecting closing purchase transactions, as
well as for purchases and sales of underlying securities. The writing of covered
call options could result in significant increases in a Fund's portfolio
turnover rate, especially during periods when market prices of the underlying
securities appreciate. Subject to the limitation that all call and put option
writing transactions be covered, the International Bond Fund and International
Equity Fund may, to the extent determined appropriate by the Sub-Adviser, engage
without limitation in the writing of options on their portfolio securities.
Writing Put Options. Each Fund, as specified for the Fund in the
Prospectus, may also write covered put options. A put option is a short-term
contract which gives the purchaser of the put option, in return for a premium,
the right to sell the underlying security to the seller of the option at a
specified price during the term of the option. A put option written by the Fund
is "covered" if the Fund maintains liquid assets with a value equal to the
exercise price in a segregated account with its custodian. A put option is also
"covered" if the Fund holds on a share-for-share basis a put on the same
security as the put written, where the exercise price of the put held is equal
to or greater than the exercise price of the put written, or less than the
exercise price of the put written if the difference is maintained by the Fund in
liquid assets in a segregated account with its custodian.
The premium which the Funds receive from writing a put option will
reflect, among other things, the current market price of the underlying
security, the relationship of the exercise price to such market price, the
historical price volatility of the underlying security, the option period,
supply and demand and interest rates.
The Funds may effect a closing purchase transaction to realize a profit on
an outstanding put option or to prevent an outstanding put option from being
exercised. If a Fund is able
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to enter into a closing purchase transaction, the Fund will realize a profit or
loss from such transaction if the cost of such transaction is less or more than
the premium received from the writing of the option. After writing a put option,
the Fund may incur a loss equal to the difference between the exercise price of
the option and the sum of the market value of the underlying security plus the
premium received from the sale of the option.
In addition, the Funds may also write straddles (combinations of covered
puts and calls on the same underlying security). The extent to which the Funds
may write covered call options and enter into so-called "straddle" transactions
involving put or call options may be limited by the requirements of the Internal
Revenue Code for qualification as a regulated investment company and the
Company's intention that each Fund qualify as such.
Purchasing Options. Each Fund, as specified for the Fund in the
Prospectus, may purchase put or call options which are traded on an Exchange or
in the over-the-counter market. Options traded in the over-the-counter market
may not be as actively traded as those listed on an Exchange. Accordingly, it
may be more difficult to value such options and to be assured that they can be
closed out at any time. The Funds will engage in such transactions only with
firms of sufficient creditworthiness so as to minimize these risks.
The Funds may purchase put options on securities to protect their holdings
in an underlying or related security against a substantial decline in market
value. Securities are considered related if their price movements generally
correlate with one another. The purchase of put options on securities held in
the portfolio or related to such securities will enable a Fund to preserve, at
least partially, unrealized gains occurring prior to the purchase of the option
on a portfolio security without actually selling the security. In addition, the
Fund will continue to receive interest or dividend income on the security.
The Funds may also purchase call options on securities the Funds intend to
purchase to protect against substantial increases in prices of such securities
pending their ability to invest in an orderly manner in such securities. In
order to terminate an option position, the Funds may sell put or call options
identical to those previously purchased, which could result in a net gain or
loss depending on whether the amount received on the sale is more or less than
the premium and other transaction costs paid on the put or call option when it
was purchased.
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Special Risks Associated With Options On Securities. There can be no
assurance that viable markets will develop or continue in the United States or
abroad for options on securities. If a put or call option purchased by a Fund is
not sold when it has remaining value, and if the market price of the underlying
security, in the case of a put, remains equal to or greater than the exercise
price, or, in the case of a call, remains less than or equal to the exercise
price, the Fund will not be able to exercise profitably the option and will lose
its entire investment in the option. Also, the price of a put or call option
purchased to hedge against price movements in a related security may move more
or less than the price of the related security.
Options on Foreign Currencies
Each Fund, as specified for the Fund in the Prospectus, may purchase and
write options on foreign currencies for hedging purposes in a manner similar to
that of the Fund's transactions in currency futures contracts or forward
contracts. A Fund may purchase and write put and call options on foreign
currencies for the purpose of protecting against declines in the dollar value of
foreign portfolio securities and against increases in the U.S. dollar cost of
foreign securities to be acquired. A fund may also use foreign currency options
to protect against potential losses in positions denominated in one foreign
currency against another foreign currency in which the Fund's assets are or may
be invested. For example, a decline in the dollar value of a foreign currency in
which portfolio securities are denominated will reduce the dollar value of such
securities, even if their value in the foreign currency remains constant. In
order to protect against such diminutions in the value of portfolio securities,
a Fund may purchase put options on the foreign currency. If the value of the
currency does decline, that Fund will have the right to sell such currency for a
fixed amount of dollars which exceeds the market value of such currency,
resulting in a gain that may offset, in whole or in part, the negative effect of
currency depreciation on the value of the Fund's securities denominated in that
currency.
Conversely, if a rise in the dollar value of a currency in which
securities to be acquired are denominated is projected, thereby increasing the
cost of such securities, a Fund may purchase call options on such currency. If
the value of such currency does increase, the purchase of such call options
would enable the Fund to purchase currency for a fixed amount of dollars which
is less than the market value of such currency, resulting in a gain that may
offset, at least partially, the effect of any currency-related increase in the
price of securities the Fund intends to acquire. As in the case of other
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types of options transactions, however, the benefit a Fund derives from
purchasing foreign currency options will be reduced by the amount of the premium
and related transaction costs. In addition, if currency exchange rates do not
move in the direction or to the extent anticipated, a Fund could sustain losses
on transactions in foreign currency options which would deprive it of a portion
or all of the benefits of advantageous changes in such rates.
A Fund may also write options on foreign currencies for hedging purposes.
For example, if a Fund anticipates a decline in the dollar value of foreign
currency-denominated securities due to declining exchange rates, it could,
instead of purchasing a put option, write a call option on the relevant
currency. If the expected decline occurs, the option will most likely not be
exercised, and the diminution in value of portfolio securities will be offset by
the amount of the premium received by the Fund.
Similarly, instead of purchasing a call option to hedge against an
anticipated increase in the dollar cost of securities to be acquired, a Fund
could write a put option on the relevant currency. If rates move in the manner
projected, the put option will expire unexercised and allow the Fund to offset
such increased cost up to the amount of the premium. As in the case of other
types of options transactions, however, the writing of a foreign currency option
will constitute only a partial hedge up to the amount of the premium, and only
if rates move in the expected direction. If unanticipated exchange rate
fluctuations occur, the option may be exercised and a Fund would be required to
purchase or sell the underlying currency at a loss which may not be fully offset
by the amount of the premium. As a result of writing options on foreign
currencies, a Fund also may be required to forego all or a portion of the
benefits which might otherwise have been obtained from favorable movements in
currency exchange rates.
A call option written on foreign currency by a Fund is "covered" if that
Fund owns the underlying foreign currency subject to the call or securities
denominated in that currency or has an absolute and immediate right to acquire
that foreign currency without additional cash consideration (or for additional
cash consideration held in a segregated account by its custodian) upon
conversion or exchange of other foreign currency held in its portfolio. A call
option is also covered if a Fund holds a call on the same foreign currency for
the same principal amount as the call written where the exercise price of the
call held (a) is equal to or less than the exercise price of the call written or
(b) is greater than the exercise price of the call written if the amount of the
difference is maintained by a Fund in liquid assets in a segregated account with
its custodian.
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Options on foreign currencies to be written or purchased by a Fund will be
traded on U.S. and foreign exchanges or over-the-counter. Exchange-traded
options generally settle in cash, whereas options traded over-the-counter may
settle in cash or result in delivery of the underlying currency upon exercise of
the option. As with other kinds of option transactions, however, the writing of
an option on foreign currency will constitute only a partial hedge up to the
amount of the premium received and a Fund could be required to purchase or sell
foreign currencies at disadvantageous exchange rates, thereby incurring losses.
The purchase of an option on foreign currency may constitute an effective hedge
against exchange rate fluctuations, although, in the event of rate movements
adverse to a Fund's position, a Fund may forfeit the entire amount of the
premium plus related transaction costs.
Futures Transactions
Each Fund, as specified for the Fund in the Prospectus, may purchase and
sell futures contracts on securities, interest rates, foreign currency and on
indexes of securities, to hedge against anticipated changes in interest rates
and other economic factors that might otherwise have an adverse effect upon the
value of a Fund's portfolio securities. An interest rate or stock index futures
contract is an agreement to take or make delivery of an amount of cash based on
the difference between the value of the index at the beginning and at the end of
the contract period. A futures contract on a foreign currency is an agreement to
buy or sell a specified amount of a currency for a set price on a future date.
The Funds, as specified in the Prospectus, may also enter into such futures
contracts in order to lengthen or shorten the average maturity or duration of
the Fund's portfolio. For example, a Fund may purchase futures contracts as a
substitute for the purchase of longer-term debt securities to lengthen the
average duration of a Fund's portfolio of fixed-income securities. A Fund may
purchase and sell stock index futures to hedge its securities portfolio with
regard to market (systematic) risk (involving the market's assessment of overall
economic prospects), as distinguished from stock-specific risk (involving the
market's evaluation of the merits of the issuer of a particular security).
The Funds, as specified for the Fund in the Prospectus, may also purchase
and sell other futures when deemed appropriate, in order to hedge the equity or
non-equity portions of their portfolios. In addition, each Fund, as specified
for the Fund in the Prospectus, may enter into contracts for the future delivery
of foreign currencies to hedge against changes in currency exchange rates. Each
of the Funds, as specified for the Fund in the Prospectus, may also purchase and
write put and call options
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on futures contracts of the type into which such Fund is authorized to enter and
may engage in related closing transactions. In the United States, all such
futures on securities, debt index futures, stock index futures, foreign currency
futures and related options will be traded on exchanges that are regulated by
the Commodity Futures Trading Commission ("CFTC"). Subject to compliance with
applicable CFTC rules, the Funds also may enter into futures contracts traded on
foreign futures exchanges as long as trading on the aforesaid foreign futures
exchanges does not subject a Fund to risks that are materially greater than the
risks associated with trading on U.S. exchanges.
A futures contract is an agreement to buy or sell a security or currency
(or to deliver a final cash settlement price in the case of a contract relating
to an index or otherwise not calling for physical delivery at the end of trading
in the contracts), for a set price in a future month. In the United States,
futures contracts are traded on boards of trade which have been designated
"contract markets" by the CFTC. Futures contracts trade on these markets through
an "open outcry" auction on the exchange floor. Currently, there are futures
contracts based on a variety of instruments, indexes and currencies.
When a purchase or sale of a futures contract is made by a Fund, the Fund
is required to deposit with its custodian (or broker, if legally permitted) a
specified amount of liquid assets ("initial margin") as a partial guarantee of
its performance under the contract. The margin required for a futures contract
is set by the exchange on which the contract is traded and may be modified
during the term of the contract. The initial margin is in the nature of a
performance bond or good faith deposit on the futures contract which is returned
to the Fund upon termination of the contract assuming all contractual
obligations have been satisfied. Each Fund expects to earn interest income on
its initial margin deposits. A futures contract held by a Fund is valued daily
at the official settlement price of the exchange on which it is traded. Each
day, as the value of the security, currency or index fluctuates, the Fund pays
or receives cash, called "variation margin," equal to the daily change in value
of the futures contract. This process is known as "marking to market." Variation
margin does not represent a borrowing or loan by a Fund but is instead a
settlement between the Fund and the broker of the amount one would owe the other
if the futures contract expired. In computing daily net asset value, each Fund
will mark to market its open futures positions.
A Fund is also required to deposit and maintain margin with respect to put
and call options on futures contracts written by it. Such margin deposits will
vary depending on the nature of
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the underlying futures contract (and the related initial margin requirements),
the current market value of the option, and other futures positions held by the
Fund.
Positions taken in the futures markets are not normally held until
delivery or final cash settlement is required, but are instead liquidated
through offsetting transactions which may result in a gain or a loss. While
futures positions taken by a Fund will usually be liquidated in this manner, the
Fund may instead make or take delivery of underlying securities or currencies
whenever it appears economically advantageous to the Fund to do so. A clearing
organization associated with the exchange on which futures are traded assumes
responsibility for closing-out transactions and guarantees that as between the
clearing members of an exchange, the sale and purchase obligations will be
performed with regard to all positions that remain open at the termination of
the contract.
Futures on Debt Securities. A futures contract on a debt security is a
binding contractual commitment which, if held to maturity, will result in an
obligation to make or accept delivery, during a particular future month, of
securities having a standardized face value and rate of return. By purchasing
futures on debt securities--assuming a "long" position--a Fund will legally
obligate itself to accept the future delivery of the underlying security and pay
the agreed-upon price. By selling futures on debt securities--assuming a "short"
position--it will legally obligate itself to make the future delivery of the
security against payment of the agreed-upon price. Open futures positions on
debt securities will be valued at the most recent settlement price, unless such
price does not appear to the Directors to reflect the fair value of the
contract, in which case the positions will be valued by or under the direction
of the Directors.
Hedging by use of futures on debt securities seeks to establish more
certainly than would otherwise be possible the effective rate of return on
portfolio securities. A Fund may, for example, take a "short" position in the
futures market by selling contracts for the future delivery of debt securities
held by the Fund (or securities having characteristics similar to those held by
the Fund) in order to hedge against an anticipated rise in interest rates that
would adversely affect the value of the Fund's portfolio securities. When
hedging of this character is successful, any depreciation in the value of
portfolio securities will be substantially offset by appreciation in the value
of the futures position.
On other occasions, a Fund may take a "long" position by purchasing
futures on debt securities. This would be done, for
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example, when the Fund intends to purchase particular securities and it has the
necessary cash, but expects the rate of return available in the securities
markets at that time to be less favorable than rates currently available in the
futures markets. If the anticipated rise in the price of the securities should
occur (with its concomitant reduction in yield), the increased cost to the Fund
of purchasing the securities will be offset, at least to some extent, by the
rise in the value of the futures position taken in anticipation of the
subsequent securities purchase. A Fund may also purchase futures contracts as a
substitute for the purchase of longer-term securities to lengthen the average
duration of the Fund's portfolio.
The Fund could accomplish similar results by selling securities with long
maturities and investing in securities with short maturities when interest rates
are expected to increase or by buying securities with long maturities and
selling securities with short maturities when interest rates are expected to
decline. However, by using futures contracts as a risk management technique,
given the greater liquidity in the futures market than in the cash market, it
may be possible to accomplish the same result more easily and more quickly.
Securities Index Futures. A securities index futures contract does not
require the physical delivery of securities, but merely provides for profits and
losses resulting from changes in the market value of the contract to be credited
or debited at the close of each trading day to the respective accounts of the
parties to the contract. On the contract's expiration date a final cash
settlement occurs and the futures positions are simply closed out. Changes in
the market value of a particular stock index futures contract reflect changes in
the specified index of equity securities on which the contract is based. A stock
index is designed to reflect overall price trends in the market for equity
securities.
Stock index futures may be used to hedge a Fund's securities portfolio
with regard to market (systematic) risk, as distinguished from stock-specific
risk. Similarly, the Funds may enter into futures on debt securities indexes to
the extent they have debt securities in their portfolios. By establishing an
appropriate "short" position in securities index futures, a Fund may seek to
protect the value of its portfolio against an overall decline in the market for
securities. Alternatively, in anticipation of a generally rising market, a Fund
can seek to avoid losing the benefit of apparently low current prices by
establishing a "long" position in securities index futures and later liquidating
that position as particular securities are in fact acquired. To the extent that
these hedging strategies are successful, the Fund will be affected to a lesser
degree by
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adverse overall market price movements, unrelated to the merits of specific
portfolio securities, than would otherwise be the case. A Fund may also purchase
futures on debt securities or indexes as a substitute for the purchase of
longer-term debt securities to lengthen the average duration of the Fund's debt
portfolio.
Currency Futures. A sale of a currency futures contract creates an
obligation by a Fund, as seller, to deliver the amount of currency called for in
the contract at a specified future time for a specified price. A purchase of a
currency futures contract creates an obligation by a Fund, as purchaser, to take
delivery of an amount of currency at a specified future time at a specified
price. A Fund may sell a currency futures contract if a Sub-Adviser anticipates
that exchange rates for a particular currency will fall, as a hedge against a
decline in the value of the Fund's securities denominated in such currency. If a
Sub-Adviser anticipates that exchange rates will rise, the Fund may purchase a
currency futures contract to protect against an increase in the price of
securities denominated in a particular currency the Fund intends to purchase.
Although the terms of currency futures contracts specify actual delivery or
receipt, in most instances the contracts are closed out before the settlement
date without the making or taking of delivery of the currency. Closing out of a
currency futures contract is effected by entering into an offsetting purchase or
sale transaction. To offset a currency futures contract sold by a Fund, the Fund
purchases a currency futures contract for the same aggregate amount of currency
and delivery date. If the price in the sale exceeds the price in the offsetting
purchase, the Fund is immediately paid the difference. Similarly, to close out a
currency futures contract purchased by the Fund, the Fund sells a currency
futures contract. If the offsetting sale price exceeds the purchase price, the
Fund realizes a gain, and if the offsetting sale price is less than the purchase
price, the Fund realizes a loss.
A risk in employing currency futures contracts to protect against the
price volatility of portfolio securities denominated in a particular currency is
that changes in currency exchange rates or in the value of the futures position
may correlate imperfectly with changes in the cash prices of a Fund's
securities. The degree of correlation may be distorted by the fact that the
currency futures market may be dominated by short-term traders seeking to profit
from changes in exchange rates. This would reduce the value of such contracts
for hedging purposes over a short-term period. Such distortions are generally
minor and would diminish as the contract approached maturity. Another risk is
that a Sub-Adviser could be incorrect in its expectation as to the direction or
extent of various
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exchange rate movements or the time span within which the movements take place.
Options on Futures. For bona fide hedging and other appropriate risk
management purposes, the Funds also may purchase and write call and put options
on futures contracts which are traded on exchanges that are licensed and
regulated by the CFTC for the purpose of options trading, or, subject to
applicable CFTC rules, on foreign exchanges. A "call" option on a futures
contract gives the purchaser the right, in return for the premium paid, to
purchase a futures contract (assume a "long" position) at a specified exercise
price at any time before the option expires. A "put" option gives the purchaser
the right, in return for the premium paid, to sell a futures contract (assume a
"short" position), for a specified exercise price at any time before the option
expires.
Upon the exercise of a "call," the writer of the option is obligated to
sell the futures contract (to deliver a "long" position to the option holder) at
the option exercise price, which will presumably be lower than the current
market price of the contract in the futures market. Upon exercise of a "put,"
the writer of the option is obligated to purchase the futures contract (deliver
a "short" position to the option holder) at the option exercise price, which
will presumably be higher than the current market price of the contract in the
futures market. When an entity exercises an option and assumes a long futures
position, in the case of a "call," or a short futures position, in the case of a
"put," its gain will be credited to its futures margin account, while the loss
suffered by the writer of the option will be debited to its account. However, as
with the trading of futures, most participants in the options markets do not
seek to realize their gains or losses by exercise of their option rights.
Instead, the writer or holder of an option will usually realize a gain or loss
by buying or selling an offsetting option at a market price that will reflect an
increase or a decrease from the premium originally paid.
Options on futures contracts can be used by a Fund to hedge substantially
the same risks and for the same duration and risk management purposes as might
be addressed or served by the direct purchase or sale of the underlying futures
contracts. If the Fund purchases an option on a futures contract, it may obtain
benefits similar to those that would result if it held the futures position
itself.
The purchase of put options on futures contracts is a means of hedging a
Fund's portfolio against the risk of rising interest rates, declining securities
prices or declining exchange rates for a particular currency. The purchase of a
call option on a
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futures contract represents a means of hedging against a market advance
affecting securities prices or currency exchange rates when the Fund is not
fully invested or of lengthening the average maturity or duration of a Fund's
portfolio. Depending on the pricing of the option compared to either the futures
contract upon which it is based or upon the price of the underlying securities
or currencies, it may or may not be less risky than ownership of the futures
contract or underlying securities or currencies.
In contrast to a futures transaction, in which only transaction costs are
involved, benefits received in an option transaction will be reduced by the
amount of the premium paid as well as by transaction costs. In the event of an
adverse market movement, however, the Fund will not be subject to a risk of loss
on the option transaction beyond the price of the premium it paid plus its
transaction costs, and may consequently benefit from a favorable movement in the
value of its portfolio securities or the currencies in which such securities are
denominated that would have been more completely offset if the hedge had been
effected through the use of futures.
If a Fund writes options on futures contracts, the Fund will receive a
premium but will assume a risk of adverse movement in the price of the
underlying futures contract comparable to that involved in holding a futures
position. If the option is not exercised, the Fund will realize a gain in the
amount of the premium, which may partially offset unfavorable changes in the
value of securities held by or to be acquired for the Fund. If the option is
exercised, the Fund will incur a loss in the option transaction, which will be
reduced by the amount of the premium it has received, but which may partially
offset favorable changes in the value of its portfolio securities or the
currencies in which such securities are denominated.
The writing of a call option on a futures contract constitutes a partial
hedge against declining prices of the underlying securities or the currencies in
which such securities are denominated. If the futures price at expiration is
below the exercise price, the Fund will retain the full amount of the option
premium, which provides a partial hedge against any decline that may have
occurred in the Fund's holdings of securities or the currencies in which such
securities are denominated.
The writing of a put option on a futures contract is analogous to the
purchase of a futures contract. For example, if the Fund writes a put option on
a futures contract on debt securities related to securities that the Fund
expects to acquire and the market price of such securities increases, the net
cost
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to a Fund of the debt securities acquired by it will be reduced by the amount of
the option premium received. Of course, if market prices have declined, the
Fund's purchase price upon exercise may be greater than the price at which the
debt securities might be purchased in the securities market.
While the holder or writer of an option on a futures contract may normally
terminate its position by selling or purchasing an offsetting option of the same
series, a Fund's ability to establish and close out options positions at fairly
established prices will be subject to the maintenance of a liquid market. The
Funds will not purchase or write options on futures contracts unless the market
for such options has sufficient liquidity such that the risks associated with
such options transactions are not at unacceptable levels.
Limitations on Purchase and Sale of Futures Contracts and Options on
Futures Contracts. A Fund will only enter into futures contracts or related
options which are standardized and traded on a U.S. or foreign exchange or board
of trade, or similar entity, or quoted on an automated quotation system. In
general, the Funds will engage in transactions in futures contracts and related
options only for bona fide hedging and other appropriate risk management
purposes, and not for speculation. The Funds will not enter into futures
contracts for which the aggregate contract amounts exceed 100% of the Fund's net
assets. In addition, with respect to positions in futures and related options
that do not constitute bona fide hedging positions, a Fund will not enter into a
futures contract or futures option contract if, immediately thereafter, the
aggregate initial margin deposits relating to such positions plus premiums paid
by it for open futures option positions, less the amount by which any such
options are "in-the-money," would exceed 5% of the Fund's total assets. A call
option is "in-the-money" if the value of the futures contract that is the
subject of the option exceeds the exercise price. A put option is "in-the-money"
if the exercise price exceeds the value of the futures contract that is the
subject of the option.
When purchasing a futures contract, a Fund will maintain with its
custodian (and mark-to-market on a daily basis) liquid assets that, when added
to the amounts deposited with a futures commission merchant as margin, are equal
to the market value of the futures contract. Alternatively, the Fund may "cover"
its position by purchasing a put option on the same futures contract with a
strike price as high or higher than the price of the contract held by the Fund.
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When selling a futures contract, a Fund will maintain with its custodian
(and mark-to-market on a daily basis) liquid assets that, when added to the
amount deposited with a futures commission merchant as margin, are equal to the
market value of the instruments underlying the contract. Alternatively, the Fund
may "cover" its position by owning the instruments underlying the contract (or,
in the case of an index futures contract, a portfolio with a volatility
substantially similar to that of the index on which the futures contract is
based), or by holding a call option permitting the Fund to purchase the same
futures contract at a price no higher than the price of the contract written by
the Fund (or at a higher price if the difference is maintained in liquid assets
with the Fund's custodian).
When selling a call option on a futures contract, a Fund will maintain
with its custodian (and mark-to-market on a daily basis) liquid assets that,
when added to the amounts deposited with a futures commission merchant as
margin, equal the total market value of the futures contract underlying the call
option. Alternatively, the Fund may cover its position by entering into a long
position in the same futures contract at a price no higher than the strike price
of the call option, by owning the instruments underlying the futures contract,
or by holding a separate call option permitting the Fund to purchase the same
futures contract at a price not higher than the strike price of the call option
sold by the Fund.
When selling a put option on a futures contract, a Fund will maintain with
its custodian (and mark-to-market on a daily basis) liquid assets that equal the
purchase price of the futures contract, less any margin on deposit.
Alternatively, the Fund may cover the position either by entering into a short
position in the same futures contract, or by owning a separate put option
permitting it to sell the same futures contract so long as the strike price of
the purchased put option is the same or higher than the strike price of the put
option sold by the Fund.
The requirements for qualification as a regulated investment company also
may limit the extent to which a Fund may enter into futures or futures options.
See "Tax Information."
Risks Associated with Futures and Futures Options. There are several risks
associated with the use of futures contracts and futures options as hedging
techniques. There can be no assurance that hedging strategies using futures will
be successful. A purchase or sale of a futures contract may result in losses in
excess of the amount invested in the futures contract, which in some cases may
be unlimited. There can be no guarantee that there will be a correlation between
price movements in the hedging vehicle and in the Fund's securities
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being hedged. An incorrect correlation could result in a loss on both the hedged
securities or currencies and the hedging vehicle so that the portfolio return
might have been better had hedging not be attempted. In addition, there are
significant differences between the securities and futures markets that could
result in an imperfect correlation between the markets, causing a given hedge
not to achieve its objectives. The degree of imperfection of correlation depends
on circumstances such as variations in speculative market demand for futures and
futures options on securities, including technical influences in futures trading
and futures options, and differences between the financial instruments being
hedged and the instruments underlying the standard contracts available for
trading in such respects as interest rate levels, maturities, and
creditworthiness of issuers. A decision as to whether, when and how to hedge
involves the exercise of skill and judgment, and even a well-conceived hedge may
be unsuccessful to some degree because of market behavior or unexpected interest
rate trends.
Futures exchanges may limit the amount of fluctuation permitted in certain
futures contract prices during a single trading day. The daily limit establishes
the maximum amount that the price of a futures contract may vary either up or
down from the previous day's settlement price at the end of the current trading
session. Once the daily limit has been reached in a futures contract subject to
the limit, no more trades may be made on that day at a price beyond that limit.
The daily limit governs only price movements during a particular trading day and
therefore does not limit potential losses because the limit may work to prevent
the liquidation of unfavorable positions. For example, futures prices have
occasionally moved to the daily limit for several consecutive trading days with
little or no trading, thereby preventing prompt liquidation of positions and
subjecting some holders of futures contracts to substantial losses.
There can be no assurance that a liquid market will exist at a time when a
Fund seeks to close out a futures or a futures option position, and that Fund
would remain obligated to meet margin requirements until the position is closed.
In addition, many of the contracts discussed above are relatively new
instruments without a significant trading history. As a result, there can be no
assurance that an active secondary market will develop or continue to exist.
Lack of a liquid market for any reason may prevent the Fund from liquidating an
unfavorable position and the Fund would remain obligated to meet margin
requirements until the position is closed.
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Additional Risks of Options on Securities, Futures Contracts, Options on
Futures Contracts, and Forward Currency Exchange Contracts and Options Thereon.
Options on securities, futures contracts, options on futures contracts,
currencies and options on currencies may be traded on foreign exchanges. Such
transactions may not be regulated as effectively as similar transactions in the
United States; may not involve a clearing mechanism and related guarantees; and
are subject to the risk of governmental actions affecting trading in, or the
prices of, foreign securities. The value of such positions also could be
adversely affected by (i) other complex foreign political, legal and economic
factors, (ii) lesser availability than in the United States of data on which to
make trading decisions, (iii) delays in a Fund's ability to act upon economic
events occurring in foreign markets during non-business hours in the United
States, (iv) the imposition of different exercise and settlement terms and
procedures and margin requirements than in the United States, and (v) lesser
trading volume.
Swap Agreements
The International Bond Fund, International Equity Fund and Multi-Asset
Fund may enter into interest rate, index and currency exchange rate swap
agreements for purposes of attempting to obtain a particular desired return at a
lower cost to the Fund than if the Fund had invested directly in an instrument
that yielded that desired return or for other portfolio management purposes. The
EAFE Index Fund may enter into index and currency exchange rate swap agreements,
the Indexed Bond Fund may invest up to 10% of its total assets in interest rate
and index swap agreements and the Indexed Equity Fund may enter into index swap
agreements. Swap agreements are two party contracts entered into primarily by
institutional investors for periods ranging from a few weeks to more than one
year. In a standard "swap" transaction, two parties agree to exchange the
returns (or differentials in rates of return) earned or realized on particular
predetermined investments or instruments. The gross returns to be exchanged or
"swapped" between the parties are calculated with respect to a "notional
amount," i.e., the return on or increase in value of a particular dollar amount
invested at a particular interest rate, in a particular foreign currency, or in
a "basket" of securities representing a particular index. The "notional amount"
of the swap agreement is only a fictive basis on which to calculate the
obligations that the parties to a swap agreement have agreed to exchange. Most
swap agreements entered into by the Funds would calculate the obligations of the
parties to the agreement on a "net" basis. Consequently, a Fund's obligations
(or rights) under a swap agreement will generally be equal only to the net
amount to be paid or received under the agreement based on the relative values
of the positions held by
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each party to the agreement (the "net amount"). A Fund's obligations under a
swap agreement will be accrued daily (offset against any amounts owing to the
Fund) and any accrued but unpaid net amounts owed to a swap counterparty will be
covered by the maintenance of a segregated account consisting of liquid assets
to avoid any potential leveraging of the Fund's portfolio. The International
Bond Fund and International Equity Fund will not enter into a swap agreement
with any single party if the net amount owed or to be received under existing
contracts with that party would exceed 5% of the Fund's assets. The EAFE Index
Fund, Indexed Bond Fund, Indexed Equity Fund and Multi-Asset Fund may enter into
swap agreements only to the extent that obligations under such agreements
represent not more than 10% of the Fund's total assets.
Commonly used swap agreements include interest rate caps, under which, in
return for a premium, one party agrees to make payments to the other to the
extent that interest rates exceed a specified rate, or "cap"; interest rate
floors, under which, in return for a premium, one party agrees to make payments
to the other to the extent that interest rates fall below a specified level, or
"floor"; and interest rate collars, under which a party sells a cap and
purchases a floor or vice versa in an attempt to protect itself against interest
rate movements exceeding given minimum or maximum levels.
Whether a Fund's use of swap agreements will be successful in furthering
its investment objective will depend on the Sub-Adviser's ability to correctly
predict whether certain types of investments are likely to produce greater
returns than other investments. Because they are two party contracts and because
they may have terms of greater than seven days, swap agreements may be
considered to be illiquid. Moreover, a Fund bears the risk of loss of the amount
expected to be received under a swap agreement in the event of the default or
bankruptcy of a swap agreement counterparty. The Sub-Adviser will cause a Fund
to enter into swap agreements only with counterparties that would be eligible
for consideration as repurchase agreement counterparties under the Fund's
repurchase agreement guidelines. Certain restrictions imposed on the Funds by
the Internal Revenue Code may limit the Funds' ability to use swap agreements.
The swaps market is a relatively new market and is largely unregulated. It is
possible that developments in the swaps market, including potential government
regulation, could adversely affect a Fund's ability to terminate existing swap
agreements or to realize amounts to be received under such agreements.
Certain swap agreements are exempt from most provisions of the Commodity
Exchange Act ("CEA") and, therefore, are not regulated as futures or commodity
option transactions under the
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CEA, pursuant to regulations approved by the Commodity Futures Trading
Commission ("CFTC") effective February 22, 1993. To qualify for this exemption,
a swap agreement must be entered into by "eligible participants," which includes
the following, provided the participants' total assets exceed established
levels: a bank or trust company, savings association or credit union, insurance
company, investment company subject to regulation under the Investment Company
Act of 1940, commodity pool, corporation, partnership, proprietorship,
organization, trust or other entity, employee benefit plan, governmental entity,
broker-dealer, futures commission merchant, natural person, or regulated foreign
person. To be eligible, natural persons and most other entities must have total
assets exceeding $10 million; commodity pools and employee benefit plans must
have assets exceeding $5 million. In addition, an eligible swap transaction must
meet three conditions. First, the swap agreement may not be part of a fungible
class of agreements that are standardized as to their material economic terms.
Second, the creditworthiness of parties with actual or potential obligations
under the swap agreement must be a material consideration in entering into or
determining the terms of the swap agreement, including pricing, cost or credit
enhancement terms. Third, swap agreements may not be entered into and traded on
or through a multilateral transaction execution facility.
This exemption is not exclusive, and participants may continue to rely on
existing exclusions for swaps, such as the Policy Statement issued in July 1989
which recognized a safe harbor for swap transactions from regulation as futures
or commodity option transactions under the CEA or its regulations. The Policy
Statement applies to swap transactions settled in cash that (1) have
individually tailored terms, (2) lack exchange-style offset and the use of a
clearing organization or margin system, (3) are undertaken in conjunction with a
line of business, and (4) are not marketed to the public.
Forward Foreign Currency Contracts
A forward foreign currency contract (a "forward contract") is an
obligation to purchase or sell a specific currency for an agreed price at a
future date (usually less than a year), which is individually negotiated and
privately traded by currency traders and their customers. A forward contract
generally has no deposit requirement, and no commissions are charged at any
stage for trades. Although foreign exchange dealers do not charge a fee for
commissions, they do realize a profit based on the difference between the price
at which they are buying and selling various currencies. Although these
contracts are intended to minimize the risk of loss due to a decline in the
value of the hedged currencies, at the same time, they tend to limit any
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potential gain which might result should the value of such currencies increase.
While a Fund may enter into forward contracts to reduce currency exchange
risks, changes in currency exchange rates may result in poorer overall
performance for the Fund than if it had not engaged in such transactions.
Moreover, there may be an imperfect correlation between a Fund's portfolio
holdings of securities denominated in a particular currency and forward
contracts entered into by the Fund. Such imperfect correlation may prevent the
Fund from achieving the intended hedge or expose the Fund to the risk of
currency exchange loss.
A Fund will not enter into forward contracts or maintain a net exposure to
such contracts where the consummation of the contracts would obligate the Fund
to deliver an amount of currency in excess of the value of the Fund's portfolio
securities or other assets denominated in that currency.
A Fund will hold liquid assets in a segregated account with its custodian
in an amount equal (on a daily marked-to-market basis) to the amount of the
commitments under these contracts. At the maturity of a forward contract, a Fund
may either accept or make delivery of the currency specified in the contract, or
prior to maturity, enter into a closing purchase transaction involving the
purchase or sale of an offsetting contract. Closing purchase transactions with
respect to forward contracts are usually effected with the currency trader who
is a party to the original forward contract. A Fund will only enter into such a
forward contract if it is expected that there will be a liquid market in which
to close out the contract. However, there can be no assurance that a liquid
market will exist in which to close a forward contract, in which case the Fund
may suffer a loss.
Normally, consideration of the prospect for currency parities will be
incorporated in a longer term investment decision made with regard to overall
diversification strategies. However, each Sub-Adviser believes that it is
important to have the flexibility to enter into such forward contracts when it
determines that the best interest of a Fund will be served. For example, when a
Fund enters into a contract for the purchase or sale of a security denominated
in a foreign currency, it may desire to "lock in" the U.S. dollar price of the
security. By entering into a forward contract for the purchase or sale, for a
fixed amount of U.S. dollars, of the amount of foreign currency involved in the
underlying security transaction, a Fund will be able to insulate itself from a
possible loss resulting from a change in the relationship between the U.S.
dollar and the subject foreign currency during the period between the date on
which the security is purchased or sold and the date on which
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payment is made or received, although a Fund would also forego any gain it might
have realized had rates moved in the opposite direction. This technique is
sometimes referred to as a "settlement" hedge or "transaction" hedge.
When a Sub-Adviser believes that the currency of a particular foreign
country may suffer a substantial decline against the U.S. dollar, it may enter
into a forward contract to sell, for a fixed amount of dollars, the amount of
foreign currency approximating the value of some or all of a Fund's portfolio
securities denominated in such foreign currency. Such a hedge (sometimes
referred to as a "position hedge") will tend to offset both positive and
negative currency fluctuations, but will not offset changes in security values
caused by other factors. The Fund also may hedge the same position by using
another currency (or a basket of currencies) expected to perform in a manner
substantially similar to the hedged currency ("proxy" hedge). The precise
matching of the forward contract amounts and the value of the securities
involved will not generally be possible since the future value of such
securities in foreign currencies will change as a consequence of market
movements in the value of those securities between the date the forward contract
is entered into and the date it matures. With respect to positions that
constitute "transaction" or "position" hedges (including "proxy" hedges), a Fund
will not enter into forward contracts to sell currency or maintain a net
exposure to such contracts if the consummation of such contracts would obligate
the Fund to deliver an amount of foreign currency in excess of the value of the
Fund's portfolio securities or other assets denominated in that currency (or the
related currency, in the case of a "proxy" hedge).
Finally, a Fund may enter into forward contracts to shift its investment
exposure from one currency into another currency that is expected to perform
inversely with respect to the hedged currency relative to the U.S. dollar. This
type of strategy, sometimes known as a "cross-currency" hedge, will tend to
reduce or eliminate exposure to the currency that is sold, and increase exposure
to the currency that is purchased, much as if the Fund had sold a security
denominated in one currency and purchased an equivalent security denominated in
another. "Cross-currency" hedges protect against losses resulting from a decline
in the hedged currency, but will cause the Fund to assume the risk of
fluctuations in the value of the currency it purchases.
At the consummation of the forward contract, a Fund may either make
delivery of the foreign currency or terminate its contractual obligation to
deliver the foreign currency by purchasing an offsetting contract obligating it
to purchase at the same maturity date the same amount of such foreign currency.
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If a Fund chooses to make delivery of the foreign currency, it may be required
to obtain such currency for delivery through the sale of portfolio securities
denominated in such currency or through conversion of other assets of the Fund
into such currency. If a Fund engages in an offsetting transaction, the Fund
will realize a gain or a loss to the extent that there has been a change in
forward contract prices. Closing purchase transactions with respect to forward
contracts are usually effected with the currency trader who is a party to the
original forward contract.
A Fund's dealing in forward contracts will be limited to the transactions
described above. Of course, a Fund is not required to enter into such
transactions with regard to its foreign currency-denominated securities and will
not do so unless deemed appropriate by a Sub-Adviser. A Fund generally will not
enter into a forward contract with a term of greater than one year.
In cases of transactions which constitute "transaction" or "settlement"
hedges or "position" hedges (including "proxy" hedges) or "cross-currency"
hedges that involve the purchase and sale of two different foreign currencies
directly through the same forward foreign currency contact, a Fund may deem its
forward currency hedge position to be covered by underlying Fund portfolio
securities or may establish a Segregated Account with its Custodian in an amount
equal to the value of the Fund's total assets committed to the consummation of
the subject hedge. The Segregated Account will consist of liquid assets. In the
case of "anticipatory" hedges and "cross-currency" hedges that involve the
purchase and sale of two different foreign currencies indirectly through
separate forward currency contracts, the Fund will establish a Segregated
Account with its Custodian as described above. In the event a Fund establishes a
Segregated Account, the Fund will mark-to-market the value of the assets in the
Segregated Account. If the value of the assets placed in the Segregated Account
declines, additional liquid assets will be placed in the account by the Fund on
a daily basis so that the value of the account will equal the amount of the
Fund's commitments with respect to such contracts.
It should be realized that this method of protecting the value of a Fund's
portfolio securities against a decline in the value of a currency does not
eliminate fluctuations in the underlying prices of the securities. It simply
establishes a rate of exchange which can be achieved at some future point in
time. It also reduces any potential gain which may have otherwise occurred had
the currency value increased above the settlement price of the contract.
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The Sub-Advisers believe that active currency management can enhance
portfolio returns through opportunities arising from interest rate differentials
between securities denominated in different currencies and/or changes in value
between currencies. Moreover, the Sub-Advisers believe active currency
management can be employed as an overall portfolio risk management tool. For
example, in their view, foreign currency management can provide overall
portfolio risk diversification when combined with a portfolio of foreign
securities and the market risks by currency strategies which may not involve the
currency in which the foreign security is denominated.
Forward contracts are intended to minimize the risk of loss to a Fund from
adverse changes in the relationship between the U.S. dollar and foreign
currencies. Such contracts do not eliminate fluctuations in the underlying
prices of securities held by the Funds. Although such contracts tend to minimize
the risk of loss due to a decline in the value of a currency that has been sold
forward, and the risk of loss due to an increase in the value of a currency that
has been purchased forward, at the same time they tend to limit any potential
gain that might be realized should the value of such currency increase.
The Funds cannot assure that their use of forward contracts will always be
successful. Successful use of forward contracts depends on the Sub-Adviser's
skill in analyzing and predicting relative currency values. Forward contracts
alter a Fund's exposure to currency exchange rate activity and could result in
losses to the Fund if currencies do not perform as the Sub-Adviser anticipates.
A Fund may also incur significant costs when converting assets from one currency
to another.
A Fund's foreign currency transactions may be limited by the requirements
of Subchapter M of the Code for qualification as a regulated investment company.
Foreign Index-Linked Instruments
As part of its investment program, and to maintain greater flexibility,
the EAFE Index Fund, International Equity Fund, Multi-Asset Fund and
International Bond Fund may invest in instruments which have the investment
characteristics of particular securities, securities indexes, futures contracts
or currencies. Such instruments may take a variety of forms, such as debt
instruments with interest or principal payments determined by reference to the
value of a currency or commodity at a future point in time. For example, a Fund
may, subject to compliance with its respective limitations applicable to its
investment in debt securities, invest in instruments issued by the U.S. or a
foreign government or by private issuers that
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return principal and/or pay interest to investors in amounts which are linked to
the level of a particular foreign index ("foreign index-linked instruments"). A
foreign index may be based upon the exchange rate of a particular currency or
currencies or the differential between two currencies, or the level of interest
rates in a particular country or countries or the differential in interest rates
between particular countries. In the case of foreign index-linked instruments
linking the interest components to a foreign index, the amount of interest
payable will adjust periodically in response to changes in the level of the
foreign index during the term of the foreign index-linked instrument. The risks
of such investments would reflect the risks of investing in the index or other
instrument, the performance of which determines the return for the instrument.
Tax considerations may limit the Funds' ability to invest in foreign
index-linked instruments.
Warrants
The holder of a warrant has the right to purchase a given number of shares
of a particular issuer at a specified price until expiration of the warrant.
Such investments can provide a greater potential for profit or loss than an
equivalent investment in the underlying security. Prices of warrants do not
necessarily move in tandem with the prices of the underlying securities, and are
speculative investments. Warrants pay no dividends and confer no rights other
than a purchase option. If a warrant is not exercised by the date of its
expiration, the Fund will lose its entire investment in such warrant.
Short Sales Against the Box
A short sale is a transaction in which a Fund sells through a broker a
security it does not own in anticipation of a decline in market price. A short
sale "against the box" is a short sale in which, at the time of the short sale,
a Fund owns or has the right to obtain securities equivalent in kind and amount.
Each of the Funds will only enter into short sales against the box. A Fund may
enter into a short sale against the box among other reasons, to hedge against a
possible market decline in the value of a security owned. If the value of a
security sold short against the box increases, the Fund would suffer a loss when
it purchases or delivers to the selling broker the security sold short. The
proceeds of the short sale are retained by the broker pursuant to applicable
margin rules. In addition, the Fund may segregate assets, equal in value to 50%
of the value of the short sale, in a special account with the Fund's custodian.
The segregated assets are pledged to the broker pursuant to
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applicable margin rules. If a broker, with which the Fund has open short sales,
were to become bankrupt, a Fund could experience losses or delays in recovering
gains on short sales. The Funds will only enter into short sales against the box
with brokers they believe are creditworthy. Short sales against the box will be
limited to no more than 25% of a Fund's total assets.
High Yield/High Risk Securities
Analysis of the creditworthiness of issuers of high yield/high risk bonds
may be more complex than for issuers of higher quality debt securities, and the
ability of the Fund to achieve its investment objective may, to the extent of
its investment in high yield/high risk bonds, be more dependent upon such
creditworthiness analysis than would be the case if the Fund were investing in
higher quality bonds.
High yield/high risk bonds may be more susceptible to real or perceived
adverse economic and competitive industry conditions than higher grade bonds.
The prices of high yield/high risk bonds have been found to be less sensitive to
interest rate changes than more highly rated investments, but more sensitive to
adverse economic downturns or individual corporate developments. If the issuer
of high yield/high risk bonds defaults, the Fund may incur additional expenses
to seek recovery. In the case of high yield/high risk bonds structured as zero
coupon or payment-in-kind securities, the market prices of such securities are
affected to a greater extent by interest rate changes and, therefore, tend to be
more volatile than securities which pay interest periodically and in cash.
The secondary market on which high yield/high risk bonds are traded may be
less liquid than the market for higher grade bonds. Less liquidity in the
secondary trading market could adversely affect the price at which the Fund
could sell a high yield/high risk bond, and could adversely affect and cause
large fluctuations in the daily net asset value of the Fund's shares. A
projection of an economic downturn or of a period of rising interest rates, for
example, could cause a decline in high yield/high risk bond prices because the
advent of a recession could lessen the ability of a highly leveraged company to
make principal and interest payments on its debt securities. Adverse publicity
and investor perceptions, whether or not based on fundamental analysis, may
decrease the values and liquidity of high yield/high risk bonds, especially in a
thinly traded market.
Legislation designed to limit the use of high yield/high risk bonds in
corporate transactions may have a material adverse effect on the International
Bond Fund's net asset value and investment practices. In addition, there may be
special tax
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<PAGE>
considerations associated with investing in high yield/high risk bonds
structured as zero coupon or payment-in-kind securities. Interest on these
securities is recorded annually as income even though no cash interest is
received until the security's maturity or payment date. As a result, the amounts
which have accrued each year are required to be distributed to shareholders and,
such amounts will be taxable to shareholders. Therefore, the Fund may have to
sell some of its assets to distribute cash to shareholders. These actions are
likely to reduce the Fund's assets and may thereby increase its expense ratios
and decrease its rate of return.
The use of credit ratings as the sole method for evaluating high
yield/high risk bonds also involves certain risks. For example, credit ratings
evaluate the safety of principal and interest payments, not the market value
risk of high yield/high risk bonds. Also, credit rating agencies may fail to
change credit ratings on a timely basis to reflect subsequent events.
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 a Fund must accrue
and distribute every year even though the Fund receives no payment on the
investment in that year.
INDEXED EQUITY FUND SPECIAL CONSIDERATIONS
Standard & Poor's, "S&P 500", "S&P", "S&P 500", "Standard & Poor's 500"
and "500" are trademarks of Standard & Poor's Corporation and have been licensed
for use by Monitor Capital Advisors, Inc. S&P does not sponsor, endorse, sell or
promote the Fund or represent the advisability of investing in the Fund.
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<PAGE>
The Fund is not sponsored, endorsed, sold or promoted by S&P. S&P makes no
representation or warranty, express or implied, to the owners of the Fund or any
member of the public regarding the advisability of investing in securities
generally or in the fund particularly or the ability of the S&P 500 Index to
track general stock market performance. S&P's only relationship to Monitor is
the licensing of certain trademarks and trade names of S&P and of the S&P 500
Index which is determined, composed and calculated by S&P without regard to
Monitor or the Fund. S&P has no obligation to take the needs of Monitor or the
owners of the Fund into consideration in determining, composing or calculating
the S&P 500 Index. S&P is not responsible for and has not participated in the
determination of the prices and amount of the Fund or the timing of the issuance
or sale of the Fund or in the determination or calculation of the equation by
which the Fund is to be converted into cash. S&P has no obligation or liability
in connection with the administration, marketing or trading of the Fund.
S&P does not guarantee the accuracy and/or the completeness of the S&P 500
Index or any data included therein and S&P shall have no liability for any
errors, omissions, or interruptions therein. S&P makes no warranty, express or
implied, as to results to be obtained by Monitor, owners of the Fund, or any
other person or entity from the use of the S&P Index or any data included
therein. S&P makes no express or implied warranties, and expressly disclaims all
warranties of merchantability or fitness for a particular purpose or use with
respect to the S&P 500 Index or any data included therein. Without limiting any
of the foregoing, in no event shall S&P have any liability for any special,
punitive, indirect, or consequential damages (including lost profits), even if
notified of the possibility of such damages.
INVESTMENT RESTRICTIONS
The Funds' investment restrictions set forth below are fundamental
policies of each Fund; i.e., they may not be changed with respect to a Fund
without a majority vote of the outstanding shares of that Fund, as defined in
the 1940 Act. Except for those investment policies of a 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.
Unless otherwise indicated, all of the percentage limitations below, and
in the investment restrictions recited
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<PAGE>
in the Prospectus, apply to each 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 or from a change in a
Fund's net assets will not be considered a violation.
Each 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 Funds elect to
be so classified and the foregoing limitation shall no longer apply with respect
to the Funds;
(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 (this
restriction is not applicable to the International Bond Fund);
(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 (this
restriction is not applicable to the International Bond Fund);
(4) borrow money or issue senior securities, except that a 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 a 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)
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<PAGE>
lend its portfolio securities in accordance with applicable 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) a 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) a 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
Each 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 each 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 or from a change in a Fund's net assets will not be
considered a violation.
Under these restrictions, a Fund may not:
(1) (except for the International Bond Fund and International Equity Fund)
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
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<PAGE>
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 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
(15% of net assets in the case of the International Bond Fund and International
Equity Fund);
(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) a 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) a 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-Advisers,pursuant to guidelines approved by the Directors.
Each Sub-Adviser takes into account a number of factors in determining
whether a Rule 144A security being considered for purchase by a 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;
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<PAGE>
(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
(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, a
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 nationally
recognized statistical rating organizations ("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).
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):
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<PAGE>
Name Position(s) with Principal Occupation(s)
Address and Age the Company During Past 5 Years
- --------------- ---------------- -------------------
Stephen C. Roussin, 35 Director and Chairperson President, Chief
of the Board of Directors* Executive Officer and
Trustee, The MainStay
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;
353 Canterbury Drive Vice President,
Ramsey, NJ 07446 Investment Banking, The
First Boston Corporation,
1964-1987.
Robert P. Mulhearn, 51 Director Private Investor, 1987 to
60 Twin Brooks Road present; Managing
Saddle River, NJ 07458 Director, Morgan Stanley,
1979-1987.
Susan B. Kerley, 46 Director President, Global
P.O. 9572 Research Associates, 1990
New Haven, CT 06535 to present; Manager,
Special Investments,
Rockefeller & Co.,
1988-1990; Director of
Research, Rogers, Casey
and Barksdale, 1983-1988;
Director, Citifunds, 1991
to present.
Linda M. Livornese, 46 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.
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<PAGE>
Name Position(s) with Principal Occupation(s)
Address and Age the Company During Past 5 Years
- --------------- ---------------- -------------------
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.
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
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<PAGE>
Name Position(s) with Principal Occupation(s)
Address and Age the Company During Past 5 Years
- --------------- ---------------- -------------------
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.
Anthony W. Polis, 54 Treasurer (Principal Vice President, New York
Financial and Accounting Life Insurance Company,
Officer) 1988 to present;
Director, Vice President
and Chief Financial
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.
* 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.
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<PAGE>
Aggregate Compensation
Name and Position from Company(1)
----------------- ----------------------
Lawrence Glacken $ 30,000
Director
Robert P. Mulhearn $ 30,000
Director
Susan B. Kerley $ 30,000
Director
(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.
Management Agreement
Pursuant to the Management Agreement for the Funds 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
Funds, administers the Funds' 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 each of the Funds 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 each of the
Funds (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 the have been elected or appointed.
The Management Agreement provides that the Manager shall not be liable to
a Fund for any error or judgment by the Manager or
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<PAGE>
for any loss sustained by a 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 each of
the Funds, and except as indicated in the Prospectus under the heading "Manager
and Sub-Advisers," 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-Advisers pursuant to the Sub-Advisory
Agreements; and
(c) all expenses incurred by the Manager in connection with administering
the ordinary course of the Funds' business, other than those assumed by the
Company.
For its services, each Fund pays the Manager a monthly fee. (See page 48
of the Prospectus (page 22 of the Money Market Fund prospectus), "Manager and
Sub-Advisers.")
Commencing November 21, 1997 through December 31, 1997, the amount of the
management fee paid by each Fund to the Manager was as follows:
November 21, 1997
through
December 31, 1997
-----------------
EAFE Index Fund $ 57,337
Growth Equity Fund 670,493
Indexed Equity Fund 541,630
International Equity Fund 108,499
Multi-Asset Fund 305,965
Value Equity Fund 941,883
Bond Fund 155,008
Indexed Bond Fund 68,007
International Bond Fund 43,865
Money Market Fund 142,675
Short-Term Bond Fund 32,585
As of November 21, 1997, the Manager has limited certain Funds' expenses
as discussed in the Prospectus. In connection with the voluntary expense
limitations, the Manager assumed the
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<PAGE>
following expenses for the period November 21, 1997 through December 31, 1997:
EAFE Index Fund $ 42,915
Indexed Equity Fund 290,267*
International Equity Fund 13,689
Bond Fund 18,927
Indexed Bond Fund 19,676
International Bond Fund 14,104
Money Market Fund 37,695
Short-Term Bond Fund 14,826
* Manager assumed $236,104, Monitor, the Fund's Sub-Adviser, assumed $54,163.
As long as expense limitations continue, they may lower the Funds'
expenses and increase their respective yields. The Money Market Fund's voluntary
expense limitation will terminate after June 30, 1998. After December 31, 1998,
the voluntary expense limitations of the other Funds may be terminated or
revised at any time, at which time the Funds' expenses may increase and their
respective yields may be reduced, depending on the total assets of each of the
Funds.
Sub-Advisory Agreements
Pursuant to the Sub-Advisory Agreements between the Manager and
MacKay-Shields Financial Corporation ("MacKay-Shields"), between the Manager and
Monitor Capital Advisors, Inc. ("Monitor") and between the Manager and New York
Life Insurance Company ("New York Life") on behalf of each Fund (each a
"Sub-Adviser" and collectively the "Sub-Advisers"), MacKay-Shields, Monitor and
New York Life, subject to the supervision of the Directors of the Company and
the Manager in conformity with the stated policies of each of the Funds and the
Company, manage the Funds' portfolios, including the purchase, retention,
disposition and loan of securities.
The Directors, including the Independent Directors, approved the
Sub-Advisory Agreements at an in-person meeting held September 9, 1997. On
November 17, 1997, the shareholders of each of the Funds approved the
Sub-Advisory Agreements with MacKay-Shields, Monitor and New York Life. The
Sub-Advisory Agreements will remain in effect for two years following its such
continuance is specifically approved at least annually by the Directors or by a
vote of a majority of the outstanding voting securities of each of the Funds (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,
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<PAGE>
the Manager, or any Sub-Adviser (as the term is defined in the 1940 Act).
The Sub-Advisory Agreements provide that the Sub-Advisers shall not be
liable to a Fund for any error of judgment by a Sub-Adviser or for any loss
sustained by a Fund except in the case of the Sub-Adviser's willful misfeasance,
bad faith, gross negligence or reckless disregard of duty. The Sub-Advisory
Agreements also provide that they 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, each Fund
paid an advisory fee directly to New York Life, MacKay-Shields or Monitor. 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 each Fund to
New York Life, MacKay-Shields or Monitor was as follows:
Period Ended Year Ended Year Ended
Fund 11/20/97 12/31/96 12/31/95
- ---- -------- -------- --------
EAFE Index Fund $ 118,622 $ 124,284 $ 115,497
Growth Equity Fund 1,414,379 1,186,388 879,351
Indexed Equity Fund 719,601 502,686 295,487
International Equity Fund 406,316 395,717 290,777
Multi-Asset Fund 508,530 461,408 372,064
Value Equity Fund 2,008,307 1,768,836 1,275,060
Bond Fund 316,678 355,167 378,811
Indexed Bond Fund 105,411 123,798 168,137
International Bond Fund 136,941 141,296 121,813
Money Market Fund 181,674 100,230 59,918
Short-Term Bond Fund 69,125 98,265 79,193
In previous years, prior to a change in management structure, each 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 each
Fund to New York Life was as follows:
Period Ended Year Ended Year Ended
Fund 11/20/97 12/31/96 12/31/95
- ---- -------- -------- --------
EAFE Index Fund $ 632,652 $ 662,846 $ 615,986
Growth Equity Fund 3,394,512 2,847,330 2,110,442
Indexed Equity Fund 2,878,403 2,010,753 1,181,947
International Equity Fund 580,451 565,311 415,395
Multi-Asset Fund 1,695,098 1,538,025 1,240,213
Value Equity Fund 4,819,937 4,245,206 3,060,145
Bond Fund 870,864 976,711 1,041,729
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<PAGE>
Indexed Bond Fund 421,641 495,190 672,553
International Bond Fund 228,235 235,493 203,021
Money Market Fund 726,696 400,921 239,673
Short-Term Bond Fund 207,375 294,794 237,578
Also prior to the above-referenced change in management structure and in
connection with the voluntary expense limitation, New York Life, as
administrator, assumed the following expenses for the Funds for the period
January 1, 1997 through November 20, 1997 and the fiscal years ended December
31, 1996 and 1995.
Period Ended Year Ended Year Ended
Fund 11/20/97 12/31/96 12/31/95
- ---- -------- -------- --------
EAFE Index Fund $ 229,592 $ 238,764 $ 165,321(1)
Growth Equity Fund N/A(2) N/A(2) N/A(2)
Indexed Equity Fund 1,878,195(5) 753,575(3) 272,396
International Equity Fund 35,792 82,203 60,652
Multi-Asset Fund N/A(2) 164,519(4) 167,833
Value Equity Fund N/A(2) N/A(2) N/A(2)
Bond Fund 154,845 188,561 198,399
Indexed Bond Fund 161,693 189,996 225,553
International Bond Fund 60,073 61,961 31,528
Money Market Fund 194,751 170,221 136,576
Short-Term Bond Fund 96,101 122,335 114,433
(1) Fund expense limitation resumed April 1, 1995.
(2) Fund had no expense limitation during period.
(3) New York Life assumed $676,954, Monitor assumed $76,621.
(4) Fund expense limitation expired December 31, 1996.
(5) New York Life assumed $1,518,395, Monitor assumed $359,800.
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 Funds pursuant to a dealer agreement with the
Distributor. The Distributor is not obligated to sell any specific amount of the
Company's shares, and receives no compensation from the Company pursuant to the
Distribution Agreement. The Company anticipates making a continuous offering of
its 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
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<PAGE>
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 a 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 that
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
Institutional Service Class of each Fund. Under the terms of the Plan, the
Company is permitted to pay, out of the Institutional Service Class assets of
each Fund, a fee in the amount of 0.25% on an annual basis of the average daily
net assets attributable to that class, 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, each 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 Institutional Service Class of the Fund. 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.
The Plan provides that it may not be amended to materially increase the
costs which holders of Institutional Service Class of a Fund 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 "Plan
Directors"), cast in person at a meeting called for the purpose of voting on the
Plan and any related amendments.
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 Plan Directors.
The Plan was approved by the
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<PAGE>
Directors, including the Plan Directors, at a meeting held on September 13, 1994
and amended at a meeting held on March 4, 1997.
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
Plan 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.
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 and Exchange Shares", and that information is incorporated herein by
reference.
Certain clients of the Company's Sub-Advisers may purchase shares of a
Fund with liquid assets with a value which is readily ascertainable (and not
established only by evaluation procedures) as evidenced by a listing on a bona
fide domestic or foreign exchange and which would be eligible for purchase by
the Fund (consistent with such Fund's investment policies and restrictions).
These transactions will be effected only if the Fund's Sub-Adviser intends to
retain the security in the Fund as an investment. Assets so purchased by a Fund
will be valued in generally the same manner as they would be valued for purposes
of pricing the Fund's shares, if such assets were included in the Fund's assets
at the time of the purchase. The Fund reserves the right to amend or terminate
this practice at any time.
The Company determines the net asset value per share of each 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 Company not
reasonably practicable.
For shares of a Fund redeemed within any 90-day period, each 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,
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<PAGE>
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 to you, should such
a distribution occur.
Certain of the Funds have entered into a committed line of credit with The
Bank of New York, as agent, and various other lenders, from whom a Fund may
borrow up to 5% of its net assets in order to honor redemptions. The credit
facility is expected to be utilized in periods when the Funds experience
unusually large redemption requests.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Purchases and sales of securities on a securities exchange are effected by
brokers, and the Funds pay 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 a Fund, the Fund's 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.
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<PAGE>
NYLIFE Securities (the "Affiliated Broker") may act as broker for the
Funds. In order for the Affiliated Broker to effect any portfolio transactions
for the Funds, 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 Funds 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 Funds may also be
appropriate for other clients served by the Funds' Sub-Advisers. If a purchase
or sale of securities consistent with the investment policies of a 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 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 a Fund's 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 for a Fund 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 a 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
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<PAGE>
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 each of the following
Funds paid brokerage commissions as follows:
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<PAGE>
<TABLE>
<CAPTION>
Total Brokerage Total Brokerage Commissions
Commissions Paid Paid to Affiliated Persons
---------------- --------------------------
Year ended Year ended Year ended Year ended Year ended Year ended
12/31/97 12/31/96 12/31/95 12/31/97 12/31/96 12/31/95
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
EAFE Index Fund............... $ 20,593 $ N/A $ 44,798 0(0%)(1) 0(0%)(1) 0(0%)(1)
Growth Equity Fund............ 461,682 296,284 306,776 0(0%)(1) 0(0%)(1) 0(0%)(1)
Indexed Equity Fund........... 120,427 N/A 25,484 0(0%)(1) 0(0%)(1) 0(0%)(1)
International Equity Fund..... 407,665 290,329 330,914 0(0%)(1) 0(0%)(1) 0(0%)(1)
Multi-Asset Fund.............. 22,593 N/A 12,451 0(0%)(1) 0(0%)(1) 0(0%)(1)
Value Equity Fund............. 1,651,353 1,042,205 945,310 0(0%)(1) 0(0%)(1) 0(0%)(1)
Bond Fund..................... N/A 768 15,608 0(0%)(1) 0(0%)(1) 0(0%)(1)
Short-Term Bond Fund.......... 250 106 523 0(0%)(1) 0(0%)(1) 0(0%)(1)
</TABLE>
<TABLE>
<CAPTION>
Total Amount of Transaction Total Brokerage
Where Commissions Paid Commissions Paid
--------------------------- to Brokers that
Provided
Research Year
Year ended Year ended Year ended ended
12/31/97 12/31/96 12/31/95 12/31/97
---------- ---------- ---------- -------------
<S> <C> <C> <C> <C>
EAFE Index Fund................ $ 6,116,892(0%)(2) $ N/A $ 10,362,714(0%)(2) $ N/A
Growth Equity Fund............. 329,107,159(0%)(2) 182,941,279 173,585,053(0%)(2) 461,682
Indexed Equity Fund............ 114,953,870(0%)(2) N/A 20,707,836(0%)(2) N/A
International Equity Fund...... 103,697,052(0%)(N/A) 70,163,300 79,632,317(0%)(2) 407,665
Multi-Asset Fund............... 19,581,960(0%)(2) N/A 9,523,672(0%)(2) N/A
Value Equity Fund.............. 1,082,839,850(0%)(2) 656,491,378 490,519,118(0%)(2) 1,651,353
Bond Fund...................... N/A(2) 17,690,332 200,756,257(0%)(2) N/A
Short Term Bond Fund........... 3,202,719(0%)(2) 1,533,460 7,828,803(0%)(2) 250
</TABLE>
(1) Percent of total commissions paid.
(2) Percent of total transactions involving the payment of commissions
effected through affiliated persons.
The Indexed Bond Fund, International Bond Fund and Money Market Fund paid
no brokerage commissions during the years ended December 31, 1997, 1996 and
1995.
As of December 31, 1997, the following Funds held securities in issuers
with whose broker-dealer subsidiaries or affiliates the Funds regularly conduct
business:
<TABLE>
<CAPTION>
Fund Broker-Dealer Market Value
- ---- ------------- ------------
<S> <C> <C>
Indexed Equity Fund American Express Company 5,381,686(2)
Morgan Stanley, Dean Witter, Discover & Company 4,543,638(2)
Morgan (J.P.) & Co. Inc. 2,601,092(2)
Marsh & McLennan Companies, Inc. 1,641,717(2)
Merrill Lynch & Co., Inc. 3,148,785(2)
Schwab (Charles) Corp. (The) 1,439,672(2)
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Fund Broker-Dealer Market Value
- ---- ------------- ------------
<S> <C> <C>
Multi-Asset Fund American Express Company 1,402,475(2)
Morgan Stanley, Dean Witter, Discover & Company 1,177,888(2)
Morgan (J.P.) & Co. Inc. 676,008(2)
Marsh & McLennan Companies, Inc. 423,515(2)
Merrill Lynch & Co., Inc. 810,117(2)
Schwab (Charles) Corp. (The) 372,824(2)
Bear Stearns Cos., Inc. (The) 503,750(3)
Morgan (J.P.) & Co. Inc. 552,500(3)
PaineWebber Group, Inc. 421,000(3)
Value Equity Fund American Express Credit Corp. 36,755,000(1)
Prudential Funding Corp. 25,000,000(1)
Bond Fund American Express Credit Corp. 3,000,000(1)
Lehman Brothers Holdings, Inc. 2,094,760(3)
Salomon Inc. 1,734,157(3)
Money Market Fund Goldman, Sachs & Co. 9,838,360(1)
Morgan (J.P.) & Co. Inc. 4,957,747(1)
Morgan Stanley, Dean Witter, Discover & Company 7,928,105(1)
</TABLE>
(1) Represents investment in commercial paper.
(2) Represents investment in common stock.
(3) Represents investment in corporate bond.
A Fund's portfolio turnover rate is calculated by dividing the lesser of
sales or purchases of portfolio securities by the average monthly value of the
Fund's portfolio securities. For purposes of this calculation, portfolio
securities will exclude purchases and sales of debt securities having a maturity
at the date of purchase of one year or less.
The turnover rate for a Fund will vary from year-to-year and depending on
market conditions, turnover could be greater in periods of unusual market
movement and volatility. A higher turnover rate generally would result in
greater brokerage commissions or other transactional expenses which must be
borne, directly or indirectly, by the Fund and, ultimately, by the Fund's
shareholders. High portfolio turnover may result in increased brokerage
commissions and in the realization of a substantial increase in net short-term
capital gains by the Fund which, when distributed to non-tax-exempt
shareholders, will be treated as dividends (ordinary income).
Moreover, certain requirements that must be satisfied in order for the
Fund to qualify as a regulated investment company for Federal income tax
purposes may limit the extent to which the Fund can sell securities held for
less than three months.
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<PAGE>
NET ASSET VALUE
The Company determines the net asset value per share of each class of each
Fund on each day the New York Stock Exchange is open for trading. Net asset
value per share is calculated as of the close of the first session of the New
York Stock Exchange (currently 4:00 p.m., New York City time) for each class of
shares of each Fund (except the Money Market Fund, which is determined at noon),
by dividing the current market value (amortized cost, in the case of the Money
Market Fund) 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 Money Market 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 a Fund may differ somewhat than that
obtained in a similar investment company which uses available market quotations
to value all of its portfolio securities.
Portfolio securities of each of the other Funds are valued (a) by
appraising common and preferred stocks which are traded on the New York Stock
Exchange at the last sale price of the first session on that day or, if no sale
occurs, the stock is valued at the mean between the closing bid price and asked
price; (b) by appraising other common and preferred stocks as nearly as possible
in the manner described in clause (a) if traded on any other exchange, including
the National Association of Securities Dealers National Market System and
foreign securities exchanges; (c) by appraising over-the-counter common and
preferred stocks quoted on the National Association of Securities Dealers NASDAQ
system (but not listed on the National Market System) at the bid price supplied
through such system; (d) by appraising over-the-counter common and preferred
stocks not quoted on the NASDAQ system and securities listed or traded on
certain foreign exchanges whose operations are similar to the U.S.
over-the-counter market at prices supplied by a pricing agent selected by a
Fund's Sub-Adviser if the prices are deemed to be representative of market
values at the close of the first session of the New York Stock Exchange; (e) by
appraising debt securities at prices supplied by a pricing agent or, determined
using pricing procedures selected by a Fund's Sub-Adviser, which prices
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<PAGE>
reflect broker/dealer-supplied valuations or electronic data processing
techniques and/or matrix pricing if those prices are deemed by a Fund's
Sub-Adviser to be representative of market values at the close of the first
session of the New York Stock Exchange; (f) by appraising options and futures
contracts at the last sale price on the market where any such option or futures
contract is principally traded, and (g) by appraising all other securities and
other assets, including over-the-counter common and preferred stocks not quoted
on the NASDAQ system, securities not listed or traded on foreign exchanges whose
operations are similar to the U.S. over-the-counter market and debt securities
for which prices are supplied by a pricing agent but are not deemed by a Fund's
Sub-Adviser to be representative of market values, but excluding money market
instruments with a remaining maturity of sixty days or less and including
restricted securities and securities for which no market quotation is available,
at fair value in accordance with procedures approved by and determined in good
faith by the Directors, although the actual calculations may be done by others.
Money Market instruments held by the Funds with a remaining maturity of sixty
days or less are valued by the amortized cost method unless such method does not
represent fair value.
Portfolio securities traded on more than one U.S. national securities
exchange or foreign securities exchange are valued at the last sale price on the
business day as of which such value is being determined on the close of the
exchange representing the principal market for such securities. The value of all
assets and liabilities expressed in foreign currencies will be converted into
U.S. dollar values, using the W.M. Company exchange rates that have been adopted
as the standard for exchange rate valuations by major indices. If such
quotations are not available, the rate of exchange will be determined in
accordance with policies established by the Company's Directors. For financial
accounting purposes, the Company recognizes dividend income and other
distributions on the ex-dividend date, except certain dividends from foreign
securities are recognized as soon as the Company is informed on or after the
ex-dividend date.
Trading in securities on European and Far Eastern securities exchanges and
over-the-counter markets is normally completed well before the close of business
on each business day in New York (i.e., a day on which the New York Stock
Exchange is open for trading). In addition, European or Far Eastern securities
trading in a particular country or countries may not take place on all business
days in New York. Furthermore, trading takes place in Japanese markets on
certain Saturdays and in various foreign markets on days which are not business
days in New York and on which the Funds' net asset values are not calculated.
Such calculation does not take place contemporaneously with the
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<PAGE>
determination of the prices of the portfolio securities used in such
calculation. Events affecting the values of portfolio securities that occur
between the time their prices are determined and the close of the New York Stock
Exchange will not be reflected in the Fund's calculation of net asset values
unless a Fund's Sub-Adviser determines that the particular event may materially
affect net asset value, in which case an adjustment will be made.
To the extent that any newly organized fund or class of shares receives,
on or before December 31, any seed capital, the net asset value of such fund(s)
or class(es) will be calculated as of December 31.
TAX INFORMATION
While it is anticipated that many shareholders of the Funds will be
tax-exempt institutions, the following discussion may be of general interest to
these shareholders as well as for those shareholders of the Funds who do not
have tax-exempt status. Although the discussion below refers in certain
instances to distributions and other transactions as being taxable to a
shareholder, tax-exempt shareholders will, of course, not be taxed to the extent
provided by applicable tax exemptions. 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 a Fund.
Each 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 a 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 long-term capital gains in excess of net short-term
capital losses) that it distributes to its shareholders.
Each Fund intends to distribute, at least annually, to its shareholders
substantially all of its investment company taxable income and its net capital
gains. In determining amounts of capital gains to be distributed, any capital
loss carryovers from prior years will be applied against capital gains.
To qualify for treatment as a regulated investment company, a Fund
generally must, among other things: (a) derive in each taxable year at least 90%
of its gross income from dividends,
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<PAGE>
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 a 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
a 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).
The Treasury Department is authorized to issue regulations to provide that
foreign currency gains that are not directly related to a Fund's principal
business of investing in securities (or options and futures with respect to
securities) may be excluded from the income which qualifies for purposes of the
90% gross income requirement described above. To date, however, no such
regulations have been issued.
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, a 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 a 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
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<PAGE>
of the following calendar year. Such a distribution will be includable in the
gross income of shareholders in the calendar year in which it is declared,
rather than the calendar year in which it is received. To prevent application of
the excise tax, the Funds intend to make distributions in accordance with the
calendar year distribution requirement.
A 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 investment company taxable income generally are
characterized as ordinary income. If a Fund's income consists in whole or in
part of dividends paid by U.S. corporations, a portion of the dividends paid by
a Fund may be eligible for the corporate dividends-received deduction. The
dividends-received deduction is reduced to the extent shares of a Fund or the
underlying company paying dividends to a Fund are treated as debt-financed under
the Code and is eliminated if applicable holding period requirements are not
met. In addition, dividends (including the deducted portion) are includable in
the corporate shareholder's alternative minimum taxable income. A portion of the
dividends paid by the Growth Equity Fund, Indexed Equity Fund, Multi-Asset Fund,
and Value Equity Fund, may qualify for the dividends-received deduction
available to corporations. The dividends paid by the other Funds are not
expected to so qualify. The alternative minimum tax and environmental tax
applicable to corporations may reduce the value of the dividends-received
deduction.
Distributions of net capital gains, if any, designated by a 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 a 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 a 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.
A Fund's distributions with respect to a given taxable year may exceed its
current and accumulated earnings and profits
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<PAGE>
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.
Distributions by a Fund reduce the net asset value of the Fund's shares.
Should a distribution reduce the net asset value below a shareholder's cost
basis, such distribution, nevertheless, would be taxable to the shareholder as
ordinary income or capital gain as described above, even though, from an
investment standpoint, it may constitute a partial return of capital. In
particular, investors should be careful to consider the tax implications of
buying shares just prior to a distribution by a Fund. The price of shares
purchased at that time includes the amount of the forthcoming distribution.
Those purchasing just prior to a distribution will receive a distribution which
will nevertheless generally be taxable to them.
Upon the taxable disposition (including a sale or redemption) of shares of
a 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 a 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 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 a Fund on the reinvestment date.
Under the Code, gains or losses attributable to fluctuations in foreign
currency exchange rates which occur between the time a Fund accrues income or
other receivables or accrues expenses or other liabilities denominated in a
foreign currency and the time a Fund actually collects such receivables or pays
such
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<PAGE>
liabilities generally are treated as ordinary income or ordinary loss.
Similarly, on disposition of debt securities denominated in a foreign currency
and on disposition of certain financial contracts and options, gains or losses
attributable to fluctuations in the value of foreign currency between the date
of acquisition of the security or contract and the date of disposition also are
treated as ordinary gain or loss. These gains and losses, referred to under the
Code as "section 988" gains and losses, may increase or decrease the amount of a
Fund's investment company taxable income to be distributed to its shareholders
as ordinary income. For example, fluctuations in exchange rates may increase the
amount of income that a Fund must distribute in order to qualify for treatment
as a regulated investment company and to prevent application of an excise tax on
undistributed income. Alternatively, fluctuations in exchange rates may decrease
or eliminate income available for distribution. If section 988 losses exceed
other investment company taxable income during a taxable year, a Fund generally
would not be able to make ordinary dividend distributions, or distributions made
before the losses were realized would be recharacterized as return of capital to
shareholders for Federal income tax purposes, rather than as an ordinary
dividend, reducing each shareholder's basis in his Fund shares.
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.
Income received by a Fund from sources within a foreign country may be
subject to withholding and other income or similar taxes imposed by that
country. If more than 50% of the value of a Fund's total assets at the close of
its taxable year consists of securities of foreign corporations, the Fund will
be eligible and may elect to "pass-through" to the Fund's shareholders the
amount of foreign income and similar taxes paid by the Fund. Pursuant to the
Funds' current investment policies and practices, only the EAFE Index Fund and
the International Equity Fund are expected to invest in foreign securities
sufficient in amount to be eligible to permit this election to be made. Pursuant
to this election, a shareholder will be required to include in gross income (in
addition to taxable dividends actually received) his pro rata share of the
foreign income and similar taxes paid by a Fund, and will be entitled either to
claim a deduction (as an itemized deduction) for his pro rata share of such
foreign taxes in computing his taxable income or to use it as a foreign tax
credit against his U.S. Federal income taxes, subject to limitations. Foreign
taxes may not be deducted by a shareholder that is an individual in computing
the alternative minimum tax.
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<PAGE>
Each shareholder will be notified within 60 days after the close of a Fund's
taxable year whether the foreign taxes paid by the Fund will "pass-through" for
that year and, if so, such notification will designate (a) the shareholder's
portion of the foreign taxes paid to each such country and (b) the portion of
the dividend which represents income derived from sources within each such
country.
Generally, a credit for foreign taxes is subject to the limitation that it
may not exceed the shareholder's U.S. tax attributable to his total foreign
source taxable income. For this purpose, if a Fund makes the election described
in the preceding paragraph, the source of a Fund's income flows through to its
shareholders. With respect to the Funds, gains from the sale of securities
generally will be treated as derived from U.S. sources and section 988 gains
generally will be treated as ordinary income derived from U.S. sources. The
limitation on the foreign tax credit is applied separately to foreign source
passive income (as defined for purposes of the foreign tax credit), including
foreign source passive income received from a Fund. In addition, the foreign tax
credit may offset only 90% of the alternative minimum tax imposed on
corporations and individuals. If a Fund is not eligible to make the election
described above, the foreign income and similar taxes it pays generally will
reduce investment company taxable income and distributions by a Fund will be
treated as United States source income.
The foregoing is only a general description of the foreign tax credit
under current law. Because application of the credit depends on the particular
circumstances of each shareholder, shareholders are advised to consult their own
tax advisers.
A Fund may invest in shares of foreign corporations which may be
classified under the Code as passive foreign investment companies ("PFICs").
Pursuant to the Funds' current investment policies and practices, the EAFE Index
Fund, Growth Equity Fund, International Equity Fund, Multi-Asset Fund and Value
Equity Fund are expected to invest in shares of foreign corporations. In
general, a foreign corporation is classified as a PFIC for a taxable year if at
least one-half of its assets constitute investment-type assets or 75% or more of
its gross income is investment-type income. If a Fund receives a so-called
"excess distribution" with respect to PFIC stock, the Fund itself may be subject
to a tax on a portion of the excess distribution, whether or not the
corresponding income is distributed by the Fund to shareholders. In general,
under the PFIC rules, an excess distribution is treated as having been realized
ratably over the period during which a Fund held the PFIC shares. A Fund itself
will be subject to tax on the portion, if any, of an excess
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<PAGE>
distribution that is so allocated to prior Fund taxable years and an interest
factor will be added to the tax, as if the tax had been payable in such prior
taxable years. Certain distributions from a PFIC as well as gain from the sale
of PFIC shares are treated as excess distributions. Excess distributions are
characterized as ordinary income even though, absent application of the PFIC
rules, certain excess distributions might have been classified as capital gain.
A Fund may be eligible to elect alternative tax treatment with respect to
PFIC shares. Under an election that currently is available in some
circumstances, a Fund generally would be required to include in its gross income
its share of the earnings of a PFIC on a current basis, regardless of whether
distributions are received from the PFIC in a given year. If this election were
made, the special rules, discussed above, relating to the taxation of excess
distributions, would not apply. Alternatively, a Fund may elect to mark to
market its PFIC shares at the end of each taxable year, with the result that
unrealized gains would be treated as though they were realized and reported as
ordinary income. Any mark-to-market losses and any loss from an actual
disposition of PFIC shares would be deductible as ordinary losses to the extent
of any net mark-to-market gains included in income in prior years.
Because the application of the PFIC rules may affect, among other
things, the character of gains, the amount of gain or loss and the timing of the
recognition of income with respect to PFIC shares, as well as subject a Fund
itself to tax on certain income from PFIC shares, the amount that must be
distributed to shareholders, and which will be taxed to shareholders as ordinary
income or long-term capital gain, may be increased or decreased substantially as
compared to a fund that did not invest in PFIC shares.
A Fund may invest in municipal bonds or obligations issued or
guaranteed by a state, the interest on which may be exempt from Federal income
tax. It is expected that shareholders will be subject to tax on dividends
distributed by a Fund that are derived from tax-exempt interest income.
Some of the debt securities that may be acquired by a 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 Funds, original issue
discount on a taxable debt security earned in a given year generally is treated
for Federal income tax purposes as interest and,
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<PAGE>
therefore, such income would be subject to the distribution requirements of the
Code.
Some of the debt securities may be purchased by a 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 a
Fund at a constant rate over the time remaining to the debt security's maturity
or, at the election of a Fund, at a constant yield to maturity which takes into
account the semi-annual compounding of interest.
If a 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.
Certain of the options, futures contracts, and forward contracts in which
the Funds may invest may be "section 1256 contracts." With certain exceptions,
gains or losses on section 1256 contracts generally are considered 60% long-term
and 40% short-term capital gains or losses ("60/40"). Also, section 1256
contracts held by a Fund at the end of each taxable year are "marked-to-market"
with the result that unrealized gains or losses are treated as though they were
realized and the resulting gain or loss generally is treated as 60/40 gain or
loss. These contracts also may be marked-to-market at other times during the
year under rules prescribed pursuant to the Code.
The transactions undertaken by the Funds involving options, futures and
forward contracts may result in "straddles" for Federal income tax purposes. The
straddle rules may affect the character of gains (or losses) realized by a Fund.
In addition, losses realized by a Fund on positions that are part of a straddle
may be deferred under the straddle rules, rather than being taken into account
in calculating the taxable income for the taxable year in which such losses are
realized. Because only a few regulations implementing the straddle rules have
been promulgated, the tax consequences to the Funds of transactions involving
options, futures and forward contracts are not entirely clear. These
transactions may increase the amount of short-term
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<PAGE>
capital gain realized by a Fund which is taxed as ordinary income when
distributed to shareholders.
The Funds may make one or more of the elections available under the Code
which are applicable to straddles. If a Fund makes any of the elections, the
amount, character and timing of the recognition of gains or losses from the
affected straddle positions will be determined under rules that vary according
to the election(s) made. The rules applicable under certain of the elections may
operate to accelerate the recognition of gains or losses from the affected
straddle positions.
Because application of the straddle rules may affect the character of
gains or losses, defer losses and/or accelerate the recognition of gains or
losses from the affected straddle positions, the amount which must be
distributed to shareholders, and which will be taxed to shareholders as ordinary
income or long-term capital gain, may be increased or decreased substantially as
compared to a Fund that did not engage in such transactions.
Rules governing the tax aspects of swap agreements are in a developing
stage and are not entirely clear in certain respects. Accordingly, while the
Funds eligible to enter into swap agreements intend to account for such
transactions in a manner deemed to be appropriate, the Internal Revenue Service
("IRS") might not accept such treatment. If it did not, the status of a Fund as
a regulated investment company might be affected. It is possible that
developments in the swap market and the laws relating to swaps, including
potential government regulation, could have tax consequences. The Funds intend
to monitor developments in this area.
Certain requirements that must be met under the Code in order for a Fund
to qualify as a regulated investment company may limit the extent to which a
Fund will be able to engage in transactions in options, futures, forward
contracts, and swaps.
Recently enacted rules may affect the timing and character of gain if a
Fund engages in transactions that reduce or eliminate its risk of loss with
respect to appreciated financial positions. If a Fund enters into certain
transactions in property while holding substantially identical property (for
example, a short sale against the box), the Fund would be treated as if it had
sold and immediately repurchased the property and would be taxed on any gain
(but not loss) from the constructive sale. The character of gain from a
constructive sale would depend upon the Fund's holding period in the property.
Loss from a constructive sale would be recognized when the property was
subsequently disposed of, and its character would depend on the
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<PAGE>
Fund's holding period and the application of various loss deferral provisions of
the Code.
Each Fund is required to report to the IRS all distributions except in the
case of certain exempt shareholders. All such 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 Funds 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 Funds 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
of its Money Market Fund, the yield of the other Funds or Classes, and the total
return of all Funds or Classes in advertisements, sales literature, or reports
to shareholders or prospective investors. Due to the deduction of the
shareholder service fee, performance of the Institutional Service Class of each
Fund will be lower than the performance of the Institutional Class of the Fund.
Each of the Funds began offering Institutional Service Class shares on
January 1, 1995. Thus, the performance figures for
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<PAGE>
Institutional Service Class shares prior to that date have been calculated based
on the historical performance of the Funds' Institutional Class shares from
inception through December 31, 1994.
Current yield for the Money Market 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 366/7, with the resulting yield figure
carried to at least the nearest hundredth of one percent. "Effective yield" for
the Money Market Fund assumes that all dividends received during an annual
period have been reinvested. Calculation of "effective yield" begins with the
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) to the 366th power divided by 7] - 1
The current and effective seven-day average yields as of December 31, 1997
for the Money Market Fund were 5.31% and 5.45%, respectively, for the
Institutional Class, and were 5.06% and 5.19%, respectively, for the
Institutional Service Class. Had certain expenses not been assumed by the
Manager, these yields would have been 5.15% and 5.28%, respectively, for the
Institutional Class, and 4.90% and 5.02%, respectively, for the Institutional
Service Class.
Quotations of yield for the other Funds will be based on all investment
income per share earned during a particular 30-day period (including dividends
and interest), less expenses accrued during the period ("net investment
income"), and are computed by dividing net investment income by the maximum
offering price per share on the last day of the period, according to the
following formula:
2[(a - b + 1) to the 6th power - 1]
-----
cd
where a = dividends and interest earned during the
period,
b = expenses accrued for the period (net of
reimbursements),
c = the average daily number of shares
outstanding during the period that were
entitled to receive dividends, and
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<PAGE>
d = the maximum offering price per share on the
last day of the period.
For the 30-day period ended December 31, 1997, the yield for the
Short-Term Bond Fund was 5.68% for the Institutional Class, and was 5.45% for
the Institutional Service Class.
Quotations of average annual total return for a 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) to the nth power = 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, and assume
that all dividends and distributions are reinvested when paid. Quotations of
total return may also be shown for other periods.
The average annual total return of the following Funds for the one-year
and five-year periods ended December 31, 1997 and the period from inception to
December 31, 1997 were as follows:
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<PAGE>
<TABLE>
<CAPTION>
Five Years Average Annual
Year Ended Ended Total Return
Fund 12/31/97 12/31/97 Since Inception
---- ---------------------- ---------------
<S> <C> <C> <C>
EAFE Index Fund
Institutional Class(1) ........... 0.40% 9.93% 6.47%
-------------------------------
Institutional Service Class(2) ... 0.08% 9.76% 6.35%
-------------------------------
Growth Equity Fund
Institutional Class(1) ........... 24.73% 17.52% 21.68%
-------------------------------
Institutional Service Class(2) ... 24.50% 17.34% 21.55%
-------------------------------
Indexed Equity Fund
Institutional Class(1) ........... 32.88% 19.74% 19.21%
-------------------------------
Institutional Service Class(2) ... 32.60% 19.58% 19.10%
-------------------------------
International Equity Fund*
Institutional Class(3) ........... 5.44% 11.41% 9.35%
-------------------------------
Institutional Service Class(3) ... 4.88% 11.12% 9.10%
-------------------------------
Multi-Asset Fund
Institutional Class(1) ........... 26.69% 15.02% 14.24%
-------------------------------
Institutional Service Class(2) ... 26.30% 14.87% 14.14%
-------------------------------
Value Equity Fund
Institutional Class(1) ........... 22.63% 17.71% 20.65%
-------------------------------
Institutional Service Class(2) ... 22.28% 17.56% 20.54%
-------------------------------
Bond Fund
Institutional Class(1) ........... 8.57% 6.90% 7.81%
-------------------------------
Institutional Service Class(2) ... 8.21% 6.73% 7.69%
-------------------------------
Indexed Bond Fund
Institutional Class(1) ........... 9.01% 6.92% 8.02%
-------------------------------
Institutional Service Class(3) ... 8.75% 6.81% 7.93%
-------------------------------
International Bond Fund*
Institutional Class(3) ........... 2.62% 10.42% 9.80%
-------------------------------
Institutional Service Class(3) ... 2.27% 10.26% 9.70%
-------------------------------
Short-Term Bond Fund
Institutional Class(1) ........... 6.13% 5.35% 6.26%
-------------------------------
Institutional Service Class(2) ... 5.98% 5.21% 6.16%
-------------------------------
</TABLE>
(1) The inception date of these Institutional Class shares is 1/2/91.
(2) Performance figures for the Institutional Service Class, first offered to
the public on 1/1/95, include the historical performance of the
Institutional Class from the Funds' inception (1/2/91) up to 12/31/94.
(3) The inception date of the International Equity Fund and International Bond
Fund shares is 1/1/95.
* Performance figures include the historical performance of the Separate
Accounts for the period prior to commencement of operations of the
International Bond Fund and the International Equity Fund on January 1,
1995. MacKay-Shields Financial Corporation, the current Sub-Adviser to
both the International Bond Fund and the International Equity Fund, served
as investment adviser to both corresponding Separate Accounts, and the
objectives, policies, restrictions, guidelines and management styles of
the Separate Accounts were materially equivalent to those of their
corresponding Funds. Performance figures for the
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<PAGE>
period prior to January 1, 1995, have been calculated by measuring the
change in value of a unit in the Separate Account from the time period
indicated to January 1, 1995 using the expense structure of each Separate
Account, which generally was higher than the expense structure of its
corresponding Fund. Neither Separate Account was registered under the
Investment Company Act of 1940 ("1940 Act") and therefore was not subject
to certain investment restrictions imposed under the 1940 Act. If the
Separate Accounts had been registered under the 1940 Act, their
performance may have been adversely affected. The International Equity
Fund's predecessor Separate Account commenced operations on July 31, 1992;
the International Bond Fund's predecessor Separate Account commenced
operations on January 31, 1990.
In addition, advertising for a 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 a 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 a
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 a Fund may discuss
the investment philosophy, personnel and assets under management of the Fund's
Sub-Adviser, and other pertinent facts relating to the management of the Fund by
the Sub-Adviser.
From time to time any of the Funds 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.
In addition, performance information for a 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
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<PAGE>
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 Funds. 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 Funds may include general
information about the services and products offered by the Funds, 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 Funds are separate portfolios 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. The
Board of Directors may establish additional portfolios (with different
investment objectives and fundamental policies) at any time in the future.
Establishment and offering of additional portfolios will not alter the rights of
the Company's shareholders. When issued, shares are fully paid, non-assessable,
redeemable, and freely transferable.
Effective Maturity
Certain Funds may use an effective maturity for determining the maturity
of their portfolio. Effective maturity means the average expected repayment date
of the portfolio taking into account prospective calls, puts and mortgage
prepayments, in addition to the maturity dates of the securities in the
portfolio.
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<PAGE>
Beneficial Ownership of the Funds
The following table sets forth the information concerning beneficial
ownership, as of April 1, 1998, of the Funds' shares by each person who
beneficially owned more than 5% of the voting securities of any Fund:
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<PAGE>
<TABLE>
<CAPTION>
Percentage of
Name and Address of Shareholder Fund Shares Owned(1) Outstanding Shares(2)
<S> <C> <C> <C>
TRUSTEES OF THE NEW YORK LIFE INSURANCE COMPANY BOND 6,093.959 35.1%
RETIREMENT PLAN AND PENSION PLAN (COMPANY PLAN) GROWTH EQUITY 5,204,767 18.3%
51 MADISON AVENUE INDEXED BOND 3,966,072 30.9%
NEW YORK, NY 10010 INDEXED EQUITY 7,117,064 17.5%
INTERNATIONAL BOND 3,559,841 71.2%
INTERNATIONAL EQUITY 2,640,050 22.7%
VALUE EQUITY 20,342,583 33.3%
TRUSTEES OF THE NYLIC RETIREMENT PLAN (AGENTS) BOND 2,062,408 11.9%
51 MADISON AVENUE GROWTH EQUITY 3,552,854 12.5%
NEW YORK, NY 10010 INDEXED BOND 2,125,713 36.5%
INDEXED EQUITY 6,753,899 16.6%
INTERNATIONAL BOND 1,014,242 20.3%
INTERNATIONAL EQUITY 2,569,230 22.1%
VALUE EQUITY 12,737,651 20.8%
NEW YORK LIFE INSURANCE COMPANY EAFE INDEX 1,225,734 23.6%
51 MADISON AVENUE INDEXED EQUITY 3,959,310 9.7%
NEW YORK, NY 10010 MULTI-ASSET 8,568,605 28.4%
TRUSTEES OF THE LONE STAR HOURLY RETIREMENT MONEY MARKET 16,000,295 5.7%
PLAN, DAY & ZIMMERMAN, INC. SHORT-TERM BOND 310,235 7.2%
1818 MARKET STREET
PHILADELPHIA, PA 19103
TRUSTEES OF THE VOGEL SHORT-TERM BOND 258,839 6.0%
EMPLOYEES PENSION TRUST
P.O. BOX 380
ORANGE CITY, IA 51041-0380
TRUSTEES OF THE NEW YORK LIFE INSURANCE COMPANY GROWTH EQUITY 6,063,587 21.5%
EMPLOYEE PROGRESS SHARING INVESTMENT PLAN TRUST INDEXED EQUITY 2,554,838 6.3%
51 MADISON AVENUE MULTI-ASSET 2,291,178 7.7%
NEW YORK, NY 10010 SHORT-TERM BOND 449,001 10.4%
TRUSTEES OF THE NEW LIFE INSURANCE COMPANY GROWTH EQUITY 3,187,810 11.2%
AGENTS PROGRESS SHARING INVESTMENT PLAN TRUST
51 MADISON AVENUE
NEW YORK, NY 10010
NEW YORK LIFE INSURANCE COMPANY EMPLOYEES' EAFE INDEX 860,727 16.6%
HEALTH AND LIFE BENEFIT TRUST - (HEALTH
BENEFITS)
51 MADISON AVENUE
NEW YORK, NY 10010
NEW YORK LIFE INSURANCE COMPANY EMPLOYEES' BOND 904,935 5.2%
HEALTH AND LIFE BENEFIT TRUST (LIFE BENEFITS) EAFE INDEX 296,507 5.7%
51 MADISON AVENUE
NEW YORK, NY 10010
NEW YORK LIFE INSURANCE COMPANY AGENTS' HEALTH EAFE INDEX 691,402 13.3%
AND LIFE BENEFIT TRUST
(HEALTH BENEFITS)
51 MADISON AVENUE
NEW YORK, NY 10010
</TABLE>
- 86 -
<PAGE>
<TABLE>
<CAPTION>
Percentage of
Name and Address of Shareholder Fund Shares Owned(1) Outstanding Shares(2)
<S> <C> <C> <C>
PLASTICS ENGINEERING COMPANY EAFE INDEX 747,616 14.4%
P.O. BOX 758
SHEBOYGAM, WI 53082-0758
MERRILL LYNCH TRUST COMPANY INDEXED EQUITY 3,160,780 7.8%
TTEE FBO CHRYSLER 401(K) PLAN
265 DAVIDSON AVENUE
SOMERSET, NJ 08873
NYL TRUST COMPANY CLIENT ACCOUNTS BOND 1,825,709 10.5%
51 MADISON AVENUE, ROOM 117A EAFE INDEX 473,281 9.2%
NEW YORK, NY 10010 GROWTH EQUITY 4,697,577 16.6%
INDEXED BOND 3,856,458 30.0%
INDEXED EQUITY 8,471,592 21.1%
MONEY MARKET 127,236,376 45.2%
MULTI-ASSET 6,820,900 23.1%
SHORT-TERM BOND 694,463 16.2%
VALUE EQUITY 9,787,509 16.6%
TRUSTEES OF THE HARVEST STATES COOPERATIVE INTERNATIONAL EQUITY 843,813 7.3%
COMBINED RETIREMENT FUND
P.O. BOX 64594
ST. PAUL, MN 55169
METHODIST HOME ENDOWMENT FUND INTERNATIONAL EQUITY 706,119 6.1%
1111 HERRING AVENUE
WACO, TX 76708
MACKAY-SHIELDS FINANCIAL CORPORATION SHORT-TERM BOND 401,861 9.3%
9 WEST 57TH STREET
NEW YORK, NY 10019
BHC SECURITIES INC. MONEY MARKET 70,903,910 25.2%
2005 MARKET STREET
1 COMMERCE SQUARE
PHILADELPHIA, PA 19103
TRUSTEES OF THE NEW YORK LIFE INSURANCE COMPANY BOND 6,093,959 35.1%
PENSION PLAN INDEXED BOND 3,966,072 30.9%
51 MADISON AVENUE INTERNATIONAL BOND 3,559,841 71.2%
NEW YORK, NY 10020 VALUE EQUITY 20,342,561 33.3%
TRUSTEES OF THE NYLIC RETIREMENT PLAN INTERNATIONAL EQUITY 3,359,070 28.9%
51 MADISON AVENUE
NEW YORK, NY 10010
NEW YORK LIFE INSURANCE COMPANY MULTI-ASSET 8,568,605 28.4%
51 MADISON AVENUE
NEW YORK, NY 10010
NEW YORK LIFE TRUST COMPANY INDEXED BOND 3,836,458 30.0%
CLIENT ACCOUNTS MONEY MARKET 127,336,376 45.2%
51 MADISON AVENUE, ROOM 117A
NEW YORK, NY 10010
</TABLE>
- ----------------------------
(1) This information, not being within the knowledge of the Company, has
been furnished by each of the above persons. Beneficial ownership is as defined
under Section 13(d) of the Securities Exchange Act of 1934. Fractional shares
have been omitted.
(2) Only the ownership of at least one-tenth of one percent is listed.
As of April 1, 1998, the Directors and officers of the Company as a group
owned less than 1% of the shares of any Fund.
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
- 87 -
<PAGE>
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
Price Waterhouse 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's financial statements for the Funds, including the Statements
of Assets and Liabilities, the Portfolios of Investments and the Statements of
Operations for the year ended December 31, 1997, and the Statements of Changes
in Net Assets for the years ended December 31, 1997 and December 31, 1996, the
notes to the Financial Statements, and the Report of the Independent
Accountants, all of which are included in the 1997 Annual Report to
Shareholders, are hereby incorporated by reference into this Statement of
Additional Information.
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
- 88 -
<PAGE>
to the registration statement, each such statement being qualified in all
respects by such reference.
- 89 -
<PAGE>
MAINSTAY INSTITUTIONAL FUNDS INC.
PART C. OTHER INFORMATION
Item 24. Financial Statements and Exhibits
a. Financial Statements:
Included in Part A of this Registration Statement:
Financial Highlights for the period January 2, 1991 (commencement of
operations) through December 31, 1991, for the years ended December
31, 1992, 1993, 1994, 1995, 1996 and 1997 for all Funds but the
International Equity and International Bond Funds. Financial
Highlights for the period January 1, 1995 (commencement of
operations) through December 31, 1995 and for the years ended
December 31, 1996 and 1997 for the International Equity and
International Bond Funds.
Incorporated by reference in Part B of this Registration Statement:
Statement of Assets and Liabilities at December 31, 1997;
Statement of Operations for the year ended December 31, 1997;
Statement of Changes in Net Assets for the years ended December 31,
1996 and 1997;
Notes to Financial Statements;
Portfolio of Investments at December 31, 1997.
All other financial statements and schedules are not required, not
applicable or the required information is shown in financial
statements or the notes thereto.
b. Exhibits:
1. (a) Articles of Incorporation(1)
(b) Articles Supplementary(2)
(c) Articles of Amendment(4)
(d) Form of Articles Supplementary(6)
(e) Articles of Amendment(7)
2. By-laws(1)
3. Inapplicable
<PAGE>
4. Specimen Certificates for Common Stock(3)
5. (a) Form of (composite) Management Agreement between MainStay
Institutional Funds, Inc., on behalf of the Bond Fund, EAFE
Index Fund, Growth Equity Fund, Indexed Bond Fund, Indexed
Equity Fund, International Bond Fund, International Equity
Fund, Money Market Fund, Multi-Asset Fund, Short-Term Bond
Fund and Value Equity Fund, and MainStay Management, Inc.(11)
(b) Form of (composite) Sub-Advisory Agreement between MainStay
Management, Inc., on behalf of the Bond Fund, Growth Equity
Fund, International Bond Fund, International Equity Fund,
Short-Term Bond Fund and Value Equity Fund, and MacKay-Shields
Financial Corporation.(11)
(c) Form of (composite) Sub-Advisory Agreement between MainStay
Management, Inc., on behalf of the EAFE Index Fund, Indexed
Bond Fund, Indexed Equity Fund and Multi-Asset Fund, and
Monitor Capital Advisors, Inc.(11)
(d) Form of Sub-Advisory Agreement between MainStay Management,
Inc., on behalf of the Money Market Fund and New York Life
Insurance Company.(11)
6. Distribution Agreement(5)
7. Inapplicable
8. Form of Custodian Contract(6)
9. (a) Form of Transfer Agency and Service Agreement(2)
(b) Form of License Agreement(2)
(c) Form of Service Agreement with New York Life Benefit Services,
Inc.(10)
(d) Form of Service Agreement with New York Life Insurance
Company(10)
10. Opinion and Consent of Counsel(3)
11. Consent of Independent Accountants
12. Inapplicable
13. Initial Subscription Agreement(3)
14. Inapplicable
C-3
<PAGE>
15. (a) Form of Account Application(3)
(b) Shareholder Services Plan(10)
16. Inapplicable
17. Financial Data Schedules
18. Multiple Class Plan(11)
- ----------
1. Filed with Registration Statement No. 33-36962 on September 21, 1990.
2. Filed with Pre-Effective Amendment No. 1 to Registration Statement No.
33-36962 on November 19, 1990.
3. Filed with Pre-Effective Amendment No. 2 to Registration Statement No.
33-36962 on December 26, 1990.
4. Filed with Post-Effective Amendment No. 4 to Registration Statement No.
33-36962 on November 2, 1992.
5. Filed with Post-Effective Amendment No. 6 to Registration Statement No.
33-36962 on April 29, 1994.
6. Filed with Post-Effective Amendment No. 7 to Registration Statement No.
33-36962 on October 14, 1994.
7. Filed with Post-Effective Amendment No. 8 to Registration Statement No.
33-36962 on December 29, 1994.
8. Filed with Post-Effective Amendment No. 10 to Registration Statement No.
33-36962 on April 28, 1995.
9. Filed with Post-Effective Amendment No. 12 to Registration Statement No.
33-36962 on February 28, 1996.
10. Filed with Post-Effective Amendment No. 14 to Registration Statement No.
33-36962 on May 1, 1997.
11. Filed with Post-Effective Amendment No. 17 to Registration Statement No.
33-36962 on May 1, 1997.
Item 25. Persons Controlled by or under Common Control with Registrant
The following chart indicates the persons controlled by New York Life:
C-4
<PAGE>
<TABLE>
<CAPTION>
Jurisdiction of Percent of Voting
Name+ Organization Securities Owned
----- --------------- -----------------
<S> <C> <C>
Eagle Strategies Corporation Arizona 100%
Greystone Realty Corporation which owns 100% Delaware 100%
of the shares of:
Greystone Realty Management, Inc. Delaware
NYLIFE Administration Corp. Texas 100%
MacKay-Shields Financial Corporation Delaware 100%
Madison Square Advisors, Inc. Delaware 100%
MSC Holding, Inc. (formerly Magnus Software Georgia 85.43%
Corporation, Inc.)
The Mainstay Funds Massachusetts ***
MainStay Management, Inc. Delaware 100%
MainStay Shareholder Services, Inc. Delaware 100%
Monitor Capital Advisors, Inc. Delaware 100%
NYLIFE SFD Holding, Inc. Delaware 100%
which owns 83.33% of NYLIFE
Structured Asset Management Company Ltd. Texas
New York Life Capital Corporation Delaware 100%
New York Life Fund, Inc. New York *
New York Life Insurance and Annuity Delaware 100%
Corporation
New York Life International Investment Inc. Delaware
which owns 100% of the shares of:
Monetary Research Ltd. Bermuda
and 100% of the shares of:
NYL Management Limited England
MainStay VP Series Fund, Inc. Maryland *
New York Life International, Inc. (formerly New York Delaware
Life Worldwide Holding, Inc.), which owns 100% of the
shares of:
New York Life Worldwide Capital, Inc. Delaware
New York Life Worldwide Development, Inc. Delaware
New York Life Worldwide (Bermuda) Ltd.
New York Life Insurance Worldwide Ltd. Bermuda
and owns 99.97% of the shares of Bermuda
New York Life (U.K.) Ltd., which owns England
100% of the shares of:
Windsor Construction Company Limited England 100%
and 33.3% of Japan Gamma Asset Management Japan
Limited and 31.5% of the shares of:
Life Assurance Holding Corporation
Limited, which owns South Korea
100% of the shares of:
Windsor Life Assurance Company
Limited and which Indonesia
owns 51% of the shares of:
KOHAP New York Life Insurance Ltd. Mexico
and which owns 50.2% of the shares
of:
P.T. Asuransi Jiwa Sewur -
New York and which owns 49% of
the shares of:
GEO New York Life, S.A.
NYLIFE Depositary Corporation which owns 16.67% of Delaware 100%
NYLIFE Structured Asset Management Company Ltd. Texas
</TABLE>
C-5
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
New York Life Benefit Services, Inc. which owns 100% Massachusetts 100%
of ADQ Insurance Agency Inc. Massachusetts
New York Life Trust Company New York 100%
NYLIFE Distributors Inc. Delaware 100%
NYLIFE Healthcare Management Inc., which owns 54.3%
of total combined stock and 89.6% of the voting rights of:
Express Scripts, Inc., which owns 100% of the
shares of: Delaware
Great Plains Reinsurance Company Arizona
Practice Patterns Science, Inc. Delaware
ESI Canada Holdings, Inc., which owns 100% of Canada
the shares of:
ESI Canada, Inc. Canada
IVTx of Houston, Inc. Texas
IVTx of Dallas, Inc. Texas
PhyNet, Inc. Texas
Express Scripts Vision Corporation Delaware
NYLCare Health Plans, Inc. Delaware
(formerly Sanus Corp. Health Systems), which owns
100% of the shares of: Delaware
New York Life and Health Insurance Company Delaware
Avanti Corporate Health Systems Inc. Delaware
Avanti Health Systems, Inc., which owns 100% of Maryland
the shares of:
Avanti of the District, Inc. Maryland
Avanti of Illinois, Inc. Illinois
Avanti of New York, Inc. New York
Avanti of New Jersey, Inc. New Jersey
and owns 80% of the shares of:
NYLCare Health Plans of the Mid-Atlantic, Inc., Maryland
which owns 100% of the shares of:
Physicians Health Services Foundation, Inc. Maryland
Lonestar Holding Co., which owns 90% of the
shares of: Delaware
Lone Star Health Plan, Inc., which owns
100% of the shares of: Texas
NYLCare Health Plans of the Gulf Coast,
Inc. Texas
Prime Provider Corp., which owns 100% of the
shares of: New York
Prime Provider Corp. of Texas Texas
NYLCare of Connecticut, Inc. Connecticut
Sanus Dental Plan of New Jersey, Inc. New Jersey
NYLCare Dental Plans of the Southwest, Inc. Texas
NYLCare Health Plans of New York, Inc. New York
NYLCare Health Plans of Connecticut, Inc. Connecticut
NYLCare Health Plans of the Midwest, Inc. Illinois
NYLCare Health Plans of New Jersey, Inc. New Jersey
NYLCare of Texas, Inc., which owns 100% of the Texas
shares of:
NYLCare Passport PPO of the Southwest, Inc. Texas
NYLCare Preference Services, Inc. Maryland
Sanus Preferred Providers West, Inc. California
Sanus Preferred Services of Illinois, Inc. Illinois
NYLCare Health Plans of the Southwest, Inc. Texas
WellPath of Arizona Reinsurance Company Arizona
NYLCare Health Plans of Louisiana, Inc. Louisiana
NYLCare of New England, Inc. Delaware
Sanus - Northeast, Inc. Delaware
NYLCare Health Plans of Maine, Inc. Maine
NYLCare NC Holdings, Inc. which owns 50% of the Delaware
shares of:
</TABLE>
C-6
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
WellPath Community Health Plan Holdings, North Carolina
L.L.C. which owns 100% of WPCHP Holdings, Inc.
and 99% of: Delaware
WellPath Preferred Services, L.L.C.
and North Carolina
WellPath Select Holdings, L.L.C., which
owns 100% of: North Carolina
WellPath Select, Inc. North Carolina
WellPath of North Carolina, Inc. North Carolina
Sanus of New York and New Jersey, Inc. New York
NYLCare Health Plans of Pennsylvania, Inc. Pennsylvania
Docservo, Inc. New York
The ETHIX Corporation, which owns 100% of the Delaware
shares of:
ETHIX Great Lakes, Inc. Michigan
ETHIX Mid-Atlantic, Inc., which owns 100% Pennsylvania
of the shares of:
ETHIX Midlands, Inc. Delaware
ETHIX Mid-Rivers, Inc. Missouri
ETHIX Northwest Public Services, Inc. Washington
ETHIX Northwest, Inc., Washington
which owns 100% of:
NYLCare Health Plans Northwest, Inc. Washington
ETHIX Pacific, Inc. Oregon
ETHIX Risk Management, Inc. Oregon
ETHIX Southeast, Inc. North Carolina
ETHIX Southwest, Inc. Texas
Benefit Panel Services which owns 100% of the shares of California
VivaHealth, Incorporated California
One Liberty Plaza Holdings, Inc. Delaware
NYLIFE Inc. New York 100%
NYLIFE Insurance Company of Arizona Arizona 100%
NYLIFE Refinery, Inc. Delaware 100%
NYLIFE Securities Inc. New York 100%
NYLINK Insurance Agency Incorporated Delaware 100% which owns 100%
of the shares of:
NYLINK Insurance Agency of Alabama Alabama
NYLINK Insurance Agency of New Mexico New Mexico
NYLINK Insurance Agency of Hawaii Incorporated Hawaii
NYLINK Insurance Agency of Massachusetts, Massachusetts 100%
Incorporated
NYLTEMPS Inc. Delaware
</TABLE>
+ By including the indicated corporation in this list, New Your life is not
stating or admitting that said corporations are under its actual control;
rather, these corporations are listed here to ensure full compliance with
the requirements of this Form N-1A.
* New York Life serves as investment adviser to these entities, the shares
of which are held or record by separate accounts of New York Life (for the
New York Life Fund, Inc.) and NYLIAC (for the MainStay
C-7
<PAGE>
VP Series Fund, Inc.). New York Life disclaims any beneficial ownership
and control of these entities.
** New York Life Foundation does not issue voting securities.
*** MacKay-Shields Financial Corporation and Monitor Capital Advisores, Inc.
serve as sub-advisers to this entity.
Item 26. Number of Holders of Securities.
As of April 1, 1998, the number of record holders of each class of
securities of the Registrant were as follows:
(1) (2)
Title of Class Number of Record Holders
- -------------- ------------------------
Shares of Common Stock:
Bond Fund
Institutional Class 141
Institutional Service Class 63
EAFE Index Fund
Institutional Class 83
Institutional Service Class 41
Growth Equity Fund
Institutional Class 297
Institutional Service Class 288
Indexed Bond Fund
Institutional Class 50
Institutional Service Class 52
Indexed Equity Fund
Institutional Class 173
Institutional Service Class 129
International Bond Fund
Institutional Class 22
Institutional Service Class 27
International Equity Fund
Institutional Class 48
Institutional Service Class 52
Money Market Fund
Institutional Class 166
C-8
<PAGE>
(1) (2)
Title of Class Number of Record Holders
- -------------- ------------------------
Institutional Service Class 78
Multi-Asset Fund
Institutional Class 257
Institutional Service Class 109
Short-Term Bond Fund
Institutional Class 123
Institutional Service Class 26
Value Equity Fund
Institutional Class 368
Institutional Service Class 239
Item 27. Indemnification
Reference is made to Article VI of the Registrant's By-Laws (Exhibit 2),
and Article VII, Section 2 of the Registrant's Articles of Incorporation
(Exhibit 1), which are incorporated by reference herein.
Item 28. Business or Other Connections of Investment Advisers
The business of MainStay Management, Inc. is summarized under "Know Who
You're Investing With" in the Prospectus constituting Part A of this
Registration Statement, which summary is incorporated herein by reference.
The business or other connections of each director and officer of MainStay
Management, Inc. is currently listed in the investment adviser registration on
Form ADV for MainStay Management, Inc. (File No. 801-54912) and is hereby
incorporated herein by reference thereto.
The business of MacKay-Shields Financial Corporation is summarized under
"Who Manages Your Money" in the Prospectus constituting Part A of this
Registration Statement, which summary is incorporated herein by reference.
The business of Monitor Capital Advisors, Inc. is summarized under "Who
Manages Your Money?" in the Prospectus constituting Part A of this Registration
Statement, which summary is incorporated herein by reference.
C-9
<PAGE>
The business or other connections of each director and officer of Monitor
Capital Advisors, Inc. is currently listed in the investment adviser
registration on Form ADV for Monitor Capital Advisors, Inc. (File No. 801-34412)
and is hereby incorporated herein by reference thereto.
The business of New York Life Insurance Company is summarized under "Who
Manages Your Money?" in the Prospectus constituting Part A of this Registration
Statement, which summary is incorporated herein by reference.
The business or other connections of each director and officer of New York
Life Insurance Company is currently listed in the investment adviser
registration on Form ADV for New York Life Insurance Company (File No.
801-19525) and is hereby incorporated herein by reference thereto.
Item 29. Principal Underwriters
a. NYLIFE Distributors Inc. also acts as the principal underwriter for The
MainStay Funds (File No. 33-2610) and NYLIAC Variable Universal Life
Separate Accounts I and II.
<TABLE>
<CAPTION>
b. (3)
(1) (2) Position(s) and Office
Name and Principal Position(s) and Office(s) Office(s) with
Business Address with NYLIFE Distributors Inc. Registrant
<S> <C> <C>
Mistero, Frank Director, President and None
300 Interpace Parkway Cheif Executive Officer
Parsippany, NJ 07054
Davidson, Sheila Chief Compliance Officer None
51 Madison Avenue
New York, NY 10010
Brady, Robert E. Director and Vice President None
260 Cherry Hill Road
Parsippany, NJ 07054
Boyce, Jefferson C. Director Senior Vice President
51 Madison Avenue
New York, NY 10010
Roussin, Stephen C. Director Director and Chairman
300 Interpace Parkway
Parsippany, NJ 07054
Gallo, Michael G. Director None
51 Madison Avenue
New York, NY 10010
Rock, Robert D. Director None
51 Madison Avenue
New York, NY 10010
Boccio, Frank M. Director None
51 Madison Avenue
New York, NY 10010
Hildebrand, Phillip J. Director None
51 Madison Avenue
New York, NY 10010
Adasse, Louis H. Corporate Vice President None
51 Madison Avenue,
New York, NY 10010
Polis, Anthony W. Vice President and Treasurer, Chief
300 Interpace Parkway Chief Financial Officer Financial and
Parsippany, NJ 07054 Accounting Officer
Calhoun, Jay S. Vice President and Treasurer None
51 Madison Avenue
New York, NY 10010
</TABLE>
C-10
<PAGE>
Warga, Thomas J. Senior Vice President None
51 Madison Avenue and General Auditor
New York, NY 10010
Livornese, Linda M. Vice President President
51 Madison Avenue
New York, NY 10010
Murray, Thomas J. Corporate Vice President None
51 Madison Avenue
New York, NY 10010
Zuccaro, Richard W. Tax Vice PresidenT Tax Vice President
51 Madison Avenue
New York, NY 10010
Krystel, David J. Vice President None
51 Madison Avenue
New York, NY 10010
O'Byrne, John H. Vice President and Chief None
51 Madison Avenue Compliance Officer
New York, NY 10010
Daoust, George R. Assistant Vice President None
300 Interpace Parkway
Parsippany, NJ 07054
Arizmendi, Arphiela Assistant Vice President Assistant Treasurer
300 Interpace Parkway
Parsippany, NJ 07054
Cirillo, Antoinette B. Assistant Vice President Assistant Treasurer
300 Interpace Parkway
Parsippany, NJ 07054
Lorito, Geraldine Assistant Vice President Assistant Treasurer
300 Interpace Parkway
Parsippany, NJ 07054
Gomez, Mark A. Assistant Secretary None
51 Madison Avenue
New York, NY 10010
c. Inapplicable.
Item 30. Location of Accounts and Records.
Certain accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940 and the Rules promulgated
thereunder are maintained at the offices of the Registrant, and New York Life
Insurance Company, 51 Madison Avenue, New York, NY 10010, at the offices of
MainStay Management, Inc. and NYLIFE Distributors Inc., 300 Interpace Parkway,
Parsippany NJ 07054, at the offices of Monitor Capital Advisors, Inc., 504
Carnegie Center, Princeton, NJ 08540-6242, and at the offices of MacKay-Shields
Financial Corporation, 9 West 57th Street, New York, NY 10019. Records relating
to the duties of the custodian for the Funds are maintained by The Bank of New
York, 90 Washington Street, New York, NY 10286. Records relating to the duties
of the Registrant's transfer agent are maintained by Boston Financial Data
Services, 2 Heritage Drive, North Quincy, MA 02171.
Item 31. Management Services.
Inapplicable.
C-11
<PAGE>
Item 32. Undertakings.
c. The Registrant hereby undertakes to furnish each person to whom a
prospectus is delivered a copy of the Registrant's latest annual report to
shareholders upon request and without charge.
a:\56991.13b
C-12
<PAGE>
EXHIBIT INDEX
-------------
EXHIBIT ITEM NO.
------- --------
Consent of Independent Accounts 11
Financial Data Schedules for the fiscal year ended
December 31, 1997 17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that this
Post-Effective Amendment No. 18 to the Registration Statement meets the
requirements for effectiveness pursuant to Rule 485(b) under the Securities Act
of 1933, as amended, and the Registrant has duly caused this Post-Effective
Amendment No. 18 to the Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New York in the State of
New York, on the 30th day of April, 1998.
MAINSTAY INSTITUTIONAL FUNDS INC.
By: /s/ Linda M. Livornese
---------------------------------
Linda M. Livornese
President
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment No. 18 to the Registrant's Registration Statement has
been signed below by the following persons in the capacities and on the dates
indicated.
Signature Title Date
- --------- ----- ----
Chairperson and April 30, 1998
- -------------------- Director
Stephen C. Roussin*
Director April 30, 1998
- --------------------
Patrick G. Boyle*
Director April 30, 1998
- --------------------
Lawrence Glacken*
Director April 30, 1998
- --------------------
Robert P. Mulhearn*
Director April 30, 1998
- --------------------
Susan B. Kerley*
<PAGE>
Signature Title Date
- --------- ----- ----
/s/ Linda M. Livornese President April 30, 1998
- -------------------------------- (Principal
Linda M. Livornese Executive
Officer)
/s/ Anthony W. Polis Treasurer April 30, 1998
- -------------------------------- (Principal
Anthony W. Polis Financial
and Accounting
Officer)
*By: /s/ Jeffrey L. Steele
----------------------------
Jeffrey L. Steele
as Attorney-in-Fact
* Powers of Attorney filed with the initial Registration Statement No.
33-36962 on September 21, 1990, with Pre-Effective Amendment No. 2 to the
Registration Statement on December 26, 1990, and with Post-Effective
Amendment No. 7 to the Registration Statement on October 14, 1994,
incorporated by reference within. Power of Attorney of Stephen C. Roussin
filed herewith.
56991.137
<PAGE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned constitutes and
appoints each of Jeffrey L. Steele, Robert W. Helm, A. Thomas Smith III and Sara
L. Badler his true and lawful attorney-in-fact and agent, each with full power
of substitution and resubstitution for him in his name, place and stead, to sign
any and all Registration Statements applicable to MainStay Institutional Funds
Inc. and any amendments or supplements thereto, and to file the same, with all
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission and the states, granting unto said
attorney-in-fact and agent full power and authority to do and perform each and
every act and thing requisite and necessary to be done, as fully to all intents
and purposes as he might or could do in person, hereby ratifying and confirming
all that said attorney-in-fact and agent, or his substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
Signature Title Date
- --------- ----- ----
/s/ Stephen C. Roussin Chairman and April 21, 1998
- ---------------------- Director
Stephen C. Roussin
<PAGE>
EXHIBIT 99.11
Consent of Independent Accountants
We hereby consent to the incorporation by reference in the Prospectuses and
Statement of Additional Information constituting parts of this Post-Effective
Amendment No. 18 to the registration statement on Form N-1A (the "Registration
Statement") of our report dated February 23, 1998, relating to the financial
statements and financial highlights appearing in the December 31, 1997 Annual
Report to Shareholders of MainStay Instituional Funds, Inc., which financial
statements are also incorporated by reference into the Registration Statement.
We also consent to the references to us under the heading "Financial Highlights"
in the Prospectuses and under the heading "Other Information - Independent
Accountants" in the Statement of Additional Information.
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York
April 27, 1998
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