<PAGE> 1
As filed with the Securities and Exchange Commission on March 2, 1999
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. 20 / X /
and
REGISTRATION STATEMENT UNDER THE INVESTMENT
COMPANY ACT OF 1940 / X /
Amendment No. 22 / 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, 1999
pursuant to paragraph (a) of Rule 485 under the Securities Act
of 1933.
<PAGE> 2
PROSPECTUS AND STATEMENT OF
ADDITIONAL INFORMATION RELATING TO
MAINSTAY INSTITUTIONAL FUNDS INC.
CROSS REFERENCE SHEET
ITEMS REQUIRED BY FORM N-1A
<TABLE>
<CAPTION>
Item Number in Part A Prospectus Caption
- --------------------- ------------------
<S> <C>
1 Front Cover Page; Back Cover Page
2 Investment Objectives, Strategies and Risks: An Overview; More About
Strategies and Risks
3 Investment Objectives, Strategies and Risks: An Overview
4 Investment Objectives, Strategies and Risks: An Overview; More About
Strategies and Risks
5 See Annual Reports
6 Know With Whom You're Investing
7 Account Policies: Buying, Selling and Exchanging Shares;
Decide How to Receive Your Earnings; Understand the Tax Consequences
8 Distribution and Service Fees; Service Fees
9 Financial Highlights
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
Statement of Additional
Item Number in Part B Information Caption
- --------------------- -----------------------------------
<S> <C>
10 Cover Page and Table of Contents
11 Organization and Capitalization
12 Additional Investment Policies of the Funds; Investment
Objectives and Policies
13 Directors and Officers
14 Other Information
15 Management of the Company
16 Portfolio Transactions and Brokerage
17 Organization and Capitalization
18 Net Asset Value; Shareholder Investment Account; Purchases,
Redemption, Exchange and Repurchase
19 Tax Information
20 The Management of the Company
21 Calculation of Performance; Quotation; Tax Information
22 Cover Page
</TABLE>
<PAGE> 4
MAINSTAY INSTITUTIONAL FUNDS INC.
INSTITUTIONAL CLASS SHARES
PROSPECTUS DATED
MAY 1, 1999
<PAGE> 5
MainStay Institutional Funds Inc. Prospectus May 1, 1999
Institutional Class
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.
MainStay Institutional Funds offers 11 no-load mutual funds with a broad range
of investment choices.
EQUITY
EAFE Index Fund............................................................... 4
Growth Equity Fund............................................................ 6
Indexed Equity Fund........................................................... 8
International Equity
Fund.............. 10
Multi-Asset
Fund.............. 13
Value Equity
Fund.............. 15
FIXED INCOME
Bond Fund......... 17
Indexed Bond
Fund.............. 19
International Bond
Fund.............. 21
Money Market Fund.............................................................24
Short-Term Bond Fund..........................................................26
<PAGE> 6
What's Inside?
Investment Objectives, Strategies and Risks: An Overview...................... 3
Descriptions of Each Fund.......................................................
More About Investment Strategies and
Risks... 28
Account Policies: Buying, Selling and Exchanging
Shares... 30
Decide How to Receive Your
Earnings... 37
Understand the Tax
Consequences... 38
Know With Whom You're
Investing... 39
Financial
Highlights... 41
2
<PAGE> 7
Investment Objectives, Strategies and Risks: An Overview
EQUITY AND FIXED INCOME FUNDS
This prospectus discusses 11 mutual funds (the "Funds") which invest for varying
combinations of income and capital appreciation. Each of the Funds is managed by
MainStay Management, Inc. and has a Sub-Adviser that is responsible for the day
to day operations of the Fund. Each of the Funds pursues somewhat different
strategies to achieve its objective, but all of the Equity Funds invest, under
normal market conditions, primarily in equity securities and all of the Fixed
Income Funds invest, under normal market conditions, primarily in debt or fixed
income securities.
Publicly held corporations may raise needed cash by issuing or selling equity
securities to investors. When you buy stock in a corporation you become part
owner. The Funds may buy equity securities through principal stock exchanges,
such as the New York Stock Exchange or the American Stock Exchange, or in the
over-the-counter market. There are many different types of equity securities,
including stocks, convertible securities, American Depositary Receipts and
others. Investors buy equity securities to make money through dividend payments
and/or selling them for more than they paid.
Both governments and companies may raise needed cash by issuing or selling debt
securities to investors. The Funds may buy debt securities directly from those
governments and companies or in the secondary trading markets. There are many
different types of debt securities, including bonds, notes, debentures and
others. Some pay fixed rates of return; others pay variable rates. Interest may
be paid at different intervals. Some debt securities do not make regular
interest payments, but instead are initially sold at a discount to the principal
amount to be paid at maturity. The amount of interest paid is subject to many
variables, including creditworthiness of the issuer, length of maturity of the
security, market factors, and the nature of the debt instrument.
Each of the Funds described in this prospectus invests in particular types of
securities, consistent with its own investment objective and strategies which
are described in the succeeding pages of this prospectus.
NOT INSURED
An investment in the Funds is not a deposit in a bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency. Although, the Money Market Fund seeks to preserve the value of your
investment at $1.00 per share, it is possible to lose money by investing in the
Funds.
YOU COULD LOSE MONEY
Before considering one or more investments, you should understand that you could
lose money.
NAV WILL FLUCTUATE
Security values change. For debt securities this usually happens when interest
rates change. Generally when interest rates go up, the value of a debt security
goes down and when interest rates go down, the value of a debt security goes up.
The value of Fund shares will in turn fluctuate based on the value of the Fund's
holdings. Other factors, such as changes in company or industry conditions,
changes in how the market views the creditworthiness of an issuer, changes in
economic or market conditions, changes in relative values of currencies, the
risks inherent in management's ability to anticipate such changes and changes in
the average maturity of a Fund's investment can also affect security values and
Fund share prices. Investment in common stocks and other equity securities is
particularly subject to the risk of changing economic, stock market, industry
and company conditions which can adversely affect the value of the Fund's
holdings.
TEMPORARY INVESTMENTS
In times of unusual or adverse conditions, for temporary defensive purposes,
each Fund may invest outside the scope of its principal investment focus. Under
such conditions, 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.
NON-DIVERSIFIED
The International Bond Fund is "non-diversified" which means that the Fund may
invest a greater percentage of its assets than other funds in a particular
issuer. This may make it more susceptible to risks associated with a single
economic, political or regulatory occurrence than diversified funds.
PORTFOLIO TURNOVER
Portfolio turnover measures the amount of trading a Fund does during the year.
The turnover for each Fund is found in its Financial Highlights. The use of
certain investment strategies may generate increased portfolio turnover. Funds
with high turnover rates (over 100%) often have higher transaction costs (which
are paid by the fund) and may generate short-term capital gains (on which you'll
pay taxes, even if you don't sell any shares by year-end).
MORE INFORMATION
The next section of this prospectus gives you more detailed information about
the investment objectives, policies, strategies, risks, performance and expenses
of each of the 11 Funds offered in this prospectus. Please review it carefully.
3
<PAGE> 8
EAFE INDEX FUND
INVESTMENT OBJECTIVE -- The EAFE Index Fund's investment objective is 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 Index
(the "EAFE Index")(1).
PRINCIPAL INVESTMENT STRATEGIES -- The Fund normally invests in a statistically
selected sample of securities in the EAFE Index, which is a
capitalization-weighted index of stock and stock-related securities from
countries outside the United States. The Fund normally invests at least 80% of
its total assets in stocks in the EAFE Index.
INVESTMENT PROCESS -- 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. Monitor Capital
Advisors, Inc., the Fund's Sub-Adviser, uses 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
- ------------
(1)The EAFE Index is an unmanaged index generally considered representative of
the international stock market. The Fund is neither sponsored by nor affiliated
with Morgan Stanley.
of changes in the composition of the EAFE Index, but such changes should be
infrequent. The correlation between the performance of the 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.
RISKS -- Investment in common stocks and other equity securities is particularly
subject to the risk of changing economic, stock market, industry and company
conditions which can adversely affect the value of the Fund's holdings.
Since the Fund principally invests in FOREIGN SECURITIES, it will be subject to
various risks of loss that are different from risks of investing in securities
of U.S. based companies. These include losses due to fluctuating currency
values, less liquid trading markets, greater price volatility, political and
economic instability, less publicly available issuer information, changes in
U.S. or foreign tax or currency laws, and changes in monetary policy. In
addition, the Fund's investments in emerging market countries present risks in
greater degree than investments in developed market countries.
For the fiscal year ended December 31, 1998, the Fund's PORTFOLIO TURNOVER rate
was %.
4
<PAGE> 9
PAST PERFORMANCE
The bar chart and table indicate some of the risks of investing in the Fund by
showing changes in its performance over the life of the Fund and by showing how
the Fund's average annual returns for one year, five years and life of the Fund
periods compare to those of a broad-based securities market index. As with all
mutual funds, past performance is not necessarily an indication of how the Fund
will perform in the future.
<TABLE>
<CAPTION>
<S> <C> <C>
BAR CHART
EAFE INDEX FUND QUARTER/YEAR RETURN
Highest Return/Best Quarter
Lowest Return/Worst Quarter
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS AS OF 12/31/98
<S> <C> <C> <C>
SINCE
1 YEAR 5 YEARS INCEPTION**
EAFE Index Fund
MSCI EAFE Index*
</TABLE>
* The MSCI EAFE Index--is an unmanaged index generally considered to be
representative of the international stock market.
** January 2, 1991.
EXPENSES
The table below describes the fees and expenses that you may pay if you buy and
hold shares of the Fund. The "Example" is intended to help you compare the cost
of investing in the Fund with the cost of investing in other mutual funds. The
Example assumes that you invest $10,000 in the Fund for the time periods
indicated and reflects what you would pay if you redeemed all your shares or if
you hold them. The Example also assumes that your investment has a 5% return
each year and that the Fund operating expenses remain the same. Your actual
costs may be higher or lower than those shown below. The Example does not
reflect sales charges (loads) on reinvested dividends. There is no sales charge
(load) on reinvested dividends.
EAFE INDEX FUND
<TABLE>
<CAPTION>
EXAMPLE
-------
ASSUMING
REDEMPTION
ASSUMING NO AT THE END
FEES AND EXPENSES EXPENSES AFTER REDEMPTION OF EACH PERIOD
----------------- -------------- ----------- --------------
<S> <C> <C> <C> <C>
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
Maximum Sales Charge (Load) Imposed on Purchases of Shares
(as a percentage of offering price) None 1 year $ $
3 years $ $
5 years $ $
10 years $ $
Maximum Deferred Sales Charge (Load) (as a percentage of
redemption proceeds) None
Exchange Fee None
ANNUAL FUND OPERATING EXPENSES
(EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)
Management Fee %
Distribution and/or Service (12b-1) Fees None
Other Expenses %
-----
Total Fund Operating Expenses(+) %
=====
</TABLE>
<TABLE>
<S> <C>
(+) The Manager has voluntarily agreed to waive a portion of the
fees otherwise payable to it. With this reduction, for the
fiscal year ended December 31, 1998 the management fee paid
was 0.63% and total fund operating expenses were 0.94%.
</TABLE>
5
<PAGE> 10
GROWTH EQUITY FUND
INVESTMENT OBJECTIVE -- The Growth Equity Fund's investment 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.
PRINCIPAL INVESTMENT STRATEGIES -- The Fund normally invests at least 65% of
total assets in equity securities.
INVESTMENT PROCESS -- The Fund normally invests in securities of companies with
investment characteristics such as:
- - participation in expanding product or service markets;
- - increasing unit sales volume;
- - growth in revenues and earnings per share superior to that of the average of
common stocks comprising indices such as the S&P 500 Index;(1) or
- - increasing return on investment.
The Fund maintains a flexible approach towards investing in various types of
companies as well as types of securities, depending upon the economic
environment and the relative attractiveness of the various securities
- ------------
(1)"S&P 500 Composite Stock Price Index" and "S&P 500" are trademarks of The
McGraw Hill Companies, Inc. The S&P 500 is an unmanaged index and is considered
to be generally representative of the U.S. stock market.
markets. As a result the Fund may invest in securities of companies without some
or all of the listed characteristics which, in the judgment of the Sub-Adviser,
are ready for a rise in price, or expected to undergo an acceleration in growth
of earnings because of special factors such as new management, new products,
changes in consumer demand or changes in the economy.
RISKS -- Investment in common stocks and other equity securities is particularly
subject to the risk of changing economic, stock market, industry and company
conditions which can adversely affect the value of the Fund's holdings.
Opportunities for greater gain often come with greater risk of loss. Some of the
securities, therefore, may carry above-average risk, compared to common stock
indexes, such as the Dow Jones Industrial Average and the S&P 500 Index.
The principal risk of growth stocks is that investors expect growth companies to
increase their earnings at a certain rate which is generally higher than the
rate expected for non-growth companies. If these expectations are not met, the
market price of the stock may decline significantly, even if earnings showed an
absolute increase. Growth company stocks also typically lack the dividend yield
that can cushion stock prices in market downturns.
For the fiscal year ended December 31, 1998, the Fund's PORTFOLIO TURNOVER rate
was %.
6
<PAGE> 11
PAST PERFORMANCE
The bar chart and table indicate some of the risks of investing in the Fund by
showing changes in its performance over the life of the Fund and by showing how
the Fund's average annual returns for one year, five years and life of the Fund
periods compare to those of a broad-based securities market index. As with all
mutual funds, past performance is not necessarily an indication of how the Fund
will perform in the future.
<TABLE>
<CAPTION>
<S> <C> <C>
BAR CHART
GROWTH EQUITY FUND QUARTER/YEAR RETURN
Highest Return/Best Quarter
Lowest Return/Worst Quarter
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS AS OF 12/31/98
<S> <C> <C> <C>
SINCE
1 YEAR 5 YEARS INCEPTION**
Growth Equity Fund
S&P 500*
</TABLE>
* The S&P 500 is an unmanaged index and is considered to be generally
representative of the U.S. stock market. Results assume the reinvestment of
all income and capital gain distributions.
** January 2, 1991.
EXPENSES
The table below describes the fees and expenses that you may pay if you buy and
hold shares of the Fund. The "Example" is intended to help you compare the cost
of investing in the Fund with the cost of investing in other mutual funds. The
Example assumes that you invest $10,000 in the Fund for the time periods
indicated and reflects what you would pay if you redeemed all your shares or if
you hold them. The Example also assumes that your investment has a 5% return
each year and that the Fund operating expenses remain the same. Your actual
costs may be higher or lower than those shown below. The Example does not
reflect sales charges (loads) on reinvested dividends. There is no sales charge
(load) on reinvested dividends.
GROWTH EQUITY FUND
<TABLE>
<CAPTION>
EXAMPLE
-------
ASSUMING
REDEMPTION
ASSUMING NO AT THE END
FEES AND EXPENSES EXPENSES AFTER REDEMPTION OF EACH PERIOD
----------------- -------------- ----------- --------------
<S> <C> <C> <C> <C>
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
Maximum Sales Charge (Load) Imposed on Purchases of Shares
(as a percentage of offering price) None 1 year $ $
3 years $ $
5 years $ $
10 years $ $
Maximum Deferred Sales Charge (Load) (as a percentage of
redemption proceeds) None
Exchange Fee None
ANNUAL FUND OPERATING EXPENSES
(EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)
Management Fees %
Distribution and/or Service (12b-1) Fees None
Other Expenses %
-----
Total Fund Operating Expenses %
=====
</TABLE>
7
<PAGE> 12
INDEXED EQUITY FUND
INVESTMENT OBJECTIVE -- The Indexed Equity Fund's investment 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.(3)
PRINCIPAL INVESTMENT STRATEGIES -- The Fund normally invests at least 80% of
total assets in stocks in the S&P 500 Index in the same proportion as they are
represented in the S&P 500 Index, to the extent feasible.
INVESTMENT PROCESS -- 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. Monitor Capital
Advisors, Inc., the Fund's Sub-Adviser, uses statistical techniques to determine
which stocks are to be purchased or sold to replicate the S&P 500 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 S&P 500 Index, but such
changes should be infrequent. The correlation
- ------------
(3)"S&P 500 Composite Stock Price Index" and "S&P 500" are trademarks of The
McGraw-Hill Companies, Inc. and have been licensed for use by Monitor Capital
Advisors, Inc. Standard & Poor's does not sponsor, endorse, sell or promote the
Fund or represent the advisability of investing in the Fund. The S&P 500 is
capitalization-weighted and includes 500 different industrial, utility,
financial and transportation sector companies selected by Standard & Poor's. The
S&P 500 is an unmanaged index and is considered to be generally representative
of the U.S. Stock Market. Typically, companies included in the S&P 500 are the
largest and most dominant firms in their respective industries.
between the performance of the Fund and the S&P 500 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 S&P 500 Index.
The Fund's investments also include derivatives such as stock index futures to
replicate the S&P 500 Index and for cash management purposes.
RISKS -- Investment in common stocks and other equity securities is particularly
subject to the risk of changing economic, stock market, industry and company
conditions which can adversely affect the value of the Fund's holdings.
The Fund's ability to mirror the S&P 500 Index may be affected by, among other
things, transactions costs, changes in either the makeup of the S&P 500 Index or
number of shares outstanding for the components of the S&P 500 Index, and the
timing and amount of contributions to, and redemptions from, the Fund by
shareholders. If the value of the S&P 500 Index declines, the net asset value of
shares of the Fund will also decline.
The Fund's investments include DERIVATIVES such as stock index futures. The
value of derivatives is based on certain underlying equity or fixed-income
securities, interest rates or indexes. The Fund may use derivatives to try to
enhance returns. The Fund may lose money using derivatives. The derivatives may
increase the volatility of the Fund's net asset value and may involve a small
investment of cash relative to the magnitude of risk assumed.
For the fiscal year ended December 31, 1998, the Fund's PORTFOLIO TURNOVER rate
was %.
8
<PAGE> 13
PAST PERFORMANCE
The bar chart and table indicate some of the risks of investing in the Fund by
showing changes in its performance over the life of the Fund and by showing how
the Fund's average annual returns for one year, five years and life of the Fund
periods compare to those of a broad-based securities market index. As with all
mutual funds, past performance is not necessarily an indication of how the Fund
will perform in the future.
<TABLE>
<CAPTION>
<S> <C> <C>
BAR CHART
INDEXED EQUITY FUND QUARTER/YEAR RETURN
Highest Return/Best Quarter
Lowest Return/Worst Quarter
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS AS OF 12/31/98
<S> <C> <C> <C>
SINCE
1 YEAR 5 YEARS INCEPTION**
Indexed Equity Fund
S&P 500*
</TABLE>
* The S&P 500 is an unmanaged index and is considered to be generally
representative of the U.S. stock market. Results assume the reinvestment of
all income and capital gain distributions.
** January 2, 1991.
EXPENSES
The table below describes the fees and expenses that you may pay if you buy and
hold shares of the Fund. The "Example" is intended to help you compare the cost
of investing in the Fund with the cost of investing in other mutual funds. The
Example assumes that you invest $10,000 in the Fund for the time periods
indicated and reflects what you would pay if you redeemed all your shares or if
you hold them. The Example also assumes that your investment has a 5% return
each year and that the Fund operating expenses remain the same. Your actual
costs may be higher or lower than those shown below. The Example does not
reflect sales charges (loads) on reinvested dividends. There is no sales charge
(load) on reinvested dividends.
INDEXED EQUITY FUND
<TABLE>
<CAPTION>
EXAMPLE
-------
ASSUMING
REDEMPTION
ASSUMING NO AT THE END
FEES AND EXPENSES EXPENSES AFTER REDEMPTION OF EACH PERIOD
----------------- -------------- ----------- --------------
<S> <C> <C> <C> <C>
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
Maximum Sales Charge (Load) Imposed on Purchases of Shares
(as a percentage of offering price) None 1 year $ $
3 years $ $
5 years $ $
10 years $ $
Maximum Deferred Sales Charge (Load) (as a percentage of
redemption proceeds) None
Exchange Fee None
ANNUAL FUND OPERATING EXPENSES
(EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)
Management Fee %
Distribution and/or Service (12b-1) Fees None
Other Expenses %
-----
Total Fund Operating Expenses(+) %
=====
</TABLE>
<TABLE>
<S> <C>
(+) The Manager has voluntarily agreed to waive a portion of the
fees otherwise payable to it. With this reduction, for the
fiscal year ended December 31, 1998 the management fee paid
was 0.24% and total fund operating expenses were .30%.
</TABLE>
9
<PAGE> 14
INTERNATIONAL EQUITY FUND
INVESTMENT OBJECTIVE -- The International Equity Fund's investment 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.
PRINCIPAL INVESTMENT STRATEGIES -- The Fund normally invests at least 65% of
total assets in equity securities of foreign corporations wherever organized,
which do business mainly outside the United States. Investments will be made in
a variety of countries with a minimum of five countries other than the United
States. This includes countries with established economies as well as emerging
market countries that MacKay-Shields Financial Corporation, the Fund's
Sub-Adviser, believes present favorable opportunities.
INVESTMENT PROCESS -- In pursuing the Fund's investment strategy, the Fund's
Sub-Adviser seeks to identify investment opportunities by beginning with country
selection. Local currencies are then assessed for upside potential and downside
risk. Finally, individual securities are evaluated based on the financial
condition and competitiveness of individual companies. In making investments in
foreign markets, the Sub-Adviser considers several factors including prospects
for currency exchange, interest rates, inflation, relative economic growth and
governmental policies.
As part of its investment strategy, the Fund may buy and sell currency on a spot
basis and enter into foreign currency forward contracts for hedging purposes or
to increase the Fund's investment return. In addition, the Fund may buy
derivatives such as foreign currency options, securities and securities index
options, foreign currency options, and enter into swap agreements and futures
contracts and related options. These techniques may be used for any legally
permissible purpose including to increase the Fund's returns.
RISKS -- Investment in common stocks and other equity securities is particularly
subject to the risk of changing economic, stock market, industry and company
conditions which can adversely affect the value of the Fund's holdings.
Since the Fund principally invests in FOREIGN SECURITIES, it will be subject to
various risks of loss that are different from risks of investing in securities
of U.S. based companies. These include losses due to fluctuating currency
values, less liquid trading markets, greater price volatility, political and
economic instability, less publicly available company information, changes in
U.S. or foreign tax or currency laws, and changes in monetary policy. These
risks are likely to be greater in emerging market countries than investments in
developed market countries.
The Fund's investments include DERIVATIVES such as options, futures, forwards
and swaps. The Fund may use derivatives to try to enhance returns or reduce the
risk of loss (hedge) of certain of its holdings. Regardless of the purpose, the
Fund may lose money using derivatives. The derivatives may increase the
volatility of the Fund's net asset value and may involve a small investment of
cash relative to the magnitude of risk assumed.
ADDITIONAL TEMPORARY INVESTMENTS -- 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 and cash equivalents.
For the fiscal year ended December 31, 1998, the Fund's PORTFOLIO TURNOVER rate
was %.
10
<PAGE> 15
PAST PERFORMANCE
The bar chart and table indicate some of the risks of investing in the Fund by
showing changes in its performance over the life of the Fund and by showing how
the Fund's average annual returns for one year, five years and life of the Fund
periods compare to those of a broad-based securities market index. As with all
mutual funds, past performance is not necessarily an indication of how the Fund
will perform in the future.
<TABLE>
<CAPTION>
<S> <C> <C>
BAR CHART
INTERNATIONAL EQUITY FUND QUARTER/YEAR RETURN
Highest Return/Best Quarter
Lowest Return/Worst Quarter
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS AS OF 12/31/98
<S> <C> <C> <C>
SINCE
1 YEAR 5 YEARS INCEPTION**
International Equity Fund***
MSCI EAFE Index*
</TABLE>
* The Morgan Stanley Capital International Europe, Australia, Far East
Index--The EAFE Index--is an unmanaged index generally considered to be
representative of the international stock market.
** January 1, 1995.
*** The inception date was July 31, 1992 for the International Equity Fund's
predecessor separate account ("Separate Account"). 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.
11
<PAGE> 16
EXPENSES
The table below describes the fees and expenses that you may pay if you buy and
hold shares of the Fund. The "Example" is intended to help you compare the cost
of investing in the Fund with the cost of investing in other mutual funds. The
Example assumes that you invest $10,000 in the Fund for the time periods
indicated and reflects what you would pay if you redeemed all your shares or if
you hold them. The Example also assumes that your investment has a 5% return
each year and that the Fund operating expenses remain the same. Your actual
costs may be higher or lower than those shown below. The Example does not
reflect sales charges (loads) on reinvested dividends. There is no sales charge
(load) on reinvested dividends.
INTERNATIONAL EQUITY FUND
<TABLE>
<CAPTION>
EXAMPLE
-------
ASSUMING
REDEMPTION
ASSUMING NO AT THE END
FEES AND EXPENSES EXPENSES AFTER REDEMPTION OF EACH PERIOD
----------------- -------------- ----------- --------------
<S> <C> <C> <C> <C>
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
Maximum Sales Charge (Load) Imposed on Purchases of Shares
(as a percentage of offering price) None 1 year $ $
3 years $ $
5 years $ $
10 years $ $
Maximum Deferred Sales Charge (Load) (as a percentage of
redemption proceeds) None
Exchange Fee None
ANNUAL FUND OPERATING EXPENSES
(EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)
Management Fees %
Distribution and/or Service (12b-1) Fees None
Other Expenses %
-----
Total Fund Operating Expenses %
=====
</TABLE>
12
<PAGE> 17
MULTI-ASSET FUND
INVESTMENT OBJECTIVE -- The Multi-Asset Fund's investment 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.
PRINCIPAL INVESTMENT STRATEGIES -- The Fund normally invests in the three asset
classes subject to the following constraints: 30% to 80% of net assets in common
stocks selected to parallel the performance of the S&P 500 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 Smith
Barney Broad Investment Grade Bond Index ("BIG Index")(4) (although the
securities don't have to be in the BIG Index); and 10% to 60% of net assets in
selected money market instruments. The expected return for money market
instruments is the current yield on three-month Treasury Bills.
In pursuing the Fund's investment strategy within the above constraints, the
Fund may also invest up to 20% of total assets in foreign securities of
developed and emerging market countries.
INVESTMENT PROCESS -- The Fund attempts to achieve its objective through active
management and allocation of investments among the three asset classes by
Monitor Capital Advisors, Inc., the Fund's Sub-Adviser. The presence of the
constraints however, may restrict the Sub-Adviser's ability to fully maximize
total return. To determine the best investment levels, the Sub-Adviser estimates
risk, return and correlation for the three asset groups based on a disciplined
valuation methodology. Although these levels maintain the balanced nature of the
overall investments, they are not intended to act as a fully balanced investment
program.
As part of its investment strategy, the Fund may also invest in derivatives such
as stock index futures to rebalance or alter its portfolio composition and risk
- ------------
(4)The BIG Index is a capitalization-weighted index that contains about 5,500
individually priced fixed income securities. The BIG Index is an unmanaged index
generally considered representative of the U.S. bond market.
profile and to diversify the Fund's holding where futures transactions are more
efficient than direct investment transactions; and in foreign currency exchange
transactions using currencies, options, futures or options on futures, or
forward contracts for any legally permissible purpose.
RISKS -- Investment in common stocks and other equity securities is particularly
subject to the risk of changing economic, stock market, industry and company
conditions which can adversely affect the value of the Fund's holdings. The
values of debt securities fluctuate depending upon various factors, including
interest rates, issuer creditworthiness, market conditions and maturities.
Overall, 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.
Since the Fund invests in FOREIGN SECURITIES, it can be subject to various risks
of loss that are different from risks of investing in securities of U.S. based
companies. These include losses due to fluctuating currency values, less liquid
trading markets, political and economic instability, less publicly available
company information, changes in U.S. or foreign tax or currency laws, and
changes in monetary policy. In addition, the Fund's investments in emerging
market countries present risks in greater degree than investments in developed
market countries.
The Fund's principal investments include DERIVATIVES such as options and stock
index futures. The Fund may use derivatives to try to enhance returns or reduce
the risk of loss (hedge) of certain of its holdings. Regardless of the purpose,
the Fund may lose money using derivatives. The derivatives may increase the
volatility of the Fund's net asset value and may involve a small investment of
cash relative to the magnitude of risk assumed.
For the fiscal year ended December 31, 1998, the Fund's PORTFOLIO TURNOVER rate
was %.
13
<PAGE> 18
PAST PERFORMANCE
The bar chart and table indicate some of the risks of investing in the Fund by
showing changes in its performance over the life of the Fund and by showing how
the Fund's average annual returns for one year, five years and life of the Fund
periods compare to those of a broad-based securities market index. As with all
mutual funds, past performance is not necessarily an indication of how the Fund
will perform in the future.
<TABLE>
<CAPTION>
<S> <C> <C>
BAR CHART
MULTI-ASSET FUND QUARTER/YEAR RETURN
Highest Return/Best Quarter
Lowest Return/Worst Quarter
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS AS OF 12/31/98
<S> <C> <C> <C>
SINCE
1 YEAR 5 YEARS INCEPTION**
Multi-Asset Fund
To come*
</TABLE>
* To come
** January 2, 1991.
EXPENSES
The table below describes the fees and expenses that you may pay if you buy and
hold shares of the Fund. The "Example" is intended to help you compare the cost
of investing in the Fund with the cost of investing in other mutual funds. The
Example assumes that you invest $10,000 in the Fund for the time periods
indicated and reflects what you would pay if you redeemed all your shares or if
you hold them. The Example also assumes that your investment has a 5% return
each year and that the Fund operating expenses remain the same. Your actual
costs may be higher or lower than those shown below. The Example does not
reflect sales charges (loads) on reinvested dividends. There is no sales charge
(load) on reinvested dividends.
MULTI-ASSET FUND
<TABLE>
<CAPTION>
EXAMPLE
-------
ASSUMING
REDEMPTION
ASSUMING NO AT THE END
FEES AND EXPENSES EXPENSES AFTER REDEMPTION OF EACH PERIOD
----------------- -------------- ----------- --------------
<S> <C> <C> <C> <C>
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
Maximum Sales Charge (Load) Imposed on Purchases of Shares
(as a percentage of offering price) None 1 year $ $
3 years $ $
5 years $ $
10 years $ $
Maximum Deferred Sales Charge (Load) (as a percentage of
redemption proceeds) None
Exchange Fee None
ANNUAL FUND OPERATING EXPENSES
(EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)
Management Fee %
Distribution and/or Service (12b-1) Fees None
Other Expenses %
-----
Total Fund Operating Expenses %
=====
</TABLE>
14
<PAGE> 19
VALUE EQUITY FUND
INVESTMENT OBJECTIVE -- The Value Equity Fund's investment 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.
PRINCIPAL INVESTMENT STRATEGIES -- The Fund normally invests at least 65% of
total assets in equity securities.
INVESTMENT PROCESS -- The Fund principally invests in common stocks which:
- - MacKay-Shield's Financial Corporation, the Fund's Sub-Adviser, believes were
"undervalued" (selling below their value) when purchased;
- - typically pay dividends, although there may be non-dividend paying stocks if
they meet the "undervalued" criteria; and
- - are listed on a national securities exchange or are traded in the
over-the-counter market.
In pursuing the Fund's investment strategy, the Sub-Adviser emphasizes
investment in securities which are, in its opinion, undervalued at the time of
purchase. The Sub-Adviser's value investment process focuses on such factors as
low price to earnings and price to cash flow ratios, financial strength, and
earnings predictability. 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 Sub-Adviser also emphasizes investment in dividend-paying
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.
RISKS -- Investment in common stocks and other equity securities is particularly
subject to the risk of changing economic, stock market, industry and company
conditions which can adversely affect the value of the Fund's holdings.
The principal risk of investing in value stocks in which the Fund invests is
that they may never reach what the Sub-Adviser believes is their full value or
that they may even go down in value. In addition, different types of stocks tend
to shift in and out of favor depending on market and economic conditions and
therefore the Fund's performance may be lower or higher than that of funds that
invest in other types of equity securities (such as those emphasizing growth
stocks).
For the fiscal year ended December 31, 1998, the Fund's PORTFOLIO TURNOVER rate
was %.
15
<PAGE> 20
PAST PERFORMANCE
The bar chart and table indicate some of the risks of investing in the Fund by
showing changes in its performance over the life of the Fund and by showing how
the Fund's average annual returns for one year, five years and life of the Fund
periods compare to those of a broad-based securities market index. As with all
mutual funds, past performance is not necessarily an indication of how the Fund
will perform in the future.
<TABLE>
<CAPTION>
<S> <C> <C>
BAR CHART
VALUE EQUITY FUND QUARTER/YEAR RETURN
Highest Return/Best Quarter
Lowest Return/Worst Quarter
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS AS OF 12/31/98
<S> <C> <C> <C>
SINCE
1 YEAR 5 YEARS INCEPTION**
Value Equity Fund
To come*
</TABLE>
* To come
** January 2, 1991.
EXPENSES
The table below describes the fees and expenses that you may pay if you buy and
hold shares of the Fund. The "Example" is intended to help you compare the cost
of investing in the Fund with the cost of investing in other mutual funds. The
Example assumes that you invest $10,000 in the Fund for the time periods
indicated and reflects what you would pay if you redeemed all your shares or if
you hold them. The Example also assumes that your investment has a 5% return
each year and that the Fund operating expenses remain the same. Your actual
costs may be higher or lower than those shown below. The Example does not
reflect sales charges (loads) on reinvested dividends. There is no sales charge
(load) on reinvested dividends.
VALUE EQUITY FUND
<TABLE>
<CAPTION>
EXAMPLE
-------
ASSUMING
REDEMPTION
ASSUMING NO AT THE END
FEES AND EXPENSES EXPENSES AFTER REDEMPTION OF EACH PERIOD
----------------- -------------- ----------- --------------
<S> <C> <C> <C> <C>
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
Maximum Sales Charge (Load) Imposed on Purchases of Shares
(as a percentage of offering price) None 1 year $ $
3 years $ $
5 years $ $
10 years $ $
Maximum Deferred Sales Charge (Load) (as a percentage of
redemption proceeds) None
Exchange Fee None
ANNUAL FUND OPERATING EXPENSES
(EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)
Management Fee %
Distribution and/or Service (12b-1) Fees None
Other Expenses %
-----
Total Fund Operating Expenses %
=====
</TABLE>
16
<PAGE> 21
BOND FUND
INVESTMENT OBJECTIVE -- The Bond Fund's investment objective is to seek to
maximize total return, consistent with liquidity, low risk to principal and
investment in debt securities.
PRINCIPAL INVESTMENT STRATEGIES -- The Fund normally invests at least 70% of
total assets in debt or debt-related securities issued or guaranteed by the U.S.
or foreign governments, their agencies or instrumentalities; obligations of
international or supranational entities; debt securities issued by U.S. or
foreign corporate entities; zero coupon bonds; municipal bonds; mortgage-related
and other asset-backed securities and loan participation interests. The
effective maturity of this portion of the Fund's portfolio will usually be in
the intermediate range (three to ten years), although it may vary depending on
market conditions as judged by MacKay-Shields Financial Corporation, the Fund's
Sub-Adviser. At least 65% percent of the Fund's total assets will be invested in
debt 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.
Normally the Fund may use 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: long-term U.S. Treasuries (ten to thirty years) and cash equivalent
short-term obligations including certificates of deposit, time deposits,
bankers' acceptances issued by U.S. or foreign banks, certificates of deposit
and time deposits issued by savings and loan associations, commercial paper,
repurchase agreements and reverse repurchase agreements.
INVESTMENT PROCESS -- In pursuing the Fund's investment strategy, the Fund's
Sub-Adviser 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 the Sub-Adviser 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.
The Fund's principal investments include debt securities of U.S. issuers,
including derivatives such as mortgaged-backed and asset-backed securities.
Principal investments which must be, when purchased, rated Prime-1 by Moody's or
A-1 by S&P, or if unrated, determined by the Sub-Adviser to be of comparable
quality. The Fund's principal investments may have fixed, floating or inverse
floating rates of interest. The interest rate on a floating rate debt instrument
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 an inverse floater resets in
the opposite direction from the market rate of interest to which the inverse
floater is indexed.
As part of the Fund's principal strategies, the Sub-Adviser may use investment
practices such as mortgage dollar rolls and portfolio securities lending.
RISKS -- The values of debt securities fluctuate depending upon various factors,
including interest rates, issuer creditworthiness, market conditions and
maturities.
The Fund's investments include DERIVATIVES such as mortgage-backed and
asset-backed securities. The Fund may use derivatives to try to enhance returns
or reduce the risk of loss (hedge) of certain of its holdings. Regardless of the
purpose, the Fund may lose money using derivatives. The derivatives may increase
the volatility of the Fund's net asset value and may involve a small investment
of cash relative to the magnitude of risk assumed.
The Fund's use of investment practices such as mortgage dollar rolls and
securities lending also presents certain risks. A mortgage dollar roll is a
transaction in which a Fund sells mortgage-backed securities from its portfolio
to a counterparty and at the same time agrees to buy a similar security from the
same party at a later date. The principal risk of MORTGAGE DOLLAR ROLLS is that
the security the Fund receives at the end of the transaction is worth less than
the security the Fund sold to the same counterparty at the beginning of the
transaction. The principal risk of SECURITIES LENDING is that the financial
institution that borrows securities from the Fund could go bankrupt and the Fund
might not be able to recover the securities or their value.
For the fiscal year ended December 31, 1998, the Fund's PORTFOLIO TURNOVER rate
was %.
17
<PAGE> 22
PAST PERFORMANCE
The bar chart and table indicate some of the risks of investing in the Fund by
showing changes in its performance over the life of the Fund and by showing how
the Fund's average annual returns for one year, five years and life of the Fund
periods compare to those of a broad-based securities market index. As with all
mutual funds, past performance is not necessarily an indication of how the Fund
will perform in the future.
<TABLE>
<CAPTION>
<S> <C> <C>
BAR CHART
BOND FUND QUARTER/YEAR RETURN
Highest Return/Best Quarter
Lowest Return/Worst Quarter
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS AS OF 12/31/98
<S> <C> <C> <C>
SINCE
1 YEAR 5 YEARS INCEPTION**
Bond Fund
Lehman Brothers
Gov't/Corporate Bond Index*
</TABLE>
* The Lehman Brothers Gov't/Corporate Bond Index includes issues of the U.S.
government and agencies thereof, as well as fixed rate debt-issues that are
rated investment grade by Moody's, S&P, or Fitch, in that order, with at
least one year to maturity.
** January 2, 1991.
EXPENSES
The table below describes the fees and expenses that you may pay if you buy and
hold shares of the Fund. The "Example" is intended to help you compare the cost
of investing in the Fund with the cost of investing in other mutual funds. The
Example assumes that you invest $10,000 in the Fund for the time periods
indicated and reflects what you would pay if you redeemed all your shares or if
you hold them. The Example also assumes that your investment has a 5% return
each year and that the Fund operating expenses remain the same. Your actual
costs may be higher or lower than those shown below. The Example does not
reflect sales charges (loads) on reinvested dividends. There is no sales charge
(load) on reinvested dividends.
BOND FUND
<TABLE>
<CAPTION>
EXAMPLE
-------
ASSUMING
REDEMPTION
ASSUMING NO AT THE END
FEES AND EXPENSES EXPENSES AFTER REDEMPTION OF EACH PERIOD
----------------- -------------- ----------- --------------
<S> <C> <C> <C> <C>
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
Maximum Sales Charge (Load) Imposed on Purchases of Shares
(as a percentage of offering price) None 1 year $ $
3 years $ $
5 years $ $
10 years $ $
Maximum Deferred Sales Charge (Load) (as a percentage of
redemption proceeds) None
Exchange Fee None
ANNUAL FUND OPERATING EXPENSES
(EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)
Management Fee %
Distribution and/or Service (12b-1) Fees None
Other Expenses %
-----
Total Fund Operating Expenses(+) %
=====
</TABLE>
<TABLE>
<S> <C>
(+) The Manager has voluntarily agreed to waive a portion of the
fees otherwise payable to it. With this reduction, for the
fiscal year ended December 31, 1998 the management fee paid
was 0.65% and total fund operating expenses were 0.75%.
</TABLE>
18
<PAGE> 23
INDEXED BOND FUND
INVESTMENT OBJECTIVE -- The Indexed Bond Fund's investment 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 Smith
Barney Broad Investment Grade Bond Index (the "BIG Index").
PRINCIPAL INVESTMENT STRATEGIES -- The Fund normally invests at least 80% of
total assets in fixed income securities in the BIG Index. The BIG Index is
capitalization-weighted and contains about 5500 individually priced fixed-income
securities and includes investment grade corporate bonds, U.S.
dollar-denominated securities of foreign issuers, U.S. Treasury or agency
issues, and mortgage-backed securities, and other securities. Corporate bonds
and securities of foreign issuers must be rated BBB or better by S&P or Baa or
better by Moody's.
As of March 31, 1999, the approximate weighting in the BIG Index was as follows:
U.S. Treasury and agency securities %, corporate debt securities % and
mortgage-backed securities %.
INVESTMENT PROCESS -- 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 Fund in the traditional
sense using economic, financial and market analysis. Monitor Capital Advisors,
Inc., the Fund's Sub-Adviser, employs a stratified sampling method to track
index performance. Using this method, the Fund invests in about 50 fixed income
securities which in the aggregate are expected to mirror the performance of the
BIG Index. From time to time, adjustments may be made in the Fund's portfolio
because of changes in the composition of the BIG Index, but such changes should
be infrequent. The correlation between the performance of the Fund and the BIG
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 BIG Index.
The Fund's principal investments may have fixed, variable, floating or inverse
floating rates of interest. The interest rate on a floating rate debt instrument
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 an inverse floater resets in
the opposite direction from the market rate of interest to which the inverse
floater is indexed.
RISKS -- The values of debt securities fluctuate depending upon various factors,
including interest rates, issuer creditworthiness, market conditions and
maturities.
The Fund's ability to track the BIG Index may be affected by, among other
things, transaction costs, changes in either the composition of the BIG Index or
number of bonds outstanding for the components of the BIG Index, and the timing
and amount of contributions to and redemptions from the Fund by shareholders.
Since the Fund invests in FOREIGN SECURITIES, it can be subject to various risks
of loss that are different from risks of investing in securities of U.S. based
companies. These include losses due to fluctuating currency values, less liquid
trading markets, greater price volatility, political and economic instability,
less publicly available issuer information, changes in U.S. or foreign tax or
currency laws, and changes in monetary policy. In addition, the Fund's
investments in emerging market countries present risks in greater degree than
investments in developed market countries.
The Fund's principal investments include DERIVATIVES such as mortgage-backed
securities. The Fund may use derivatives to try to enhance returns or reduce the
risk of loss (hedge) of certain of its holdings. Regardless of the purpose, the
Fund may lose money using derivatives. The derivatives may increase the
volatility of the Fund's net asset value and may involve a small investment of
cash relative to the magnitude of risk assumed.
For the fiscal year ended December 31, 1998, the Fund's PORTFOLIO TURNOVER rate
was %.
19
<PAGE> 24
PAST PERFORMANCE
The bar chart and table indicate some of the risks of investing in the Fund by
showing changes in its performance over the life of the Fund and by showing how
the Fund's average annual returns for one, five and life of the Fund compare to
those of a broad-based securities market index. As with all mutual funds, past
performance is not necessarily an indication of how the Fund will perform in the
future.
<TABLE>
<CAPTION>
<S> <C> <C>
BAR CHART
INDEXED BOND FUND QUARTER/YEAR RETURN
Highest Return/Best Quarter
Lowest Return/Worst Quarter
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS AS OF 12/31/98
<S> <C> <C> <C>
SINCE
1 YEAR 5 YEARS INCEPTION**
Indexed Bond Fund
Salomon Smith Barney Broad
Investment Grade Bond Index*
</TABLE>
* The Salomon Smith Barney Broad Investment Grade Bond Index is an unmanaged
index that is considered representative of the U.S.
bond market.
** January 2, 1991.
EXPENSES
The table below describes the fees and expenses that you may pay if you buy and
hold shares of the Fund. The "Example" is intended to help you compare the cost
of investing in the Fund with the cost of investing in other mutual funds. The
Example assumes that you invest $10,000 in the Fund for the time periods
indicated and reflects what you would pay if you redeemed all your shares or if
you hold them. The Example also assumes that your investment has a 5% return
each year and that the Fund operating expenses remain the same. Your actual
costs may be higher or lower than those shown below. The Example does not
reflect sales charges (loads) on reinvested dividends. There is no sales charge
(load) on reinvested dividends.
INDEXED BOND FUND
<TABLE>
<CAPTION>
EXAMPLE
-------
ASSUMING
REDEMPTION
ASSUMING NO AT THE END
FEES AND EXPENSES EXPENSES AFTER REDEMPTION OF EACH PERIOD
----------------- -------------- ----------- --------------
<S> <C> <C> <C> <C>
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
Maximum Sales Charge (Load) Imposed on Purchases of Shares
(as a percentage of offering price) None 1 year $ $
3 years $ $
5 years $ $
10 years $ $
Maximum Deferred Sales Charge (Load) (as a percentage of
redemption proceeds) None
Exchange Fee None
ANNUAL FUND OPERATING EXPENSES
(EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)
Management Fee %
Distribution and/or Service (12b-1) Fees None
Other Expenses %
-----
Total Fund Operating Expenses(+) %
=====
</TABLE>
<TABLE>
<S> <C>
(+) The Manager has voluntarily agreed to waive a portion of the
fees otherwise payable to it. With this reduction, for the
fiscal year ended December 31, 1998 the management fee paid
was 0.35% and total fund operating expenses were 0.50%.
</TABLE>
20
<PAGE> 25
INTERNATIONAL BOND FUND
INVESTMENT OBJECTIVE -- The International Bond Fund's investment objective is to
seek to provide total return by investing primarily in a portfolio of non-U.S.
(primarily government) debt securities.
PRINCIPAL INVESTMENT STRATEGIES -- The Fund normally invests at least 65% of its
total assets in foreign bonds which include debt securities of foreign
governments, agencies and supranational organizations, and secondarily debt
securities of corporate issuers, located in a variety of countries with a
minimum of five countries other than the U.S. This includes countries with
established economies as well as emerging market countries that MacKay-Shields
Financial Corporation, the Fund's Sub-Adviser, believes present favorable
opportunities.
INVESTMENT PROCESS -- In pursuing the Fund's investment strategy, the Fund's
Sub-Adviser seeks to identify investment opportunities by beginning with country
selection, then assessing local currencies for upside potential and downside
risk and finally, evaluating individual securities based on the financial
condition and competitiveness of individual companies. In making investments in
foreign markets, the Sub-Adviser considers several factors including prospects
for currency exchange, interest rates, inflation, relative economic growth and
governmental policies.
The Fund's principal investments include debt securities (limited to 25% of net
assets) rated below BBB by S&P or Baa by Moody's or, if unrated, determined by
the Sub-Adviser to be of comparable quality and mortgage-backed and asset-backed
securities. The Fund's principal investments may have fixed, variable, floating
or inverse floating rates of interest. The interest rate on a floating rate debt
instrument 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 an inverse
floater resets in the opposite direction from the market rate of interest to
which the inverse floater is indexed.
As part of its investment strategy, the Fund may buy and sell currency on a spot
basis and enter into foreign currency forward contracts for hedging purposes or
to increase the Fund's investment return. Additionally, the Fund may buy foreign
currency options, securities and securities index options, and enter into swaps
and futures contracts and related options. These techniques may be used for any
legally permissible purpose.
RISKS -- The values of debt securities fluctuate depending upon various factors,
including interest rates, issuer creditworthiness, market conditions and
maturities.
Since the Fund principally invests in FOREIGN SECURITIES, it can be subject to
various risks of loss that are different from risks of investing in securities
of U.S. issuers. These include losses due to fluctuating currency values, less
liquid trading markets, greater price volatility, political and economic
instability, less publicly available issuer information, changes in U.S. or
foreign tax or currency laws, and changes in monetary policy. In addition, the
Fund's investments in emerging market countries present risks in greater degree
than investments in developed market countries.
The Fund's principal investments can include HIGH YIELD SECURITIES (sometimes
called "junk bonds") which are generally considered speculative because they
present a greater risk of loss, including default, than higher quality debt
securities. These securities pay a premium -- a high interest rate or yield
because of this increased risk of loss. These securities can be also subject to
greater price volatility.
The Fund's principal investments include DERIVATIVES such as floaters, including
inverse floaters, and forward foreign currency options, securities and
securities index options, swaps, futures contracts and related options and
mortgage-backed and asset-backed securities. The Fund may use derivatives to try
to enhance returns or reduce the risk of loss (hedge) of certain of its
holdings. Regardless of the purpose, the Fund may lose money using derivatives.
The derivatives may increase the volatility of the Fund's net asset value and
may involve a small investment of cash relative to the magnitude of risk
assumed.
For the fiscal year ended December 31, 1998, the Fund's PORTFOLIO TURNOVER rate
was %.
21
<PAGE> 26
PAST PERFORMANCE
The bar chart and table indicate some of the risks of investing in the Fund by
showing changes in its performance over the life of the Fund and by showing how
the Fund's average annual returns for one year, five years and life of the Fund
periods compare to those of a broad-based securities market index. As with all
mutual funds, past performance is not necessarily an indication of how the Fund
will perform in the future.
<TABLE>
<CAPTION>
<S> <C> <C>
BAR CHART
INTERNATIONAL BOND FUND QUARTER/YEAR RETURN
Highest Return/Best Quarter
Lowest Return/Worst Quarter
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS AS OF 12/31/98
<S> <C> <C> <C>
SINCE
1 YEAR 5 YEARS INCEPTION**
International Bond Fund(***)
Salomon Brothers Non-U.S.
Dollar World Government Bond
Index*
</TABLE>
* The Salomon Brothers Non-U.S. Dollar World Government Bond Index is an
unmanaged index generally considered to be representative of the world bond
market.
*** The inception date was January 31, 1990 for the International Bond Fund's
predecessor separate account ("Separate Account"). 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.
22
<PAGE> 27
EXPENSES
The table below describes the fees and expenses that you may pay if you buy and
hold shares of the Fund. The "Example" is intended to help you compare the cost
of investing in the Fund with the cost of investing in other mutual funds. The
Example assumes that you invest $10,000 in the Fund for the time periods
indicated and reflects what you would pay if you redeemed all your shares or if
you hold them. The Example also assumes that your investment has a 5% return
each year and that the Fund operating expenses remain the same. Your actual
costs may be higher or lower than those shown below. The Example does not
reflect sales charges (loads) on reinvested dividends. There is no sales charge
(load) on reinvested dividends.
INTERNATIONAL BOND FUND
<TABLE>
<CAPTION>
EXAMPLE
-------
ASSUMING
REDEMPTION
ASSUMING NO AT THE END
FEES AND EXPENSES EXPENSES AFTER REDEMPTION OF EACH PERIOD
----------------- -------------- ----------- --------------
<S> <C> <C> <C> <C>
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
Maximum Sales Charge (Load) Imposed on Purchases of Shares
(as a percentage of offering price) None 1 year $ $
3 years $ $
5 years $ $
10 years $ $
Maximum Deferred Sales Charge (Load) (as a percentage of
redemption proceeds) None
Exchange Fee None
ANNUAL FUND OPERATING EXPENSES
(EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)
Management Fee %
Distribution and/or Service (12b-1) Fees None
Other Expenses %
-----
Total Fund Operating Expenses(+) %
=====
</TABLE>
<TABLE>
<S> <C>
(+) The Manager has voluntarily agreed to waive a portion of the
fees otherwise payable to it. With this reduction, for the
fiscal year ended December 31, 1998 the management fee paid
was 0.65% and total fund operating expenses were 0.95%.
</TABLE>
23
<PAGE> 28
MONEY MARKET FUND
INVESTMENT OBJECTIVE -- The Money Market Fund's investment objective is to seek
a high level of current income while preserving capital and maintaining
liquidity.
NOT GUARANTEED -- An investment in the Fund is not insured or guaranteed by the
Federal Deposit Insurance Corporation or any other government agency. Although
the Fund seeks to preserve the value of your investment at $1.00 per share, it
is possible to lose money by investing in the Fund. This could occur because of
highly unusual market conditions or a sudden collapse in the creditworthiness of
a company once believed to be an issuer of high quality, short-term securities.
PRINCIPAL INVESTMENT STRATEGIES -- The Fund invests in high quality short-term
securities denominated in U.S. dollars that mature in 397 days (13 months) or
less. The weighted average portfolio maturity will not exceed 90 days. These
securities may include obligations issued or guaranteed by the U.S. government
or any of its agencies or instrumentalities; bank and bank holding company
obligations such as CDs and bankers' acceptances; commercial paper which is
short-term unsecured loans to corporations; loans to U.S. and foreign issuers
and securities of foreign branches of U.S. banks, such as negotiable CDs, also
known as Eurodollars; time deposits; repurchase agreements; and corporate bonds.
These securities may be variable rate notes, floating rate notes and
asset-backed securities. The interest rate on a floating rate debt instrument is
a variable rate which is tied to another interest rate such as a money market
index or Treasury bill rate. All securities purchased by the Fund must meet the
requirements of Rule 2a-7 under the Investment Company Act of 1940 which are
designed to mitigate the risk of loss. 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
the floater will approximate its amortized cost.
RISKS -- Since the Fund invests in dollar-denominated FOREIGN SECURITIES, it can
be subject to various risks of loss that are different from risks of investing
in securities of U.S. based issuers. These include political and economic
instability, less publicly available issuer information and changes in U.S. or
foreign tax or currency laws.
The Fund's principal investments include DERIVATIVES such as variable rate
notes, floating rate notes and asset-backed securities. If New York Life
Insurance Company, the Fund's Sub-Adviser, is wrong about its expectations about
changes in interest rates or market conditions, the use of derivatives could
result in a loss. With respect to asset-backed securities, if interest rates
fall, the underlying debt may be paid off reducing the value of the Fund's
investments.
24
<PAGE> 29
PAST PERFORMANCE
The bar chart and table indicate some of the risks of investing in the Fund by
showing changes in its performance over the life of the Fund and by showing how
the Fund's average annual returns for one year, five years and life of the Fund
periods compare to those of a broad-based securities market index. As with all
mutual funds, past performance is not necessarily an indication of how the Fund
will perform in the future.
<TABLE>
<CAPTION>
<S> <C> <C>
BAR CHART
MONEY MARKET FUND QUARTER/YEAR RETURN
Highest Return/Best Quarter
Lowest Return/Worst Quarter
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS AS OF 12/31/98
<S> <C> <C> <C>
SINCE
1 YEAR 5 YEARS INCEPTION**
Money Market Fund
To come*
</TABLE>
* To come
** January 2, 1991
EXPENSES
The table below describes the fees and expenses that you may pay if you buy and
hold shares of the Fund. The "Example" is intended to help you compare the cost
of investing in the Fund with the cost of investing in other mutual funds. The
Example assumes that you invest $10,000 in the Fund for the time periods
indicated and reflects what you would pay if you redeemed all your shares or if
you hold them. The Example also assumes that your investment has a 5% return
each year and that the Fund operating expenses remain the same. Your actual
costs may be higher or lower than those shown below. The Example does not
reflect sales charges (loads) on reinvested dividends. There is no sales charge
(load) on reinvested dividends.
MONEY MARKET FUND
<TABLE>
<CAPTION>
EXAMPLE
-------
ASSUMING
REDEMPTION
ASSUMING NO AT THE END
FEES AND EXPENSES EXPENSES AFTER REDEMPTION OF EACH PERIOD
----------------- -------------- ----------- --------------
<S> <C> <C> <C> <C>
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
Maximum Sales Charge (Load) Imposed on Purchases of Shares
(as a percentage of offering price) None 1 year $ $
3 years $ $
5 years $ $
10 years $ $
Maximum Deferred Sales Charge (Load) (as a percentage of
redemption proceeds) None
Exchange Fee None
ANNUAL FUND OPERATING EXPENSES
(EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)
Management Fee %
Distribution and/or Service (12b-1) Fees None
Other Expenses %
-----
Total Fund Operating Expenses(+) %
=====
</TABLE>
<TABLE>
<S> <C>
(+) The Manager has voluntarily agreed to waive a portion of the
fees otherwise payable to it. With this reduction, the
management fee would be 0.39% and total fund operating
expenses would be 0.50%.
</TABLE>
25
<PAGE> 30
SHORT-TERM BOND FUND
INVESTMENT OBJECTIVE -- The Short-Term Bond Fund's investment objective is to
seek to maximize total return, consistent with liquidity, preservation of
capital and investment in short-term debt securities.
PRINCIPAL INVESTMENT STRATEGIES -- The Fund normally invests at least 65% of
total assets in a diversified portfolio of actively managed short-term debt
securities, including securities with special features (e.g. puts and variable
or floating coupon rates) which have price characteristics similar to short-term
debt securities.
INVESTMENT PROCESS -- In pursuing the Fund's investment strategy, the Fund's
Sub-Adviser 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 the Sub-Adviser in determining whether to
increase or decrease the investment emphasis placed on a particular type of
security or industry sector within the Fund's investment portfolio.
The Fund's principal investments include obligations issued or guaranteed by the
U.S. government, its agencies or instrumentalities; mortgage-related and
asset-backed securities; CDs, time deposits and bankers' acceptances issued by
U.S. banks or savings and loan associations and debt securities issued by U.S.
corporate entities. The Fund invests in securities rated Baa or better by
Moody's or BBB or better by S&P, or if unrated, determined by MacKay-Shields
Financial Corporation, the Fund's Sub-Adviser, to be of comparable quality; and
invests in 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. The Fund's principal investments may have fixed, variable,
floating or inverse floating rates of interest. The interest rate on a floating
rate debt instrument 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 an
inverse floater resets in the opposite direction from the market rate of
interest to which the inverse floater is indexed. The effective maturity of the
Fund's portfolio will be less than three years.
As part of the Fund's principal strategies, the Sub-Adviser may use investment
practices such as mortgage dollar rolls and portfolio securities lending.
RISKS -- The values of debt securities fluctuate depending upon various factors,
including interest rates, issuer creditworthiness, market conditions and
maturities.
The Fund's investments include DERIVATIVES such as options, futures,
mortgage-related and asset-backed securities. The Fund may use derivatives to
try to enhance returns or reduce the risk of loss (hedge) of certain of its
holdings. Regardless of the purpose, the Fund may lose money using derivatives.
The derivatives may increase the volatility of the Fund's net asset value and
may involve a small investment of cash relative to the magnitude of risk
assumed.
The Fund's use of investment practices such as mortgage dollar rolls and
securities lending also presents certain risks. A mortgage dollar roll is a
transaction in which a Fund sells mortgage-backed securities from its portfolio
to a counterparty and at the same time agrees to buy a similar security from the
same party at a later date. The principal risk of MORTGAGE DOLLAR ROLLS is that
the security the Fund receives at the end of the transaction is worth less than
the security the Fund sold to the same counterparty at the beginning of the
transaction. The principal risk of SECURITIES LENDING is that the financial
institution that borrows securities from the Fund could go bankrupt and the Fund
might not be able to recover the securities or their value.
For the fiscal year ended December 31, 1998, the Fund's PORTFOLIO TURNOVER rate
was %.
26
<PAGE> 31
PAST PERFORMANCE
The bar chart and table indicate some of the risks of investing in the Fund by
showing changes in its performance over the life of the Fund and by showing how
the Fund's average annual returns for one year, five years and life of the Fund
periods compare to those of a broad-based securities market index. As with all
mutual funds, past performance is not necessarily an indication of how the Fund
will perform in the future.
<TABLE>
<CAPTION>
<S> <C> <C>
BAR CHART
SHORT-TERM BOND FUND QUARTER/YEAR RETURN
Highest Return/Best Quarter
Lowest Return/Worst Quarter
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS AS OF 12/31/98
<S> <C> <C> <C>
SINCE
1 YEAR 5 YEARS INCEPTION**
Short-Term Bond Fund
Salomon 1-3 Year Treasury
Index*
</TABLE>
* To come
** January 2, 1991.
EXPENSES
The table below describes the fees and expenses that you may pay if you buy and
hold shares of the Fund. The "Example" is intended to help you compare the cost
of investing in the Fund with the cost of investing in other mutual funds. The
Example assumes that you invest $10,000 in the Fund for the time periods
indicated and reflects what you would pay if you redeemed all your shares or if
you hold them. The Example also assumes that your investment has a 5% return
each year and that the Fund operating expenses remain the same. Your actual
costs may be higher or lower than those shown below. The Example does not
reflect sales charges (loads) on reinvested dividends. There is no sales charge
(load) on reinvested dividends.
SHORT-TERM BOND FUND
<TABLE>
<CAPTION>
EXAMPLE
-------
ASSUMING
REDEMPTION
ASSUMING NO AT THE END
FEES AND EXPENSES EXPENSES AFTER REDEMPTION OF EACH PERIOD
----------------- -------------- ----------- --------------
<S> <C> <C> <C> <C>
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
Maximum Sales Charge (Load) Imposed on Purchases of Shares
(as a percentage of offering price) None 1 year $ $
3 years $ $
5 years $ $
10 years $ $
Maximum Deferred Sales Charge (Load) (as a percentage of
redemption proceeds) None
Exchange Fee None
ANNUAL FUND OPERATING EXPENSES
(EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)
Management Fee %
Distribution and/or Service (12b-1) Fees None
Other Expenses %
-----
Total Fund Operating Expenses(+) %
=====
</TABLE>
<TABLE>
<S> <C>
(+) The Manager has voluntarily agreed to waive a portion of the
fees otherwise payable to it. With this reduction, for the
fiscal year ended December 31, 1998 the management fee paid
was 0.38% and total fund operating expenses were 0.60%.
</TABLE>
27
<PAGE> 32
More About Investment Strategies and Risks
Information about each Fund's principal investments, investment practices and
principal risks appears at the beginning of the prospectus. The information
below further describes the principal investments, investment practices and
risks pertinent to a Fund.
DERIVATIVE SECURITIES
The value of derivatives is based on certain underlying equity or fixed-income
securities, interest rates, currencies or indexes. They may be hard to sell and
are very sensitive to changes in the underlying security, interest rate,
currency or index, and as a result can be highly volatile. If the Sub-Adviser is
wrong about its expectations of changes in interest rates or market conditions,
the use of derivatives could result in a loss. In addition, the leverage
associated with inverse floaters may result in greater volatility in their
market value than other income-producing securities.
FOREIGN SECURITIES
Foreign investments could be more difficult to sell than U.S. investments. They
also may subject the Fund to risks different from investing in domestic
securities. Investments in foreign securities involve difficulties in receiving
or interpreting financial and economic information, possible imposition of
taxes, higher brokerage and custodian fees, possible currency exchange controls
or other government restrictions, including possible seizure or nationalization
of foreign deposits or assets. Foreign securities may also be less liquid and
more volatile than U.S. securities. There may also be difficulty in invoking
legal protections across borders. In addition, investment in emerging market
countries presents risks in greater degree than those presented by investment in
foreign issuers in countries with developed securities markets and more advanced
regulatory systems.
Some foreign securities are issued by companies organized outside the United
States and are traded only or primarily in trading markets outside the United
States. These foreign securities can be subject to most, if not all, of the
risks of foreign investing. Some foreign securities are issued by companies
organized outside the United States but are traded in U.S. securities markets
and are denominated in U.S. dollars. For example, American Depositary Receipts
and shares of some large foreign-based companies are traded on principal U.S.
exchanges. Other securities are not traded in the United States but are
denominated in U.S. dollars. These securities are not subject to all the risks
of foreign investing. For example, foreign trading market or currency risks will
not apply to dollar denominated securities traded in U.S. securities markets.
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 to protect itself against fluctuations
in currency exchange rates in relation to the U.S. dollar. See "Risk Management
Techniques."
LENDING OF PORTFOLIO SECURITIES
Portfolio securities may be lent to brokers, dealers and financial institutions
to realize additional income under guidelines adopted by the Board of Trustees.
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.
MORTGAGE-BACKED AND
ASSET-BACKED SECURITIES
Mortgage-backed and asset-backed securities are securities whose value is based
on 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 Sub-Adviser's ability to correctly forecast interest rates
and other economic factors correctly will impact the success of investments in
mortgage-backed and asset-backed securities. 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 some or all of the premium may be lost in the event of
prepayment.
RISK MANAGEMENT TECHNIQUES
Various techniques can be used to increase or decrease a Fund's 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
28
<PAGE> 33
foreign currency exchange contracts and options on foreign currencies) and
purchasing put or call options on securities and securities indexes.
These practices can be used 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.
SWAP AGREEMENTS
A Fund may enter into interest rate, index and currency exchange rate swap
agreements to attempt to obtain a desired return at a lower cost than a direct
investment in an instrument yielding that desired return.
Whether a Fund's use of swap agreements will be successful will depend on
whether the Sub-Adviser correctly predicts movements in interest rates, indexes
and currency exchange rates. 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. See Tax Status in the SAI for
information regarding the tax considerations relating to swap agreements.
RISKS OF INVESTING IN HIGH YIELD SECURITIES
("JUNK BONDS")
Debt securities rated lower than Baa by Moody's or BBB by S&P or, if not rated,
determined to be of equivalent quality by the Sub-Adviser are sometimes referred
to as junk bonds and are considered speculative.
Investment in high yield bonds involves special risks in addition to the risks
associated with investments in higher rated debt securities. High yield 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 securities.
OTHER INFORMATION
The services provided to the Funds by the Manager, the Sub-Adviser 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-Adviser 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-Adviser
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-Adviser
and the Funds' other service providers.
29
<PAGE> 34
Account Policies: Buying, Selling and Exchanging Shares
General Instructions: Buying and Selling Shares
[CAPTION]
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
TO OPEN AN ACCOUNT TO BUY MORE SHARES TO SELL SHARES
<S> <C> <C> <C> <C> <C>
You are eligible to buy Send additional investments directly to: Write a letter of instruction that
Institutional Class shares if includes:
you are: MainStay Institutional Funds Inc.
P.O. Box 8407 - your name(s) and signature(s)
- an institutional investor Boston, MA 02266-8407 - your account number
investing as an employer, - Fund name(s)
association or other group Include the name of the appropriate Fund - dollar amount you want to sell
retirement plan, employee or Funds and the account number on your
benefit trust, financial check.
institution, endowment,
foundation or corporation; or
- in a Group IRA or Group
Account and you bought shares
before January 1, 1995.
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 to buy and
sell shares in the Funds.
If you are investing through a
Group IRA or Group Account, the
following information will help
you buy shares:
A plan sponsor can open an
account.
Complete your application and
send it to:
MainStay Institutional Funds
Inc.
P.O. Box 461
Parsippany, NJ
07054-0461
</TABLE>
IN WRITING
30
<PAGE> 35
[CAPTION]
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
TO OPEN AN ACCOUNT TO BUY MORE SHARES TO SELL SHARES
<S> <C> <C> <C> <C> <C>
A plan sponsor can open an WIRE GETTING YOUR MONEY BY WIRE TRANSFER
account, and you (or your
sponsor, if you are investing You or your registered representative Be sure we have your bank account
through a group or plan) can should call MSS at 1-800-695-2126 for an information on file. Call MSS at
make an investment by calling account number and wiring instructions. 1-800-695-2126 to request your
MainStay Shareholder Services, Give them to your bank, which may charge transaction. Or, if you prefer, you
Inc. ("MSS"), the Fund's a fee for wiring. The wire must include may wire your order. Proceeds will be
transfer agent, at your name--exactly as it appears on your wired to your bank.
1-800-695-2126 between 8:30 AM application--your account number and the
and 4:00 PM Eastern time on any name of the Fund or Funds in which you Generally, after receiving your sell
day the New York Stock Exchange want to invest. MSS must receive your order by phone, we will send the
is open. You'll be given an money (and application, if it's your proceeds by bank wire to your
account number and wire or mail initial investment) within three designated bank account within seven
instructions for sending business days of your placing an order. days after your redemption request is
payment. All calls are received (one business day for the
recorded. Money Market Fund). Your bank may
charge you a fee to receive the wire
MSS must receive your money transfer.
(and the application, if it's
your first investment) within GETTING YOUR MONEY BY CHECK
the next three business days of Call us to request your transaction. A
placing your order. check will be sent to the address of
record.
The check will be payable to the name
(or names) on the account and mailed
to the address on the account. (See
the SAI for more details.)
Telephone or wire redemptions are not
permitted for shares represented by
certificates.
</TABLE>
BY TELEPHONE
31
<PAGE> 36
[CAPTION]
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
TO OPEN AN ACCOUNT TO BUY MORE SHARES TO SELL SHARES
<S> <C> <C> <C> <C> <C>
PAYROLL DEDUCTION
For making automatic investments through
a payroll deduction.
DIVIDEND REINVESTMENT
For automatically reinvesting the
dividends and distributions from one
MainStay Institutional Fund in the same
or another MainStay Institutional Fund.
SYSTEMATIC WITHDRAWAL PLAN
To make regular redemptions, choose
the plan when you open your account or
call MSS to request a form to add the
plan. Complete the form, specifying
the amount and frequency of
withdrawals you would like.
Withdrawals must be at least $100 a
month. Requires at least $10,000 in
the account at the time of request and
shares must not be in certificate
form.
CHECKWRITING SERVICES
For Money Market Fund only.
SYSTEMATIC EXCHANGES
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 one MainStay Institutional Fund
to another MainStay Institutional Fund
within the same class of shares.
TELEPHONE EXCHANGES
For telephone exchanges from one
MainStay Institutional Fund to
another.
</TABLE>
AUTOMATICALLY
32
<PAGE> 37
[CAPTION]
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
TO OPEN AN ACCOUNT TO BUY MORE SHARES TO SELL SHARES
<S> <C> <C> <C> <C> <C>
You buy shares at net asset You may sell shares by calling or
value ("NAV"). NAV is generally writing MSS or your investment
calculated as of the close of professional. MSS must receive your
trading on the New York Stock order with all the information,
Exchange (usually 4:00 pm signatures and documentation necessary
Eastern time, except for the to sell your shares. If you have share
Money Market Fund, which is certificates, you must return them
calculated at noon) everyday with your redemption request.
the Exchange is open. When you
buy shares, you must pay the Your shares will be sold at the next
next NAV calculated after MSS NAV calculated after MSS accepts your
accepts your order. This means order. MainStay will make the payment
all the necessary information, within seven days after receiving your
signatures and documentation request in good order (one business
has been received. day for the Money Market Fund).
VALUING SECURITIES
The Funds' investments are
valued based on current market
value, except for the Money
Market Fund, which uses the
amortized cost method of
valuation. Events affecting the
values of portfolio securities
which occur between the time
their prices are determined and
the close of the Exchange will
not be reflected in the Funds'
calculation of NAV unless the
Sub-Adviser deems that the
particular event would
materially affect NAV, in which
case an adjustment will be
made.
</TABLE>
NAV
33
<PAGE> 38
<TABLE>
<CAPTION>
TO OPEN AN ACCOUNT TO BUY MORE SHARES TO SELL SHARES
<S> <C> <C> <C> <C> <C>
MINIMUM INVESTMENTS* If you buy shares by check and quickly There will be no redemption, however,
decide to sell them, the Fund may delay during any period in which the right
One of the following minimums payment for up to 15 days to allow the of redemption is suspended or date of
will apply to you, depending check to clear. payment is postponed because the New
upon how you are investing: York Stock Exchange is closed or
trading on the Exchange is restricted
FOR INSTITUTIONAL INVESTORS: or the SEC deems an emergency to
exist.
- Initial combined
investments--at least REDEMPTIONS-IN-KIND
$250,000, which may be spread
over a thirteen-month period Each Fund reserves the right to pay
after opening the account. certain redemptions, either totally or
- Each investment after partially, by a distribution in kind
that--at least $1,000. of securities (instead of cash) from
the applicable Fund's portfolio. See
FOR A GROUP IRA: the SAI for details.
NOTE: REINVESTMENT WON'T RELIEVE YOU
If you are invested in an IRA OF ANY TAX CONSEQUENCES on gains
offered through a group: realized from the sale. The deductions
for losses may, however, be denied.
- Each additional
investment--at least $100. CONVENIENT, YES . . . BUT NOT
RISK-FREE
FOR A GROUP ACCOUNT:
Telephone redemption privileges are
If you are a member of a group convenient, but you give up some
that participates in our Group security. When you sign the
IRA program: application to buy shares, you agree
that neither the MainStay
- Each additional Institutional Funds nor MSS will be
investment--at least $1,000. liable for following phone
instructions that they reasonably
*MainStay Institutional Funds believe are genuine. When using the
Inc. may also accept MainStay Audio Response System, you
investments of smaller amounts bear the risk of any loss from your
at its discretion. errors unless the Funds or MSS fail to
use established safeguards for your
Tax deductible contributions to protection. These safeguards are among
a regular IRA generally are those currently in place at
limited to $2,000 a year MainStay Institutional Funds:
($4,000 in the case of a
spousal IRA). An investor in - all phone calls are tape recorded;
certain qualified retirement and
plans may be able to open an - written confirmation of every
account with a smaller minimum transaction is sent to your address
investment. of record.
All investments must be in U.S.
dollars and drawn on a U.S.
bank. Except under certain
circumstances, third-party
checks cannot be accepted. If
your check doesn't clear, your
order will be canceled and you
could be liable for losses or
</TABLE>
OTHER
34
<PAGE> 39
<TABLE>
<CAPTION>
TO OPEN AN ACCOUNT TO BUY MORE SHARES TO SELL SHARES
<S> <C> <C> <C> <C> <C>
fees. We also reserve the right
to limit the number of checks
processed at one time. Wires
are not accepted when the New
York Stock Exchange or banks
are closed.
The Fund has the right to close
your account if it gets too
small. 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.
</TABLE>
OTHER
35
<PAGE> 40
SHAREHOLDER SERVICES
AUTOMATIC SERVICES
Buying or selling shares automatically is easy with the services described
below. With each service, you select a schedule and amount, subject to certain
restrictions. You can set up most of these services with your application or by
calling 1-800-MAINSTAY for a form.
EXCHANGE PRIVILEGES
Once you open an account, you may exchange shares of the same class between
MainStay Institutional Funds.
IN GENERAL
Selling and exchanging shares may result in a gain or loss and therefore may be
subject to taxation. Consult your tax adviser on the consequences.
MainStay may revise or terminate the systematic withdrawal plan and the exchange
privileges upon written notice.
GENERAL POLICIES--PURCHASING, SELLING AND EXCHANGING SHARES
Unless you decline telephone privileges on your application, you may be
responsible for any fraudulent telephone order as long as MSS takes reasonable
measures to verify the order.
The Funds reserve the right to:
- - refuse any purchase or exchange request that could adversely affect a Fund or
its operations including those from any individual or group who, in the Fund's
view, is likely to engage in excessive trading
- - change or discontinue its exchange privilege, or temporarily suspend this
privilege during unusual market conditions
- - change its minimum investment amounts
If you invest through a third party (rather than directly with MainStay), the
policies and fees may be different than those described here. Banks, brokers,
401(k) plans, financial advisers and financial supermarkets may charge
transaction fees and may set different minimum investments or limitations on
buying or selling shares. Consult a representative of your plan or financial
institution if in doubt.
36
<PAGE> 41
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." The dividends paid by each Fund will vary based on the income from
its investments and the expenses incurred by the Fund.
WHEN THE FUNDS PAY
The Money Market Fund declares dividends daily and pays them monthly. The other
Funds in this prospectus declare and distribute any dividends at least once a
year.
In the Money Market Fund, you begin earning dividends the business day after MSS
receives your investment and is open for business.
CAPITAL GAINS
Funds earn capital gains when they sell securities at a profit.
WHEN THE FUNDS PAY
At the end of each fiscal year, each MainStay Institutional Fund matches its
gains against its losses. If the balance results in a gain, the Fund will
distribute the gain to shareholders.
HOW TO TAKE YOUR EARNINGS
You may choose how to receive earnings (and change your choice as often as you
like) by notifying your investment professional (if permitted by the broker-
dealer) or MainStay directly. If you don't make a choice on your application,
your earnings will be automatically reinvested in the same class of shares of
the same Fund. In order to reinvest dividends and/or capital gains in another
Fund, you must have an established account in that class of shares of that Fund.
Here are your choices:
REINVEST EARNINGS IN:
- - the same Fund; or
- - in another Fund of your choice.
TAKE EARNINGS IN CASH
37
<PAGE> 42
Understand the Tax Consequences
MOST OF YOUR DIVIDENDS ARE TAXABLE
Virtually all of the dividends you receive from The MainStay Institutional Funds
are taxable, whether you take them as cash or automatically reinvest them. Some
dividends will be taxable as long-term capital gains.
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.
RETIREMENT PLANS
None of the dividends earned in a tax-deferred retirement plan are taxable until
distributed from the plan.
TAXES ON FOREIGN INVESTMENT INCOME
(Mainly from the International Bond, International Equity and EAFE Index Funds.)
Income earned from investments in foreign countries may be withheld by those
countries as income taxes. Under certain circumstances, the Fund may elect to
pass along tax credits or deductions to you for foreign income taxes paid,
although there are no assurances that the Fund will be able to do so, or that
the credits or deductions will result in a tax benefit to you.
You should be aware that if you buy shares shortly before a dividend payment a
part of your investment will be returned in the form of a dividend which may
be taxable income for you.
c
SEEK ASSISTANCE
Your registered representative is always available to help you keep your
investment goals coordinated with your tax considerations. You should,
however, rely on your tax adviser for tax counsel.
For additional information on taxation, see the SAI.
38
<PAGE> 43
Know With Whom You're Investing
WHO RUNS THE FUNDS' DAY-TO-DAY BUSINESS?
MainStay Management, Inc., 300 Interpace Parkway, Building A, Parsippany, NJ
07054, serves as the Funds' manager, handling business affairs for the Funds.
MainStay Management, Inc. is a corporation organized under the laws of Delaware
and is an indirect wholly owned subsidiary of New York Life Insurance Company.
The Manager provides offices and conducts clerical, recordkeeping and
bookkeeping services, and keeps most of the financial and accounting records
required for the Funds. 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 aren't the responsibility of the
Funds, including the fees paid to the Sub-Advisers.
For the fiscal year ended December 31, 1998, the Company, on behalf of each
Fund, paid the Manager an aggregate fee for services performed as a percentage
of the average daily net assets of that Fund as follows:
<TABLE>
<CAPTION>
RATE PAID FOR
THE YEAR ENDED
DECEMBER 31,
1998
- ----------------------------------------------------------------
<S> <C>
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............................... %
Short-Term Bond Fund............................ %
- ----------------------------------------------------------------
</TABLE>
The Manager is not responsible for records maintained by the Funds' Custodian,
Transfer Agent, Dividend Disbursing and Shareholder Servicing Agent, or Sub-
Advisers.
WHO MANAGES YOUR MONEY?
MacKay-Shields Financial Corporation, 9 West 57th St., New York, NY 10019, is
the Sub-Adviser to the Bond Fund, Growth Equity Fund, International Bond Fund,
International Equity Fund, Short-Term Bond Fund and Value Equity Fund. The firm
was incorporated in 1969 as an independent investment advisory firm and was
privately held until 1984 when it became a wholly owned but autonomously managed
subsidiary of New York Life Insurance Company. As of December 31, 1998, MacKay-
Shields managed over $ billion in assets.
New York Life Insurance Company, 51 Madison Avenue, New York, NY 10010, is the
Sub-Adviser to 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, 1998, New York Life had total assets of
approximately $ billion and managed approximately $ billion in assets
for qualified retirement plans.
Monitor Capital Advisors, Inc., 504 Carnegie Center, Princeton, NJ 08540, is the
Sub-Adviser to 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, 1998, Monitor Capital managed
approximately $ billion in assets.
Under the supervision of the Manager, each 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. For these services, each Sub-Adviser is paid a monthly fee
by the Manager, not the Funds. (See the SAI for a breakdown of fees.) The Funds'
Directors oversee the management and operations of the Funds.
39
<PAGE> 44
PORTFOLIO MANAGERS -- BIOGRAPHIES
RAVI AKHOURY -- Mr. Akhoury has managed the Short-Term Bond and Bond Funds since
inception. Mr. Akhoury joined MacKay-Shields as a Director in 1984, became
Managing Director in 1988, President and member, Board of Directors in 1989,
Chairman and CEO in 1992 and Senior Managing Director of MacKay-Shields and
Executive Vice President of New York Life Insurance Company and Chief Executive
Officer of New York Life Asset Management, a division of New York Life Insurance
Company, in 1997.
RUDOLPH CARRYL -- Mr. Carryl has managed the Growth Equity Fund since August
1992. 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.
DAVID CLEMENT -- Mr. Clement has managed the Money Market Fund since inception
and is a member of the fixed income portfolio management team at New York Life
Insurance Company. Mr. Clement joined the Asset Management Group of New York
Life in 1990.
STEPHEN KILLIAN -- Mr. Killian has managed the Indexed Equity Fund since
February 1999. Mr. Killian is a Vice President with portfolio management
responsibility for international equity funds, active quantitative equity
portfolios and development of quantitative strategies at Monitor Capital. He
joined Monitor Capital in 1997 after being a Partner and Senior Portfolio
Manager at RhumbLine Advisers from 1992 to 1997. Mr. Killian is a candidate in
the CFA Program.
DENIS LAPLAIGE -- Mr. Laplaige has managed the Value Equity Fund since
inception. Mr. Laplaige is President, Senior Managing Director and Chief
Investment Officer of MacKay-Shields. He joined the firm in 1982, became a
Director in 1988, Managing Director in 1991, a member of the Board of Directors
in 1993, President in 1994 and Senior Managing Director and Chief Investment
Officer in 1996.
JAMES MEHLING -- Mr. Mehling has managed the EAFE Index, Indexed Equity,
Multi-Asset and Indexed Bond Funds since 1991. 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 to 1991.
EDWARD MUNSHOWER -- Mr. Munshower has managed the Bond Fund since inception and
the Short-Term Bond Fund since 1993. Mr. Munshower is a Director of
MacKay-Shields. He joined MacKay-Shields as a fixed income investment specialist
in 1985 after having been an investment analyst for New York Life Insurance
Company. Mr. Munshower has over 14 years of experience in investment management
and research.
JOSEPH PORTERA -- Mr. Portera has managed the International Equity Fund since
September 1998. Mr. Portera is a Director of MacKay-Shields specializing in
international securities. 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 to August 1995 and
currently manages the Fund.
RICHARD ROSEN -- Mr. Rosen has managed the Value Equity Fund since February
1999. Mr. Rosen is a Director of MacKay-Shields in the Equity Division. He
joined MacKay-Shields in January 1999 after working as a Managing Director
responsible for equity securities at Prudential Investments from August 1991 to
January 1999 and Senior Portfolio Manager and Vice President at Marine Midland
Bank from June 1986 to August 1991.
EDMUND SPELMAN -- Mr. Spelman has managed the Growth Equity Fund since February
1991. 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. from 1984 to 1991.
JONATHAN SWANEY -- Mr. Swaney has managed the Multi-Asset Fund since February
1999. As a Portfolio Manager at Monitor Capital, Mr. Swaney is primarily
responsible for asset allocation. He joined Monitor Capital in 1997 after
working as the Manager of a tax advantaged equity index product at Pine Grove
Partners, a hedge fund, from 1995 to 1997 and as a fixed income statistician at
The Vanguard Group, Inc. from 1993 to 1995. Mr. Swaney is a candidate in the CFA
Program and has completed Level I of the Program.
40
<PAGE> 45
Financial Highlights
The financial highlights tables are intended to help you understand the Funds'
financial performance for the past 5 years or, if shorter, the period of the
Funds' operations. Certain information reflects financial results for a single
Fund share. The total returns in the tables represent the rate that an investor
would have earned or lost on an investment in the Funds (assuming reinvestment
of all dividends and distributions). This information has been audited by
PricewaterhouseCoopers LLP, whose report, along with the Funds' financial
statements, are included in the annual reports, which are available upon
request.
EAFE INDEX FUND
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net asset value at beginning of period...................... $ 14.00 $ 13.56 $ 12.63 $ 12.03 $ 9.60
------- ------- ------- ------- -------
Net investment income....................................... 0.22 0.16 0.13 0.10 0.06
Net realized and unrealized gain (loss) on investments...... (0.28) 0.71 1.11 0.70 2.71
Net realized and unrealized gain (loss) on foreign currency
transactions.............................................. (0.00)(b) (0.00)(b) (0.10) 0.03 (0.01)
------- ------- ------- ------- -------
Total from investment operations............................ (0.06) 0.87 1.14 0.83 2.76
------- ------- ------- ------- -------
Less dividends and distributions:
From net investment income.................................. (0.22) (0.16) (0.04) (0.09) (0.14)
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)
------- ------- ------- ------- -------
Net asset value at end of period............................ $ 10.24 $ 14.00 $ 13.56 $ 12.63 $ 12.03
======= ======= ======= ======= =======
Total investment return..................................... 0.40% 6.45% 9.03% 6.83% 28.97%
Ratios (to average net assets)/Supplemental Data:
Net investment income..................................... 1.04% 1.11% 1.01% 0.57% 0.53%
Net expenses.............................................. 0.94% 0.94% 1.03% 1.26% 1.27%
Expenses (before reimbursement)........................... 1.26% 1.23% 1.24% 1.26% 1.27%
Portfolio turnover rate..................................... 6% 4% 6% 7% 16%
Average commission rate paid................................ $0.0205 $0.0097 (c) (c) (c)
Net assets at end of period (in 000's)...................... $55,177 $89,029 $80,087 $72,265 $53,714
</TABLE>
- --------
<TABLE>
<C> <S>
(b) Less than one cent per share.
(c) Disclosure of amount required for fiscal years beginning on
or after September 1, 1995.
</TABLE>
GROWTH EQUITY FUND
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value at beginning of period..................... $ 21.99 $ 18.84 $ 13.68 $ 14.40 $ 14.71
-------- -------- -------- -------- --------
Net investment income (loss)............................... (0.08)(b) (0.06)(b) 0.02 0.01 (0.01)
Net realized and unrealized gain (loss) on investments..... 5.45 4.14 5.16 (0.33) 1.41
-------- -------- -------- -------- --------
Total from investment operations........................... 5.37 4.08 5.18 (0.32) 1.40
Less dividends and distributions:
From net investment income................................. -- -- (0.02) (0.01) --
From net realized gain on investments...................... (1.93) (0.93) -- (0.39) (1.68)
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)
-------- -------- -------- -------- --------
Net asset value at end of period........................... $ 25.43 $ 21.99 $ 18.84 $ 13.68 $ 14.40
======== ======== ======== ======== ========
Total investment return.................................... 24.73% 21.62% 37.88% (2.23%) 9.59%
Ratios (to average net assets)/Supplemental Data:
Net investment income (loss)............................. (0.31%) (0.27%) 0.12% 0.04% (0.07%)
Net expenses............................................. 0.93% 0.92% 0.93% 0.92% 0.90%
Expenses (before reimbursement).......................... 0.93% 0.92% 0.93% 0.92% 0.93%
Portfolio turnover rate.................................... 36% 22% 33% 37% 81%
Average commission rate paid............................... $ 0.0596 $ 0.0604 (d) (d) (d)
Net assets at end of period (in 000's)..................... $700,070 $541,212 $412,129 $284,388 $258,751
</TABLE>
- --------
<TABLE>
<C> <S>
(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.
</TABLE>
41
<PAGE> 46
INDEXED EQUITY FUND
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value at beginning of period...................... $ 21.05 $ 17.82 $ 13.53 $ 13.86 $ 13.50
-------- -------- -------- -------- --------
Net investment income....................................... 0.37 0.34 0.35 0.33 0.30
Net realized and unrealized gain (loss) on investments...... 6.54 3.69 4.64 (0.20) 0.93
-------- -------- -------- -------- --------
Total from investment operations............................ 6.91 4.03 4.99 0.13 1.23
-------- -------- -------- -------- --------
Less dividends and distributions:
From net investment income.................................. (0.37) (0.34) (0.34) (0.33) (0.61)
From net realized gain on investments....................... (0.54) (0.46) (0.36) (0.13) (0.25)
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)
-------- -------- -------- -------- --------
Net asset value at end of period............................ $ 27.05 $ 21.05 $ 17.82 $ 13.53 $ 13.86
======== ======== ======== ======== ========
Total investment return..................................... 32.88% 22.57% 36.88% 0.90% 9.41%
Ratios (to average net assets)/Supplemental Data:
Net investment income..................................... 1.56% 1.96% 2.21% 2.43% 2.39%
Net expenses.............................................. 0.30% 0.44% 0.50% 0.50% 0.45%
Expenses (before reimbursement)........................... 0.56% 0.59% 0.59% 0.58% 0.60%
Portfolio turnover rate..................................... 3% 8% 4% 5% 5%
Average commission rate paid................................ $ 0.0500 $ 0.0498 (c) (c) (c)
Net assets at end of period (in 000's)...................... $966,217 $617,716 $354,420 $244,685 $219,351
</TABLE>
- --------
<TABLE>
<C> <S>
(b) Less than one cent per share.
(c) Disclosure of amount required for fiscal years beginning on
or after September 1, 1995.
</TABLE>
INTERNATIONAL EQUITY FUND
<TABLE>
<CAPTION>
JANUARY 1, 1995(A)
THROUGH
YEAR ENDED YEAR ENDED DECEMBER 31,
DECEMBER 31, 1997 DECEMBER 31, 1996 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>
- --------
<TABLE>
<C> <S>
(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.
</TABLE>
42
<PAGE> 47
MULTI-ASSET FUND
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value at beginning of period..................... $ 13.19 $ 11.79 $ 10.67 $ 11.67 $ 12.02
-------- -------- -------- -------- --------
Net investment income...................................... 0.34 0.38 0.48 0.45 0.39
Net realized and unrealized gain (loss) on investments..... 3.15 1.53 2.39 (0.55) 0.59
Net realized and unrealized gain (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
-------- -------- -------- -------- --------
Less dividends and distributions:
From net investment income................................. (0.34) (0.38) (0.48) (0.45) (0.88)
From net realized gain on investments...................... (1.51) (0.13) (1.18) (0.42) (0.44)
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)
-------- -------- -------- -------- --------
Net asset value at end of period........................... $14.83 $13.19 $11.79 $10.67 $11.67
======== ======== ======== ======== ========
Total investment return.................................... 26.69% 16.16% 26.81% (0.86%) 8.79%
Ratios (to average net assets)/Supplemental Data:
Net investment income.................................... 2.27% 2.99% 4.03% 3.63% 3.55%
Net expenses............................................. 0.76% 0.70% 0.70% 0.70% 0.60%
Expenses (before reimbursement).......................... 0.76% 0.75% 0.77% 0.75% 0.75%
Portfolio turnover rate.................................... 19% 103% 261% 128% 101%
Average commission rate paid............................... $ 0.0499 $ 0.0498 (c) (c) (c)
Net assets at end of period (in 000's)..................... $414,824 $323,790 $273,351 $229,079 $258,345
</TABLE>
- --------
<TABLE>
<C> <S>
(b) Less than one cent per share.
(c) Disclosure of amount required for fiscal years beginning on
or after September 1, 1995.
</TABLE>
VALUE EQUITY FUND
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value at beginning of period..................... $ 15.87 $ 14.43 $ 11.58 $ 12.40 $ 14.16
-------- -------- -------- -------- --------
Net investment income...................................... 0.23 0.25 0.21 0.17 0.16
Net realized and unrealized gain (loss) on investments..... 3.31 2.98 3.20 (0.02) 1.63
-------- -------- -------- -------- --------
Total from investment operations........................... 3.54 3.23 3.41 0.15 1.79
-------- -------- -------- -------- --------
Less dividends and distributions:
From net investment income................................. (0.23) (0.25) (0.21) (0.17) (0.37)
From net realized gain on investments...................... (2.82) (1.54) (0.35) (0.80) (3.18)
-------- -------- -------- -------- --------
Total dividends and distributions.......................... (3.05) (1.79) (0.56) (0.97) (3.55)
-------- -------- -------- -------- --------
Net asset value at end of period........................... $ 16.36 $ 15.87 $ 14.43 $ 11.58 $ 12.40
======== ======== ======== ======== ========
Total investment return.................................... 22.63% 22.41% 29.42% 1.22% 14.90%
Ratios (to average net assets)/Supplemental Data:
Net investment income.................................... 1.30% 1.70% 1.64% 1.50% 1.38%
Net expenses............................................. 0.93% 0.92% 0.93% 0.92% 0.90%
Expenses (before reimbursement).......................... 0.93% 0.92% 0.93% 0.92% 0.93%
Portfolio turnover rate.................................... 66% 50% 51% 43% 83%
Average commission rate paid............................... $ 0.0592 $ 0.0594 (b) (b) (b)
Net assets at end of period (in 000's)..................... $984,220 $821,725 $603,749 $396,537 $305,060
</TABLE>
- --------
<TABLE>
<C> <S>
(b) Disclosure of amount required for fiscal years beginning on
or after September 1, 1995.
</TABLE>
43
<PAGE> 48
BOND FUND
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value at beginning of period...................... $ 9.51 $ 9.85 $ 8.93 $ 9.98 $ 11.08
-------- -------- -------- -------- --------
Net investment income....................................... 0.61 0.62 0.68 0.72 0.74
Net realized and unrealized gain (loss) on investments...... 0.20 (0.34) 0.92 (1.05) 0.26
-------- -------- -------- -------- --------
Total from investment operations............................ 0.81 0.28 1.60 (0.33) 1.00
-------- -------- -------- -------- --------
Less dividends and distributions:
From net investment income.................................. (0.61) (0.62) (0.68) (0.72) (1.35)
From net realized gain on investments....................... -- -- -- -- (0.65)
In excess of net realized gain on investments............... -- -- -- -- (0.10)
-------- -------- -------- -------- --------
Total dividends and distributions........................... (0.61) (0.62) (0.68) (0.72) (2.10)
-------- -------- -------- -------- --------
Net asset value at end of period............................ $ 9.71 $ 9.51 $ 9.85 $ 8.93 $ 9.98
======== ======== ======== ======== ========
Total investment return..................................... 8.57% 2.80% 17.88% (3.31%) 9.74%
Ratios (to average net assets)/Supplemental Data:
Net investment income..................................... 6.21% 6.10% 6.62% 7.13% 6.86%
Net Expenses.............................................. 0.75% 0.75% 0.75% 0.75% 0.70%
Expenses (before reimbursement)........................... 0.85% 0.86% 0.86% 0.82% 0.84%
Portfolio turnover rate..................................... 338% 398% 470% 478% 567%
Net assets at end of period (in 000's)...................... $183,846 $177,009 $193,518 $202,970 $219,834
</TABLE>
INDEXED BOND FUND
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value at beginning of period...................... $ 10.52 $ 10.99 $ 10.06 $ 11.08 $ 11.65
-------- -------- -------- -------- --------
Net investment income....................................... 0.73 0.76 0.82 0.65 0.67
Net realized and unrealized gain (loss) on investments...... 0.22 (0.48) 1.00 (1.03) 0.38
-------- -------- -------- -------- --------
Total from investment operations............................ 0.95 0.28 1.82 (0.38) 1.05
-------- -------- -------- -------- --------
Less dividends and distributions:
From net investment income.................................. (0.73) (0.75) (0.82) (0.64) (1.46)
From net realized gain on investments....................... -- -- (0.07) -- (0.15)
In excess of net realized gain on investments............... -- -- -- -- (0.01)
-------- -------- -------- -------- --------
Total dividends and distributions........................... (0.73) (0.75) (0.89) (0.64) (1.62)
-------- -------- -------- -------- --------
Net asset value at end of period............................ $ 10.74 $ 10.52 $ 10.99 $ 10.06 $ 11.08
======== ======== ======== ======== ========
Total investment return..................................... 9.01% 2.55% 18.07% (3.44%) 9.64%
Ratios (to average net assets)/Supplemental Data:
Net investment income..................................... 6.60% 6.21% 6.38% 6.13% 6.19%
Net expenses.............................................. 0.50% 0.50% 0.50% 0.50% 0.45%
Expenses (before reimbursement)........................... 0.65% 0.65% 0.63% 0.61% 0.61%
Portfolio turnover rate..................................... 32% 312% 284% 274% 213%
Net assets at end of period (in 000's)...................... $117,922 $109,482 $163,219 $169,404 $159,792
</TABLE>
44
<PAGE> 49
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>
- --------
<TABLE>
<C> <S>
(a) Commencement of operations.
</TABLE>
MONEY MARKET FUND
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value at beginning of period...................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- ------- ------- -------
Net investment income....................................... 0.05 0.05 0.05 0.04 0.03
-------- -------- ------- ------- -------
Less dividends and distributions:
From net investment income.................................. (0.05) (0.05) (0.05) (0.04) (0.03)
From net realized gain on investments....................... (0.00)(b) -- -- -- --
-------- -------- ------- ------- -------
Total dividends and distributions........................... (0.05) (0.05) (0.05) (0.04) (0.03)
-------- -------- ------- ------- -------
Net asset value at end of period............................ $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======= ======= =======
Total investment return..................................... 5.27% 5.11% 5.63% 3.88% 2.89%
Ratios (to average net assets)/Supplemental Data:
Net investment income..................................... 5.18% 5.00% 5.48% 3.89% 2.85%
Net expenses.............................................. 0.50% 0.50% 0.50% 0.50% 0.45%
Expenses (before reimbursement)........................... 0.61% 0.67% 0.73% 0.68% 0.67%
Net assets at end of period (in 000's)...................... $190,319 $110,760 $67,869 $65,106 $75,832
</TABLE>
- --------
<TABLE>
<C> <S>
(b) Less than one cent per share.
</TABLE>
45
<PAGE> 50
SHORT-TERM BOND FUND
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
Net asset value at beginning of period...................... $ 9.48 $ 9.68 $ 9.37 $ 10.33 $ 11.23
Net investment income....................................... 0.67 0.66 0.65 0.97 0.72
Net realized and unrealized gain (loss) on investments...... (0.09) (0.20) 0.31 (0.96) (0.12)
------- ------- ------- ------- --------
Total from investment operations............................ 0.58 0.46 0.96 0.01 0.60
------- ------- ------- ------- --------
Less dividends and distributions:
From net investment income.................................. (0.67) (0.66) (0.65) (0.97) (1.36)
From net realized gain on investments....................... -- -- -- -- (0.04)
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)
------- ------- ------- ------- --------
Net asset value at end of period............................ $ 9.39 $ 9.48 $ 9.68 $ 9.37 $ 10.33
======= ======= ======= ======= ========
Total investment return..................................... 6.13% 4.81% 10.27% 0.11% 5.67%
Ratios (to average net assets)/Supplemental Data:
Net investment income..................................... 6.24% 5.85% 6.38% 5.90% 6.32%
Net expenses.............................................. 0.60% 0.60% 0.60% 0.60% 0.55%
Expenses (before reimbursement)........................... 0.82% 0.79% 0.82% 0.72% 0.68%
Portfolio turnover rate..................................... 153% 195% 171% 269% 232%
Net assets at end of period (in 000's)...................... $46,674 $57,805 $50,902 $62,340 $148,846
</TABLE>
46
<PAGE> 51
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
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.
MAINSTAY INSTITUTIONAL FUNDS INC.LOGO
NYLIFE DISTRIBUTORS INC.
300 Interpace Parkway
Building A
Parsippany, New Jersey 07054
Distributor of MainStay Institutional Funds Inc.
NYLIFE Distributors Inc. is an indirect wholly owned
subsidiary of New York Life Insurance Company.
NYLIFE.LOGO
RECYCLE.LOGO
MORE INFORMATION ABOUT THE FUNDS IS AVAILABLE FREE UPON REQUEST:
STATEMENT OF ADDITIONAL INFORMATION (SAI)
Provides more details about the Funds. A current SAI is incorporated by
reference into the prospectus and has been filed with the SEC.
ANNUAL/SEMIANNUAL REPORTS
Provides additional information about the Funds' investments and include
discussions of market conditions and investment strategies that significantly
affected the Funds' performance during the last fiscal year.
TO OBTAIN INFORMATION:
Write to NYLIFE Distributors Inc., 300 Interpace Parkway, Building A,
Parsippany, N.J. 07054, call 1-800-MAINSTAY (1-800-624-6782) or visit our
website at mainstayfunds.com.
You can obtain information about the Funds (including the SAI) by visiting the
SEC's Public Reference Room in Washington, D.C. (phone 1-800-SEC-0330). You may
visit the SEC's website at sec.gov or you may send your written request and a
duplicating fee to the SEC's Public Reference Section, Washington, D.C.
20549-6009.
MAINSTAY INSTITUTIONAL FUNDS INC.
SEC File Number: 811-6175
<PAGE> 52
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<PAGE> 53
This page intentionally left blank
<PAGE> 54
USE BACK COVER FOR MAINSTAY INSTITUTIONAL FUNDS, INC.
<PAGE> 55
MAINSTAY INSTITUTIONAL FUNDS INC.
INSTITUTIONAL SERVICE CLASS SHARES
PROSPECTUS DATED
MAY 1, 1999
<PAGE> 56
MainStay Institutional Funds Inc. Prospectus May 1, 1999
Institutional Service Class
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.
MainStay Institutional Funds offers 11 no-load mutual funds with a broad range
of investment choices.
EQUITY
EAFE Index Fund............................................................... 4
Growth Equity Fund............................................................ 6
Indexed Equity Fund........................................................... 8
International Equity Fund.....................................................10
Multi-Asset Fund..............................................................12
Value Equity Fund.............................................................14
FIXED INCOME
Bond Fund.....................................................................16
Indexed Bond Fund.............................................................18
International Bond Fund.......................................................20
Money Market Fund.............................................................22
Short-Term Bond Fund..........................................................24
<PAGE> 57
What's Inside?
Investment Objectives, Strategies and Risks: An Overview...................... 3
Descriptions of Each Fund..................................................... 4
More About Investment Strategies and Risks....................................26
Service
Fees... 27
Account Policies: Buying, Selling and Exchanging Shares.......................28
Decide How to Receive Your Earnings...........................................35
Understand the Tax Consequences...............................................36
Know With Whom You're Investing...............................................37
Financial
Highlights... 40
2
<PAGE> 58
Investment Objectives, Strategies and Risks: An Overview
EQUITY AND FIXED INCOME FUNDS
This prospectus discusses 11 mutual funds (the "Funds") which invest for varying
combinations of income and capital appreciation. Each of the Funds is managed by
MainStay Management, Inc. and has a Sub-Adviser that is responsible for the day
to day operations of the Fund. Each of the Funds pursues somewhat different
strategies to achieve its objective, but all of the Equity Funds invest, under
normal market conditions, primarily in equity securities and all of the Fixed
Income Funds invest, under normal market conditions, primarily in debt or fixed
income securities.
Publicly held corporations may raise needed cash by issuing or selling equity
securities to investors. When you buy stock in a corporation you become part
owner. The Funds may buy equity securities through principal stock exchanges,
such as the New York Stock Exchange or the American Stock Exchange, or in the
over-the-counter market. There are many different types of equity securities,
including stocks, convertible securities, American Depositary Receipts and
others. Investors buy equity securities to make money through dividend payments
and/or selling them for more than they paid.
Both governments and companies may raise needed cash by issuing or selling debt
securities to investors. The Funds may buy debt securities directly from those
governments and companies or in the secondary trading markets. There are many
different types of debt securities, including bonds, notes, debentures and
others. Some pay fixed rates of return; others pay variable rates. Interest may
be paid at different intervals. Some debt securities do not make regular
interest payments, but instead are initially sold at a discount to the principal
amount to be paid at maturity. The amount of interest paid is subject to many
variables, including creditworthiness of the issuer, length of maturity of the
security, market factors, and the nature of the debt instrument.
Each of the Funds described in this prospectus invests in particular types of
securities, consistent with its own investment objective and strategies which
are described in the succeeding pages of this prospectus.
NOT INSURED
An investment in the Funds is not a deposit in a bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency. Although, the Money Market Fund seeks to preserve the value of your
investment at $1.00 per share, it is possible to lose money by investing in the
Funds.
YOU COULD LOSE MONEY
Before considering one or more investments, you should understand that you could
lose money.
NAV WILL FLUCTUATE
Security values change. For debt securities this usually happens when interest
rates change. Generally when interest rates go up, the value of a debt security
goes down and when interest rates go down, the value of a debt security goes up.
The value of Fund shares will in turn fluctuate based on the value of the Fund's
holdings. Other factors, such as changes in company or industry conditions,
changes in how the market views the creditworthiness of an issuer, changes in
economic or market conditions, changes in relative values of currencies, the
risks inherent in management's ability to anticipate such changes and changes in
the average maturity of a Fund's investment can also affect security values and
Fund share prices. Investment in common stocks and other equity securities is
particularly subject to the risk of changing economic, stock market, industry
and company conditions which can adversely affect the value of the Fund's
holdings.
TEMPORARY INVESTMENTS
In times of unusual or adverse conditions, for temporary defensive purposes,
each Fund may invest outside the scope of its principal investment focus. Under
such conditions, 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.
NON-DIVERSIFIED
The International Bond Fund is "non-diversified" which means that the Fund may
invest a greater percentage of its assets than other funds in a particular
issuer. This may make it more susceptible to risks associated with a single
economic, political or regulatory occurrence than diversified funds.
PORTFOLIO TURNOVER
Portfolio turnover measures the amount of trading a Fund does during the year.
The turnover for each Fund is found in its Financial Highlights. The use of
certain investment strategies may generate increased portfolio turnover. Funds
with high turnover rates (over 100%) often have higher transaction costs (which
are paid by the fund) and may generate short-term capital gains (on which you'll
pay taxes, even if you don't sell any shares by year-end).
MORE INFORMATION
The next section of this prospectus gives you more detailed information about
the investment objectives, policies, strategies, risks, performance and expenses
of each of the 11 Funds offered in this prospectus. Please review it carefully.
3
<PAGE> 59
EAFE INDEX FUND
INVESTMENT OBJECTIVE -- The EAFE Index Fund's investment objective is 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 Index
(the "EAFE Index")(1).
PRINCIPAL INVESTMENT STRATEGIES -- The Fund normally invests in a statistically
selected sample of securities in the EAFE Index, which is a
capitalization-weighted index of stock and stock-related securities from
countries outside the United States. The Fund normally invests at least 80% of
its total assets in stocks in the EAFE Index.
INVESTMENT PROCESS -- 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. Monitor Capital
Advisors, Inc., the Fund's Sub-Adviser, uses 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
- ------------
(1)The EAFE Index is an unmanaged index generally considered representative of
the international stock market. The Fund is neither sponsored by nor affiliated
with Morgan Stanley.
of changes in the composition of the EAFE Index, but such changes should be
infrequent. The correlation between the performance of the 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.
RISKS -- Investment in common stocks and other equity securities is particularly
subject to the risk of changing economic, stock market, industry and company
conditions which can adversely affect the value of the Fund's holdings.
Since the Fund principally invests in FOREIGN SECURITIES, it will be subject to
various risks of loss that are different from risks of investing in securities
of U.S. based companies. These include losses due to fluctuating currency
values, less liquid trading markets, greater price volatility, political and
economic instability, less publicly available issuer information, changes in
U.S. or foreign tax or currency laws, and changes in monetary policy. In
addition, the Fund's investments in emerging market countries present risks in
greater degree than investments in developed market countries.
For the fiscal year ended December 31, 1998, the Fund's PORTFOLIO TURNOVER rate
was %.
4
<PAGE> 60
PAST PERFORMANCE
The bar chart and table indicate some of the risks of investing in the Fund by
showing changes in its performance over the life of the Fund and by showing how
the Fund's average annual returns for one year, five years and life of the Fund
periods compare to those of a broad-based securities market index. Performance
figures for Institutional Service Class shares, first offered 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 data for
the classes after that date vary based on differences in their expense
structures. As with all mutual funds, past performance is not necessarily an
indication of how the Fund will perform in the future.
<TABLE>
<CAPTION>
<S> <C> <C>
BAR CHART
EAFE INDEX FUND QUARTER/YEAR RETURN
Highest Return/Best Quarter
Lowest Return/Worst Quarter
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS AS OF 12/31/98
<S> <C> <C> <C>
SINCE
1 YEAR 5 YEARS INCEPTION**
EAFE Index Fund
MSCI EAFE Index*
</TABLE>
* The MSCI EAFE Index--is an unmanaged index generally considered to be
representative of the international stock market.
** January 2, 1991.
EXPENSES
The table below describes the fees and expenses that you may pay if you buy and
hold shares of the Fund. The "Example" is intended to help you compare the cost
of investing in the Fund with the cost of investing in other mutual funds. The
Example assumes that you invest $10,000 in the Fund for the time periods
indicated and reflects what you would pay if you redeemed all your shares or if
you hold them. The Example also assumes that your investment has a 5% return
each year and that the Fund operating expenses remain the same. Your actual
costs may be higher or lower than those shown below. The Example does not
reflect sales charges (loads) on reinvested dividends. There is no sales charge
(load) on reinvested dividends.
EAFE INDEX FUND
<TABLE>
<CAPTION>
EXAMPLE
-------
ASSUMING
REDEMPTION
ASSUMING NO AT THE END
FEES AND EXPENSES EXPENSES AFTER REDEMPTION OF EACH PERIOD
----------------- -------------- ----------- --------------
<S> <C> <C> <C> <C>
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
Maximum Sales Charge (Load) Imposed on Purchases of Shares
(as a percentage of offering price) None 1 year $ $
3 years $ $
5 years $ $
10 years $ $
Maximum Deferred Sales Charge (Load) (as a percentage of
redemption proceeds) None
Exchange Fee None
ANNUAL FUND OPERATING EXPENSES
(EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)
Management Fee %
Distribution and/or Service (12b-1) Fees None
Shareholder Service Fees 0.25%
Other Expenses %
-----
Total Fund Operating Expenses(+) %
=====
</TABLE>
<TABLE>
<S> <C>
(+) The Manager has voluntarily agreed to waive a portion of the
fees otherwise payable to it. With this reduction, for the
fiscal year ended December 31, 1998 the management fee paid
was % and total fund operating expenses were %.
</TABLE>
5
<PAGE> 61
GROWTH EQUITY FUND
INVESTMENT OBJECTIVE -- The Growth Equity Fund's investment 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.
PRINCIPAL INVESTMENT STRATEGIES -- The Fund normally invests at least 65% of
total assets in equity securities.
INVESTMENT PROCESS -- The Fund normally invests in securities of companies with
investment characteristics such as:
- - participation in expanding product or service markets;
- - increasing unit sales volume;
- - growth in revenues and earnings per share superior to that of the average of
common stocks comprising indices such as the S&P 500 Index;(1) or
- - increasing return on investment.
The Fund maintains a flexible approach towards investing in various types of
companies as well as types of securities, depending upon the economic
environment and the relative attractiveness of the various securities
- ------------
(1)"S&P 500 Composite Stock Price Index" and "S&P 500" are trademarks of The
McGraw Hill Companies, Inc. The S&P 500 is an unmanaged index and is considered
to be generally representative of the U.S. stock market.
markets. As a result the Fund may invest in securities of companies without some
or all of the listed characteristics which, in the judgment of the Sub-Adviser,
are ready for a rise in price, or expected to undergo an acceleration in growth
of earnings because of special factors such as new management, new products,
changes in consumer demand or changes in the economy.
RISKS -- Investment in common stocks and other equity securities is particularly
subject to the risk of changing economic, stock market, industry and company
conditions which can adversely affect the value of the Fund's holdings.
Opportunities for greater gain often come with greater risk of loss. Some of the
securities, therefore, may carry above-average risk, compared to common stock
indexes, such as the Dow Jones Industrial Average and the S&P 500 Index.
The principal risk of growth stocks is that investors expect growth companies to
increase their earnings at a certain rate which is generally higher than the
rate expected for non-growth companies. If these expectations are not met, the
market price of the stock may decline significantly, even if earnings showed an
absolute increase. Growth company stocks also typically lack the dividend yield
that can cushion stock prices in market downturns.
For the fiscal year ended December 31, 1998, the Fund's PORTFOLIO TURNOVER rate
was %.
6
<PAGE> 62
PAST PERFORMANCE
The bar chart and table indicate some of the risks of investing in the Fund by
showing changes in its performance over the life of the Fund and by showing how
the Fund's average annual returns for one year, five years and life of the Fund
periods compare to those of a broad-based securities market index. Performance
figures for Institutional Service Class shares, first offered 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 data for
the classes after that date vary based on differences in their expense
structures. As with all mutual funds, past performance is not necessarily an
indication of how the Fund will perform in the future.
<TABLE>
<CAPTION>
<S> <C> <C>
BAR CHART
GROWTH EQUITY FUND QUARTER/YEAR RETURN
Highest Return/Best Quarter
Lowest Return/Worst Quarter
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS AS OF 12/31/98
<S> <C> <C> <C>
SINCE
1 YEAR 5 YEARS INCEPTION**
Growth Equity Fund
S&P 500*
</TABLE>
* The S&P 500 is an unmanaged index and is considered to be generally
representative of the U.S. stock market. Results assume the reinvestment of
all income and capital gain distributions.
** January 2, 1991.
EXPENSES
The table below describes the fees and expenses that you may pay if you buy and
hold shares of the Fund. The "Example" is intended to help you compare the cost
of investing in the Fund with the cost of investing in other mutual funds. The
Example assumes that you invest $10,000 in the Fund for the time periods
indicated and reflects what you would pay if you redeemed all your shares or if
you hold them. The Example also assumes that your investment has a 5% return
each year and that the Fund operating expenses remain the same. Your actual
costs may be higher or lower than those shown below. The Example does not
reflect sales charges (loads) on reinvested dividends. There is no sales charge
(load) on reinvested dividends.
GROWTH EQUITY FUND
<TABLE>
<CAPTION>
EXAMPLE
-------
ASSUMING
REDEMPTION
ASSUMING NO AT THE END
FEES AND EXPENSES EXPENSES AFTER REDEMPTION OF EACH PERIOD
----------------- -------------- ----------- --------------
<S> <C> <C> <C> <C>
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
Maximum Sales Charge (Load) Imposed on Purchases of Shares
(as a percentage of offering price) None 1 year $ $
3 years $ $
5 years $ $
10 years $ $
Maximum Deferred Sales Charge (Load) (as a percentage of
redemption proceeds) None
Exchange Fee None
ANNUAL FUND OPERATING EXPENSES
(EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)
Management Fees %
Distribution and/or Service (12b-1) Fees None
Shareholder Service Fees 0.25%
Other Expenses %
-----
Total Fund Operating Expenses %
=====
</TABLE>
<TABLE>
<S> <C>
</TABLE>
7
<PAGE> 63
INDEXED EQUITY FUND
INVESTMENT OBJECTIVE -- The Indexed Equity Fund's investment 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.(3)
PRINCIPAL INVESTMENT STRATEGIES -- The Fund normally invests at least 80% of
total assets in stocks in the S&P 500 Index in the same proportion as they are
represented in the S&P 500 Index, to the extent feasible.
INVESTMENT PROCESS -- 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. Monitor Capital
Advisors, Inc., the Fund's Sub-Adviser, uses statistical techniques to determine
which stocks are to be purchased or sold to replicate the S&P 500 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 S&P 500 Index, but such
changes should be infrequent. The correlation
- ------------
(3)"S&P 500 Composite Stock Price Index" and "S&P 500" are trademarks of The
McGraw-Hill Companies, Inc. and have been licensed for use by Monitor Capital
Advisors, Inc. Standard & Poor's does not sponsor, endorse, sell or promote the
Fund or represent the advisability of investing in the Fund. The S&P 500 is
capitalization-weighted and includes 500 different industrial, utility,
financial and transportation sector companies selected by Standard & Poor's. The
S&P 500 is an unmanaged index and is considered to be generally representative
of the U.S. Stock Market. Typically, companies included in the S&P 500 are the
largest and most dominant firms in their respective industries.
between the performance of the Fund and the S&P 500 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 S&P 500 Index.
The Fund's investments also include derivatives such as stock index futures to
replicate the S&P 500 Index and for cash management purposes.
RISKS -- Investment in common stocks and other equity securities is particularly
subject to the risk of changing economic, stock market, industry and company
conditions which can adversely affect the value of the Fund's holdings.
The Fund's ability to mirror the S&P 500 Index may be affected by, among other
things, transactions costs, changes in either the makeup of the S&P 500 Index or
number of shares outstanding for the components of the S&P 500 Index, and the
timing and amount of contributions to, and redemptions from, the Fund by
shareholders. If the value of the S&P 500 Index declines, the net asset value of
shares of the Fund will also decline.
The Fund's investments include DERIVATIVES such as stock index futures. The
value of derivatives is based on certain underlying equity or fixed-income
securities, interest rates or indexes. The Fund may use derivatives to try to
enhance returns. The Fund may lose money using derivatives. The derivatives may
increase the volatility of the Fund's net asset value and may involve a small
investment of cash relative to the magnitude of risk assumed.
For the fiscal year ended December 31, 1998, the Fund's PORTFOLIO TURNOVER rate
was %.
8
<PAGE> 64
PAST PERFORMANCE
The bar chart and table indicate some of the risks of investing in the Fund by
showing changes in its performance over the life of the Fund and by showing how
the Fund's average annual returns for one year, five years and life of the Fund
periods compare to those of a broad-based securities market index. Performance
figures for Institutional Service Class shares, first offered 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 data for
the classes after that date vary based on differences in their expense
structures. As with all mutual funds, past performance is not necessarily an
indication of how the Fund will perform in the future.
<TABLE>
<CAPTION>
<S> <C> <C>
BAR CHART
INDEXED EQUITY FUND QUARTER/YEAR RETURN
Highest Return/Best Quarter
Lowest Return/Worst Quarter
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS AS OF 12/31/98
<S> <C> <C> <C>
SINCE
1 YEAR 5 YEARS INCEPTION**
Indexed Equity Fund
S&P 500*
</TABLE>
* The S&P 500 is an unmanaged index and is considered to be generally
representative of the U.S. stock market. Results assume the reinvestment of
all income and capital gain distributions.
** January 2, 1991.
EXPENSES
The table below describes the fees and expenses that you may pay if you buy and
hold shares of the Fund. The "Example" is intended to help you compare the cost
of investing in the Fund with the cost of investing in other mutual funds. The
Example assumes that you invest $10,000 in the Fund for the time periods
indicated and reflects what you would pay if you redeemed all your shares or if
you hold them. The Example also assumes that your investment has a 5% return
each year and that the Fund operating expenses remain the same. Your actual
costs may be higher or lower than those shown below. The Example does not
reflect sales charges (loads) on reinvested dividends. There is no sales charge
(load) on reinvested dividends.
INDEXED EQUITY FUND
<TABLE>
<CAPTION>
EXAMPLE
-------
ASSUMING
REDEMPTION
ASSUMING NO AT THE END
FEES AND EXPENSES EXPENSES AFTER REDEMPTION OF EACH PERIOD
----------------- -------------- ----------- --------------
<S> <C> <C> <C> <C>
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
Maximum Sales Charge (Load) Imposed on Purchases of Shares
(as a percentage of offering price) None 1 year $ $
3 years $ $
5 years $ $
10 years $ $
Maximum Deferred Sales Charge (Load) (as a percentage of
redemption proceeds) None
Exchange Fee None
ANNUAL FUND OPERATING EXPENSES
(EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)
Management Fee %
Distribution and/or Service (12b-1) Fees None
Shareholder Service Fees 0.25%
Other Expenses %
-----
Total Fund Operating Expenses(+) %
=====
</TABLE>
<TABLE>
<S> <C>
(+) The Manager has voluntarily agreed to waive a portion of the
fees otherwise payable to it. With this reduction, for the
fiscal year ended December 31, 1998 the management fee paid
was % and total fund operating expenses were %.
</TABLE>
9
<PAGE> 65
INTERNATIONAL EQUITY FUND
INVESTMENT OBJECTIVE -- The International Equity Fund's investment 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.
PRINCIPAL INVESTMENT STRATEGIES -- The Fund normally invests at least 65% of
total assets in equity securities of foreign corporations wherever organized,
which do business mainly outside the United States. Investments will be made in
a variety of countries with a minimum of five countries other than the United
States. This includes countries with established economies as well as emerging
market countries that MacKay-Shields Financial Corporation, the Fund's
Sub-Adviser, believes present favorable opportunities.
INVESTMENT PROCESS -- In pursuing the Fund's investment strategy, the Fund's
Sub-Adviser seeks to identify investment opportunities by beginning with country
selection. Local currencies are then assessed for upside potential and downside
risk. Finally, individual securities are evaluated based on the financial
condition and competitiveness of individual companies. In making investments in
foreign markets, the Sub-Adviser considers several factors including prospects
for currency exchange, interest rates, inflation, relative economic growth and
governmental policies.
As part of its investment strategy, the Fund may buy and sell currency on a spot
basis and enter into foreign currency forward contracts for hedging purposes or
to increase the Fund's investment return. In addition, the Fund may buy
derivatives such as foreign currency options, securities and securities index
options, foreign currency options, and enter into swap agreements and futures
contracts and related options. These techniques may be used for any legally
permissible purpose including to increase the Fund's returns.
RISKS -- Investment in common stocks and other equity securities is particularly
subject to the risk of changing economic, stock market, industry and company
conditions which can adversely affect the value of the Fund's holdings.
Since the Fund principally invests in FOREIGN SECURITIES, it will be subject to
various risks of loss that are different from risks of investing in securities
of U.S. based companies. These include losses due to fluctuating currency
values, less liquid trading markets, greater price volatility, political and
economic instability, less publicly available company information, changes in
U.S. or foreign tax or currency laws, and changes in monetary policy. These
risks are likely to be greater in emerging market countries than investments in
developed market countries.
The Fund's investments include DERIVATIVES such as options, futures, forwards
and swaps. The Fund may use derivatives to try to enhance returns or reduce the
risk of loss (hedge) of certain of its holdings. Regardless of the purpose, the
Fund may lose money using derivatives. The derivatives may increase the
volatility of the Fund's net asset value and may involve a small investment of
cash relative to the magnitude of risk assumed.
ADDITIONAL TEMPORARY INVESTMENTS -- 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 and cash equivalents.
For the fiscal year ended December 31, 1998, the Fund's PORTFOLIO TURNOVER rate
was %.
10
<PAGE> 66
PAST PERFORMANCE
The bar chart and table indicate some of the risks of investing in the Fund by
showing changes in its performance over the life of the Fund and by showing how
the Fund's average annual returns for one year, five years and life of the Fund
periods compare to those of a broad-based securities market index. Performance
figures for Institutional Service Class Shares, first offered on January 1,
1995, include the historical performance of the Institutional Class from the
Fund's inception (July 31, 1992) up to December 31, 1994. Performance data for
the classes after that date vary based on differences in their expense
structure. As with all mutual funds, past performance is not necessarily an
indication of how the Fund will perform in the future.
<TABLE>
<CAPTION>
<S> <C> <C>
BAR CHART
INTERNATIONAL EQUITY FUND QUARTER/YEAR RETURN
Highest Return/Best Quarter
Lowest Return/Worst Quarter
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS AS OF 12/31/98
<S> <C> <C> <C>
SINCE
1 YEAR 5 YEARS INCEPTION**
International Equity Fund***
MSCI EAFE Index*
</TABLE>
* The Morgan Stanley Capital International Europe, Australia, Far East
Index--The EAFE Index--is an unmanaged index generally considered to be
representative of the international stock market.
** The inception date was July 31, 1992 for the International Equity Fund's
predecessor separate account ("Separate Account").
*** 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.
11
<PAGE> 67
EXPENSES
The table below describes the fees and expenses that you may pay if you buy and
hold shares of the Fund. The "Example" is intended to help you compare the cost
of investing in the Fund with the cost of investing in other mutual funds. The
Example assumes that you invest $10,000 in the Fund for the time periods
indicated and reflects what you would pay if you redeemed all your shares or if
you hold them. The Example also assumes that your investment has a 5% return
each year and that the Fund operating expenses remain the same. Your actual
costs may be higher or lower than those shown below. The Example does not
reflect sales charges (loads) on reinvested dividends. There is no sales charge
(load) on reinvested dividends.
INTERNATIONAL EQUITY FUND
<TABLE>
<CAPTION>
EXAMPLE
-------
ASSUMING
REDEMPTION
ASSUMING NO AT THE END
FEES AND EXPENSES EXPENSES AFTER REDEMPTION OF EACH PERIOD
----------------- -------------- ----------- --------------
<S> <C> <C> <C> <C>
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
Maximum Sales Charge (Load) Imposed on Purchases of Shares
(as a percentage of offering price) None 1 year $ $
3 years $ $
5 years $ $
10 years $ $
Maximum Deferred Sales Charge (Load) (as a percentage of
redemption proceeds) None
Exchange Fee None
ANNUAL FUND OPERATING EXPENSES
(EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)
Management Fees %
Distribution and/or Service (12b-1) Fees None
Shareholder Service Fees 0.25%
Other Expenses %
-----
Total Fund Operating Expenses %
=====
</TABLE>
12
<PAGE> 68
MULTI-ASSET FUND
INVESTMENT OBJECTIVE -- The Multi-Asset Fund's investment 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.
PRINCIPAL INVESTMENT STRATEGIES -- The Fund normally invests in the three asset
classes subject to the following constraints: 30% to 80% of net assets in common
stocks selected to parallel the performance of the S&P 500 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 Smith
Barney Broad Investment Grade Bond Index ("BIG Index")(4) (although the
securities don't have to be in the BIG Index); and 10% to 60% of net assets in
selected money market instruments. The expected return for money market
instruments is the current yield on three-month Treasury Bills.
In pursuing the Fund's investment strategy within the above constraints, the
Fund may also invest up to 20% of total assets in foreign securities of
developed and emerging market countries.
INVESTMENT PROCESS -- The Fund attempts to achieve its objective through active
management and allocation of investments among the three asset classes by
Monitor Capital Advisors, Inc., the Fund's Sub-Adviser. The presence of the
constraints however, may restrict the Sub-Adviser's ability to fully maximize
total return. To determine the best investment levels, the Sub-Adviser estimates
risk, return and correlation for the three asset groups based on a disciplined
valuation methodology. Although these levels maintain the balanced nature of the
overall investments, they are not intended to act as a fully balanced investment
program.
As part of its investment strategy, the Fund may also invest in derivatives such
as stock index futures to rebalance or alter its portfolio composition and risk
- ------------
(4)The BIG Index is a capitalization-weighted index that contains about 5,500
individually priced fixed income securities. The BIG Index is an unmanaged index
generally considered representative of the U.S. bond market.
profile and to diversify the Fund's holding where futures transactions are more
efficient than direct investment transactions; and in foreign currency exchange
transactions using currencies, options, futures or options on futures, or
forward contracts for any legally permissible purpose.
RISKS -- Investment in common stocks and other equity securities is particularly
subject to the risk of changing economic, stock market, industry and company
conditions which can adversely affect the value of the Fund's holdings. The
values of debt securities fluctuate depending upon various factors, including
interest rates, issuer creditworthiness, market conditions and maturities.
Overall, 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.
Since the Fund invests in FOREIGN SECURITIES, it can be subject to various risks
of loss that are different from risks of investing in securities of U.S. based
companies. These include losses due to fluctuating currency values, less liquid
trading markets, political and economic instability, less publicly available
company information, changes in U.S. or foreign tax or currency laws, and
changes in monetary policy. In addition, the Fund's investments in emerging
market countries present risks in greater degree than investments in developed
market countries.
The Fund's principal investments include DERIVATIVES such as options and stock
index futures. The Fund may use derivatives to try to enhance returns or reduce
the risk of loss (hedge) of certain of its holdings. Regardless of the purpose,
the Fund may lose money using derivatives. The derivatives may increase the
volatility of the Fund's net asset value and may involve a small investment of
cash relative to the magnitude of risk assumed.
For the fiscal year ended December 31, 1998, the Fund's PORTFOLIO TURNOVER rate
was %.
13
<PAGE> 69
PAST PERFORMANCE
The bar chart and table indicate some of the risks of investing in the Fund by
showing changes in its performance over the life of the Fund and by showing how
the Fund's average annual returns for one year, five years and life of the Fund
periods compare to those of a broad-based securities market index. Performance
figures for Institutional Service Class shares, first offered 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 data for
the classes after that date vary based on differences in their expense
structures. As with all mutual funds, past performance is not necessarily an
indication of how the Fund will perform in the future.
<TABLE>
<CAPTION>
<S> <C> <C>
BAR CHART
MULTI-ASSET FUND QUARTER/YEAR RETURN
Highest Return/Best Quarter
Lowest Return/Worst Quarter
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS AS OF 12/31/98
<S> <C> <C> <C>
SINCE
1 YEAR 5 YEARS INCEPTION**
Multi-Asset Fund
To come*
</TABLE>
* To come
** January 2, 1991.
EXPENSES
The table below describes the fees and expenses that you may pay if you buy and
hold shares of the Fund. The "Example" is intended to help you compare the cost
of investing in the Fund with the cost of investing in other mutual funds. The
Example assumes that you invest $10,000 in the Fund for the time periods
indicated and reflects what you would pay if you redeemed all your shares or if
you hold them. The Example also assumes that your investment has a 5% return
each year and that the Fund operating expenses remain the same. Your actual
costs may be higher or lower than those shown below. The Example does not
reflect sales charges (loads) on reinvested dividends. There is no sales charge
(load) on reinvested dividends.
MULTI-ASSET FUND
<TABLE>
<CAPTION>
EXAMPLE
-------
ASSUMING
REDEMPTION
ASSUMING NO AT THE END
FEES AND EXPENSES EXPENSES AFTER REDEMPTION OF EACH PERIOD
----------------- -------------- ----------- --------------
<S> <C> <C> <C> <C>
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
Maximum Sales Charge (Load) Imposed on Purchases of Shares
(as a percentage of offering price) None 1 year $ $
3 years $ $
5 years $ $
10 years $ $
Maximum Deferred Sales Charge (Load) (as a percentage of
redemption proceeds) None
Exchange Fee None
ANNUAL FUND OPERATING EXPENSES
(EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)
Management Fee %
Distribution and/or Service (12b-1) Fees None
Shareholder Service Fees 0.25%
Other Expenses %
-----
Total Fund Operating Expenses %
=====
</TABLE>
<TABLE>
<S> <C>
</TABLE>
14
<PAGE> 70
VALUE EQUITY FUND
INVESTMENT OBJECTIVE -- The Value Equity Fund's investment 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.
PRINCIPAL INVESTMENT STRATEGIES -- The Fund normally invests at least 65% of
total assets in equity securities.
INVESTMENT PROCESS -- The Fund principally invests in common stocks which:
- - MacKay-Shield's Financial Corporation, the Fund's Sub-Adviser, believes were
"undervalued" (selling below their value) when purchased;
- - typically pay dividends, although there may be non-dividend paying stocks if
they meet the "undervalued" criteria; and
- - are listed on a national securities exchange or are traded in the
over-the-counter market.
In pursuing the Fund's investment strategy, the Sub-Adviser emphasizes
investment in securities which are, in its opinion, undervalued at the time of
purchase. The Sub-Adviser's value investment process focuses on such factors as
low price to earnings and price to cash flow ratios, financial strength, and
earnings predictability. 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 Sub-Adviser also emphasizes investment in dividend-paying
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.
RISKS -- Investment in common stocks and other equity securities is particularly
subject to the risk of changing economic, stock market, industry and company
conditions which can adversely affect the value of the Fund's holdings.
The principal risk of investing in value stocks in which the Fund invests is
that they may never reach what the Sub-Adviser believes is their full value or
that they may even go down in value. In addition, different types of stocks tend
to shift in and out of favor depending on market and economic conditions and
therefore the Fund's performance may be lower or higher than that of funds that
invest in other types of equity securities (such as those emphasizing growth
stocks).
For the fiscal year ended December 31, 1998, the Fund's PORTFOLIO TURNOVER rate
was %.
15
<PAGE> 71
PAST PERFORMANCE
The bar chart and table indicate some of the risks of investing in the Fund by
showing changes in its performance over the life of the Fund and by showing how
the Fund's average annual returns for one year, five years and life of the Fund
periods compare to those of a broad-based securities market index. Performance
figures for Institutional Service Class shares, first offered 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 data for
the classes after that date vary based on differences in their expense
structures. As with all mutual funds, past performance is not necessarily an
indication of how the Fund will perform in the future.
<TABLE>
<CAPTION>
<S> <C> <C>
BAR CHART
VALUE EQUITY FUND QUARTER/YEAR RETURN
Highest Return/Best Quarter
Lowest Return/Worst Quarter
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS AS OF 12/31/98
<S> <C> <C> <C>
SINCE
1 YEAR 5 YEARS INCEPTION**
Value Equity Fund
To come*
</TABLE>
* To come
** January 2, 1991.
EXPENSES
The table below describes the fees and expenses that you may pay if you buy and
hold shares of the Fund. The "Example" is intended to help you compare the cost
of investing in the Fund with the cost of investing in other mutual funds. The
Example assumes that you invest $10,000 in the Fund for the time periods
indicated and reflects what you would pay if you redeemed all your shares or if
you hold them. The Example also assumes that your investment has a 5% return
each year and that the Fund operating expenses remain the same. Your actual
costs may be higher or lower than those shown below. The Example does not
reflect sales charges (loads) on reinvested dividends. There is no sales charge
(load) on reinvested dividends.
VALUE EQUITY FUND
<TABLE>
<CAPTION>
EXAMPLE
-------
ASSUMING
REDEMPTION
ASSUMING NO AT THE END
FEES AND EXPENSES EXPENSES AFTER REDEMPTION OF EACH PERIOD
----------------- -------------- ----------- --------------
<S> <C> <C> <C> <C>
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
Maximum Sales Charge (Load) Imposed on Purchases of Shares
(as a percentage of offering price) None 1 year $ $
3 years $ $
5 years $ $
10 years $ $
Maximum Deferred Sales Charge (Load) (as a percentage of
redemption proceeds) None
Exchange Fee None
ANNUAL FUND OPERATING EXPENSES
(EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)
Management Fee %
Distribution and/or Service (12b-1) Fees None
Shareholder Service Fees 0.25%
Other Expenses %
-----
Total Fund Operating Expenses %
=====
</TABLE>
<TABLE>
<S> <C>
</TABLE>
16
<PAGE> 72
BOND FUND
INVESTMENT OBJECTIVE -- The Bond Fund's investment objective is to seek to
maximize total return, consistent with liquidity, low risk to principal and
investment in debt securities.
PRINCIPAL INVESTMENT STRATEGIES -- The Fund normally invests at least 70% of
total assets in debt or debt-related securities issued or guaranteed by the U.S.
or foreign governments, their agencies or instrumentalities; obligations of
international or supranational entities; debt securities issued by U.S. or
foreign corporate entities; zero coupon bonds; municipal bonds; mortgage-related
and other asset-backed securities and loan participation interests. The
effective maturity of this portion of the Fund's portfolio will usually be in
the intermediate range (three to ten years), although it may vary depending on
market conditions as judged by MacKay-Shields Financial Corporation, the Fund's
Sub-Adviser. At least 65% percent of the Fund's total assets will be invested in
debt 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.
Normally the Fund may use 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: long-term U.S. Treasuries (ten to thirty years) and cash equivalent
short-term obligations including certificates of deposit, time deposits,
bankers' acceptances issued by U.S. or foreign banks, certificates of deposit
and time deposits issued by savings and loan associations, commercial paper,
repurchase agreements and reverse repurchase agreements.
INVESTMENT PROCESS -- In pursuing the Fund's investment strategy, the Fund's
Sub-Adviser 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 the Sub-Adviser 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.
The Fund's principal investments include debt securities of U.S. issuers,
including derivatives such as mortgaged-backed and asset-backed securities.
Principal investments which must be, when purchased, rated Prime-1 by Moody's or
A-1 by S&P, or if unrated, determined by the Sub-Adviser to be of comparable
quality. The Fund's principal investments may have fixed, floating or inverse
floating rates of interest. The interest rate on a floating rate debt instrument
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 an inverse floater resets in
the opposite direction from the market rate of interest to which the inverse
floater is indexed.
As part of the Fund's principal strategies, the Sub-Adviser may use investment
practices such as mortgage dollar rolls and portfolio securities lending.
RISKS -- The values of debt securities fluctuate depending upon various factors,
including interest rates, issuer creditworthiness, market conditions and
maturities.
The Fund's investments include DERIVATIVES such as mortgage-backed and
asset-backed securities. The Fund may use derivatives to try to enhance returns
or reduce the risk of loss (hedge) of certain of its holdings. Regardless of the
purpose, the Fund may lose money using derivatives. The derivatives may increase
the volatility of the Fund's net asset value and may involve a small investment
of cash relative to the magnitude of risk assumed.
The Fund's use of investment practices such as mortgage dollar rolls and
securities lending also presents certain risks. A mortgage dollar roll is a
transaction in which a Fund sells mortgage-backed securities from its portfolio
to a counterparty and at the same time agrees to buy a similar security from the
same party at a later date. The principal risk of MORTGAGE DOLLAR ROLLS is that
the security the Fund receives at the end of the transaction is worth less than
the security the Fund sold to the same counterparty at the beginning of the
transaction. The principal risk of SECURITIES LENDING is that the financial
institution that borrows securities from the Fund could go bankrupt and the Fund
might not be able to recover the securities or their value.
For the fiscal year ended December 31, 1998, the Fund's PORTFOLIO TURNOVER rate
was %.
17
<PAGE> 73
PAST PERFORMANCE
The bar chart and table indicate some of the risks of investing in the Fund by
showing changes in its performance over the life of the Fund and by showing how
the Fund's average annual returns for one year, five years and life of the Fund
periods compare to those of a broad-based securities market index. Performance
figures for Institutional Service Class shares, first offered 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 data for
the classes after that date vary based on differences in their expense
structures. As with all mutual funds, past performance is not necessarily an
indication of how the Fund will perform in the future.
<TABLE>
<CAPTION>
<S> <C> <C>
BAR CHART
BOND FUND QUARTER/YEAR RETURN
Highest Return/Best Quarter
Lowest Return/Worst Quarter
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS AS OF 12/31/98
<S> <C> <C> <C>
SINCE
1 YEAR 5 YEARS INCEPTION**
Bond Fund
Lehman Brothers
Gov't/Corporate Bond Index*
</TABLE>
* The Lehman Brothers Gov't/Corporate Bond Index includes issues of the U.S.
government and agencies thereof, as well as fixed rate debt-issues that are
rated investment grade by Moody's, S&P, or Fitch, in that order, with at
least one year to maturity.
** January 2, 1991.
EXPENSES
The table below describes the fees and expenses that you may pay if you buy and
hold shares of the Fund. The "Example" is intended to help you compare the cost
of investing in the Fund with the cost of investing in other mutual funds. The
Example assumes that you invest $10,000 in the Fund for the time periods
indicated and reflects what you would pay if you redeemed all your shares or if
you hold them. The Example also assumes that your investment has a 5% return
each year and that the Fund operating expenses remain the same. Your actual
costs may be higher or lower than those shown below. The Example does not
reflect sales charges (loads) on reinvested dividends. There is no sales charge
(load) on reinvested dividends.
BOND FUND
<TABLE>
<CAPTION>
EXAMPLE
-------
ASSUMING
REDEMPTION
ASSUMING NO AT THE END
FEES AND EXPENSES EXPENSES AFTER REDEMPTION OF EACH PERIOD
----------------- -------------- ----------- --------------
<S> <C> <C> <C> <C>
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
Maximum Sales Charge (Load) Imposed on Purchases of Shares
(as a percentage of offering price) None 1 year $ $
3 years $ $
5 years $ $
10 years $ $
Maximum Deferred Sales Charge (Load) (as a percentage of
redemption proceeds) None
Exchange Fee None
ANNUAL FUND OPERATING EXPENSES
(EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)
Management Fee %
Distribution and/or Service (12b-1) Fees None
Shareholder Service Fees 0.25%
Other Expenses %
-----
Total Fund Operating Expenses(+) %
=====
</TABLE>
<TABLE>
<S> <C>
(+) The Manager has voluntarily agreed to waive a portion of the
fees otherwise payable to it. With this reduction, for the
fiscal year ended December 31, 1998 the management fee paid
was % and total fund operating expenses were %.
</TABLE>
18
<PAGE> 74
INDEXED BOND FUND
INVESTMENT OBJECTIVE -- The Indexed Bond Fund's investment 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 Smith
Barney Broad Investment Grade Bond Index (the "BIG Index").
PRINCIPAL INVESTMENT STRATEGIES -- The Fund normally invests at least 80% of
total assets in fixed income securities in the BIG Index. The BIG Index is
capitalization-weighted and contains about 5500 individually priced fixed-income
securities and includes investment grade corporate bonds, U.S.
dollar-denominated securities of foreign issuers, U.S. Treasury or agency
issues, and mortgage-backed securities, and other securities. Corporate bonds
and securities of foreign issuers must be rated BBB or better by S&P or Baa or
better by Moody's.
As of March 31, 1999, the approximate weighting in the BIG Index was as follows:
U.S. Treasury and agency securities %, corporate debt securities % and
mortgage-backed securities %.
INVESTMENT PROCESS -- 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 Fund in the traditional
sense using economic, financial and market analysis. Monitor Capital Advisors,
Inc., the Fund's Sub-Adviser, employs a stratified sampling method to track
index performance. Using this method, the Fund invests in about 50 fixed income
securities which in the aggregate are expected to mirror the performance of the
BIG Index. From time to time, adjustments may be made in the Fund's portfolio
because of changes in the composition of the BIG Index, but such changes should
be infrequent. The correlation between the performance of the Fund and the BIG
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 BIG Index.
The Fund's principal investments may have fixed, variable, floating or inverse
floating rates of interest. The interest rate on a floating rate debt instrument
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 an inverse floater resets in
the opposite direction from the market rate of interest to which the inverse
floater is indexed.
RISKS -- The values of debt securities fluctuate depending upon various factors,
including interest rates, issuer creditworthiness, market conditions and
maturities.
The Fund's ability to track the BIG Index may be affected by, among other
things, transaction costs, changes in either the composition of the BIG Index or
number of bonds outstanding for the components of the BIG Index, and the timing
and amount of contributions to and redemptions from the Fund by shareholders.
Since the Fund invests in FOREIGN SECURITIES, it can be subject to various risks
of loss that are different from risks of investing in securities of U.S. based
companies. These include losses due to fluctuating currency values, less liquid
trading markets, greater price volatility, political and economic instability,
less publicly available issuer information, changes in U.S. or foreign tax or
currency laws, and changes in monetary policy. In addition, the Fund's
investments in emerging market countries present risks in greater degree than
investments in developed market countries.
The Fund's principal investments include DERIVATIVES such as mortgage-backed
securities. The Fund may use derivatives to try to enhance returns or reduce the
risk of loss (hedge) of certain of its holdings. Regardless of the purpose, the
Fund may lose money using derivatives. The derivatives may increase the
volatility of the Fund's net asset value and may involve a small investment of
cash relative to the magnitude of risk assumed.
For the fiscal year ended December 31, 1998, the Fund's PORTFOLIO TURNOVER rate
was %.
19
<PAGE> 75
PAST PERFORMANCE
The bar chart and table indicate some of the risks of investing in the Fund by
showing changes in its performance over the life of the Fund and by showing how
the Fund's average annual returns for one, five and life of the Fund compare to
those of a broad-based securities market index. Performance figures for
Institutional Service Class shares, first offered 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 data for the classes
after that date vary based on differences in their expense structures. As with
all mutual funds, past performance is not necessarily an indication of how the
Fund will perform in the future.
<TABLE>
<CAPTION>
<S> <C> <C>
BAR CHART
INDEXED BOND FUND QUARTER/YEAR RETURN
Highest Return/Best Quarter
Lowest Return/Worst Quarter
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS AS OF 12/31/98
<S> <C> <C> <C>
SINCE
1 YEAR 5 YEARS INCEPTION**
Indexed Bond Fund
Salomon Smith Barney Broad
Investment Grade Bond Index*
</TABLE>
* The Salomon Smith Barney Broad Investment Grade Bond Index is an unmanaged
index that is considered representative of the U.S.
bond market.
** January 2, 1991.
EXPENSES
The table below describes the fees and expenses that you may pay if you buy and
hold shares of the Fund. The "Example" is intended to help you compare the cost
of investing in the Fund with the cost of investing in other mutual funds. The
Example assumes that you invest $10,000 in the Fund for the time periods
indicated and reflects what you would pay if you redeemed all your shares or if
you hold them. The Example also assumes that your investment has a 5% return
each year and that the Fund operating expenses remain the same. Your actual
costs may be higher or lower than those shown below. The Example does not
reflect sales charges (loads) on reinvested dividends. There is no sales charge
(load) on reinvested dividends.
INDEXED BOND FUND
<TABLE>
<CAPTION>
EXAMPLE
-------
ASSUMING
REDEMPTION
ASSUMING NO AT THE END
FEES AND EXPENSES EXPENSES AFTER REDEMPTION OF EACH PERIOD
----------------- -------------- ----------- --------------
<S> <C> <C> <C> <C>
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
Maximum Sales Charge (Load) Imposed on Purchases of Shares
(as a percentage of offering price) None 1 year $ $
3 years $ $
5 years $ $
10 years $ $
Maximum Deferred Sales Charge (Load) (as a percentage of
redemption proceeds) None
Exchange Fee None
ANNUAL FUND OPERATING EXPENSES
(EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)
Management Fee %
Distribution and/or Service (12b-1) Fees None
Shareholder Service Fees 0.25%
Other Expenses %
-----
Total Fund Operating Expenses(+) %
=====
</TABLE>
<TABLE>
<S> <C>
(+) The Manager has voluntarily agreed to waive a portion of the
fees otherwise payable to it. With this reduction, for the
fiscal year ended December 31, 1998 the management fee paid
was % and total fund operating expenses were %.
</TABLE>
20
<PAGE> 76
INTERNATIONAL BOND FUND
INVESTMENT OBJECTIVE -- The International Bond Fund's investment objective is to
seek to provide total return by investing primarily in a portfolio of non-U.S.
(primarily government) debt securities.
PRINCIPAL INVESTMENT STRATEGIES -- The Fund normally invests at least 65% of its
total assets in foreign bonds which include debt securities of foreign
governments, agencies and supranational organizations, and secondarily debt
securities of corporate issuers, located in a variety of countries with a
minimum of five countries other than the U.S. This includes countries with
established economies as well as emerging market countries that MacKay-Shields
Financial Corporation, the Fund's Sub-Adviser, believes present favorable
opportunities.
INVESTMENT PROCESS -- In pursuing the Fund's investment strategy, the Fund's
Sub-Adviser seeks to identify investment opportunities by beginning with country
selection, then assessing local currencies for upside potential and downside
risk and finally, evaluating individual securities based on the financial
condition and competitiveness of individual companies. In making investments in
foreign markets, the Sub-Adviser considers several factors including prospects
for currency exchange, interest rates, inflation, relative economic growth and
governmental policies.
The Fund's principal investments include debt securities (limited to 25% of net
assets) rated below BBB by S&P or Baa by Moody's or, if unrated, determined by
the Sub-Adviser to be of comparable quality and mortgage-backed and asset-backed
securities. The Fund's principal investments may have fixed, variable, floating
or inverse floating rates of interest. The interest rate on a floating rate debt
instrument 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 an inverse
floater resets in the opposite direction from the market rate of interest to
which the inverse floater is indexed.
As part of its investment strategy, the Fund may buy and sell currency on a spot
basis and enter into foreign currency forward contracts for hedging purposes or
to increase the Fund's investment return. Additionally, the Fund may buy foreign
currency options, securities and securities index options, and enter into swaps
and futures contracts and related options. These techniques may be used for any
legally permissible purpose.
RISKS -- The values of debt securities fluctuate depending upon various factors,
including interest rates, issuer creditworthiness, market conditions and
maturities.
Since the Fund principally invests in FOREIGN SECURITIES, it can be subject to
various risks of loss that are different from risks of investing in securities
of U.S. issuers. These include losses due to fluctuating currency values, less
liquid trading markets, greater price volatility, political and economic
instability, less publicly available issuer information, changes in U.S. or
foreign tax or currency laws, and changes in monetary policy. In addition, the
Fund's investments in emerging market countries present risks in greater degree
than investments in developed market countries.
The Fund's principal investments can include HIGH YIELD SECURITIES (sometimes
called "junk bonds") which are generally considered speculative because they
present a greater risk of loss, including default, than higher quality debt
securities. These securities pay a premium -- a high interest rate or yield
because of this increased risk of loss. These securities can be also subject to
greater price volatility.
The Fund's principal investments include DERIVATIVES such as floaters, including
inverse floaters, and forward foreign currency options, securities and
securities index options, swaps, futures contracts and related options and
mortgage-backed and asset-backed securities. The Fund may use derivatives to try
to enhance returns or reduce the risk of loss (hedge) of certain of its
holdings. Regardless of the purpose, the Fund may lose money using derivatives.
The derivatives may increase the volatility of the Fund's net asset value and
may involve a small investment of cash relative to the magnitude of risk
assumed.
For the fiscal year ended December 31, 1998, the Fund's PORTFOLIO TURNOVER rate
was %.
21
<PAGE> 77
PAST PERFORMANCE
The bar chart and table indicate some of the risks of investing in the Fund by
showing changes in its performance over the life of the Fund and by showing how
the Fund's average annual returns for one year, five years and life of the Fund
periods compare to those of a broad-based securities market index. Performance
figures for Institutional Service Class shares, first offered on January 1,
1995, include the historical performance of the Institutional Class from the
Fund's inception (January 31, 1990) up to December 31, 1994. Performance data
for the classes after that date vary based on differences in their expense
structures. As with all mutual funds, past performance is not necessarily an
indication of how the Fund will perform in the future.
<TABLE>
<CAPTION>
<S> <C> <C>
BAR CHART
INTERNATIONAL BOND FUND QUARTER/YEAR RETURN
Highest Return/Best Quarter
Lowest Return/Worst Quarter
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS AS OF 12/31/98
<S> <C> <C> <C>
SINCE
1 YEAR 5 YEARS INCEPTION**
International Bond Fund***
Salomon Brothers Non-U.S.
Dollar World Government Bond
Index*
</TABLE>
* The Salomon Brothers Non-U.S. Dollar World Government Bond Index is an
unmanaged index generally considered to be representative of the world bond
market.
** The inception date was January 31, 1990 for the International Bond Fund's
predecessor separate account ("Separate Account").
*** 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.
22
<PAGE> 78
EXPENSES
The table below describes the fees and expenses that you may pay if you buy and
hold shares of the Fund. The "Example" is intended to help you compare the cost
of investing in the Fund with the cost of investing in other mutual funds. The
Example assumes that you invest $10,000 in the Fund for the time periods
indicated and reflects what you would pay if you redeemed all your shares or if
you hold them. The Example also assumes that your investment has a 5% return
each year and that the Fund operating expenses remain the same. Your actual
costs may be higher or lower than those shown below. The Example does not
reflect sales charges (loads) on reinvested dividends. There is no sales charge
(load) on reinvested dividends.
INTERNATIONAL BOND FUND
<TABLE>
<CAPTION>
EXAMPLE
-------
ASSUMING
REDEMPTION
ASSUMING NO AT THE END
FEES AND EXPENSES EXPENSES AFTER REDEMPTION OF EACH PERIOD
----------------- -------------- ----------- --------------
<S> <C> <C> <C> <C>
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
Maximum Sales Charge (Load) Imposed on Purchases of Shares
(as a percentage of offering price) None 1 year $ $
3 years $ $
5 years $ $
10 years $ $
Maximum Deferred Sales Charge (Load) (as a percentage of
redemption proceeds) None
Exchange Fee None
ANNUAL FUND OPERATING EXPENSES
(EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)
Management Fee %
Distribution and/or Service (12b-1) Fees None
Shareholder Service Fees 0.25%
Other Expenses %
-----
Total Fund Operating Expenses(+) %
=====
</TABLE>
<TABLE>
<S> <C>
(+) The Manager has voluntarily agreed to waive a portion of the
fees otherwise payable to it. With this reduction, for the
fiscal year ended December 31, 1998 the management fee paid
was % and total fund operating expenses were %.
</TABLE>
23
<PAGE> 79
MONEY MARKET FUND
INVESTMENT OBJECTIVE -- The Money Market Fund's investment objective is to seek
a high level of current income while preserving capital and maintaining
liquidity.
NOT GUARANTEED -- An investment in the Fund is not insured or guaranteed by the
Federal Deposit Insurance Corporation or any other government agency. Although
the Fund seeks to preserve the value of your investment at $1.00 per share, it
is possible to lose money by investing in the Fund. This could occur because of
highly unusual market conditions or a sudden collapse in the creditworthiness of
a company once believed to be an issuer of high quality, short-term securities.
PRINCIPAL INVESTMENT STRATEGIES -- The Fund invests in high quality short-term
securities denominated in U.S. dollars that mature in 397 days (13 months) or
less. The weighted average portfolio maturity will not exceed 90 days. These
securities may include obligations issued or guaranteed by the U.S. government
or any of its agencies or instrumentalities; bank and bank holding company
obligations such as CDs and bankers' acceptances; commercial paper which is
short-term unsecured loans to corporations; loans to U.S. and foreign issuers
and securities of foreign branches of U.S. banks, such as negotiable CDs, also
known as Eurodollars; time deposits; repurchase agreements; and corporate bonds.
These securities may be variable rate notes, floating rate notes and
asset-backed securities. The interest rate on a floating rate debt instrument is
a variable rate which is tied to another interest rate such as a money market
index or Treasury bill rate. All securities purchased by the Fund must meet the
requirements of Rule 2a-7 under the Investment Company Act of 1940 which are
designed to mitigate the risk of loss. 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
the floater will approximate its amortized cost.
RISKS -- Since the Fund invests in dollar-denominated FOREIGN SECURITIES, it can
be subject to various risks of loss that are different from risks of investing
in securities of U.S. based issuers. These include political and economic
instability, less publicly available issuer information and changes in U.S. or
foreign tax or currency laws.
The Fund's principal investments include DERIVATIVES such as variable rate
notes, floating rate notes and asset-backed securities. If New York Life
Insurance Company, the Fund's Sub-Adviser, is wrong about its expectations about
changes in interest rates or market conditions, the use of derivatives could
result in a loss. With respect to asset-backed securities, if interest rates
fall, the underlying debt may be paid off reducing the value of the Fund's
investments.
24
<PAGE> 80
PAST PERFORMANCE
The bar chart and table indicate some of the risks of investing in the Fund by
showing changes in its performance over the life of the Fund and by showing how
the Fund's average annual returns for one year, five years and life of the Fund
periods compare to those of a broad-based securities market index. Performance
figures for Institutional Service Class shares, first offered 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 data for
the classes after that date vary based on differences in their expense
structures. As with all mutual funds, past performance is not necessarily an
indication of how the Fund will perform in the future.
<TABLE>
<CAPTION>
<S> <C> <C>
BAR CHART
MONEY MARKET FUND QUARTER/YEAR RETURN
Highest Return/Best Quarter
Lowest Return/Worst Quarter
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS AS OF 12/31/98
<S> <C> <C> <C>
SINCE
1 YEAR 5 YEARS INCEPTION**
Money Market Fund
To come*
</TABLE>
* To come
** January 2, 1991
EXPENSES
The table below describes the fees and expenses that you may pay if you buy and
hold shares of the Fund. The "Example" is intended to help you compare the cost
of investing in the Fund with the cost of investing in other mutual funds. The
Example assumes that you invest $10,000 in the Fund for the time periods
indicated and reflects what you would pay if you redeemed all your shares or if
you hold them. The Example also assumes that your investment has a 5% return
each year and that the Fund operating expenses remain the same. Your actual
costs may be higher or lower than those shown below. The Example does not
reflect sales charges (loads) on reinvested dividends. There is no sales charge
(load) on reinvested dividends.
MONEY MARKET FUND
<TABLE>
<CAPTION>
EXAMPLE
-------
ASSUMING
REDEMPTION
ASSUMING NO AT THE END
FEES AND EXPENSES EXPENSES AFTER REDEMPTION OF EACH PERIOD
----------------- -------------- ----------- --------------
<S> <C> <C> <C> <C>
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
Maximum Sales Charge (Load) Imposed on Purchases of Shares
(as a percentage of offering price) None 1 year $ $
3 years $ $
5 years $ $
10 years $ $
Maximum Deferred Sales Charge (Load) (as a percentage of
redemption proceeds) None
Exchange Fee None
ANNUAL FUND OPERATING EXPENSES
(EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)
Management Fee %
Distribution and/or Service (12b-1) Fees None
Shareholder Service Fees 0.25%
Other Expenses %
-----
Total Fund Operating Expenses(+) %
=====
</TABLE>
<TABLE>
<S> <C>
(+) The Manager has voluntarily agreed to waive a portion of the
fees otherwise payable to it. With this reduction, for the
fiscal year ended December 31, 1998 the management fee paid
was % and total fund operating expenses were %.
</TABLE>
25
<PAGE> 81
SHORT-TERM BOND FUND
INVESTMENT OBJECTIVE -- The Short-Term Bond Fund's investment objective is to
seek to maximize total return, consistent with liquidity, preservation of
capital and investment in short-term debt securities.
PRINCIPAL INVESTMENT STRATEGIES -- The Fund normally invests at least 65% of
total assets in a diversified portfolio of actively managed short-term debt
securities, including securities with special features (e.g. puts and variable
or floating coupon rates) which have price characteristics similar to short-term
debt securities.
INVESTMENT PROCESS -- In pursuing the Fund's investment strategy, the Fund's
Sub-Adviser 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 the Sub-Adviser in determining whether to
increase or decrease the investment emphasis placed on a particular type of
security or industry sector within the Fund's investment portfolio.
The Fund's principal investments include obligations issued or guaranteed by the
U.S. government, its agencies or instrumentalities; mortgage-related and
asset-backed securities; CDs, time deposits and bankers' acceptances issued by
U.S. banks or savings and loan associations and debt securities issued by U.S.
corporate entities. The Fund invests in securities rated Baa or better by
Moody's or BBB or better by S&P, or if unrated, determined by MacKay-Shields
Financial Corporation, the Fund's Sub-Adviser, to be of comparable quality; and
invests in 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. The Fund's principal investments may have fixed, variable,
floating or inverse floating rates of interest. The interest rate on a floating
rate debt instrument 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 an
inverse floater resets in the opposite direction from the market rate of
interest to which the inverse floater is indexed. The effective maturity of the
Fund's portfolio will be less than three years.
As part of the Fund's principal strategies, the Sub-Adviser may use investment
practices such as mortgage dollar rolls and portfolio securities lending.
RISKS -- The values of debt securities fluctuate depending upon various factors,
including interest rates, issuer creditworthiness, market conditions and
maturities.
The Fund's investments include DERIVATIVES such as options, futures,
mortgage-related and asset-backed securities. The Fund may use derivatives to
try to enhance returns or reduce the risk of loss (hedge) of certain of its
holdings. Regardless of the purpose, the Fund may lose money using derivatives.
The derivatives may increase the volatility of the Fund's net asset value and
may involve a small investment of cash relative to the magnitude of risk
assumed.
The Fund's use of investment practices such as mortgage dollar rolls and
securities lending also presents certain risks. A mortgage dollar roll is a
transaction in which a Fund sells mortgage-backed securities from its portfolio
to a counterparty and at the same time agrees to buy a similar security from the
same party at a later date. The principal risk of MORTGAGE DOLLAR ROLLS is that
the security the Fund receives at the end of the transaction is worth less than
the security the Fund sold to the same counterparty at the beginning of the
transaction. The principal risk of SECURITIES LENDING is that the financial
institution that borrows securities from the Fund could go bankrupt and the Fund
might not be able to recover the securities or their value.
For the fiscal year ended December 31, 1998, the Fund's PORTFOLIO TURNOVER rate
was %.
26
<PAGE> 82
PAST PERFORMANCE
The bar chart and table indicate some of the risks of investing in the Fund by
showing changes in its performance over the life of the Fund and by showing how
the Fund's average annual returns for one year, five years and life of the Fund
periods compare to those of a broad-based securities market index. Performance
figures for Institutional Service Class shares, first offered 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 data for
the classes after that date vary based on differences in their expense
structures. As with all mutual funds, past performance is not necessarily an
indication of how the Fund will perform in the future.
<TABLE>
<CAPTION>
<S> <C> <C>
BAR CHART
SHORT-TERM BOND FUND QUARTER/YEAR RETURN
Highest Return/Best Quarter
Lowest Return/Worst Quarter
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS AS OF 12/31/98
<S> <C> <C> <C>
SINCE
1 YEAR 5 YEARS INCEPTION**
Short-Term Bond Fund
Salomon 1-3 Year Treasury
Index*
</TABLE>
* To come
** January 2, 1991.
EXPENSES
The table below describes the fees and expenses that you may pay if you buy and
hold shares of the Fund. The "Example" is intended to help you compare the cost
of investing in the Fund with the cost of investing in other mutual funds. The
Example assumes that you invest $10,000 in the Fund for the time periods
indicated and reflects what you would pay if you redeemed all your shares or if
you hold them. The Example also assumes that your investment has a 5% return
each year and that the Fund operating expenses remain the same. Your actual
costs may be higher or lower than those shown below. The Example does not
reflect sales charges (loads) on reinvested dividends. There is no sales charge
(load) on reinvested dividends.
SHORT-TERM BOND FUND
<TABLE>
<CAPTION>
EXAMPLE
-------
ASSUMING
REDEMPTION
ASSUMING NO AT THE END
FEES AND EXPENSES EXPENSES AFTER REDEMPTION OF EACH PERIOD
----------------- -------------- ----------- --------------
<S> <C> <C> <C> <C>
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
Maximum Sales Charge (Load) Imposed on Purchases of Shares
(as a percentage of offering price) None 1 year $ $
3 years $ $
5 years $ $
10 years $ $
Maximum Deferred Sales Charge (Load) (as a percentage of
redemption proceeds) None
Exchange Fee None
ANNUAL FUND OPERATING EXPENSES
(EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)
Management Fee %
Distribution and/or Service (12b-1) Fees None
Shareholder Service Fees 0.25%
Other Expenses %
-----
Total Fund Operating Expenses(+) %
=====
</TABLE>
<TABLE>
<S> <C>
(+) The Manager has voluntarily agreed to waive a portion of the
fees otherwise payable to it. With this reduction, for the
fiscal year ended December 31, 1998 the management fee paid
was % and total fund operating expenses were %.
</TABLE>
27
<PAGE> 83
More About Investment Strategies and Risks
Information about each Fund's principal investments, investment practices and
principal risks appears at the beginning of the prospectus. The information
below further describes the principal investments, investment practices and
risks pertinent to a Fund.
DERIVATIVE SECURITIES
The value of derivatives is based on certain underlying equity or fixed-income
securities, interest rates, currencies or indexes. They may be hard to sell and
are very sensitive to changes in the underlying security, interest rate,
currency or index, and as a result can be highly volatile. If the Sub-Adviser is
wrong about its expectations of changes in interest rates or market conditions,
the use of derivatives could result in a loss. In addition, the leverage
associated with inverse floaters may result in greater volatility in their
market value than other income-producing securities.
FOREIGN SECURITIES
Foreign investments could be more difficult to sell than U.S. investments. They
also may subject the Fund to risks different from investing in domestic
securities. Investments in foreign securities involve difficulties in receiving
or interpreting financial and economic information, possible imposition of
taxes, higher brokerage and custodian fees, possible currency exchange controls
or other government restrictions, including possible seizure or nationalization
of foreign deposits or assets. Foreign securities may also be less liquid and
more volatile than U.S. securities. There may also be difficulty in invoking
legal protections across borders. In addition, investment in emerging market
countries presents risks in greater degree than those presented by investment in
foreign issuers in countries with developed securities markets and more advanced
regulatory systems.
Some foreign securities are issued by companies organized outside the United
States and are traded only or primarily in trading markets outside the United
States. These foreign securities can be subject to most, if not all, of the
risks of foreign investing. Some foreign securities are issued by companies
organized outside the United States but are traded in U.S. securities markets
and are denominated in U.S. dollars. For example, American Depositary Receipts
and shares of some large foreign-based companies are traded on principal U.S.
exchanges. Other securities are not traded in the United States but are
denominated in U.S. dollars. These securities are not subject to all the risks
of foreign investing. For example, foreign trading market or currency risks will
not apply to dollar denominated securities traded in U.S. securities markets.
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 to protect itself against fluctuations
in currency exchange rates in relation to the U.S. dollar. See "Risk Management
Techniques."
LENDING OF PORTFOLIO SECURITIES
Portfolio securities may be lent to brokers, dealers and financial institutions
to realize additional income under guidelines adopted by the Board of Trustees.
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.
MORTGAGE-BACKED AND
ASSET-BACKED SECURITIES
Mortgage-backed and asset-backed securities are securities whose value is based
on 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 Sub-Adviser's ability to correctly forecast interest rates
and other economic factors correctly will impact the success of investments in
mortgage-backed and asset-backed securities. 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 some or all of the premium may be lost in the event of
prepayment.
RISK MANAGEMENT TECHNIQUES
Various techniques can be used to increase or decrease a Fund's 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
28
<PAGE> 84
Service Fees
SHAREHOLDER SERVICES PLAN
The Company has also adopted a Shareholder Services Plan with respect to the
Institutional Service Class of shares of each Fund. Under the terms of the
Shareholder Services 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.
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.
Because service fees are on-going, over time they will increase the cost of an
investment in the Fund and may cost more than other types of sales charges.
29
<PAGE> 85
Account Policies: Buying, Selling and Exchanging Shares
General Instructions: Buying and Selling Shares
[CAPTION]
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
TO OPEN AN ACCOUNT TO BUY MORE SHARES TO SELL SHARES
<S> <C> <C> <C> <C> <C>
You are eligible to buy Send additional investments directly to: If you are participating in a company
Institutional Service Class plan, such as a 401(k), profit
shares if you are in a Group MainStay Institutional Funds Inc. sharing, defined benefit or other
Account or Group IRA. P.O. Box 8407 employee-directed plan, check with
Boston, MA 02266-8407 your Human Resources Department for
If you are investing through a information on how your shares may be
Group IRA or Group Account, the Include the name of the appropriate Fund redeemed. For other investors,
following information will help or Funds and the account number on your including those in a Group IRA or
you buy shares: check. Group Account, write a letter of
You (or your sponsor, if you instruction that includes:
are investing through a group
or plan) can open an account. - your name(s) and signature(s)
- your account number
Complete your application and - Fund name(s)
send it to: - dollar amount you want to sell
MainStay Institutional Funds
Inc.
P.O. Box 461
Parsippany, NJ
07054-0461
</TABLE>
IN WRITING
30
<PAGE> 86
[CAPTION]
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
TO OPEN AN ACCOUNT TO BUY MORE SHARES TO SELL SHARES
<S> <C> <C> <C> <C> <C>
You (or your plan sponsor, if WIRE GETTING YOUR MONEY BY WIRE TRANSFER
you are investing through a
group or plan) can open an You or your registered representative Be sure we have your bank account
account and make an investment should call MSS at 1-800-695-2126 for an information on file. Call MSS at
by calling MainStay Shareholder account number and wiring instructions. 1-800-695-2126 to request your
Services, Inc. ("MSS"), the Give them to your bank, which may charge transaction. Or, if you prefer, you
Funds' transfer agent, at a fee for wiring. The wire must include may wire your order. Proceeds will be
1-800-695-2126 between 8:30 AM your name--exactly as it appears on your wired to your bank.
and 4:00 PM Eastern time on any application--your account number and the
day the New York Stock Exchange name of the Fund or Funds in which you Generally, after receiving your sell
is open. You'll be given an want to invest. MSS must receive your order by phone, we will send the
account number and wire or mail money (and application, if it's your proceeds by bank wire to your
instructions for sending initial investment) within three designated bank account within seven
payment. All calls are business days of your placing an order. days after your redemption request is
recorded. received (one business day for the
Money Market Fund). Your bank may
MSS must receive your money charge you a fee to receive the wire
(and the application, if it's transfer.
your first investment) within
the next three business days of GETTING YOUR MONEY BY CHECK
placing your order. Call us to request your transaction. A
check will be sent to the address of
record.
- Maximum amount:
The check will be payable to the name
(or names) on the account and mailed
to the address on the account. (See
the SAI for more details.)
Telephone or wire redemptions are not
permitted for shares represented by
certificates.
</TABLE>
BY TELEPHONE
31
<PAGE> 87
[CAPTION]
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
TO OPEN AN ACCOUNT TO BUY MORE SHARES TO SELL SHARES
<S> <C> <C> <C> <C> <C>
PAYROLL DEDUCTION
For making automatic investments through
a payroll deduction.
DIVIDEND REINVESTMENT
For automatically reinvesting the
dividends and distributions from one
MainStay Institutional Fund in the same
or another MainStay Institutional Fund.
SYSTEMATIC WITHDRAWAL PLAN
To make regular redemptions, choose
the plan when you open your account or
call MSS to request a form to add the
plan. Complete the form, specifying
the amount and frequency of
withdrawals you would like.
Withdrawals must be at least $100 a
month. Requires at least $10,000 in
the account at the time of request and
shares must not be in certificate
form.
CHECKWRITING SERVICES
For Money Market Fund only.
SYSTEMATIC EXCHANGES
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 one MainStay Institutional Fund
to another MainStay Institutional Fund
within the same class of shares.
TELEPHONE EXCHANGES
For telephone exchanges from one
MainStay Institutional Fund to
another.
</TABLE>
AUTOMATICALLY
32
<PAGE> 88
[CAPTION]
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
TO OPEN AN ACCOUNT TO BUY MORE SHARES TO SELL SHARES
<S> <C> <C> <C> <C> <C>
You buy shares at net asset You may sell shares by calling or
value ("NAV"). NAV is generally writing MSS or your investment
calculated as of the close of professional. MSS must receive your
trading on the New York Stock order with all the information,
Exchange (usually 4:00 pm signatures and documentation necessary
Eastern time, except for the to sell your shares. If you have share
Money Market Fund, which is certificates, you must return them
calculated at noon) everyday with your redemption request.
the Exchange is open. When you
buy shares, you must pay the Your shares will be sold at the next
next NAV calculated after MSS NAV calculated after MSS accepts your
accepts your order. This means order. MainStay will make the payment
all the necessary information, within seven days after receiving your
signatures and documentation request in good order (one business
has been received. day for the Money Market Fund).
VALUING SECURITIES
The Funds' investments are
valued based on current market
value, except for the Money
Market Fund, which uses the
amortized cost method of
valuation. Events affecting the
values of portfolio securities
which occur between the time
their prices are determined and
the close of the Exchange will
not be reflected in the Funds'
calculation of NAV unless the
Sub-Adviser deems that the
particular event would
materially affect NAV, in which
case an adjustment will be
made.
</TABLE>
NAV
33
<PAGE> 89
<TABLE>
<CAPTION>
TO OPEN AN ACCOUNT TO BUY MORE SHARES TO SELL SHARES
<S> <C> <C> <C> <C> <C>
MINIMUM INVESTMENTS* If you buy shares by check and quickly There will be no redemption, however,
decide to sell them, the Fund may delay during any period in which the right
One of the following minimums payment for up to 15 days to allow the of redemption is suspended or date of
will apply to you, depending check to clear. payment is postponed because the New
upon how you are investing: York Stock Exchange is closed or
trading on the Exchange is restricted
FOR INSTITUTIONAL INVESTORS: or the SEC deems an emergency to
exist.
- Initial combined
investments--at least REDEMPTIONS-IN-KIND
$250,000, which may be spread
over a thirteen-month period Each Fund reserves the right to pay
after opening the account. certain redemptions, either totally or
- Each investment after partially, by a distribution in kind
that--at least $1,000. of securities (instead of cash) from
the applicable Fund's portfolio. See
FOR A GROUP IRA: the SAI for details.
NOTE: REINVESTMENT WON'T RELIEVE YOU
If you are invested in an IRA OF ANY TAX CONSEQUENCES on gains
offered through a group: realized from the sale. The deductions
for losses may, however, be denied.
- First investment--at least
$5,000 (at least $1,000 in CONVENIENT, YES . . . BUT NOT
each Fund in which you are RISK-FREE
investing).
Telephone redemption privileges are
- Each additional convenient, but you give up some
investment--at least $100. security. When you sign the
application to buy shares, you agree
FOR A GROUP ACCOUNT: that neither the MainStay
Institutional Funds nor MSS will be
If you are a member of a group liable for following phone
that participates in our Group instructions that they reasonably
IRA program: believe are genuine. When using the
MainStay Audio Response System, you
- First investment--at least bear the risk of any loss from your
$25,000 (at least $1,000 in errors unless the Funds or MSS fail to
each Fund in which you are use established safeguards for your
investing). protection. These safeguards are among
those currently in place at
- Each additional MainStay Institutional Funds:
investment--at least $1,000.
- all phone calls are tape recorded;
*MainStay Institutional Funds and
Inc. may also accept - written confirmation of every
investments of smaller transaction is sent to your address
amounts at its discretion. of record.
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
</TABLE>
OTHER
34
<PAGE> 90
<TABLE>
<CAPTION>
TO OPEN AN ACCOUNT TO BUY MORE SHARES TO SELL SHARES
<S> <C> <C> <C> <C> <C>
smaller minimum investment.
All investments must be in
U.S. dollars and drawn on a
U.S. bank. Except under
certain circumstances, third-
party checks cannot be
accepted. If your check
doesn't clear, your order
will be canceled and you
could be liable for losses or
fees. We also reserve the
right to limit the number of
checks processed at one time.
Wires are not accepted when
the New York Stock Exchange
or banks are closed.
The Fund has the right to
close your account if it gets
too small. 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.
</TABLE>
OTHER
35
<PAGE> 91
SHAREHOLDER SERVICES
AUTOMATIC SERVICES
Buying or selling shares automatically is easy with the services described
below. With each service, you select a schedule and amount, subject to certain
restrictions. You can set up most of these services with your application or by
calling 1-800-MAINSTAY for a form.
EXCHANGE PRIVILEGES
Once you open an account, you may exchange shares of the same class between
MainStay Institutional Funds.
IN GENERAL
Selling and exchanging shares may result in a gain or loss and therefore may be
subject to taxation. Consult your tax adviser on the consequences.
MainStay may revise or terminate the systematic withdrawal plan and the exchange
privileges upon written notice.
GENERAL POLICIES--PURCHASING, SELLING AND EXCHANGING SHARES
Unless you decline telephone privileges on your application, you may be
responsible for any fraudulent telephone order as long as MSS takes reasonable
measures to verify the order.
The Funds reserve the right to:
- - refuse any purchase or exchange request that could adversely affect a Fund or
its operations including those from any individual or group who, in the Fund's
view, is likely to engage in excessive trading
- - change or discontinue its exchange privilege, or temporarily suspend this
privilege during unusual market conditions
- - change its minimum investment amounts
If you invest through a third party (rather than directly with MainStay), the
policies and fees may be different than those described here. Banks, brokers,
401(k) plans, financial advisers and financial supermarkets may charge
transaction fees and may set different minimum investments or limitations on
buying or selling shares. Consult a representative of your plan or financial
institution if in doubt.
36
<PAGE> 92
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." The dividends paid by each Fund will vary based on the income from
its investments and the expenses incurred by the Fund.
WHEN THE FUNDS PAY
The Money Market Fund declares dividends daily and pays them monthly. The other
Funds in this prospectus declare and distribute any dividends at least once a
year.
In the Money Market Fund, you begin earning dividends the business day after MSS
receives your investment and is open for business.
CAPITAL GAINS
Funds earn capital gains when they sell securities at a profit.
WHEN THE FUNDS PAY
At the end of each fiscal year, each MainStay Institutional Fund matches its
gains against its losses. If the balance results in a gain, the Fund will
distribute the gain to shareholders.
HOW TO TAKE YOUR EARNINGS
You may choose how to receive earnings (and change your choice as often as you
like) by notifying your investment professional (if permitted by the broker-
dealer) or MainStay directly. If you don't make a choice on your application,
your earnings will be automatically reinvested in the same class of shares of
the same Fund. In order to reinvest dividends and/or capital gains in another
Fund, you must have an established account in that class of shares of that Fund.
Here are your choices:
REINVEST EARNINGS IN:
- - the same Fund; or
- - in another Fund of your choice.
TAKE EARNINGS IN CASH
37
<PAGE> 93
Understand the Tax Consequences
MOST OF YOUR DIVIDENDS ARE TAXABLE
Virtually all of the dividends you receive from The MainStay Institutional Funds
are taxable, whether you take them as cash or automatically reinvest them. Some
dividends will be taxable as long-term capital gains.
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.
RETIREMENT PLANS
None of the dividends earned in a tax-deferred retirement plan are taxable until
distributed from the plan.
TAXES ON FOREIGN INVESTMENT INCOME
(Mainly from the International Bond, International Equity and EAFE Index Funds.)
Income earned from investments in foreign countries may be withheld by those
countries as income taxes. Under certain circumstances, the Fund may elect to
pass along tax credits or deductions to you for foreign income taxes paid,
although there are no assurances that the Fund will be able to do so, or that
the credits or deductions will result in a tax benefit to you.
You should be aware that if you buy shares shortly before a dividend payment a
part of your investment will be returned in the form of a dividend which may
be taxable income for you.
c
SEEK ASSISTANCE
Your registered representative is always available to help you keep your
investment goals coordinated with your tax considerations. You should,
however, rely on your tax adviser for tax counsel.
For additional information on taxation, see the SAI.
38
<PAGE> 94
Know With Whom You're Investing
WHO RUNS THE FUNDS' DAY-TO-DAY BUSINESS?
MainStay Management, Inc., 300 Interpace Parkway, Building A, Parsippany, NJ
07054, serves as the Funds' manager, handling business affairs for the Funds.
MainStay Management, Inc. is a corporation organized under the laws of Delaware
and is an indirect wholly owned subsidiary of New York Life Insurance Company.
The Manager provides offices and conducts clerical, recordkeeping and
bookkeeping services, and keeps most of the financial and accounting records
required for the Funds. 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 aren't the responsibility of the
Funds, including the fees paid to the Sub-Advisers.
For the fiscal year ended December 31, 1998, the Company, on behalf of each
Fund, paid the Manager an aggregate fee for services performed as a percentage
of the average daily net assets of that Fund as follows:
<TABLE>
<CAPTION>
RATE PAID FOR
THE YEAR ENDED
DECEMBER 31,
1998
- ----------------------------------------------------------------
<S> <C>
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............................... %
Short-Term Bond Fund............................ %
- ----------------------------------------------------------------
</TABLE>
The Manager is not responsible for records maintained by the Funds' Custodian,
Transfer Agent, Dividend Disbursing and Shareholder Servicing Agent, or Sub-
Advisers.
WHO MANAGES YOUR MONEY?
MacKay-Shields Financial Corporation, 9 West 57th St., New York, NY 10019, is
the Sub-Adviser to the Bond Fund, Growth Equity Fund, International Bond Fund,
International Equity Fund, Short-Term Bond Fund and Value Equity Fund. The firm
was incorporated in 1969 as an independent investment advisory firm and was
privately held until 1984 when it became a wholly owned but autonomously managed
subsidiary of New York Life Insurance Company. As of December 31, 1998, MacKay-
Shields managed over $ billion in assets.
New York Life Insurance Company, 51 Madison Avenue, New York, NY 10010, is the
Sub-Adviser to 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, 1998, New York Life had total assets of
approximately $ billion and managed approximately $ billion in assets
for qualified retirement plans.
Monitor Capital Advisors, Inc., 504 Carnegie Center, Princeton, NJ 08540, is the
Sub-Adviser to 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, 1998, Monitor Capital managed
approximately $ billion in assets.
Under the supervision of the Manager, each 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. For these services, each Sub-Adviser is paid a monthly fee
by the Manager, not the Funds. (See the SAI for a breakdown of fees.) The Funds'
Directors oversee the management and operations of the Funds.
39
<PAGE> 95
PORTFOLIO MANAGERS -- BIOGRAPHIES
RAVI AKHOURY -- Mr. Akhoury has managed the Short-Term Bond and Bond Funds since
inception. Mr. Akhoury joined MacKay-Shields as a Director in 1984, became
Managing Director in 1988, President and member, Board of Directors in 1989,
Chairman and CEO in 1992 and Senior Managing Director of MacKay-Shields and
Executive Vice President of New York Life Insurance Company and Chief Executive
Officer of New York Life Asset Management, a division of New York Life Insurance
Company, in 1997.
RUDOLPH CARRYL -- Mr. Carryl has managed the Growth Equity Fund since August
1992. 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.
DAVID CLEMENT -- Mr. Clement has managed the Money Market Fund since inception
and is a member of the fixed income portfolio management team at New York Life
Insurance Company. Mr. Clement joined the Asset Management Group of New York
Life in 1990.
STEPHEN KILLIAN -- Mr. Killian has managed the Indexed Equity Fund since
February 1999. Mr. Killian is a Vice President with portfolio management
responsibility for international equity funds, active quantitative equity
portfolios and development of quantitative strategies at Monitor Capital. He
joined Monitor Capital in 1997 after being a Partner and Senior Portfolio
Manager at RhumbLine Advisers from 1992 to 1997. Mr. Killian is a candidate in
the CFA Program.
DENIS LAPLAIGE -- Mr. Laplaige has managed the Value Equity Fund since
inception. Mr. Laplaige is President, Senior Managing Director and Chief
Investment Officer of MacKay-Shields. He joined the firm in 1982, became a
Director in 1988, Managing Director in 1991, a member of the Board of Directors
in 1993, President in 1994 and Senior Managing Director and Chief Investment
Officer in 1996.
JAMES MEHLING -- Mr. Mehling has managed the EAFE Index, Indexed Equity,
Multi-Asset and Indexed Bond Funds since 1991. 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 to 1991.
EDWARD MUNSHOWER -- Mr. Munshower has managed the Bond Fund since inception and
the Short-Term Bond Fund since 1993. Mr. Munshower is a Director of
MacKay-Shields. He joined MacKay-Shields as a fixed income investment specialist
in 1985 after having been an investment analyst for New York Life Insurance
Company. Mr. Munshower has over 14 years of experience in investment management
and research.
JOSEPH PORTERA -- Mr. Portera has managed the International Equity Fund since
September 1998. Mr. Portera is a Director of MacKay-Shields specializing in
international securities. 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 to August 1995 and
currently manages the Fund.
RICHARD ROSEN -- Mr. Rosen has managed the Value Equity Fund since February
1999. Mr. Rosen is a Director of MacKay-Shields in the Equity Division. He
joined MacKay-Shields in January 1999 after working as a Managing Director
responsible for equity securities at Prudential Investments from August 1991 to
January 1999 and Senior Portfolio Manager and Vice President at Marine Midland
Bank from June 1986 to August 1991.
EDMUND SPELMAN -- Mr. Spelman has managed the Growth Equity Fund since February
1991. 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. from 1984 to 1991.
JONATHAN SWANEY -- Mr. Swaney has managed the Multi-Asset Fund since February
1999. As a Portfolio Manager at Monitor Capital, Mr. Swaney is primarily
responsible for asset allocation. He joined Monitor Capital in 1997 after
working as the Manager of a tax advantaged equity index product at Pine Grove
Partners, a hedge fund, from 1995 to 1997 and as a fixed income statistician at
The Vanguard Group, Inc. from 1993 to 1995. Mr. Swaney is a candidate in the CFA
Program and has completed Level I of the Program.
40
<PAGE> 96
Financial Highlights
The financial highlights tables are intended to help you understand the Funds'
financial performance for the Service Class shares for the past 5 years or, if
shorter, the period of the Service Class shares' operations. Certain information
reflects financial results for a single Fund share. The total returns in the
tables represent the rate that an investor would have earned or lost on an
investment in the Funds (assuming reinvestment of all dividends and
distributions). This information has been audited by PricewaterhouseCoopers LLP,
whose report, along with the Funds' financial statements, are included in the
annual reports, which are available upon request.
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>
- --------
<TABLE>
<C> <S>
(a) Less than one cent per share.
(b) Disclosure of amount required for fiscal years beginning on
or after September 1, 1995.
</TABLE>
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>
- --------
<TABLE>
<C> <S>
(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.
</TABLE>
41
<PAGE> 97
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>
- --------
<TABLE>
<C> <S>
(a) Disclosure of amount required for fiscal years beginning on
or after September 1, 1995.
</TABLE>
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>
- --------
<TABLE>
<C> <S>
(a) Less than one cent per share.
(b) Disclosure of amount required for fiscal years beginning on
or after September 1, 1995.
</TABLE>
42
<PAGE> 98
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>
- --------
<TABLE>
<C> <S>
(a) Less than one cent per share.
(b) Disclosure of amount required for fiscal years beginning on
or after September 1, 1995.
</TABLE>
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>
- --------
<TABLE>
<C> <S>
(a) Disclosure of amount required for fiscal years beginning on
or after September 1, 1995.
</TABLE>
43
<PAGE> 99
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>
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>
44
<PAGE> 100
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>
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>
- --------
<TABLE>
<C> <S>
(a) Less than one cent per share.
</TABLE>
45
<PAGE> 101
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>
46
<PAGE> 102
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
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.
MAINSTAY INSTITUTIONAL FUNDS INC.LOGO
NYLIFE DISTRIBUTORS INC.
300 Interpace Parkway
Building A
Parsippany, New Jersey 07054
Distributor of MainStay Institutional Funds Inc.
NYLIFE Distributors Inc. is an indirect wholly owned
subsidiary of New York Life Insurance Company.
NYLIFE.LOGO
RECYCLE.LOGO
MORE INFORMATION ABOUT THE FUNDS IS AVAILABLE FREE UPON REQUEST:
STATEMENT OF ADDITIONAL INFORMATION (SAI)
Provides more details about the Funds. A current SAI is incorporated by
reference into the prospectus and has been filed with the SEC.
ANNUAL/SEMIANNUAL REPORTS
Provides additional information about the Funds' investments and include
discussions of market conditions and investment strategies that significantly
affected the Funds' performance during the last fiscal year.
TO OBTAIN INFORMATION:
Write to NYLIFE Distributors Inc., 300 Interpace Parkway, Building A,
Parsippany, N.J. 07054, call 1-800-MAINSTAY (1-800-624-6782) or visit our
website at mainstayfunds.com.
You can obtain information about the Funds (including the SAI) by visiting the
SEC's Public Reference Room in Washington, D.C. (phone 1-800-SEC-0330). You may
visit the SEC's website at sec.gov or you may send your written request and a
duplicating fee to the SEC's Public Reference Section, Washington, D.C.
20549-6009.
MAINSTAY INSTITUTIONAL FUNDS INC.
SEC File Number: 811-6175
<PAGE> 103
This page intentionally left blank
<PAGE> 104
This page intentionally left blank
<PAGE> 105
USE BACK COVER FOR MAINSTAY INSTITUTIONAL FUNDS, INC.
<PAGE> 106
Money Market Fund Sweep Shares Prospectus May 1, 1999
INVESTMENT OBJECTIVES, STRATEGIES AND RISKS:
AN OVERVIEW
This prospectus discusses the Money Market Fund Sweep Shares (the "Sweep
Shares"), which are a separate class of the Money Market Fund (the "Fund"),
which is a separate series of MainStay Institutional Funds Inc. (the "Company").
The Fund invests for a high level of current income and it invests, under normal
market conditions, primarily in debt or fixed income securities.
NOT INSURED
An investment in the Fund is not a deposit in a bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency. Although, the Fund seeks to preserve the value of your investment at
$1.00 per share, it is possible to lose money by investing in the Fund.
MORE INFORMATION
The next section of this prospectus gives you more detailed information about
the investment objective, policies, strategies, risks, performance and expenses
of the Fund offered in this prospectus. Please review it carefully.
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.
WHAT'S INSIDE?
Description of the
Fund.............. 3
More About Investment Strategies and Risks.....................................5
Distribution and Service
Fees.............. 6
Account Policies: Buying and Selling
Shares............ 7
Your Earnings..... 11
Understand the Tax
Consequences...... 12
Know With Whom You're
Investing......... 13
Financial
Highlights........ 14
2
<PAGE> 107
MONEY MARKET FUND
INVESTMENT OBJECTIVE -- The Money Market Fund's investment objective is to seek
a high level of current income while preserving capital and maintaining
liquidity.
NOT GUARANTEED -- An investment in the Fund is not insured or guaranteed by the
Federal Deposit Insurance Corporation or any other government agency. Although
the Fund seeks to preserve the value of your investment at $1.00 per share, it
is possible to lose money by investing in the Fund. This could occur because of
highly unusual market conditions or a sudden collapse in the creditworthiness of
a company once believed to be an issuer of high quality, short-term securities.
PRINCIPAL INVESTMENT STRATEGIES -- The Fund invests in high quality short-term
securities denominated in U.S. dollars that mature in 397 days (13 months) or
less. The weighted average portfolio maturity will not exceed 90 days. These
securities may include obligations issued or guaranteed by the U.S. government
or any of its agencies or instrumentalities; bank and bank holding company
obligations such as CDs and bankers' acceptances; commercial paper which is
short-term unsecured loans to corporations; loans to U.S. and foreign issuers
and securities of foreign branches of U.S. banks, such as negotiable CDs, also
known as Eurodollars; time deposits; repurchase agreements; and corporate bonds.
These securities may be variable rate notes, floating rate notes and
asset-backed securities. The interest rate on a floating rate debt instrument is
a variable rate which is tied to another interest rate such as a money market
index or Treasury bill rate. All securities purchased by the Fund must meet the
requirements of Rule 2a-7 under the Investment Company Act of 1940 which are
designed to mitigate the risk of loss. 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
the floater will approximate its amortized cost.
RISKS -- Since the Fund invests in dollar-denominated FOREIGN SECURITIES, it can
be subject to various risks of loss that are different from risks of investing
in securities of U.S. based issuers. These include political and economic
instability, less publicly available issuer information and changes in U.S. or
foreign tax or currency laws.
The Fund's principal investments include DERIVATIVES such as variable rate
notes, floating rate notes and asset-backed securities. If New York Life
Insurance Company, the Fund's Sub-Adviser, is wrong about its expectations about
changes in interest rates or market conditions, the use of derivatives could
result in a loss. With respect to asset-backed securities, if interest rates
fall, the underlying debt may be paid off reducing the value of the Fund's
investments.
3
<PAGE> 108
PAST PERFORMANCE
The bar chart and table indicate some of the risks of investing in the Fund by
showing changes in its performance over the life of the Fund and by showing how
the Fund's average annual returns for one year, five year and life of the Fund
periods compare to those of a broad-based securities market index. Performance
figures for Sweep Shares, first offered on December 8, 1998, include the
historical performance of Service Class Shares from January 1, 1995 up to
December 7, 1998. The Service Class shares, first offered to the public on
January 1, 1995, include the historical performance of the Institutional Class
shares from the Fund's inception up to December 31, 1994. The Institutional
Class shares and the Service Class shares, which are not offered in this
prospectus, would have substantially similar annual returns because the shares
are invested in the same portfolio of securities and the annual returns would
differ only to the extent that the Classes do not have the same expenses. As
with all mutual funds, past performance is not necessarily an indication of how
the Fund will perform in the future.
<TABLE>
<CAPTION>
<S> <C> <C>
BAR CHART
MONEY MARKET FUND RETURN QUARTER/YEAR
Highest Return/Best Quarter
Lowest Return/Worst Quarter
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS AS OF 12/31/98
<S> <C> <C> <C>
SINCE
1 YEAR 5 YEARS INCEPTION**
Money Market Fund
To come*
* To come
** January 2, 1991
7-day yield quotation as of 12/31/98:
</TABLE>
EXPENSES
The table below describes the fees and expenses that you may pay if you buy and
hold shares of the Fund. The "Example" is intended to help you compare the cost
of investing in the Fund with the cost of investing in other mutual funds. The
Example assumes that you invest $10,000 in the Fund for the time periods
indicated and reflects what you would pay if you redeemed all your shares or if
you hold them. The Example also assumes that your investment has a 5% return
each year and that the Fund operating expenses remain the same. Your actual
costs may be higher or lower than those shown below. The Example does not
reflect sales charges (loads) on reinvested dividends. There is no sales charge
(load) on reinvested dividends.
<TABLE>
<CAPTION>
MONEY MARKET FUND
ASSUMING
REDEMPTION
ASSUMING NO AT THE END
EXPENSES AFTER REDEMPTION OF EACH PERIOD
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT) -------------- ----------- --------------
<S> <C> <C> <C> <C>
Maximum Sales Charge (Load) Imposed on Purchases of Shares
(as a percentage of offering price) None 1 year $ $
3 years $ $
5 years $ $
10 years $ $
Maximum Deferred Sales Charge (Load) (as a percentage of
redemption proceeds) None
Exchange Fee None
ANNUAL FUND OPERATING EXPENSES
(EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)
Management Fee 0.50%
Distribution and/or Service (12b-1) Fees 0.25%
Shareholder Service Fees 0.25%
Other Expenses 0.11%
-----
Total Fund Operating Expenses(+) 1.11%
=====
</TABLE>
<TABLE>
<S> <C>
(+) The Manager has voluntarily agreed to waive a portion of the
fees otherwise payable to it. With this reduction, for the
fiscal year ended December 31, 1998 the management fee paid
was 0.39% and total fund operating expenses were 1.00%.
</TABLE>
4
<PAGE> 109
More About Investment Strategies and Risks
Information about the Fund's principal investments, investment practices and
principal risks appears at the beginning of the prospectus. The information
below further describes the principal investments, investment practices and
risks pertinent to the Fund.
DERIVATIVE SECURITIES
The value of derivatives is based on certain underlying fixed-income securities,
interest rates or indexes. They may be hard to sell and are very sensitive to
changes in the underlying security, interest rate or index. If the Sub-Adviser
is wrong about its expectations of changes in interest rates or market
conditions, the use of derivatives could result in a loss. However, all
securities purchased by the Fund must meet the requirements of Rule 2a-7 under
the Investment Company Act of 1940 which are designed to mitigate the risk of
loss.
FOREIGN SECURITIES
The Fund invests in foreign securities of issuers organized outside the United
States but are traded in U.S. securities markets and are denominated in U.S.
dollars. While these securities are not subject to all the risks of foreign
investing, they could be more difficult to sell than U.S. investments. They also
may subject the Fund to risks different from investing in domestic securities.
Investments in foreign securities involve difficulties in receiving or
interpreting financial and economic information, possible imposition of taxes,
higher brokerage and custodian fees, possible government restrictions, including
possible seizure or nationalization of foreign deposits or assets. Foreign
securities may also be less liquid than U.S. securities. There may also be
difficulty in invoking legal protections across borders.
ASSET-BACKED SECURITIES
Asset-backed securities are securities whose value is based on underlying pools
of loans that may include interests in pools of lower-rated debt securities.
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, the Manager, the Sub-Adviser and the Fund's other
service providers.
5
<PAGE> 110
Distribution and Service Fees
RULE 12B-1 PLAN
The Company has adopted a distribution plan under Rule 12b-1 under the
Investment Company Act for the Sweep Shares.
Rule 12b-1 distribution and service fees are paid monthly to NYLIFE
Distributors, NYLIFE Securities, or any other broker-dealer or financial
institution, as compensation for certain account sweep and/or other
distribution-related services rendered to the Sweep Shares, at the rate of 0.25%
on an annualized basis of the average daily net assets of the Sweep Shares.
SHAREHOLDER SERVICES PLAN
The Company has also adopted a Shareholder Services Plan with respect to the
Sweep Shares. Under the terms of the Shareholder Services Plan, the Fund is
authorized to pay to New York Life, as compensation for service activities
rendered by New York Life, its affiliates or independent third-party service
providers, to the shareholders of the Sweep Shares, a shareholder services fee
at the rate of 0.25% on an annualized basis of the average daily net asset value
of the Sweep Shares.
The Fund may pay to service agents "service fees" as that term is defined in the
rules of the National Association of Securities Dealers, Inc. (the "NASD") for
services provided to shareholders of the Sweep Shares. These fees are for
personal services, including assistance in establishing and maintaining
shareholder accounts and assisting shareholders that have questions or other
needs relating to their accounts.
Because Rule 12b-1 fees and Service fees are on-going, over time they will
increase the cost of an investment in the Fund and may cost more than other
types of sales charges.
ACCOUNT REPRESENTATIVES
Account representatives may impose other conditions on buying and selling
shares. They may also charge you additional fees. They are responsible for
giving you a schedule of fees and information about any conditions they've
added. Ask your account representative about these fees and conditions.
6
<PAGE> 111
Account Policies: Buying and Selling Shares
General Instructions: Buying and Selling Shares
[CAPTION]
<TABLE>
<CAPTION>
<S> <C> <C>
TO OPEN AN ACCOUNT TO SELL SHARES
<S> <C> <C>
If you are participating in an account sweep arrangement Check with your account representative for information on
with a financial institution, that institution will provide how your Sweep Shares may be redeemed (sold).
you with the information you need to open an account and
buy Sweep Shares. Generally, if your financial institution offers an
automatic sweep arrangement, the sweep will automatically
You are eligible to buy Sweep Shares if you are a customer transfer from your Fund account sufficient amounts to
of a financial institution that has made arrangements with cover security purchases in your brokerage account.
NYLIFE Distributors, Inc. for the purchase of Sweep Shares.
The price of each share will be the next NAV determined
You should speak to your account representative at your after receipt of a redemption request. The Fund imposes no
financial institution to open an account in the Fund in charge for selling your shares. You should check with your
conjunction with your brokerage account. account representative to determine if your financial
institution imposes a charge for selling shares.
A financial institution will establish a single omnibus
account with the Fund's transfer agent, MainStay
Shareholder Services, Inc. ("MSS"), on behalf of its
clients. You should read this prospectus along with the
financial institution's agreement or literature describing
its services (including sweep arrangements with the Fund)
and fees charged by the financial institution.
</TABLE>
7
<PAGE> 112
[CAPTION]
<TABLE>
<CAPTION>
<S> <C> <C>
TO OPEN AN ACCOUNT TO SELL SHARES
<S> <C> <C>
You buy shares at net asset value ("NAV"). NAV is
calculated at noon everyday the New York Stock Exchange is
open. Your price per share, generally $1.00, will be the
next NAV calculated after MSS receives an order from your
financial institution in proper form.
VALUING SECURITIES
The Fund's investments are valued based on the amortized
cost method of valuation.
</TABLE>
NAV
8
<PAGE> 113
<TABLE>
<CAPTION>
<S> <C> <C>
<CAPTION>
TO OPEN AN ACCOUNT TO SELL SHARES
<S> <C> <C>
MINIMUM INVESTMENTS* There will be no redemption, however, during any period in
which the right of redemption is suspended or date of
The minimum required investment by a financial institution payment is postponed because the New York Stock Exchange
is: is closed or trading on the Exchange is restricted or the
SEC deems an emergency to exist.
- Initial combined investment--at least $250,000, which may
be spread over a thirteen-month period after opening the REDEMPTIONS-IN-KIND
account.
- Each investment after that--at least $1,000. Each Fund reserves the right to pay certain redemptions,
either totally or partially, by a distribution in kind of
Please check with your account representative for securities (instead of cash) from the applicable Fund's
investment minimums and/or other requirements that may portfolio. See the SAI for details.
apply to brokerage or other accounts through which you own NOTE: REINVESTMENT WON'T RELIEVE YOU OF ANY TAX
Sweep Shares. CONSEQUENCES on gains realized from the sale. The
deductions for losses may, however, be denied.
*The Company may also accept investments of smaller amounts
at its discretion. CHECKWRITING SERVICES
You can sell shares of the Fund by writing checks for $100
All investments must be in U.S. dollars. or more. You need to fill out special forms to set up
checkwriting privileges. You cannot close your account by
writing a check.
</TABLE>
OTHER
9
<PAGE> 114
SHAREHOLDER SERVICES
IN GENERAL
Selling shares may result in a gain or loss and therefore may be subject to
taxation. Consult your tax adviser on the consequences.
GENERAL POLICIES--PURCHASING AND SELLING SHARES
The Fund reserves the right to:
- - refuse any purchase request that could adversely affect a Fund or its
operations
- - change its minimum investment amounts
10
<PAGE> 115
Your Earnings
TWO KINDS OF EARNINGS
DIVIDENDS AND INTEREST
Most funds earn either dividends from stocks, interest from bonds and other
securities, or both. A money market fund generally earns interest from its
investments and pays this income to you as dividends. The dividends paid by the
Fund will vary based on the income from its investments and the expenses
incurred by the Fund.
WHEN THE FUND PAYS
The Fund declares dividends daily and pays them monthly.
You begin earning dividends the business day that MSS receives an order by noon
and payment through the Federal Funds wire system by 4:00 p.m. Eastern time.
CAPITAL GAINS
The Fund earns capital gains when it sells securities at a profit.
WHEN THE FUND PAYS
At the end of each fiscal year, the Fund matches its gains against its losses.
If the balance results in a gain, the Fund will distribute the gain to
shareholders.
REINVESTMENT OF EARNINGS
Your earnings will automatically be reinvested in Sweep Shares.
11
<PAGE> 116
Understand the Tax Consequences
MOST OF YOUR DIVIDENDS ARE TAXABLE
Virtually all of the dividends and capital gains you receive from the Fund are
taxable. Some dividends will be taxable as long-term capital gains.
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.
c
SEEK ASSISTANCE
Your account representative is always available to help you keep your
investment goals coordinated with your tax considerations. You should,
however, rely on your tax adviser for tax counsel.
For additional information on taxation, see the SAI.
12
<PAGE> 117
Know With Whom You're Investing
WHO RUNS THE FUND'S DAY-TO-DAY BUSINESS?
MainStay Management, Inc., 300 Interpace Parkway, Building A, Parsippany, NJ
07054, serves as the Fund's manager, handling business affairs for the Fund.
MainStay Management, Inc. is a corporation organized under the laws of Delaware
and is an indirect wholly owned subsidiary of New York Life Insurance Company.
The Manager provides offices and conducts clerical, recordkeeping and
bookkeeping services, and keeps most of the financial and accounting records
required for the Fund. 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 aren't the responsibility of the
Fund, including the fees paid to the Sub-Adviser.
For the fiscal year ended December 31, 1998, the Company, on behalf of the Fund,
paid the Manager an aggregate fee for services performed of % as a
percentage of the average daily net assets of the Fund.
The Manager is not responsible for records maintained by the Fund's Custodian,
Transfer Agent, Dividend Disbursing and Shareholder Servicing Agent, or Sub-
Adviser.
WHO MANAGES YOUR MONEY?
New York Life Insurance Company, 51 Madison Avenue, NY, New York 10010, is the
Sub-Adviser to the 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, 1998, New York Life had total assets of
approximately $ billion and managed approximately $ billion in assets
for qualified retirement plans.
Under the supervision of the Manager, 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. For these services, the Sub-Adviser is paid a monthly fee
by the Manager, not the Fund. (See the SAI for a breakdown of fees.) The Fund's
Directors oversee the management and operations of the Fund.
13
<PAGE> 118
Financial Highlights
The financial highlights tables are intended to help you understand the Fund's
financial performance for the Sweep Shares for the period of the Sweep Shares'
operations. Certain information reflects financial results for a single Sweep
Share. The total returns in the tables represent the rate that an investor would
have earned or lost on an investment in the Sweep Shares (assuming reinvestment
of all dividends and distributions). This information has been audited by
PricewaterhouseCoopers LLP, whose report, along with the Fund's financial
statements, are included in the annual reports, which are available upon
request.
MONEY MARKET FUND
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value at beginning of
period...............................
Net investment income..................
Less dividends from net investment
income...............................
Net asset value at end of period.......
Total investment return(b).............
Ratios (to average net assets)/
Supplemental Data:
Net investment income................
Net expenses.........................
Expenses (before waiver and
reimbursement).....................
Net assets at end of period (in
000's)...............................
</TABLE>
- --------
<TABLE>
<C> <S>
+ Annualized.
</TABLE>
14
<PAGE> 119
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
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.
MAINSTAY INSTITUTIONAL FUNDS INC.LOGO
NYLIFE DISTRIBUTORS INC.
300 Interpace Parkway
Building A
Parsippany, New Jersey 07054
Distributor of Money Market Fund Sweep Shares
NYLIFE Distributors Inc. is an indirect wholly owned
subsidiary of New York Life Insurance Company.
NYLIFE.LOGO
RECYCLE.LOGO
MORE INFORMATION ABOUT THE FUND IS AVAILABLE FREE UPON REQUEST:
STATEMENT OF ADDITIONAL INFORMATION (SAI)
Provides more details about the Fund. A current SAI is incorporated by reference
into the prospectus and has been filed with the SEC.
ANNUAL/SEMIANNUAL REPORTS
Provides additional information about the Fund's investments and include
discussions of market conditions and investment strategies that significantly
affected the Fund's performance during the last fiscal year.
TO OBTAIN INFORMATION:
Write to NYLIFE Distributors Inc., 300 Interpace Parkway, Building A,
Parsippany, N.J. 07054, call 1-800-MAINSTAY (1-800-624-6782) or visit our
website at mainstayfunds.com.
You can obtain information about the Fund (including the SAI) by visiting the
SEC's Public Reference Room in Washington, D.C. (phone 1-800-SEC-0330). You may
visit the SEC's website at sec.gov or you may send your written request and a
duplicating fee to the SEC's Public Reference Section, Washington, D.C.
20549-6009.
MAINSTAY INSTITUTIONAL FUNDS INC.
SEC File Number: 811-6175
<PAGE> 120
MAINSTAY INSTITUTIONAL FUNDS INC.
51 MADISON AVENUE
NEW YORK, NEW YORK 10010
STATEMENT OF ADDITIONAL INFORMATION
DATE: MAY 1, 1999
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").
Each Fund, other than the International Bond Fund, is a diversified fund as
defined by the Investment Company Act of 1940, as amended (the "1940 Act")
This Statement of Additional Information supplements the information
contained in the Company's Institutional Class and Institutional Service Class
Prospectuses dated May 1, 1999 (collectively, the "Prospectus" or the
"Prospectuses"), and should be read in conjunction with the Prospectuses. The
Prospectuses are 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 of the 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.
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, 1998, and the
Statements of Changes in Net Assets for the years ended December 31, 1998 and
December 31, 1997, the
<PAGE> 121
notes to the Financial Statements, and the Report of the Independent
Accountants, all of which are included in the 1998 Annual Report to
Shareholders, are hereby incorporated by reference into this Statement of
Additional Information.
- 2 -
<PAGE> 122
TABLE OF CONTENTS
ADDITIONAL INVESTMENT POLICIES OF THE FUNDS....................................1
EAFE Index Fund.......................................................1
Growth Equity Fund....................................................1
Indexed Equity Fund...................................................2
International Equity Fund.............................................2
Multi-Asset Fund......................................................4
Value Equity Fund.....................................................5
Bond Fund.............................................................6
Indexed Bond Fund.....................................................6
International Bond Fund...............................................7
Short-Term Bond Fund..................................................8
Money Market Fund.....................................................9
INVESTMENT OBJECTIVES AND POLICIES............................................12
Arbitrage............................................................13
Borrowing............................................................13
Commercial Paper.....................................................14
Repurchase Agreements and Reverse Repurchase Agreements..............14
Government Securities................................................15
Corporate Debt Securities............................................15
Lending of Portfolio Securities......................................16
Restricted Securities................................................17
Municipal Bonds......................................................17
Banking Industry and Savings and Loan Industry Obligations...........18
Floating and Variable Rate Securities................................18
Foreign Securities...................................................20
American Depositary Receipts ("ADRs")................................22
When-Issued and Firm or Standby Commitment Agreements................22
Mortgage-Related and Other Asset-Backed Securities...................23
Mortgage Dollar Rolls................................................31
Brady Bonds..........................................................31
Loan Participation Interests.........................................32
Risk Management Techniques...........................................34
Options on Securities................................................35
Options on Foreign Currencies........................................39
Futures Transactions.................................................41
Swap Agreements......................................................51
Forward Foreign Currency Contracts...................................53
Foreign Index-Linked Instruments.....................................57
Warrants.............................................................58
Short Sales Against the Box..........................................58
High Yield/High Risk Securities......................................59
Zero Coupon Bonds....................................................61
INDEXED EQUITY FUND SPECIAL CONSIDERATIONS....................................61
INVESTMENT RESTRICTIONS.......................................................62
- i -
<PAGE> 123
MANAGEMENT OF THE COMPANY.....................................................66
Directors and Officers...............................................66
Compensation Table...................................................70
Management Agreement.................................................71
Sub-Advisory Agreements..............................................73
Distributor..........................................................75
Service Fees.........................................................76
PURCHASES AND REDEMPTIONS.....................................................77
PORTFOLIO TRANSACTIONS AND BROKERAGE..........................................78
NET ASSET VALUE...............................................................83
TAX INFORMATION...............................................................85
PERFORMANCE INFORMATION.......................................................94
OTHER INFORMATION.............................................................99
Capitalization.......................................................99
Effective Maturity...................................................99
Beneficial Ownership of the Funds...................................100
Code of Ethics......................................................102
Independent Accountants.............................................103
Legal Counsel.......................................................103
Custodian...........................................................103
Registration Statement..............................................103
APPENDIX A..........................................................104
DESCRIPTION OF SECURITIES RATINGS............................................104
MOODY'S INVESTORS SERVICE, INC...............................................104
STANDARD & POOR'S............................................................106
- ii -
<PAGE> 124
ADDITIONAL INVESTMENT POLICIES OF THE FUNDS
EAFE INDEX FUND
The EAFE Index Fund may invest 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. The
Fund may invest up to 10% of its total assets in index and currency exchange
rate swap agreements. The Fund may engage 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.
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.
Not all Morgan Stanley Capital International Europe, Australia and Far
East Index (the "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.
GROWTH EQUITY FUND
The Growth Equity 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.
<PAGE> 125
The Fund may enter into 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.
The Fund will invest 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.
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 Financial Corporation
("MacKay-Shields") if 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 appears to offer relatively greater
appreciation potential or a relatively greater anticipated level of performance.
INDEXED EQUITY FUND
The Index Equity Fund invests 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. The Fund may invest up to 10% of its
total assets in index swap agreements.
The Fund believes its indexing approach 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 International Equity Fund will invest in a diversified portfolio of
securities, including common stocks, preferred stocks, warrants and other
comparable equity securities.
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The International Equity Fund may invest in 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, the Fund may invest in currencies 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; cash, including foreign currency, or cash equivalents such as
obligations of banks, commercial paper and short-term obligations of U.S. or
foreign issuers.
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-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.
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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
The Multi-Asset Fund may invest up to 20% of total its assets in
foreign securities (defined as "traded primarily in a market outside the U.S.")
of developed and emerging market countries.
The Fund may invest up to 10% of total assets in interest rate, index,
and currency exchange rate swap agreements.
The Fund may invest 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.
The Fund may invest 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.
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 of 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.
To determine the best investment levels, Monitor Capital Advisors
(Monitor or 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
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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 expected 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
Equity securities in which the Value Equity Fund may invest include
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.
The Fund may invest up to 35% of its 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.
The convertible preferred stocks, debentures and
zero coupon bonds in which the Funds may invest, 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.
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The Fund may invest in stock index futures contracts and related
options to protect against changes in stock prices.
The Fund may participate in 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.
The Fund intends to purchase those securities which it believes to be
undervalued in the market relative to comparable securities. 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
The Fund may invest in 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.
The Fund may invest 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.
The Fund may enter into 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.
The Fund may invest in interest rate and bond index futures contracts,
and options on these contracts; and options on debt securities.
INDEXED BOND FUND
The Fund may invest 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, to facilitate trading, or reduce transaction costs.
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Monitor Capital believes the indexing approach is an effective method
of simulating percentage changes in the Big 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 Big Index. The Fund invests primarily
in a representative sample of the securities in the Big Index. Bonds are
selected for inclusion in the Fund's portfolio based on credit quality, sector,
maturity, coupon, current yield, yield to maturity, duration, and convexity.
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.
INTERNATIONAL BOND FUND
The Fund may invest in any debt or debt-related investment, domestic or
foreign, denominated in foreign or U.S. currency.
The Fund will invest 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. 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.
To enhance returns, manage risk more efficiently and help protect
against price changes in securities the Fund owns or may own, currencies 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.
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.
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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 contacts
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.
SHORT-TERM BOND FUND
The Fund may invest in obligations issued or guaranteed by the U.S.
government, its agencies or instrumentalities; mortgage- related and other
asset-backed securities; certificates of deposits, 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.
The Fund may invest in 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.
The Fund may invest in corporate commercial paper only if rate, 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.
The Fund may invest 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.
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The Fund may invest in 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.
The Fund may invest in U.S. dollar- or foreign currency- denominated
obligations of foreign governments or their subdivisions, agencies or
instrumentalities, international agencies or supranational entities.
The effective maturity of the Fund's portfolio will be less than three
years.
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.
MONEY MARKET FUND
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
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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 Guarantee 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 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, except that the Fund
may exceed this 5% limitation with respect to 25% of its total assets for up to
three business days
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after the purchase of "First Tier" securities of any one issuer and except that
this limitation shall not apply to U.S. government securities or securities
subject to certain Guarantees. The Fund may invest up to 5% of its total assets
in securities that were "Second Tier" when acquired. 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 "Second Tier" securities of any one issuer, 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
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available market quotations or market equivalents (the determination of value by
reference to interest rate levels, quotations of comparable securities and other
factors) deviates from $1.00 per share based on amortized cost.
The extent of deviation between the Fund's net asset value based upon
available market quotations or market equivalents and $1.00 per share based on
amortized cost will be periodically examined by the Directors. If such deviation
exceeds 1/2 of 1%, the Directors will promptly consider what action, if any,
will be initiated. In the event the Directors determine that a deviation exists
which may result in material dilution or other unfair results to investors or
existing shareholders, they will take such corrective action as they regard to
be necessary and appropriate, including the sale of portfolio instruments prior
to maturity to realize capital gains or losses or to shorten average portfolio
maturity; withholding part or all of dividends or payment of distributions from
capital or capital gains; redemptions of shares in kind; or establishing a net
asset value per share by using available market quotations or equivalents. In
addition, in order to stabilize the net asset value per share at $1.00, the
Directors have the authority (1) to reduce or 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 PRACTICES AND INSTRUMENTS COMMON TO MULTIPLE FUNDS
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.
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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 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 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
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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.
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.
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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 Fund 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.
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.
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.
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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 Internatinal 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. 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.
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
total market value of securities loaned will not at any time exceed 33% of the
total assets of a Fund. The Fund would have the right to call a loan and obtain
the securities loaned at any time generally on less than five days' notice. For
the duration of a loan, the Fund would continue to receive the equivalent of the
interest or dividends paid by the issuer on the securities loaned and would also
receive compensation from the investment of the collateral. The Fund would not,
however, have the right to vote any securities having voting rights during the
existence of the loan, but the Fund would call the loan in anticipation of an
important vote to be taken among holders of the securities or of the giving or
withholding of their consent on a material matter affecting the
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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.
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.
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. 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
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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).
BANKING INDUSTRY AND SAVINGS AND LOAN INDUSTRY 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.
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
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.
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
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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. To be an eligible investment for the Money Market Fund, there must be a
reasonable expectation that, at any time until the final maturity for 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. An inverse floater may be considered to be leveraged to the
extent that its interest rate varies by a magnitude that exceeds the magnitude
of the change in the index rate of interest. The higher degree of leverage
inherent in inverse floaters is associated with greater volatility in their
market values. Accordingly, the duration of an inverse floater may exceed its
stated final maturity. Certain inverse floaters may be determined to be illiquid
securities for purposes of 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
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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.
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 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.
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 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, which presents risks in greater degree than, and in
addition to, those presented by investment in foreign issuers in general. A
number
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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 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
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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.
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
leaveraging 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.
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
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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 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
Mortgage-backed and asset-back securities are securities which derive
their value from underlying pools of loans that may include interests in pools
of lower-rate 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 crediworthiness 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 and asset-backed securities that meet the
requirements of Rule 2a-7 under the 1940 Act. 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).
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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 princi- pal payments owed on the mortgage
pool, net of certain fees, at the scheduled payment dates regardless of whether
or not the mortgagor actually makes the payment.
The principal governmental guarantor of mortgage-related securities is
the Government National Mortgage Association ("GNMA"). GNMA is a wholly owned
U.S. Government corporation within the Department of Housing and Urban
Development. GNMA is authorized to guarantee, with the full faith and credit of
the U.S. Government, the timely payment of principal and interest on securities
issued by institutions approved by GNMA (such as S&Ls, commercial banks and
mortgage bankers) and backed by pools of Federal Housing Administration-insured
or Veterans Administration-guaranteed mortgages.
Government-related guarantors (i.e., not backed by the full faith and
credit of the U.S. Government) include the Federal National Mortgage Association
("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC"). FNMA is a
government-sponsored 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
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the availability of mortgage credit for residential housing. Its stock is owned
by the twelve Federal Home Loan Banks. FHLMC issues Participation Certificates
("PCS") which represent interests in conventional mortgages from FHLMC's
national portfolio. FHLMC guarantees the timely payment of interest and ultimate
collection of principal, but PCs are not backed by the full faith and credit of
the U.S. Government.
Commercial banks, savings and loan institutions, private mortgage
insurance companies, mortgage bankers and other secondary market issuers also
create pass-through pools of conventional residential mortgage loans. Such
issuers may, in addition, be the originators and/or servicers of the underlying
mortgage loans as well as the guarantors of the mortgage-related securities.
Pools created by such non-governmental issuers generally offer a higher rate of
interest than government and government-related pools because there are no
direct or indirect government or agency guarantees of payments in the former
pools. However, timely payment of interest and principal of these pools may be
supported by various forms of insurance or guarantees, including individual
loan, title, pool and hazard insurance and letters of credit. The insurance and
guarantees are issued by governmental entities, private insurers and the
mortgage poolers. Such insurance and guarantees and the creditworthiness of the
issuers thereof will be considered in determining whether a mortgage-related
security meets 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
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portfolios of mortgage pass-through securities guaranteed by GNMA, FHLMC, or
FNMA, and their income streams.
CMOs are structured into multiple classes, each bearing a different
stated maturity. Actual maturity and average life will depend upon the
prepayment experience of the collateral. CMOs provide for a modified form of
call protection through a de facto breakdown of the underlying pool of mortgages
according to how quickly the loans are repaid. Monthly payment of principal
received from the pool of underlying mortgages, including prepayments, is first
returned to investors holding the shortest maturity class. Investors holding the
longer maturity classes receive principal only after the first class has been
retired. An investor is partially guarded against a sooner than desired return
of principal because of the sequential payments.
In a typical CMO transaction, a corporation ("issuer") issues multiple
series (e.g., A, B, C, Z) of CMO bonds ("Bonds"). Proceeds of the Bond offering
are used to purchase mortgages or mortgage pass-through certificates
("Collateral"). The Collateral is pledged to a third-party trustee as security
for the Bonds. Principal and interest payments from the Collateral are used to
pay principal on the Bonds in the order A, B, C, Z. The Series A, B, and C Bonds
all bear current interest. Interest on the Series Z Bond is accrued and added to
principal and a like amount is paid as principal on the Series A, B, or C Bond
currently being paid off. When the Series A, B, and C Bonds are paid in full,
interest and principal on the Series Z Bond begins to be paid currently. With
some CMOs, the issuer serves as a conduit to allow loan originators (primarily
builders or savings and loan associations) to borrow against their loan
portfolios.
The 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
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mortgage collateral pool. All sinking fund payments in the CMOs are allocated to
the retirement of the individual classes of bonds in the order of their stated
maturities. Payment of principal on the mortgage loans in the collateral pool in
excess of the amount of FHLMC's minimum sinking fund obligation for any payment
date are paid to the holders of the CMOs as additional sinking fund payments.
Because of the "pass-through" nature of all principal payments received on the
collateral pool in excess of FHLMC's minimum sinking fund requirement, the rate
at which principal of the CMOs is actually repaid is likely to be such that each
class of bonds will be retired in advance of its scheduled maturity date.
If collection of principal (including prepayments) on the mortgage
loans during any semiannual payment period is not sufficient to meet FHLMC's
minimum sinking fund obligation on the next sinking fund payment date, FHLMC
agrees to make up the deficiency from its general funds.
Criteria for the mortgage loans in the pool backing the CMOs are
identical to those of FHLMC PCs. FHLMC has the right to substitute collateral in
the event of delinquencies and/or defaults.
Other Mortgage-Related Securities. The 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
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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 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
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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 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
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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 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 Receivables,
("CARSs"). CARSs represent undivided fractional interests in a trust ("trust")
whose assets consist of a pool of motor vehicle retail installment sales
contracts and security interests in the vehicles securing the contracts.
Payments of principal and interest on CARSs are passed-through monthly to
certificate holders, and are guaranteed up to certain amounts and for a certain
time period by a letter of credit issued by a financial institution unaffiliated
with the trustee or originator of the 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.
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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.
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.
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. 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").
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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
The Funds may invest in participation interest in loans. 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 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
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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.
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
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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.
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.
RISK MANAGEMENT TECHNIQUES
The Funds can use various techniques to increase or decrease their
exporsure to changing security prices, interest rates, currency exchange rates,
commodity price 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.
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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.
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.
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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 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
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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 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
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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.
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. A Fund may use foreign currency
options contracts for various reasons, including: to manage its exposure to
changes in currency exchange rates; as an efficient means of adjusting to
overall exposure to certain currencies, or in an effort to enhance return. A
Fund may purchase and write put and call options on foreign currencies for
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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 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.
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
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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.
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.
There can be no assurance that a liquid market will exist when a Fund
seeks to close out an option position. Furthermore, if trading restrictions or
suspensions are imposed on the options markets, a Fund may be unable to close
out a position.
Currency options traded on U.S. or other exchanges may be subject to
position limits which may limit the ability of a Fund to reduce foreign
currency risk using such options. Over-the-counter options differ from 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. Foreign currency 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.
FUTURES TRANSACTIONS
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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 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
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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 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.
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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 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
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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 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
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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 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.
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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 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
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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 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.
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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.
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
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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 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.
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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.
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.
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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 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
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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 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,
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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
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
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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 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
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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.
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
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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.
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
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<PAGE> 180
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 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.
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<PAGE> 181
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 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
Securities rated below BBB by S&P or Baa by Moody's (sometimes called
"junk bonds") are not considered "investment grade". There is more price
volatility, more risk of losing your principal interest, a greater possibility
of the issuer going
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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.
Investors should be willing to accept the risk 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.
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,
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<PAGE> 183
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 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
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<PAGE> 184
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.
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
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<PAGE> 185
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 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
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<PAGE> 186
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) 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
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<PAGE> 187
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 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
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<PAGE> 188
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;
(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
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<PAGE> 189
(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> 190
<TABLE>
<CAPTION>
NAME POSITION(S) WITH PRINCIPAL OCCUPATION(S)
ADDRESS AND AGE THE COMPANY DURING PAST 5 YEARS
--------------- ---------------- -------------------
<S> <C> <C>
Stephen C. Roussin, 35 Director and Chairperson of the President, Chief Executive Officer and Trustee,
Board of Directors* 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, 45 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, 71 Director Retired, 1987 to present; Vice President,
353 Canterbury Drive Investment Banking, The First Boston
Ramsey, NJ 07446 Corporation, 1964-1987.
Robert P. Mulhearn, 51 Director Private Investor, 1987 to present; Managing
60 Twin Brooks Road Director, Morgan Stanley, 1979-1987.
Saddle River, NJ 07458
Susan B. Kerley, 47 Director President, Global Research Associates, 1990 to
P.O. 9572 present; Manager, Special Investments,
New Haven, CT 06535 Rockefeller & Co., 1988-1990; Director of
Research, Rogers, Casey and Barksdale, 1983-1988;
Director, Citifunds, 1991 to present.
</TABLE>
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<PAGE> 191
<TABLE>
<CAPTION>
NAME, POSITION(S) WITH PRINCIPAL OCCUPATION(S)
ADDRESS AND AGE THE COMPANY DURING PAST 5 YEARS
--------------- ------------- -------------------
<S> <C> <C>
Linda M. Livornese, 47 President Vice President, Pension Department, New York Life
Insurance Company, 1990 to present; Pension Vice
President, Pension Department, New York Life
Insurance Company, 1988-1990; Assistant Vice
President, Pension Department, New York Life
Insurance Company, 1986-1988; Vice President,
NYLIFE Distributors Inc., 1993 to present; Vice
President, NYLIFE Securities Inc., 1992 to
present.
Jefferson C. Boyce, 41 Senior Vice President Senior Vice President, New York Life Insurance
Company, 1994 to present; Senior Vice President,
The MainStay Funds, 1995 to present; Director,
Monitor Capital Advisors, Inc., 1991 to present
and Senior Vice President, 1996 to present;
Director, MSC Holding, Inc., 1992 to present and
Secretary, 1994 to present; Director, Eagle
Strategies Corp., 1993 to present; Director,
NYLIFE Equity, Inc., 1993 to present; President
and Chief Executive Officer, NYLIFE Distributors
Inc., 1996 to present and Director, 1993 to
present; Director, NYLIFE Inc., 1993 to present;
Director, NYLIFE Structured Asset Management
Company Ltd., 1993 to present; Director, CNP
Realty Investments, Inc., 1994 to present;
Director, New York Life Benefit Services, Inc.,
1994 to present; Director, NYLIFE Depositary
Corporation, 1994 to present; Director, NYLIFE
Realty Inc., 1994 to present; Director, NYLIFE
SFD Holding Inc. (formerly NAFCO, Inc.), 1994 to
present; Director, President and Chief Executive
Officer, NYLIFE Securities Inc., 1996 to present;
Chairman and Director, MainStay Shareholder
Services Inc., 1997 to present; Chief
Administrative Officer, Pension, Mutual Funds,
Structured Finance, Corporate Quality, Human
Resources and Employees' Health Departments, New
York Life Insurance Company, 1992 to 1994; Vice
President, Pension Department, New York Life
Insurance Company, 1989 to 1992.
</TABLE>
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<PAGE> 192
<TABLE>
<CAPTION>
NAME, POSITION(S) WITH PRINCIPAL OCCUPATION(S)
ADDRESS AND AGE THE COMPANY DURING PAST 5 YEARS
--------------- ------------- -------------------
<S> <C> <C>
Richard W. Zuccaro, 49 Tax Vice President Vice President, New York Life Insurance Company,
1995 to present; Vice President -- Tax, New York
Life Insurance Company, 1986 to 1995; Tax Vice
President, NYLIFE Securities Inc., 1987 to
present; Tax Vice President, NYLIFE SFD Holding
Inc., 1990 to present; Tax Vice President, NYLIFE
Depositary Inc., 1990 to present; Tax Vice
President, NYLIFE Inc., 1990 to present; Tax Vice
President, NYLIFE Insurance Company of Arizona,
1990 to present; Tax Vice President, NYLIFE
Realty Inc., 1991 to present; Tax Vice President,
NYLICO Inc., 1991 to present; Tax Vice President,
New York Life Fund Inc., 1991 to present; Tax
Vice President, New York Life International
Investment, Inc., 1991 to present; Tax Vice
President NYLIFE Funding Inc., 1991 to present;
Tax Vice President, NYLCO, 1991 to present; Tax
Vice President, NYLIFE Equity Inc., 1991 to
present; Tax Vice President, MainStay VP Series
Fund, Inc., 1991 to present; Tax Vice President,
CNP Realty Investments, Inc., 1991 to present;
Tax Vice President, New York Life Worldwide
Holding, Inc., 1992 to present; Tax Vice
President, NYLIFE Structured Asset Management
Company Ltd., 1992 to present; Tax Vice
President, The MainStay Funds, 1991 to present;
Tax Vice President, Eagle Strategies Corp.
(registered investment adviser), 1993 to present;
Tax Vice President, NYLIFE Distributors Inc.,
1993 to present; Vice President & Assistant
Controller, New York Life Insurance and Annuity
Corp., 1995 to present, and Assistant Controller,
1991 to 1995; Vice President, NYLCare Health
Plans, Inc., 1995 to present; Vice President -
Tax, New York Life and Health Insurance Co., 1996
to present; Tax Vice President, New York Life
Trust Company, 1996 to present; Tax Vice
President, Monitor Capital Advisors, Inc., 1996
to present; Tax Vice President, NYLINK Insurance
Agency Incorporated, 1996 to present; Tax Vice
President, MainStay Shareholder Services Inc.,
1997 to present.
</TABLE>
- 69 -
<PAGE> 193
<TABLE>
<CAPTION>
NAME, POSITION(S) WITH PRINCIPAL OCCUPATION(S)
ADDRESS AND AGE THE COMPANY DURING PAST 5 YEARS
--------------- ------------- -------------------
<S> <C> <C>
Anthony W. Polis, 54 Treasurer (Principal Financial Vice President, New York Life Insurance Company,
and Accounting 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.
</TABLE>
* Messrs. Boyle and Roussin are Directors who are "interested persons" of
the Company as that term is defined in the 1940 Act.
COMPENSATION TABLE
The following table sets forth information regarding compensation
received by the Directors of the Company for the year ended December 31, 1998.
- 70 -
<PAGE> 194
<TABLE>
<CAPTION>
Aggregate Compensation
Name and Position from Company(1)
----------------- -------------
<S> <C>
Lawrence Glacken $ ______
Director
Robert P. Mulhearn $ ______
Director
Susan B. Kerley $ ______
Director
</TABLE>
(1) Directors, other than those affiliated with New York Life Insurance
Company, MainStay Management, Inc., MacKay-Shields Financial
Corporation, Monitor Capital Advisors, Inc. or NYLIFE Distributors Inc.
are paid an annual fee of $24,000 and $1,000 for each Board of
Directors meeting and Committee meeting attended plus reimbursement for
travel and out-of-pocket expenses.
As of April 1, 1999, the Directors and Officers of the Company as a
group owned less than 1% of the outstanding shares of any Class of a Fund.
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
- 71 -
<PAGE> 195
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 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.
Commencing November 21, 1997 through December 31, 1997 and for the
fiscal year ended December 31, 1998, the amount of the management fee paid by
each Fund to the Manager was as follows:
<TABLE>
<CAPTION>
November 21, 1997
through Year Ended
December 31, 1997 December 31, 1998
----------------- -----------------
<S> <C> <C>
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
</TABLE>
- 72 -
<PAGE> 196
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 following expenses for the period November
21, 1997 through December 31, 1997 and for the fiscal year ended December 31,
1998:
<TABLE>
<CAPTION>
November 21, 1997
through Year Ended
December 31, 1997 December 31, 1998
------------------ ------------------
<S> <C> <C>
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
</TABLE>
*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 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
- 73 -
<PAGE> 197
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, 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 year ended
December 31, 1996, the amount of the advisory fee paid by each Fund to New York
Life, MacKay-Shields or Monitor was as follows:
<TABLE>
<CAPTION>
Period Ended Year Ended
Fund 11/20/97 12/31/96
- ---- -------- --------
<S> <C> <C>
EAFE Index Fund $ 118,622 $ 124,284
Growth Equity Fund 1,414,379 1,186,388
Indexed Equity Fund 719,601 502,686
International Equity Fund 406,316 395,717
Multi-Asset Fund 508,530 461,408
Value Equity Fund 2,008,307 1,768,836
Bond Fund 316,678 355,167
Indexed Bond Fund 105,411 123,798
International Bond Fund 136,941 141,296
Money Market Fund 181,674 100,230
Short-Term Bond Fund 69,125 98,265
</TABLE>
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 year ended
December 31, 1996, the amount of the administration fee paid by each Fund to New
York Life was as follows:
- 74 -
<PAGE> 198
<TABLE>
<CAPTION>
Period Ended Year Ended
Fund 11/20/97 12/31/96
- ---- -------- --------
<S> <C> <C>
EAFE Index Fund $ 632,652 $ 662,846
Growth Equity Fund 3,394,512 2,847,330
Indexed Equity Fund 2,878,403 2,010,753
International Equity Fund 580,451 565,311
Multi-Asset Fund 1,695,098 1,538,025
Value Equity Fund 4,819,937 4,245,206
Bond Fund 870,864 976,711
Indexed Bond Fund 421,641 495,190
International Bond Fund 228,235 235,493
Money Market Fund 726,696 400,921
Short-Term Bond Fund 207,375 294,794
</TABLE>
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 year ended December 31,
1996.
<TABLE>
<CAPTION>
Period Ended Year Ended
Fund 11/20/97 12/31/96
- ---- -------- --------
<S> <C> <C>
EAFE Index Fund $ 229,592 $238,764
Growth Equity Fund N/A (1) N/A (1)
Indexed Equity Fund 1,878,195 (4) 753,575 (2)
International Equity Fund 35,792 82,203
Multi-Asset Fund N/A (1) 164,519 (3)
Value Equity Fund N/A (1) N/A (1)
Bond Fund 154,845 188,561
Indexed Bond Fund 161,693 189,996
International Bond Fund 60,073 61,961
Money Market Fund 194,751 170,221
Short-Term Bond Fund 96,101 122,335
</TABLE>
1 Fund had no expense limitation during period.
2 New York Life assumed $676,954, Monitor assumed $76,621.
3 Fund expense limitation expired December 31, 1996.
4 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
- 75 -
<PAGE> 199
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 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
- 76 -
<PAGE> 200
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 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
- 77 -
<PAGE> 201
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, 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
- 78 -
<PAGE> 202
execution of the Fund's orders. The Sub-Adviser attempts to achieve this result
by selecting broker-dealers to execute portfolio transactions on behalf of the
Fund and its other clients on the basis of the broker-dealers' professional
capability, the value and quality of their brokerage services and the level of
their brokerage commissions.
NYLIFE Securities (the "Affiliated Broker") may act as broker for the
Funds. In order for the Affiliated Broker to effect any portfolio transactions
for the Funds on an exchange, the commissions, fees or other remuneration
received by the Affiliated Broker must be reasonable and fair compared to the
commissions, fees or other remuneration paid to other brokers in connection with
comparable transactions involving similar securities being purchased or sold on
an exchange during a comparable period of time. This standard would allow the
Affiliated Broker to receive no more than the remuneration which would be
expected to be received by an unaffiliated broker in a commensurate arms-length
transaction. The 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
- 79 -
<PAGE> 203
Fund. The management fee paid by the Fund and the sub-advisory fee paid by the
Manager are not reduced because the Sub-Adviser and its affiliates receive such
services.
As permitted by Section 28(e) of the Securities Exchange Act of 1934,
an investment adviser (or sub-adviser) may cause a Fund to pay a broker-dealer
which provides "brokerage and research services" (as defined in that Act) to the
investment adviser (or sub-adviser) an amount of disclosed commission for
effecting a securities transaction for the Fund in excess of the commission
which another broker-dealer would have charged for effecting that transaction.
For the years ended December 31, 1998, 1997 and 1996 each of the
following Funds paid brokerage commissions as follows:
- 80 -
<PAGE> 204
<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
12/31/98 12/31/97 12/31/96 12/31/98 12/31/97 12/31/96
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
EAFE Index Fund............... $ 20,593 $ N/A 0(0%)(1) 0(0%)(1)
Growth Equity Fund............ 461,682 296,284 0(0%)(1) 0(0%)(1)
Indexed Equity Fund........... 120,427 N/A 0(0%)(1) 0(0%)(1)
International Equity Fund..... 407,665 290,329 0(0%)(1) 0(0%)(1)
Multi-Asset Fund.............. 22,593 N/A 0(0%)(1) 0(0%)(1)
Value Equity Fund............. 1,651,353 1,042,205 0(0%)(1) 0(0%)(1)
Bond Fund..................... N/A 768 0(0%)(1) 0(0%)(1)
Short-Term Bond Fund.......... 250 106 0(0%)(1) 0(0%)(1)
</TABLE>
<TABLE>
<CAPTION>
Total Brokerage
Total Amount of Transaction Commissions Paid
Where Commissions Paid to Brokers that Provided Research
---------------------- ---------------------------------
Year ended Year ended Year ended Year ended
12/31/98 12/31/97 12/31/98 12/31/97
-------- -------- -------- --------
<S> <C> <C>
EAFE Index Fund................ $ 6,116,892(0%)(2) $ N/A
Growth Equity Fund............. 329,107,159(0%)(2) 461,682
Indexed Equity Fund............ 114,953,870(0%)(2) N/A
International Equity Fund...... 103,697,052(0%)(N/A) 407,665
Multi-Asset Fund............... 19,581,960(0%)(2) N/A
Value Equity Fund.............. 1,082,839,850(0%)(2) 1,651,353
Bond Fund...................... N/A(2) N/A
Short Term Bond Fund........... 3,202,719(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, 1998, 1997 and
1996.]
As of December 31, 1998, 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 (2)
Morgan Stanley, Dean Witter, Discover & Company (2)
Morgan (J.P.) & Co. Inc. (2)
Marsh & McLennan Companies, Inc. (2)
Merrill Lynch & Co., Inc. (2)
Schwab (Charles) Corp. (The) (2)
Multi-Asset Fund American Express Company (2)
Morgan Stanley, Dean Witter, Discover & Company (2)
Morgan (J.P.) & Co. Inc. (2)
Marsh & McLennan Companies, Inc. (2)
</TABLE>
- 81 -
<PAGE> 205
<TABLE>
<S> <C> <C>
Merrill Lynch & Co., Inc. (2)
Schwab (Charles) Corp. (The) (2)
Bear Stearns Cos., Inc. (The) (3)
Morgan (J.P.) & Co. Inc. (3)
PaineWebber Group, Inc. (3)
Value Equity Fund American Express Credit Corp. (1)
Prudential Funding Corp. (1)
Bond Fund American Express Credit Corp. (1)
Lehman Brothers Holdings, Inc. (3)
Salomon Inc. (3)
Money Market Fund Goldman, Sachs & Co. (1)
Morgan (J.P.) & Co. Inc. (1)
Morgan Stanley, Dean Witter, Discover & Company (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.
- 82 -
<PAGE> 206
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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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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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
[TO BE UPDATED]
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.
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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, 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
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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 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.
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A Fund's distributions with respect to a given taxable year may exceed
its current and accumulated earnings and profits available for distribution. In
that event, distributions in excess of such earnings and profits would be
characterized as a return of capital to shareholders for Federal income tax
purposes, thus reducing each shareholder's cost basis in his Fund shares.
Distributions in excess of a shareholder's cost basis in his shares would be
treated as a gain realized from a sale of such shares.
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
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other liabilities denominated in a foreign currency and the time a Fund actually
collects such receivables or pays such 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
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limitations. Foreign taxes may not be deducted by a shareholder that is an
individual in computing the alternative minimum tax. 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
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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 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
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treated for Federal income tax purposes as interest and, therefore, such income
would be subject to the distribution requirements of the Code.
Some of the debt securities may be purchased by 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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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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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.
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Each of the Funds began offering Institutional Service Class shares on
January 1, 1995. Thus, the performance figures for 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:
366/7
Effective Yield = [(Base Period Return + 1) ] - 1
The current and effective seven-day average yields as of December 31,
1998 for the Money Market Fund were ____% and ____%, respectively, for the
Institutional Class, and were _____% and _____%, respectively, for the
Institutional Service Class. Had certain expenses not been assumed by the
Manager, these yields would have been ____% and ____%, respectively, for the
Institutional Class, and ____% and ____%, 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:
6
2[(a - b + 1) - 1]
-----
cd
where a = dividends and interest earned during the
period,
b = expenses accrued for the period (net of
reimbursements),
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c = the average daily number of shares
outstanding during the period that were
entitled to receive dividends, and
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 ____% for the Institutional Class, and was ____% 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)n = ERV (where P = a hypothetical initial payment
of $1,000, T = the total return for the period, n = the number of periods, and
ERV = the ending redeemable value of a hypothetical $1,000 payment made at the
beginning of the period). Quotations of total return may also be shown for other
periods. All total return figures reflect the deduction of a proportional share
of Fund or Class expenses on an annual basis, reflect fee waivers or
reimbursements in effect for each period and assume that all dividends and
distributions are reinvested when paid. Quotations of total return may also be
shown for other periods.
The average annual total return of the following Funds for the one-year
and five-year periods ended December 31, 1998 and the period from inception to
December 31, 1998 were as follows:
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<PAGE> 220
<TABLE>
<CAPTION>
Five Years Average Annual
Year Ended Ended Total Return
Fund 12/31/98 12/31/98 Since Inception
---- -------- -------- ---------------
<S> <C> <C> <C>
EAFE Index Fund
Institutional Class (1).... % % %
Institutional Service Class(2). % % %
Growth Equity Fund
Institutional Class (1)........ % % %
Institutional Service Class(2). % % %
Indexed Equity Fund
Institutional Class (1)........ % % %
Institutional Service Class(2). % % %
International Equity Fund*
Institutional Class (3)........ % % %
Institutional Service Class(3). % % %
Multi-Asset Fund
Institutional Class (1)........ % % %
Institutional Service Class(2). % % %
Value Equity Fund
Institutional Class (1)........ % % %
Institutional Service Class(2). % % %
Bond Fund
Institutional Class (1)........ % % %
Institutional Service Class(2). % % %
Indexed Bond Fund
Institutional Class (1)........ % % %
Institutional Service Class(3). % % %
International Bond Fund*
Institutional Class (3)........ % % %
Institutional Service Class(3). % % %
Short-Term Bond Fund
Institutional Class (1)........ % % %
Institutional Service Class(2). % % %
</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,
- 97 -
<PAGE> 221
policies, restrictions, guidelines and management styles of the
Separate Accounts were materially equivalent to those of their
corresponding Funds. 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 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
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
- 98 -
<PAGE> 222
International indexes; the Dow Jones Industrial Average, Donoghue Money Market
Institutional Averages, the Merrill Lynch 1 to 3 Year Treasury Index, the
Salomon Brothers World Government Benchmark Bond Index, the Salomon Brothers
non-U.S. Dollar World Government Bond Index, the Lehman Brothers Municipal Bond
Index and the Lehman Brothers Government Corporate Index; (ii) other groups of
mutual funds tracked by Morningstar Inc. or Lipper Analytical Services, widely
used independent research firms which rank mutual funds by overall performance,
investment objectives and assets, or tracked by other services, companies,
publications or persons who rank mutual funds on overall performance or other
criteria; and (iii) the Consumer Price Index (measure for inflation) and other
measures of the performance of the economy to assess the real rate of return
from an investment in the 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
- 99 -
<PAGE> 223
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.
BENEFICIAL OWNERSHIP OF THE FUNDS
The following table sets forth the information concerning beneficial
ownership, as of April 1, 1999, of the Funds' shares by each person who
beneficially owned more than 5% of the voting securities of any Fund:
- 100 -
<PAGE> 224
<TABLE>
<CAPTION>
Percentage of
Outstanding Shares(2)
NAME AND ADDRESS OF SHAREHOLDER Fund Shares Owned(1)
<S> <C>
TRUSTEES OF THE NEW YORK LIFE INSURANCE COMPANY BOND
RETIREMENT PLAN AND PENSION PLAN (COMPANY PLAN) GROWTH EQUITY
51 MADISON AVENUE INDEXED BOND
NEW YORK, NY 10010 INDEXED EQUITY
INTERNATIONAL BOND
INTERNATIONAL EQUITY
VALUE EQUITY
TRUSTEES OF THE NYLIC RETIREMENT PLAN (AGENTS) BOND
51 MADISON AVENUE GROWTH EQUITY
NEW YORK, NY 10010 INDEXED BOND
INDEXED EQUITY
INTERNATIONAL BOND
INTERNATIONAL EQUITY
VALUE EQUITY
NEW YORK LIFE INSURANCE COMPANY EAFE INDEX
51 MADISON AVENUE INDEXED EQUITY
NEW YORK, NY 10010 MULTI-ASSET
TRUSTEES OF THE LONE STAR HOURLY RETIREMENT PLAN, MONEY MARKET
DAY & ZIMMERMAN, INC. SHORT-TERM BOND
1818 MARKET STREET
PHILADELPHIA, PA 19103
TRUSTEES OF THE VOGEL SHORT-TERM BOND
EMPLOYEES PENSION TRUST
P.O. BOX 380
ORANGE CITY, IA 51041-0380
TRUSTEES OF THE NEW YORK LIFE INSURANCE COMPANY GROWTH EQUITY
EMPLOYEE PROGRESS SHARING INVESTMENT PLAN TRUST INDEXED EQUITY
51 MADISON AVENUE MULTI-ASSET
NEW YORK, NY 10010 SHORT-TERM BOND
TRUSTEES OF THE NEW LIFE INSURANCE COMPANY AGENTS GROWTH EQUITY
PROGRESS SHARING INVESTMENT PLAN TRUST
51 MADISON AVENUE
NEW YORK, NY 10010
NEW YORK LIFE INSURANCE COMPANY EMPLOYEES' HEALTH EAFE INDEX
AND LIFE BENEFIT TRUST - (HEALTH BENEFITS)
51 MADISON AVENUE
NEW YORK, NY 10010
NEW YORK LIFE INSURANCE COMPANY EMPLOYEES' BOND
HEALTH AND LIFE BENEFIT TRUST (LIFE BENEFITS) EAFE INDEX
51 MADISON AVENUE
NEW YORK, NY 10010
NEW YORK LIFE INSURANCE COMPANY AGENTS' HEALTH EAFE INDEX
AND LIFE BENEFIT TRUST
(HEALTH BENEFITS)
51 MADISON AVENUE
NEW YORK, NY 10010
PLASTICS ENGINEERING COMPANY EAFE INDEX
P.O. BOX 758
SHEBOYGAM, WI 53082-0758
MERRILL LYNCH TRUST COMPANY INDEXED EQUITY
TTEE FBO CHRYSLER 401(K) PLAN
265 DAVIDSON AVENUE
SOMERSET, NJ 08873
NYL TRUST COMPANY CLIENT ACCOUNTS BOND
51 MADISON AVENUE, ROOM 117A EAFE INDEX
NEW YORK, NY 10010 GROWTH EQUITY
INDEXED BOND
INDEXED EQUITY
MONEY MARKET
MULTI-ASSET
SHORT-TERM BOND
VALUE EQUITY
</TABLE>
- 101 -
<PAGE> 225
<TABLE>
<CAPTION>
Percentage of
Outstanding Shares(2)
NAME AND ADDRESS OF SHAREHOLDER Fund Shares Owned(1)
<S> <C>
TRUSTEES OF THE HARVEST STATES COOPERATIVE INTERNATIONAL EQUITY
COMBINED RETIREMENT FUND
P.O. BOX 64594
ST. PAUL, MN 55169
METHODIST HOME ENDOWMENT FUND INTERNATIONAL EQUITY
1111 HERRING AVENUE
WACO, TX 76708
MACKAY-SHIELDS FINANCIAL CORPORATION SHORT-TERM BOND
9 WEST 57TH STREET
NEW YORK, NY 10019
BHC SECURITIES INC. MONEY MARKET
2005 MARKET STREET
1 COMMERCE SQUARE
PHILADELPHIA, PA 19103
TRUSTEES OF THE NEW YORK LIFE INSURANCE BOND
COMPANY PENSION PLAN INDEXED BOND
51 MADISON AVENUE INTERNATIONAL BOND
NEW YORK, NY 10020 VALUE EQUITY
TRUSTEES OF THE NYLIC RETIREMENT PLAN INTERNATIONAL EQUITY
51 MADISON AVENUE
NEW YORK, NY 10010
NEW YORK LIFE INSURANCE COMPANY
51 MADISON AVENUE MULTI-ASSET
NEW YORK, NY 10010
NEW YORK LIFE TRUST COMPANY
CLIENT ACCOUNTS INDEXED BOND
51 MADISON AVENUE, ROOM 117A MONEY MARKET
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, 1999, 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 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.
- 102 -
<PAGE> 226
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers 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.
CUSTODIAN
The Bank of New York,90 Washington Street, New York,NY 10286, is
custodian of the Funds' investments and has subcustodial agreementsfor holding
the Funds' foreign investments.
REGISTRATION STATEMENT
This Statement of Additional Information and the Prospectus do not
contain all the information included in the Company's registration statement
filed with the SEC under the Securities Act of 1933 with respect to the
securities offered hereby, certain portions of which have been omitted pursuant
to the rules and regulations of the SEC. The registration statement, including
the exhibits filed therewith, may be examined at the offices of the SEC in
Washington, D.C.
Statements contained herein and in the Prospectus as to the contents of
any contract or other documents referred to are not necessarily complete, and,
in each instance, reference is made to the copy of such contract or other
documents filed as an exhibit to the registration statement, each such statement
being qualified in all respects by such reference.
- 103 -
<PAGE> 227
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.
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<PAGE> 228
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
midrange 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 noncallable United States government
obligations or noncallable 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.
- 105 -
<PAGE> 229
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.
- 106 -
<PAGE> 230
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 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.
- 107 -
<PAGE> 231
CCC: Debt rated CCC is currently vulnerable to nonpayment and is dependent
upon favorable business, financial and economic conditions for the obligor. 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 a 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
- 108 -
<PAGE> 232
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.
- 109 -
<PAGE> 233
MAINSTAY INSTITUTIONAL FUNDS INC.
MONEY MARKET FUND SWEEP SHARES
STATEMENT OF ADDITIONAL INFORMATION
DATE: MAY 1, 1999
MainStay Institutional Funds Inc. (the "Company") is an open-end
management investment company currently consisting of eleven separate investment
portfolios, one of which is the Money Market Fund (the "Fund"). This Statement
of Additional Information discusses the Money Market Fund Sweep Shares (the
"Sweep Shares"), a class of shares offered by the Fund.
This Statement of Additional Information supplements the information
contained in the Prospectus for the Sweep Shares dated May 1, 1999 (the
"Prospectus"), and should be read in conjunction with the Prospectus. The
Prospectus is available without charge by writing to MainStay Institutional
Funds Inc., P.O. Box 461, Parsippany, New Jersey 07054-0461, or by calling
1-800-695-2126. This Statement of Additional Information, although not in itself
a prospectus, is incorporated in its entirety by reference in and is made a part
of the Prospectus.
No dealer, salesman or any other person has been authorized to give any
information or to make any representations, other than those contained in this
Statement of Additional Information or in the Prospectus, in connection with the
offer contained herein, and, if given or made, such other information or
representations must not be relied upon as having been authorized by the Fund or
NYLife Distributors, Inc. (the "Distributor"). This Statement of Additional
Information and the Prospectus do not constitute an offer by the Company or by
the Distributor to sell or a solicitation of any offer to buy any of the
securities offered hereby in any jurisdiction to any person to whom it is
unlawful to make such offer in such jurisdiction.
The Fund's financial statement, including the Statement of Assets and
Liabilities, the Portfolio of Investments and the Statement of Operations for
the year ended December 31, 1998, and the Statements of Changes in Net Assets
for the years ended December 31, 1998 and December 31, 1997, the notes to the
Financial Statements, and the Report of the Independent Accountants, all of
which are included in the Company's 1998 Annual Report to Shareholders, are
hereby incorporated by reference into this Statement of Additional Information.
<PAGE> 234
TABLE OF CONTENTS
INVESTMENT OBJECTIVE AND POLICIES..............................................1
Borrowing ..............................................................4
Commercial Paper........................................................5
Repurchase Agreements and Reverse Repurchase Agreements.................5
Government Securities...................................................6
Lending of Portfolio Securities.........................................6
Banking Industry and Savings and Loan Industry Obligations..............7
Floating and Variable Rate Securities...................................8
Foreign Securities......................................................8
When-Issued and Firm or Standby Commitment Agreements...................9
Mortgage-Related and Other Asset-Backed Securities.....................10
Loan Participation Interests...........................................17
Zero Coupon Bonds......................................................19
INVESTMENT RESTRICTIONS.......................................................20
ADDITIONAL RESTRICTIONS.......................................................21
MANAGEMENT OF THE COMPANY.....................................................24
Directors and Officers.................................................24
Compensation Table.....................................................29
Management Agreement...................................................29
Sub-Advisory Agreement.................................................31
Distributor ...........................................................32
Service Fees...........................................................32
Distribution Fees......................................................33
ADDITIONAL INFORMATION........................................................34
PURCHASES AND REDEMPTIONS.....................................................35
PORTFOLIO TRANSACTIONS AND BROKERAGE..........................................36
NET ASSET VALUE...............................................................38
TAX INFORMATION...............................................................39
PERFORMANCE INFORMATION.......................................................43
OTHER INFORMATION.............................................................44
Capitalization.........................................................44
Beneficial Ownership of Shares.........................................45
Code of Ethics.........................................................45
Independent Accountants................................................45
Legal Counsel..........................................................45
Custodian .............................................................46
Registration Statement.................................................46
- i -
<PAGE> 235
DESCRIPTION OF SECURITIES RATINGS.............................................47
MOODY'S INVESTORS SERVICE, INC................................................47
STANDARD & POOR'S.............................................................50
- ii -
<PAGE> 236
INVESTMENT OBJECTIVE AND POLICIES
The Prospectus discusses the investment objective of the Fund and the
policies to be employed to achieve that objective. This section contains
supplemental information concerning certain of the securities and other
instruments in which the Fund may invest, the investment policies and portfolio
strategies the Fund may utilize, and certain risks involved with those
investments, policies and strategies.
The Fund may invest its assets in U.S. dollar-denominated securities of
U.S. or foreign issuers and in securities of foreign branches of U.S. banks,
such as negotiable certificates of deposit (Eurodollars). Since the portfolio of
the Fund may contain such securities, an investment therein involves investment
risks that are different in some respects from an investment in a fund which
invests only in debt obligations of U.S. domestic issuers. Such risks may
include future political and economic developments, the possible imposition of
foreign withholding taxes on interest income payable on the securities held in
the portfolio, possible seizure or nationalization of foreign deposits, the
possible establishment of exchange controls or the adoption of other foreign
governmental restrictions which might adversely affect the payment of the
principal of and interest on securities in the portfolio.
All of the assets of the Fund generally will be invested in obligations
which mature in 397 days or less and substantially all of these investments will
be held to maturity; however, securities collateralizing repurchase agreements
may have maturities in excess of 397 days. The Fund will, to the extent
feasible, make portfolio investments primarily in anticipation of or in response
to changing economic and money market conditions and trends. The dollar-weighted
average maturity of the Fund's portfolio may not exceed 90 days. Consistent with
the provisions of Rule 2a-7 under the Investment Company Act of 1940 (the "1940
Act"), the Fund invests only in U.S. dollar-denominated money market instruments
that present minimal credit risk and, with respect to 95% of its total assets,
measured at the time of investment, that are of the highest quality. The Fund's
sub-adviser, New York Life Insurance Company (the "Sub-Adviser" or "New York
Life"), shall determine whether a security presents minimal credit risk under
procedures adopted by the Company's Board of Directors. A money market
instrument will be considered to be of the highest quality (1) if rated in the
highest rating category (i.e., Aaa or Prime-1 by Moody's, AAA or A-1 by S&P's)
by (i) any two nationally recognized statistical rating organizations ("NRSROs")
or, (ii) if rated by only one NRSRO, by that NRSRO; (2) if issued by an issuer
that has received a short-term rating from an NRSRO with respect to a class of
debt obligations that is comparable in priority and security, and that are rated
in the highest rating category by (i) any two NRSROs
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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 Guarantee is substituted with
another Demand Feature or Guarantee; (5) if it is a security issued by a money
market fund registered with the Securities and Exchange Commission ("SEC") under
the 1940 Act; or (6) if it is a Government Security. With respect to 5% of its
total assets, measured at the time of investment, the Fund may also invest in
money market instruments that are in the second-highest rating category for
short-term debt obligations (i.e., rated Aa or Prime-2 by Moody's or AA or A-2
by S&P).
The Fund may not invest more than 5% of its total assets, measured at the
time of investment, in securities of any one issuer, 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 "First Tier" securities of any one
issuer and except that this limitation shall not apply to U.S. government
securities or securities subject to certain Guarantees. The Fund may invest up
to 5% of its total assets in securities that were "Second Tier" when acquired.
Immediately after the acquisition of any Demand Feature or Guarantee, the Fund,
with respect to 75% of its total assets, shall not have invested more than 10%
of its assets in securities issued by or subject to Demand Features or
Guarantees from the institution that issued the Demand Feature or Guarantee,
with certain exceptions. In addition, immediately after the acquisition of any
Demand Feature or Guarantee (or a security after giving effect to the Demand
Feature or Guarantee) that is not within the highest rating category by NRSROs,
the Fund shall not have invested more than 5% of its total assets in securities
issued by or subject to Demand Features or Guarantees from the institution that
issued the Demand Feature or Guarantee. The Fund may not invest more than the
greater of 1% of its total assets or one million dollars, measured at the time
of investment, in "Second Tier" securities of any one issuer, except that this
limitation
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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 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.
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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. The Fund is a diversified fund as defined
under the 1940 Act.
BORROWING
The Fund may borrow from a bank up to a limit of 15% of its total assets,
but only for temporary or emergency purposes. This borrowing may be unsecured.
The 1940 Act requires the Fund to maintain continuous asset coverage (that is,
total assets including borrowings, less liabilities exclusive of borrowings) of
300% of the amount borrowed. If the 300% asset coverage should decline as a
result of market fluctuations or other reasons, the Fund may be required to sell
some of its portfolio holdings within three days to reduce the debt and restore
the 300% asset coverage, even though it may be disadvantageous from an
investment standpoint to sell securities at that time and could cause the Fund
to be unable to meet certain requirements for qualification as a regulated
investment company for Federal tax purposes. To avoid the potential leveraging
effects of the Fund's borrowings, the Fund will repay any money borrowed in
excess of 5% of its total assets prior to purchasing additional securities.
Borrowing may exaggerate the effect on the Fund's net asset value of any
increase or decrease in the market value of the Fund's portfolio securities.
Money borrowed will be subject to interest costs which may or may not be
recovered by appreciation of the securities purchased. The Fund also may be
required to maintain minimum average balances in connection with such borrowing
or to pay a commitment or other fee to maintain a line of credit; either of
these requirements would increase the cost of borrowing over the stated interest
rate.
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COMMERCIAL PAPER
The Fund may invest in commercial paper. The Fund will invest in
commercial paper only if rated at the time of investment Prime-1 by Moody's or
A-1 by S&P, or, if not rated by Moody's or S&P, if the Sub-Adviser determines
that the commercial paper is of comparable quality. Commercial paper represents
short-term unsecured promissory notes issued by banks or bank holding companies,
corporations and finance companies.
REPURCHASE AGREEMENTS AND REVERSE REPURCHASE AGREEMENTS
The Fund may enter into domestic or foreign repurchase agreements with
certain sellers deemed to be creditworthy pursuant to guidelines adopted by the
Directors. A repurchase agreement, which provides a means for the Fund to earn
income on uninvested cash for periods as short as overnight, is an arrangement
under which the purchaser (i.e., the Fund) purchases securities (the
"Obligation") and the seller agrees, at the time of sale, to repurchase the
Obligation at a specified time and price. Repurchase agreements with foreign
banks may be available with respect to government securities of the particular
foreign jurisdiction. The custody of the Obligation will be maintained by the
Fund's custodian. The repurchase price may be higher than the purchase price,
the difference being income to the Fund, or the purchase and repurchase prices
may be the same, with interest at a stated rate due to the Fund together with
the repurchase price upon repurchase. In either case, the income to the Fund is
unrelated to the interest rate on the Obligation subject to the repurchase
agreement.
In the event of the commencement of bankruptcy or insolvency proceedings
with respect to the seller of the Obligation before repurchase of the Obligation
under a repurchase agreement, the Fund may encounter delays and incur costs
before being able to sell the security. Delays may involve loss of interest or
decline in price of the Obligation. The Sub-Adviser seeks to minimize the risk
of loss from repurchase agreements by analyzing the creditworthiness of the
obligor, in this case the seller of the Obligation. Apart from the risk of
bankruptcy or insolvency proceedings, there is also the risk that the seller may
fail to repurchase the security. However, if the market value of the Obligation
subject to the repurchase agreement becomes less than the repurchase price
(including accrued interest), the Fund will direct the seller of the Obligation
to deliver additional securities so that the market value of all securities
subject to the repurchase agreement equals or exceeds the repurchase price. The
Fund will not invest more than 10% of its net assets (taken
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at current market value) in repurchase agreements maturing in more than seven
days.
The Fund may enter into reverse repurchase agreements with banks or
broker-dealers, which involve the sale of a security by the Fund and its
agreement to repurchase the instrument at a specified time and price. The Fund
will maintain a segregated account consisting of liquid assets to cover its
obligations under reverse repurchase agreements. The Fund will limit its
investments in reverse repurchase agreements and other borrowing to no more than
one-third of its total assets. The use of reverse repurchase agreements by the
Fund creates leverage which increases the Fund's investment risk. If the income
and gains on securities purchased with the proceeds of reverse repurchase
agreements exceed the cost of the agreements, the Fund's earnings or net asset
value will increase faster than otherwise would be the case; conversely, if the
income and gains fail to exceed the costs, earnings or net asset value would
decline faster than otherwise would be the case.
GOVERNMENT SECURITIES
Government securities are obligations of, or guaranteed by, the U.S.
government or its agencies or instrumentalities. Some U.S. government
securities, such as Treasury bills, notes and bonds, are supported by the full
faith and credit of the United States; others, such as those of the Federal Home
Loan Bank, are supported by the right of the issuer to borrow from the Treasury;
others, such as those of the Federal National Mortgage Association, are
supported by the discretionary authority of the U.S. government to purchase the
agency's obligations; and still others, such as those of the Student Loan
Marketing Association, are supported only by the credit of the instrumentality.
LENDING OF PORTFOLIO SECURITIES
In accordance with guidelines adopted by the Board of Directors, the Fund
may seek to increase its income by lending portfolio securities. Under present
regulatory policies, such loans may be made to institutions, such as
broker-dealers, and would be required to be secured continuously by collateral
in cash or U.S. Government securities maintained on a current basis at an amount
at least equal to 100% of the current market value of the securities loaned. The
Fund would have the right to call a loan and obtain the securities loaned at any
time generally on less than five days' notice. For the duration of a loan, the
Fund would continue to receive the equivalent of the interest or dividends paid
by the issuer on the securities loaned and would also receive compensation from
the investment of the collateral.
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The Fund would not, however, have the right to vote any securities having voting
rights during the existence of the loan, but the Fund would call the loan in
anticipation of an important vote to be taken among holders of the securities or
of the giving or withholding of their consent on a material matter affecting the
investment. The Company, on behalf of the Fund, has entered into an agency
agreement with Merrill Lynch Portfolio Services, Inc. which acts as the Fund's
agent in making loans of portfolio securities and short-term money market
investments of the cash collateral received, subject to the supervision and
control of the Sub-Adviser.
As with other extensions of credit, there are risks of delay in recovery
of, or even loss of rights in, the collateral should the borrower of the
securities fail financially. However, the loans would be made only to firms
deemed by a Sub-Adviser to be creditworthy and approved by the Board, and when,
in the judgment of the Sub-Adviser, the consideration which can be earned
currently from securities loans of this type justifies the attendant risk. If
the Sub-Adviser determines to make securities loans, it is intended that the
value of the securities loaned would not exceed 33% of the value of the total
assets of the Fund. Under the guidelines adopted by the Board of Directors, the
Fund may not enter into a lending agreement with a counterparty which would
cause the Fund to have loans outstanding to that counterparty for securities
having a value greater than 5% of the Fund's total assets.
BANKING INDUSTRY AND SAVINGS AND LOAN INDUSTRY OBLIGATIONS
Certificates of deposit are receipts from a bank or savings and loan
association ("S&L"), for funds deposited for a specified period of time at a
specified rate of return. Time deposits in banks or S&Ls are generally similar
to certificates of deposit, but are uncertificated. Bankers' acceptances are
time drafts drawn on commercial banks by borrowers, usually in connection with
international commercial transactions. The Fund may not invest in time deposits
maturing in more than seven days which are subject to withdrawal penalties. The
Fund will limit its investment in time deposits for which there is a penalty for
early withdrawal to 10% of its net assets.
The Fund will not invest in any obligation of a domestic or foreign bank
unless (i) the bank has capital, surplus, and individual profits (as of the date
of the most recently published financial statements) in excess of $100 million,
or the equivalent in other currencies, and (ii) in the case of a U.S. bank, its
deposits are insured by the Federal Deposit Insurance Corporation. These
limitations do not prohibit investments in
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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 the Fund with a certain degree of protection against rises in
interest rates, the Fund will participate in any declines in interest rates as
well.
The interest rate on a leveraged inverse floating rate debt instrument
("inverse floater") resets in the opposite direction from the market rate of
interest to which the inverse floater is indexed. An inverse floater may be
considered to be leveraged to the extent that its interest rate varies by a
magnitude that exceeds the magnitude of the change in the index rate of
interest. The higher degree of leverage inherent in inverse floaters is
associated with greater volatility in their market values. Accordingly, the
duration of an inverse floater may exceed its stated final maturity. Certain
inverse floaters may be determined to be illiquid securities for purposes of the
Fund's limitation on investments in such securities.
FOREIGN SECURITIES
The Fund may purchase U.S. dollar-denominated securities of foreign
issuers. Foreign investing involves the possibility of expropriation,
nationalization, confiscatory taxation, foreign taxation of income earned in the
foreign nation (including withholding taxes on interest and dividends) or other
foreign taxes imposed with respect to investments in the foreign nation, foreign
exchange controls (which may include suspension of the ability to transfer
currency from a given country), default in foreign government securities,
political or social instability or diplomatic developments which could affect
investments in securities of issuers in those nations. In addition, in many
countries there is less publicly available information about
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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 markets of many of the countries in which the
Fund may invest may also be smaller, less liquid and subject to greater price
volatility than those in the United States.
WHEN-ISSUED AND FIRM OR STANDBY COMMITMENT AGREEMENTS
The Fund may from time to time purchase securities on a "when-issued" or
"firm commitment" or "standby commitment" basis. Debt securities are often
issued in this manner. The price of such securities, which may be expressed in
yield terms, is fixed at the time a commitment to purchase is made, but delivery
of and payment for the when-issued, or firm or standby commitment securities
take place at a later date. Normally, the settlement date occurs within one
month of the purchase. During the period between purchase and settlement, no
payment is made by the Fund and no interest accrues to the Fund. To the extent
that assets of the Fund are held in cash pending the settlement of a purchase of
securities, the Fund would earn no income; however, it is the Company's
intention that the Fund will be fully invested to the extent practicable and
subject to the policies stated herein. Although when-issued, or firm or standby
commitment securities may be sold prior to the settlement date, the Company
intends to purchase such securities with the purpose of actually acquiring them
unless a sale appears desirable for investment reasons.
At the time the Company makes the commitment on behalf of the Fund to
purchase a security on a when-issued, or firm or standby commitment basis, it
will record the transaction and reflect the amount due and the value of the
security in determining the Fund's net asset value. The market value of the
when-issued, or firm or standby commitment securities may be more or less than
the purchase price payable at the settlement date. The Directors do not believe
that the Fund's net asset value or income will be exposed to additional risk by
the purchase of securities on a when-issued or firm commitment basis. The Fund
will establish a segregated account in which it will maintain liquid assets at
least equal in value to any commitments to purchase securities on a when-issued,
firm, or standby commitment
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basis. Such segregated securities either will mature or, if necessary, be sold
on or before the settlement date.
MORTGAGE-RELATED AND OTHER ASSET-BACKED SECURITIES
The value of some mortgage-related or asset-backed securities in which
the Fund invests may be particularly sensitive to changes in prevailing interest
rates, and, like the other investments of the Fund, the ability of the Fund to
successfully utilize these instruments may depend in part upon the ability of an
investment adviser to forecast interest rates and other economic factors
correctly. While principal and interest payments on some mortgage-related
securities may be guaranteed by the U.S. government, government agencies or
other guarantors, the market value of such securities is not guaranteed.
The Fund will invest only in mortgage-related (or other asset-backed)
securities that meet the requirements of Rule 2a-7 under the 1940 Act. In
addition, if any such security is determined to be illiquid, the Fund will limit
its investments in these and other illiquid instruments to not more than 10% of
its net assets.
Mortgage Pass-Through Securities. Mortgage pass-through securities, which
are securities representing interests in pools of mortgage-related securities,
differ from other forms of debt securities, which normally provide for periodic
payment of interest in fixed amounts with principal payments at maturity or
specified call dates. Instead, these securities provide a monthly payment which
consists of both interest and principal payments. In effect, these payments are
a "pass-through" of the monthly payments made by the individual borrowers on
their residential mortgage loans, net of any fees paid to the issuer or
guarantor of such securities. Additional payments are caused by repayments of
principal resulting from the sale of the underlying residential property,
refinancing or foreclosure, net of fees or costs which may be incurred. Some
mortgage-related securities (such as securities issued by the Government
National Mortgage Association) are described as "modified pass-through." These
securities entitle the holder to receive all interest and principal payments
owed on the mortgage pool, net of certain fees, at the scheduled payment dates
regardless of whether or not the mortgagor actually makes the payment.
The principal governmental guarantor of mortgage-related securities is
the Government National Mortgage Association ("GNMA"). GNMA is a wholly owned
U.S. Government corporation within the Department of Housing and Urban
Development. GNMA is
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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. 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
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mortgage-related security meets the Fund's investment quality standards. There
can be no assurance that the private insurers or guarantors can meet their
obligations under the insurance policies or guarantee arrangements. Although the
market for such securities is becoming increasingly liquid, securities issued by
certain private organizations may not be readily marketable. Early repayment of
principal on mortgage pass-through securities (arising from prepayments of
principal due to sale of the underlying property, refinancing, or foreclosure,
net of fees and costs which may be incurred) may expose the Fund to a lower rate
of return upon reinvestment of principal. Also, if a security subject to
repayment has been purchased at a premium, in the event of prepayment the value
of the premium would be lost. The Fund will not purchase mortgage-related
securities or any other assets which in the opinion of the Sub-Adviser are
illiquid if, as a result, more than 10% of the value of the Fund's net assets
will be illiquid.
Collateralized Mortgage Obligations ("CMOs"). A CMO is a hybrid between a
mortgage-backed bond and a mortgage pass-through security. Similar to a bond,
interest and prepaid principal is paid, in most cases, semiannually. CMOs may be
collateralized by whole mortgage loans, but are more typically collateralized by
portfolios of mortgage pass-through securities guaranteed by GNMA, FHLMC, or
FNMA, and their income streams.
CMOs are structured into multiple classes, each bearing a different
stated maturity. Actual maturity and average life will depend upon the
prepayment experience of the collateral. CMOs provide for a modified form of
call protection through a de facto breakdown of the underlying pool of mortgages
according to how quickly the loans are repaid. Monthly payment of principal
received from the pool of underlying mortgages, including prepayments, is first
returned to investors holding the shortest maturity class. Investors holding the
longer maturity classes receive principal only after the first class has been
retired. An investor is partially guarded against a sooner than desired return
of principal because of the sequential payments.
In a typical CMO transaction, a corporation ("issuer") issues multiple
series (e.g., A, B, C, Z) of CMO bonds ("Bonds"). Proceeds of the Bond offering
are used to purchase mortgages or mortgage pass-through certificates
("Collateral"). The Collateral is pledged to a third-party trustee as security
for the Bonds. Principal and interest payments from the Collateral are used to
pay principal on the Bonds in the order A, B, C, Z. The Series A, B, and C Bonds
all bear current interest. Interest on the Series Z Bond is accrued and added to
principal and a like amount is paid as principal on the Series A, B, or C Bond
currently being paid off. When the Series A, B, and C Bonds are
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paid in full, interest and principal on the Series Z Bond begins to be paid
currently. With some CMOs, the issuer serves as a conduit to allow loan
originators (primarily builders or savings and loan associations) to borrow
against their loan portfolios.
The Fund will not invest in any privately issued CMOs that do not meet
the requirements of Rule 3a-7 under the 1940 Act if, as a result of such
investment, more than 5% of the Fund's net assets would be invested in any one
CMO, more than 10% of the Fund's net assets would be invested in CMOs and other
investment company securities in the aggregate, or the Fund would hold more than
3% of any outstanding issue of CMOs.
FHLMC Collateralized Mortgage Obligations. FHLMC CMOs are debt
obligations of FHLMC issued in multiple classes having different maturity dates
which are secured by the pledge of a pool of conventional mortgage loans
purchased by FHLMC. Unlike FHLMC PCS, payments of principal and interest on the
CMOs are made semiannually, as opposed to monthly. The amount of principal
payable on each semiannual payment date is determined in accordance with FHLMC's
mandatory sinking fund schedule, which, in turn, is equal to approximately 100%
of Federal Housing Administration ("FHA") prepayment experience applied to the
mortgage collateral pool. All sinking fund payments in the CMOs are allocated to
the retirement of the individual classes of bonds in the order of their stated
maturities. Payment of principal on the mortgage loans in the collateral pool in
excess of the amount of FHLMC's minimum sinking fund obligation for any payment
date are paid to the holders of the CMOs as additional sinking fund payments.
Because of the "pass-through" nature of all principal payments received on the
collateral pool in excess of FHLMC's minimum sinking fund requirement, the rate
at which principal of the CMOs is actually repaid is likely to be such that each
class of bonds will be retired in advance of its scheduled maturity date.
If collection of principal (including prepayments) on the mortgage loans
during any semiannual payment period is not sufficient to meet FHLMC's minimum
sinking fund obligation on the next sinking fund payment date, FHLMC agrees to
make up the deficiency from its general funds.
Criteria for the mortgage loans in the pool backing the CMOs are
identical to those of FHLMC PCS. FHLMC has the right to substitute collateral in
the event of delinquencies and/or defaults.
Other Mortgage-Related Securities. The Sub-Adviser expects that
governmental, government-related or private entities may create mortgage loan
pools and other mortgage-related securities
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offering mortgage pass-through and mortgage-collateralized investments in
addition to those described above. The mortgages underlying these securities may
include alternative mortgage instruments, that is, mortgage instruments whose
principal or interest payments may vary or whose terms to maturity may differ
from customary long-term fixed rate mortgages. As new types of mortgage-related
securities are developed and offered to investors, the Sub-Adviser will,
consistent with the Fund's investment objectives, policies and quality
standards, consider making investments in such new types of mortgage-related
securities.
CMO Residuals. CMO residuals are derivative mortgage securities issued by
agencies or instrumentalities of the U.S. Government or by private originators
of, or investors in, mortgage loans, including savings and loan associations,
homebuilders, mortgage banks, commercial banks, investment banks and special
purpose entities of the foregoing.
The cash flow generated by the mortgage assets underlying a series of
CMOs is applied first to make required payments of principal and interest on the
CMOs and second to pay the related administrative expenses of the issuer. The
residual in a CMO structure generally represents the interest in any excess cash
flow remaining after making the foregoing payments. Each payment of such excess
cash flow to a holder of the related CMO residual represents income and/or a
return of capital. The amount of residual cash flow resulting from a CMO will
depend on, among other things, the characteristics of the mortgage assets, the
coupon rate of each class of CMO, prevailing interest rates, the amount of
administrative expenses and the prepayment experience on the mortgage assets. In
particular, the yield to maturity on CMO residuals is extremely sensitive to
prepayments on the related underlying mortgage assets, in the same manner as an
interest-only ("IO") class of stripped mortgage-backed securities. See "Stripped
Mortgage-Backed Securities." In addition, if a series of a CMO includes a class
that bears interest at an adjustable rate, the yield to maturity on the related
CMO residual will also be extremely sensitive to changes in the level of the
index upon which interest rate adjustments are based. As described below with
respect to stripped mortgage-backed securities, in certain circumstances the
Fund may fail to recoup fully its initial investment in a CMO residual.
CMO residuals are generally purchased and sold by institutional investors
through several investment banking firms acting as brokers or dealers. The CMO
residual market has only very recently developed and CMO residuals currently may
not have the liquidity of other more established securities trading in other
markets. Transactions in CMO residuals are generally
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<PAGE> 250
completed only after careful review of the characteristics of the securities in
question. In addition, CMO residuals may or, pursuant to an exemption therefrom,
may not have been registered under the Securities Act of 1933, as amended. CMO
residuals, whether or not registered under such Act, may be subject to certain
restrictions on transferability, and may be deemed "illiquid" and subject to a
portfolio's limitations on investment in illiquid securities. The Fund limits
its investment in CMO residuals to less than 5% of its net assets.
Stripped Mortgage-Backed Securities. Stripped mortgage-backed securities
("SMBS") are derivative multi-class mortgage securities. SMBS may be issued by
agencies or instrumentalities of the U.S. Government, or by private originators
of, or investors in, mortgage loans, including savings and loan associations,
mortgage banks, commercial banks, investment banks and special purpose entities
of the foregoing.
SMBS are usually structured with two classes that receive different
proportions of the interest and principal distributions on a pool of mortgage
assets. A common type of SMBS will have one class receiving some of the interest
and most of the principal from the mortgage assets, while the other class will
receive most of the interest and the remainder of the principal. In the most
extreme case, one class will receive all of the interest (the IO class), while
the other class will receive all of the principal (the principal-only or "PO"
class). The yield to maturity on an IO class is extremely sensitive to the rate
of principal payments (including prepayments) on the related underlying mortgage
assets, and a rapid rate of principal payments may have a material adverse
effect on the Fund's yield to maturity from these securities. If the underlying
mortgage assets experience greater than anticipated prepayments of principal,
the Fund may fail to fully recoup its initial investment in these securities
even if the security is in one of the highest rating categories.
Although SMBS are purchased and sold by institutional investors through
several investment banking firms acting as brokers or dealers, these securities
were only recently developed. As a result, established trading markets have not
yet developed and, accordingly, these securities may be deemed "illiquid" and
subject to the Fund's limitations on investment in illiquid securities.
Risks Associated with Mortgage-Backed Securities. Like other fixed income
securities, when interest rates rise the value of a mortgage-related security
generally will decline; however, when interest rates are declining, the value of
mortgage-related securities with prepayment features may not increase as much as
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<PAGE> 251
other fixed income securities. The value of some mortgage-backed securities in
which the Fund may invest may be particularly sensitive to changes in prevailing
interest rates, and, like the other investments of the Fund, the ability of the
Fund to successfully utilize these instruments may depend in part upon the
ability of the Sub-Adviser to forecast interest rates and other economic factors
correctly. If the Sub-Adviser incorrectly forecasts such factors and has taken a
position in mortgage-backed securities that is or becomes contrary to prevailing
market trends, the Fund could be exposed to the risk of a loss.
Investment in mortgage-backed securities poses several risks, including
prepayment, market, and credit risk. Prepayment risk reflects the chance that
borrowers may prepay their mortgages faster than expected, thereby affecting the
investment's average life and perhaps its yield. Whether or not a mortgage loan
is prepaid is almost entirely controlled by the borrower. Borrowers are most
likely to exercise their prepayment options at a time when it is least
advantageous to investors, generally prepaying mortgages as interest rates fall,
and slowing payments as interest rates rise. Besides the effect of prevailing
interest rates, the rate of prepayment and refinancing of mortgages may also be
affected by home value appreciation, ease of the refinancing process and local
economic conditions.
Market risk reflects the chance that the price of the security may
fluctuate over time. The price of mortgage-backed securities may be particularly
sensitive to prevailing interest rates, the length of time the security is
expected to be outstanding, and the liquidity of the issue. In a period of
unstable interest rates, there may be decreased demand for certain types of
mortgage-backed securities, and the Fund invested in such securities wishing to
sell them may find it difficult to find a buyer, which may in turn decrease the
price at which they may be sold.
Credit risk reflects the chance that the Fund may not receive all or part
of its principal because the issuer or credit enhancer has defaulted on its
obligations. Obligations issued by U.S. Government-related entities are
guaranteed as to the payment of principal and interest, but are not backed by
the full faith and credit of the U.S. Government. The performance of private
label mortgage-backed securities, issued by private institutions, is based on
the financial health of those institutions.
Other Asset-Backed Securities. The Sub-Adviser expects that other
asset-backed securities (unrelated to mortgage loans) will be offered to
investors in the future. Several types of asset-backed securities have already
been offered to investors,
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<PAGE> 252
including Certificates for Automobile Receivables(s) ("CARS(s)"). CARS(s)
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 CARS(s) 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 CARS(s) may be
affected by early prepayment of principal on the underlying vehicle sales
contracts. If the letter of credit is exhausted, the trust may be prevented
from realizing the full amount due on a sales contract because of state law
requirements and restrictions relating to foreclosure sales of vehicles and the
obtaining of deficiency judgments following such sales or because of
depreciation, damage or loss of a vehicle, the application of Federal and state
bankruptcy and insolvency laws, or other factors. As a result, certificate
holders may experience delays in payments or losses if the letter of credit is
exhausted.
Consistent with the Fund's investment objective and policies and the
requirements of Rule 2a-7, the Sub-Adviser also may invest in other types of
asset-backed securities. Certain asset-backed securities may present the same
types of risks that may be associated with mortgage-backed securities.
LOAN PARTICIPATION INTERESTS
The Fund's investment in loan participation interests may take the form
of participation interests in, assignments or novations of a corporate loan
("Participation Interests"). The Participation Interests may be acquired from an
agent bank, co-lenders or other holders of Participation Interests
("Participants"). In a novation, the Fund would assume all of the rights of the
lender in a corporate loan, including the right to receive payments of principal
and interest and other amounts directly from the borrower and to enforce its
rights as a lender directly against the borrower. As an alternative, the Fund
may purchase an assignment of all or a portion of a lender's interest in a
corporate loan, in which case, the Fund may be required generally to rely on the
assigning lender to demand payment and enforce its rights against the borrower,
but would otherwise be entitled to all of such lender's rights in the corporate
loan. The Fund also may purchase a Participation Interest in a portion of the
rights of a lender in a corporate loan. In such a case, the Fund will be
entitled to receive payments of principal, interest and fees, if any, but
generally will not be entitled to enforce its rights directly against the agent
bank or the
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<PAGE> 253
borrower; rather the Fund must rely on the lending institution for that purpose.
The Fund will not act as an agent bank, a guarantor or sole negotiator of a
structure with respect to a corporate loan.
In a typical corporate loan involving the sale of Participation
Interests, the agent bank administers the terms of the corporate loan agreement
and is responsible for the collection of principal and interest and fee payments
to the credit of all lenders which are parties to the corporate loan agreement.
The agent bank in such cases will be qualified under the 1940 Act to serve as a
custodian for a registered investment company such as the Company. The Fund
generally will rely on the agent bank or an intermediate Participant to collect
its portion of the payments on the corporate loan. The agent bank monitors the
value of the collateral and, if the value of the collateral declines, may take
certain action, including accelerating the corporate loan, giving the borrower
an opportunity to provide additional collateral or seeking other protection for
the benefit of the Participants in the corporate loan, depending on the terms of
the corporate loan agreement. Furthermore, unless under the terms of a
participation agreement the Fund has direct recourse against the borrower (which
is unlikely), the Fund will rely on the agent bank to use appropriate creditor
remedies against the borrower. The agent bank also is responsible for monitoring
compliance with covenants contained in the corporate loan agreement and for
notifying holders of corporate loans of any failures of compliance. Typically,
under corporate loan agreements, the agent bank is given broad discretion in
enforcing the corporate loan agreement, and is obligated to use only the same
care it would use in the management of its own property. For these services, the
borrower compensates the agent bank. Such compensation may include special fees
paid on structuring and funding the corporate loan and other fees paid on a
continuing basis.
A financial institution's employment as an agent bank may be terminated
in the event that it fails to observe the requisite standard of care or becomes
insolvent, or has a receiver, conservator, or similar official appointed for it
by the appropriate bank regulatory authority or becomes a debtor in a bankruptcy
proceeding. A successor agent bank generally will be appointed to replace the
terminated bank, and assets held by the agent bank under the corporate loan
agreement should remain available to holders of corporate loans. If, however,
assets held by the agent bank for the benefit of the Fund were determined by an
appropriate regulatory authority or court to be subject to the claims of the
agent bank's general or secured creditors, the Fund might incur certain costs
and delays in realizing payment on a corporate loan, or suffer a loss of
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<PAGE> 254
principal and/or interest. In situations involving intermediate Participants
similar risks may arise.
When the Fund acts as co-lender in connection with a Participation
Interest or when the Fund acquires a Participation Interest the terms of which
provide that the Fund will be in privity of contract with the corporate
borrower, the Fund will have direct recourse against the borrower in the event
the borrower fails to pay scheduled principal and interest. In all other cases,
the Fund will look to the agent bank to enforce appropriate credit remedies
against the borrower. In acquiring Participation Interests the Sub-Adviser will
conduct analysis and evaluation of the financial condition of each such
co-lender and participant to ensure that the Participation Interest meets the
Fund's qualitative standards. There is a risk that there may not be a readily
available market for loan Participation Interests and, in some cases, this could
result in the Fund disposing of such securities at a substantial discount from
face value or holding such security until maturity. When the Fund is required to
rely upon a lending institution to pay the Fund principal, interest, and other
amounts received by the lending institution for the loan participation, the Fund
will treat both the borrower and the lending institution as an "issuer" of the
loan participation for purposes of certain investment restrictions pertaining to
the diversification and concentration of the Fund's portfolio. The Fund
considers Participation Interests not subject to puts to be illiquid.
ZERO COUPON BONDS
Zero coupon bonds are debt obligations issued without any requirement for
the periodic payment of interest. Zero coupon bonds are issued at a significant
discount from the face value. The discount approximates the total amount of
interest the bonds would accrue and compound over the period until maturity at a
rate of interest reflecting the market rate at the time of issuance. Cash to pay
dividends representing unpaid, accrued interest may be obtained from sales
proceeds of portfolio securities and Fund shares and from loan proceeds. Because
interest on zero coupon obligations is not paid to the Fund on a current basis
but is in effect compounded, the value of the securities of this type is subject
to greater fluctuations in response to changing interest rates than the value of
debt obligations which distribute income regularly. Zero coupon bonds tend to be
subject to greater market risk than interest paying securities of similar
maturities. The discount represents income a portion of which the Fund must
accrue and distribute every year even though the Fund receives no payment on the
investment in that year.
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<PAGE> 255
INVESTMENT RESTRICTIONS
The Fund's investment restrictions set forth below are fundamental
policies of the Fund; i.e., they may not be changed without a majority vote of
the outstanding shares of the Fund, as defined in the 1940 Act. Except for those
investment policies of the Fund specifically identified as fundamental in the
Prospectus and this Statement of Additional Information, all other investment
policies and practices described may be changed by the Board of Directors
without the approval of shareholders.
Unless otherwise indicated, all of the percentage limitations below, and
in the investment restrictions recited in the Prospectus, apply to the Fund on
an individual basis, and apply only at the time a transaction is entered into.
Accordingly, if a percentage restriction is adhered to at the time of
investment, a later increase or decrease in the percentage which results from a
relative change in values will not be considered a violation.
The Fund has adopted a fundamental restriction that it may not:
(1) invest in a security if, as a result of such investment, 25% or
more of its total assets would be invested in the securities of issuers in any
particular industry, except that this restriction does not apply to securities
issued or guaranteed by the U.S. Government or its agencies or instrumentalities
(or repurchase agreements with respect thereto) and at such time that the 1940
Act is amended to permit a registered investment company to elect to be
"periodically industry concentrated," (i.e., a fund that does not concentrate
its investments in a particular industry would be permitted, but not required,
to invest 25% or more of its assets in a particular industry) the Fund elects to
be so classified and the foregoing limitation shall no longer apply with respect
to the Fund;
(2) invest in a security if, with respect to 75% of its total assets,
more than 5% of its total assets would be invested in the securities of any one
issuer, except that this restriction does not apply to securities issued or
guaranteed by the U.S. Government, its agencies or instrumentalities;
(3) invest in a security if, with respect to 75% of its assets, it
would hold more than 10% of the outstanding voting securities of any one issuer,
except that this restriction does not apply to U.S. Government securities;
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<PAGE> 256
(4) borrow money or issue senior securities, except that the Fund may
(i) borrow from banks or enter into reverse repurchase agreements, but only if
immediately after each borrowing there is asset coverage of 300%, and (ii) issue
senior securities to the extent permitted under the 1940 Act;
(5) lend any funds or other assets, except that the Fund may,
consistent with its investment objectives and policies: (i) invest in debt
obligations including bonds, debentures or other debt securities, bankers'
acceptances and commercial paper, even though the purchase of such obligations
may be deemed to be the making of loans; (ii) enter into repurchase agreements;
and (iii) lend its portfolio securities in accordance with applicable guidelines
established by the Securities and Exchange Commission and any guidelines
established by the Company's Directors;
(6) purchase or sell real estate (although it may purchase securities
secured by real estate or interests therein, or securities issued by companies
which invest in real estate, or interests therein);
(7) purchase or sell commodities or commodities contracts, except
that, subject to restrictions described in the Prospectus and in this Statement
of Additional Information, (i) the Fund may enter into futures contracts on
securities, currencies or on indexes of such securities or currencies, or any
other financial instruments and options on such futures contracts; (ii) the Fund
may enter into spot or forward foreign currency contracts and foreign currency
options; or
(8) act as an underwriter of securities of other issuers, except to
the extent that in connection with the disposition of portfolio securities, it
may be deemed to be an underwriter under the Federal securities laws.
ADDITIONAL RESTRICTIONS
The Fund has adopted the following additional restrictions which are not
fundamental and which may be changed without shareholder approval, to the extent
permitted by applicable law, regulation or regulatory policy.
Unless otherwise indicated, all percentage limitations apply to the Fund
on an individual basis, and apply only at the time a transaction is entered
into. Accordingly, if a percentage restriction is adhered to at the time of
investment, a later increase or decrease in the percentage which results from a
relative change in values will not be considered a violation.
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<PAGE> 257
Under these restrictions, the Fund may not:
(1) purchase puts, calls, straddles, spreads and any combination
thereof if, as a result, the value of its aggregate investment in such classes
of securities would exceed 5% of its total assets;
(2) purchase securities that may not be sold without first being
registered under the Securities Act of 1933, as amended ("restricted
securities") other than Rule 144A securities and Section 4(2) commercial paper
determined to be liquid pursuant to guidelines adopted by the Company's Board of
Directors; enter into repurchase agreements having a duration of more than seven
days; purchase loan participation interests that are not subject to puts;
purchase instruments lacking readily available market quotations ("illiquid
instruments"); or purchase or sell over-the-counter options, if as a result of
the purchase or sale, the Fund's aggregate holdings of restricted securities,
repurchase agreements having a duration of more than seven days, loan
participation interests that are not subject to puts, illiquid instruments, and
over-the-counter options purchased by the Fund and the assets used as cover for
over-the-counter options written by the Fund exceed 10% of the Fund's net
assets;
(3) invest in other companies for the purpose of exercising control;
(4) purchase the securities of other investment companies, except to
the extent permitted by the 1940 Act or in connection with a merger,
consolidation, acquisition or reorganization;
(5) the Fund may not purchase securities on margin, except that the
Fund may obtain such short-term credits as are necessary for the clearance of
transactions, and provided that margin payments in connection with futures
contracts and options on futures contracts shall not constitute the purchase of
securities on margin;
(6) the Fund may not sell securities short, except for covered short
sales or unless it owns or has the right to obtain securities equivalent in kind
and amount to the securities sold short, and provided that transactions in
options, futures and forward contracts are deemed not to constitute short sales
of securities.
The Directors have the ultimate responsibility for determining whether
specific securities are liquid or illiquid. The Directors have delegated the
function of making day-to-day determinations of liquidity to the Sub-Adviser,
pursuant to guidelines approved by the Directors.
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<PAGE> 258
The Sub-Adviser takes into account a number of factors in determining
whether a Rule 144A security being considered for purchase by the Fund is
liquid, including at least the following:
(i) the frequency and size of trades and quotes for the Rule 144A
security relative to the size of the Fund's holding;
(ii) the number of dealers willing to purchase or sell the 144A
security and the number of other potential purchasers;
(iii) dealer undertaking to make a market in the 144A security; and
(iv) the nature of the 144A security and the nature of the market for
the 144A security (i.e., the time needed to dispose of the security, the method
of soliciting offers, and the mechanics of transfer).
To make the determination that an issue of 4(2) commercial paper is liquid, the
Sub-Adviser must conclude that the following conditions have been met:
(a) the 4(2) commercial paper is not traded flat or in default
as to principal or interest;
(b) the 4(2) commercial paper is rated:
(i) in one of the two highest rating categories by at least two
NRSROs; or
(ii) if only one NRSRO rates the security, the 4(2) commercial paper is
rated in one of the two highest rating categories by that NRSRO; or
(iii) if the security is unrated, the Sub-Adviser has determined that
the security is of equivalent quality based on factors commonly used by rating
agencies; and
(c) there is a viable trading market for the specific security,
taking into account all relevant factors (e.g., whether the security is the
subject of a commercial paper program that is administered by an issuing and
paying agent bank and for which there exists a dealer willing to make a market
in the security, the size of trades relative to the size of the Fund's holding
or whether the 4(2) commercial paper is administered by a direct issuer pursuant
to a direct placement program).
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<PAGE> 259
MANAGEMENT OF THE COMPANY
DIRECTORS AND OFFICERS
The Directors and Officers of the Company, their addresses, ages and
their principal occupations during the past five years are as follows (unless
otherwise indicated, the address of all persons below is 51 Madison Avenue, New
York, NY 10010):
<TABLE>
<CAPTION>
Name Position(s) with Principal Occupation(s)
Address and Age the Company During Past 5 Years
- --------------- ---------------- -------------------
<S> <C> <C>
Stephen C. Roussin, 35 Director and Chairperson of President, Chief Executive Officer and
the Board of Directors* 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, 45 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.
</TABLE>
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<PAGE> 260
<TABLE>
<CAPTION>
Name Position(s) with Principal Occupation(s)
Address and Age the Company During Past 5 Years
- --------------- ---------------- -------------------
<S> <C> <C>
Lawrence Glacken, 71 Director Retired, 1987 to present; Vice President, Investment
353 Canterbury Drive Banking, The First Boston Corporation, 1964-1987.
Ramsey, NJ 07446
Robert P. Mulhearn, 51 Director Private Investor, 1987 to present; Managing Director,
60 Twin Brooks Road Morgan Stanley, 1979-1987.
Saddle River, NJ 07458
Susan B. Kerley, 47 Director President, Global Research Associates, 1990 to
P.O. 9572 present; Manager, Special Investments, Rockefeller &
New Haven, CT 06535 Co., 1988-1990; Director of Research, Rogers, Casey
and Barksdale, 1983-1988; Director, Citifunds, 1991
to present.
Linda M. Livornese, 47 President Vice President, Pension Department, New York Life
Insurance Company, 1990 to present; Pension Vice
President, Pension Department, New York Life
Insurance Company, 1988-1990; Assistant Vice
President, Pension Department, New York Life
Insurance Company, 1986-1988; Vice President, NYLIFE
Distributors Inc., 1993 to present; Vice President,
NYLIFE Securities Inc., 1992 to present.
</TABLE>
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<PAGE> 261
<TABLE>
<CAPTION>
Name Position(s) with Principal Occupation(s)
Address and Age the Company During Past 5 Years
- --------------- ---------------- -------------------
<S> <C> <C>
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.
</TABLE>
- 26 -
<PAGE> 262
<TABLE>
<CAPTION>
Name Position(s) with Principal Occupation(s)
Address and Age the Company During Past 5 Years
- --------------- ---------------- -------------------
<S> <C> <C>
Richard W. Zuccaro, 49 Tax Vice President Vice President, New York Life Insurance Company,
1995 to present; Vice President -- Tax, New York
Life Insurance Company, 1986 to 1995; Tax Vice
President, NYLIFE Securities Inc., 1987 to present;
Tax Vice President, NYLIFE SFD Holding Inc., 1990 to
present; Tax Vice President, NYLIFE Depositary Inc.,
1990 to present; Tax Vice President, NYLIFE Inc.,
1990 to present; Tax Vice President, NYLIFE
Insurance Company of Arizona, 1990 to present; Tax
Vice President, NYLIFE Realty Inc., 1991 to present;
Tax Vice President, NYLICO Inc., 1991 to present;
Tax Vice President, New York Life Fund Inc., 1991 to
present; Tax Vice President, New York Life
International Investment, Inc., 1991 to present; Tax
Vice President NYLIFE Funding Inc., 1991 to present;
Tax Vice President, NYLCO, 1991 to present; Tax Vice
President, NYLIFE Equity Inc., 1991 to present; Tax
Vice President, MainStay VP Series Fund, Inc., 1991
to present; Tax Vice President, CNP Realty
Investments, Inc., 1991 to present; Tax Vice
President, New York Life Worldwide Holding, Inc.,
1992 to present; Tax Vice President, NYLIFE
Structured Asset Management Company Ltd., 1992 to
present; Tax Vice President, The MainStay Funds,
1991 to present; Tax Vice President, Eagle
Strategies Corp. (registered investment adviser),
1993 to present; Tax Vice President, NYLIFE
Distributors Inc., 1993 to present; Vice President &
Assistant Controller, New York Life Insurance and
Annuity Corp., 1995 to present, and Assistant
Controller, 1991 to 1995; Vice President, NYLCare
Health Plans, Inc., 1995 to present; Vice President -
Tax, New York Life and Health Insurance Co., 1996
to present; Tax Vice President, New York Life Trust
Company, 1996 to present; Tax Vice President,
Monitor Capital Advisors, Inc., 1996 to present; Tax
Vice President, NYLINK Insurance Agency
Incorporated, 1996 to present; Tax Vice President,
MainStay Shareholder Services Inc., 1997 to present.
</TABLE>
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<PAGE> 263
<TABLE>
<CAPTION>
Name Position(s) with Principal Occupation(s)
Address and Age the Company During Past 5 Years
- --------------- ---------------- -------------------
<S> <C> <C>
Anthony W. Polis, 55 Treasurer (Principal Vice President, New York Life Insurance Company,
Financial and Accounting 1988 to present; Director, Vice President and Chief
Officer) 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.
</TABLE>
* Messrs. Boyle and Roussin are Directors who are "interested persons" of
the Company as that term is defined in the 1940 Act.
- 28 -
<PAGE> 264
COMPENSATION TABLE
The following table sets forth information regarding compensation
received by the Directors of the Company for the year ended December 31, 1998.
<TABLE>
<CAPTION>
Aggregate Compensation
Name and Position from Company(1)
----------------- ----------------------
<S> <C>
Lawrence Glacken $
Director
Robert P. Mulhearn $
Director
Susan B. Kerley $
Director
</TABLE>
(1) Directors, other than those affiliated with New York Life Insurance
Company, MainStay Management, Inc., MacKay-Shields Financial Corporation,
Monitor Capital Advisors, Inc. or NYLIFE Distributors Inc. are paid an
annual fee of $24,000 and $1,000 for each Board of Directors meeting and
Committee meeting attended plus reimbursement for travel and
out-of-pocket expenses.
As of April 1, 1999, the Directors and Officers of the Company as a group owned
less than 1% of the outstanding shares of any class of the Fund.
MANAGEMENT AGREEMENT
Pursuant to the Management Agreement for the Fund dated November 21,
1997, MainStay Management, Inc. (the "Manager"), subject to the supervision of
the Directors of the Company and in conformity with the stated policies of the
Fund, administers the Fund's business affairs and investment advisory
responsibilities.
The Directors, including the Independent Directors, approved the
Management Agreement at an in-person meeting held on September 9, 1997. On
November 17, 1997, the shareholders of the Fund approved the Management
Agreement. The Management Agreement will remain in effect for two years
following its effective date, and will continue in effect thereafter only if
such continuance is specifically approved at least annually by the Directors or
by a vote of a majority of the outstanding voting securities of the Fund (as
defined in the 1940 Act and the rules thereunder) and, in either case by a
majority of the Directors who are not
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<PAGE> 265
"interested persons" of the Company or of the Manager (as the term is defined in
the 1940 Act).
The Manager has authorized any of its directors, officers and employees
who have been elected or appointed as Directors of the Company to serve in the
capacities in which they have been elected or appointed.
The Management Agreement provides that the Manager shall not be liable to
the Fund for any error or judgment by the Manager or for any loss sustained by
the Fund except in the case of the Manager's willful misfeasance, bad faith,
gross negligence or reckless disregard of duty. The Management Agreement also
provides that it shall terminate automatically if assigned and that it may be
terminated without penalty by either party upon no more than 60 days' nor less
than 30 days' written notice.
In connection with its administration of the business affairs of the
Fund, and except as indicated in the Prospectus under the heading "Manager and
Sub-Adviser," the Manager bears the following expenses:
(a) the salaries and expenses of all personnel of the Company and the
Manager, except the fees and expenses of the Directors not affiliated with the
Manager or the Sub-Adviser;
(b) the fees to be paid to the Sub-Adviser pursuant to the
Sub-Advisory Agreement; and
(c) all expenses incurred by the Manager in connection with
administering the ordinary course of the Fund's business, other than those
assumed by the Company.
For its services, the Fund pays the Manager a monthly fee. (See the
Prospectus, "Manager and Sub-Adviser.")
Commencing November 21, 1997 through December 31, 1997, the Fund paid the
Manager management fees of $142,675. For the year ended December 31, 1998, the
Fund paid the Manager management fees of .
The Manager has agreed to limit certain Fund expenses as discussed in the
Prospectus. In connection with a voluntary expense limitation, the Manager
assumed expenses in the amount of $37,695 for the period November 21, 1997
through December 31, 1997, and $383,039 for the year ended December 31, 1998.
As long as the expense limitation continues, it may lower the Fund's
expenses and increase its yield. The voluntary expense limitation may be
terminated or revised at any time, at
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<PAGE> 266
which time the Fund's expenses may increase and its yield may be reduced,
depending on the total assets of the Fund.
SUB-ADVISORY AGREEMENT
Pursuant to the Sub-Advisory Agreement between the Manager and the
Sub-Adviser on behalf of the Fund, the Sub-Adviser, subject to the supervision
of the Directors of the Company and the Manager in conformity with the stated
policies of the Fund and the Company, manages the Fund's portfolio, including
the purchase, retention, disposition and loan of securities. 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%.
The Directors, including the Independent Directors, approved the
Sub-Advisory Agreement at an in-person meeting held September 9, 1997. On
November 17, 1997, the shareholders of the Fund approved the Sub-Advisory
Agreement with New York Life. The Sub-Advisory Agreement will remain in effect
for two years following its effective date, and will continue in effect
thereafter only if such continuance is specifically approved at least annually
by the Directors or by a vote of a majority of the outstanding voting securities
of the Fund (as defined in the 1940 Act and the rules thereunder) and, in either
case, by a majority of the Directors who are not "interested persons" of the
Company, the Manager, or the Sub-Adviser (as the term is defined in the 1940
Act).
The Sub-Advisory Agreement provides that the Sub-Adviser shall not be
liable to the Fund for any error of judgment by the Sub-Adviser or for any loss
sustained by the Fund except in the case of the Sub-Adviser's willful
misfeasance, bad faith, gross negligence or reckless disregard of duty. The
Sub-Advisory Agreement also provides that it shall terminate automatically if
assigned and that they may be terminated without penalty by either party upon no
more than 60 days' nor less than 30 days' written notice.
In previous years, prior to a change in management structure, the Fund
paid an advisory fee directly to New York Life. For the fiscal years ended
December 31, 1998, 1997 and 1996, the amount of the advisory fee paid by the
Fund to New York Life was $__________, $100,230 and $59,918, respectively.
In previous years, prior to a change in management structure, the Fund
paid an administrative fee directly to New York Life as administrator. For the
fiscal years ended December
- 31 -
<PAGE> 267
31, 1996 and 1995, the amount of the administration fee paid by the Fund to New
York Life was $400,921 and $239,673, respectively.
Also prior to the above-referenced change in management structure and in
connection with the voluntary expense limitation, New York Life, as
administrator, assumed expenses for the Fund for the fiscal years ended December
31, 1996 and 1995 in the amounts of $170,221 and $136,576, respectively.
DISTRIBUTOR
NYLIFE Distributors Inc. serves as the Company's distributor and
principal underwriter (the "Distributor") pursuant to a Distribution Agreement,
dated January 1, 1994. Prior to that time, NYLIFE Securities Inc. ("NYLIFE
Securities"), an affiliated company, had acted as principal underwriter. NYLIFE
Securities sells shares of the Fund pursuant to a dealer agreement with the
Distributor. The Distributor is not obligated to sell any specific amount of the
Fund's shares, and receives no compensation from the Company pursuant to the
Distribution Agreement. The Company anticipates making a continuous offering of
the Fund's shares, although it reserves the right to suspend or terminate such
offering at any time. The Distribution Agreement was most recently approved by
the Board of Directors, including a majority of the Directors who are not
"interested persons" (as defined in the 1940 Act) of the Company or the
Distributor, on March 4, 1997. After an initial two-year period, the
Distribution Agreement is subject to annual approval by the Board of Directors.
The Distribution Agreement is terminable with respect to the Fund at any time,
without payment of a penalty, by vote of a majority of the Company's Directors
who are not "interested persons" (as defined in the 1940 Act) of the Company,
upon 60 days' written notice to the Distributor, by vote of a majority of the
outstanding voting securities of the Fund, upon 60 days' written notice to the
Distributor, or by the Distributor, upon 60 days' written notice to the Company.
The Distribution Agreement will terminate in the event of its assignment.
SERVICE FEES
The Company has adopted a Shareholder Services Plan with respect to the
Sweep Shares. Under the terms of the Plan, the Company is permitted to pay, out
of the Sweep Shares assets of the Fund, a fee in the amount of 0.25% on an
annualized basis of the average daily net assets attributable to the Sweep
Shares, to New York Life Insurance Company, its affiliates or independent third
party service providers, for providing services in
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<PAGE> 268
connection with the administration of plans or programs that use Fund shares as
their funding medium.
Under the terms of the Shareholder Services Plan, the Fund may pay to
service agents "service fees" as that term is defined in the rules of the
National Association of Securities Dealers for services provided to shareholders
of the Sweep Shares. These fees are for personal services, including assistance
in establishing and maintaining shareholder accounts and assisting shareholders
that have questions or other needs relating to their accounts.
The Plan provides that it may not be amended to materially increase the
costs which holders of Sweep Shares may bear under the Plan without the approval
of a majority of both (i) the Directors of the Company and (ii) those Directors
who are not "interested persons" of the Company (as defined in the 1940 Act) and
who have no direct or indirect financial interest in the operation of the Plan
or any agreements related to it (the "Independent Directors"), cast in person at
a meeting called for the purpose of voting on such amendment, and by a majority
(as defined in the 1940 Act) of the outstanding voting securities of the Sweep
Shares.
The Plan provides that it may not take effect until approved by vote of a
majority of both (i) the Directors of the Company and (ii) the Independent
Directors. The Plan was approved by the Directors, including the Independent
Directors, at a meeting held on September 1, 1998.
The Plan provides that it shall continue in effect so long as such
continuance is specifically approved at least annually by the Directors and the
Independent Directors. The Plan was last approved by the Directors, including
the Independent Directors, at a meeting held March 2, 1999. The Plan provides
that New York Life shall provide to the Directors, and the Board shall review at
least quarterly, a written report of the amounts expended in connection with the
performance of service activities, and the purposes for which such expenditures
were made.
DISTRIBUTION FEES
The Company has adopted a Rule 12b-1 Plan of Distribution ("12b-1 Plan")
with respect to the Sweep Shares. Under the terms of the 12b-1 Plan, the Company
is permitted to pay, out of the Sweep Shares assets of the Fund, a fee at the
annual rate of 0.25% of the average daily net assets attributable to the Sweep
Shares, to the Distributor, NYLIFE Securities, Inc. or any other broker-dealer
or other financial institution, for account sweep
- 33 -
<PAGE> 269
and other distribution-related services to the Sweep Shares and for services to
shareholders of the Sweep Shares. The amounts payable under the 12b-1 Plan are
used to support the distribution of Sweep Shares, including the establishment
and operation of account sweep services and any other activities or expenses
primarily intended to result in the sale of Sweep Shares.
The 12b-1 Plan provides that it may not be amended to materially increase
the costs which holders of Sweep Shares may bear under the Plan without the
approval of a majority of both (i) the Directors of the Company and (ii) the
Independent Directors, cast in person at a meeting called for the purpose of
voting on such amendment, and by a majority (as defined in the 1940 Act) of the
outstanding voting securities of the Sweep Shares.
The 12b-1 Plan provides that it may not take effect until approved by
vote of a majority of both (i) the Directors of the Company and (ii) the
Independent Directors. The 12b-1 Plan was approved by the Directors, including
the Independent Directors, at a meeting held on September 1, 1998.
The 12b-1 Plan provides that it shall continue in effect so long as such
continuance is specifically approved at least annually by the Directors and the
Independent Directors. The 12b-1 Plan was last approved by the Directors,
including the Independent Directors, at a meeting held on March 2, 1999. The
Plan provides that NYLIFE Distributors, Inc. and/or NYLIFE Securities, Inc.
shall provide to the Directors, and the Board shall review at least quarterly, a
written report of the amounts expended under the 12b-1 Plan and the purposes for
which such expenditures were made.
For the fiscal period from November 24, 1998 through December 31, 1998,
the Fund's Sweep Shares paid $__________ pursuant to the Sweep Shares Rule 12b-1
Plan.
ADDITIONAL INFORMATION
Shareholders maintaining Fund accounts through brokerage firms and other
institutions should be aware that such institutions necessarily set deadlines
for receipt of transaction orders from their clients that are earlier than the
transaction times of the Fund itself so that the institutions may properly
process such orders prior to their transmittal to MainStay Shareholder Services
Inc. Should an investor place a transaction order with such an institution after
its deadline, the institution may not effect the order with the Fund until the
next business day. Accordingly, an investor should familiarize
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<PAGE> 270
himself or herself with the deadlines set by his or her institution. (For
example, the Fund's Distributor accepts purchase orders from its customers up to
2:15 p.m. for issuance at the 4:00 p.m. transaction time and price.) A brokerage
firm acting on behalf of a customer in connection with transactions in Fund
shares is subject to the same legal obligations imposed on it generally in
connection with transactions in securities for a customer, including the
obligation to act promptly and accurately.
Orders for the purchase of Fund shares become effective at the next
transaction time after Federal funds or bank wire monies become available to
MainStay Shareholder Services for a shareholder's investment. Federal funds are
a bank's deposits in a Federal Reserve Bank. These funds can be transferred by
Federal Reserve wire from the account of one member bank to that of another
member bank on the same day and are considered to be immediately available
funds; similar immediate availability is accorded monies received at MainStay
Shareholder Services by bank wire. Money transmitted by a check drawn on a
member of the Federal Reserve System is converted to Federal funds in one
business day following receipt. Checks drawn on banks which are not members of
the Federal Reserve System may take longer. All payments (including checks from
individual investors) must be in United States dollars.
PURCHASES AND REDEMPTIONS
Purchases and redemptions are discussed in the Prospectus under the
headings "Tell Me The Key Facts -- Open an Account and Buy Shares", and "Know
How to Sell Shares", and that information is incorporated herein by reference.
The Company determines the net asset value per share of the Fund on each
day the New York Stock Exchange is open for trading.
The Company reserves the right to suspend or postpone redemptions during
any period when: (a) trading on the New York Stock Exchange is restricted, as
determined by the SEC, or that Exchange is closed for other than customary
weekend and holiday closings; (b) the SEC has by order permitted such
suspension; or 8 an emergency, as determined by the SEC, exists, making disposal
of portfolio securities or valuation of net assets of the Fund not reasonably
practicable.
For shares of the Fund redeemed within any 90-day period, the Fund
reserves the right to pay the shareholder a maximum of $250,000 in cash, or cash
equal to 1% of the Fund's net assets,
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<PAGE> 271
whichever is less. To protect the remaining shareholders in the Fund, anything
redeemed above this amount may not be paid in cash, but could be paid entirely,
or in part, in the same kinds of securities held by the Fund. These securities
would be valued at the same value that was assigned to them in calculating the
net asset value of the shares redeemed. Even though it is highly unlikely that
shares would ever actually be redeemed in kind, shareholders would probably have
to pay transaction costs to sell the securities distributed in kind, should such
a distribution occur.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Purchases and sales of securities on a securities exchange are effected
by brokers, and the Fund pays a brokerage commission for this service. In
transactions on stock exchanges in the United States, these commissions are
negotiated, whereas on many foreign stock exchanges these commissions are fixed.
In the over-the-counter markets, securities (i.e., municipal bonds and other
debt securities) are generally traded on a "net" basis with dealers acting as
principal for their own accounts without a stated commission, although the price
of the security usually includes a profit to the dealer. Transactions in certain
over-the-counter securities also may be effected on an agency basis when the
total price paid (including commission) is equal to or better than the best
total prices available from other sources. In underwritten offerings, securities
are purchased at a fixed price which includes an amount of compensation to the
underwriter, generally referred to as the underwriter's concession or discount.
On occasion, certain money market instruments may be purchased directly from an
issuer, in which case no commissions or discounts are paid.
In effecting purchases and sales of portfolio securities for the account
of the Fund, the Sub-Adviser will seek the best execution of the Fund's orders.
The Sub-Adviser attempts to achieve this result by selecting broker-dealers to
execute portfolio transactions on behalf of the Fund and its other clients on
the basis of the broker-dealers' professional capability, the value and quality
of their brokerage services and the level of their brokerage commissions.
NYLIFE Securities (the "Affiliated Broker") may act as broker for the
Fund. In order for the Affiliated Broker to effect any portfolio transactions
for the Fund on an exchange, the commissions, fees or other remuneration
received by the Affiliated Broker must be reasonable and fair compared to the
commissions, fees or other remuneration paid to other brokers in
- 36 -
<PAGE> 272
connection with comparable transactions involving similar securities being
purchased or sold on an exchange during a comparable period of time. This
standard would allow the Affiliated Broker to receive no more than the
remuneration which would be expected to be received by an unaffiliated broker in
a commensurate arms-length transaction. The Fund will not deal with the
Affiliated Broker in any portfolio transaction in which the Affiliated Broker
acts as principal.
Some securities considered for investment by the Fund may also be
appropriate for other clients served by the Sub-Adviser. If a purchase or sale
of securities consistent with the investment policies of the Fund and one or
more of the clients served by the Sub-Adviser is considered at or about the same
time, transactions in such securities will, to the extent practicable, be
allocated among the Fund and clients in a manner deemed equitable to the Fund
and the clients by the Sub-Adviser. Although there is no specified formula for
allocating such transactions, the various allocation methods used by the
Sub-Adviser, and the results of such allocations, are subject to periodic review
by the Company's Directors.
It has for many years been a common practice in the investment advisory
business for advisers (or sub-advisers) of investment companies and other
institutional investors to receive research services from broker-dealers which
execute portfolio transactions for the clients of such advisers. Consistent with
this practice, the Sub-Adviser may receive research services from many
broker-dealers with which the Sub-Adviser places the Fund's portfolio
transactions. These services, which in some cases may also be purchased for
cash, include such matters as general economic and security market reviews,
industry and company reviews, evaluations of securities and recommendations as
to the purchase and sale of securities. Some of these services may be of value
to the Sub-Adviser in advising its various clients (including the Fund),
although not all of these services are necessarily useful and of value in
managing the Fund. The management fee paid by the Fund and the sub-advisory fee
paid by the Manager are not reduced because the Sub-Adviser and its affiliates
receive such services.
As permitted by Section 28(e) of the Securities Exchange Act of 1934, an
investment adviser (or sub-adviser) may cause a fund to pay a broker-dealer
which provides "brokerage and research services" (as defined in that Act) to the
investment adviser (or sub-adviser) an amount of disclosed commission for
effecting a securities transaction for the Fund in excess of the commission
which another broker-dealer would have charged for effecting that transaction.
- 37 -
<PAGE> 273
For the years ended December 31, 1998, 1997 and 1996 the Fund paid no
brokerage commissions on portfolio transactions for the Institutional Class and
the Institutional Service Class.
As of December 31, 1998, the Fund held commercial paper of the following
issuers with whose broker-dealer subsidiaries or affiliates the Fund regularly
conducts business:
Broker-Dealer Market Value
- ------------- ------------
NET ASSET VALUE
The Company determines the net asset value per share of each class of the
Fund on each day the New York Stock Exchange is open for trading. Net asset
value per share is calculated as of noon (New York City time) for the Sweep
Shares of the Fund, by dividing the amortized cost of the total assets
attributable to a class, less liabilities attributable to that class, by the
total number of outstanding shares of that class.
Portfolio securities of the Fund are valued at their amortized cost,
which does not take into account unrealized securities gains or losses. This
method involves initially valuing an instrument at its cost and thereafter
assuming a constant amortization to maturity of any premium paid or discount
received. While this method provides certainty in valuation, it may result in
periods during which value, as determined by amortized cost, is higher or lower
than the price the Fund would receive if it sold the instrument. During such
periods, the yield to an investor in the Fund may differ somewhat than that
obtained in a similar investment company which uses available market quotations
to value all of its portfolio securities.
To the extent that any newly organized class of shares receives, on or
before December 31, any seed capital, the net asset value of such class(es) will
be calculated as of December 31.
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<PAGE> 274
TAX INFORMATION
[To Be Updated]
The discussion herein relating to taxes is presented for general
informational purposes only. Since the tax laws are complex and tax results can
vary depending upon specific circumstances, investors should consult tax
advisers regarding investment in the Fund.
The Fund intends to qualify annually and elect to be treated as a
regulated investment company under Subchapter M of the Internal Revenue Code of
1986, as amended (the "Code"). If the Fund so qualifies and elects, it generally
will not be subject to Federal income tax on its investment company taxable
income (which includes, among other items, dividends, interest, and the excess,
if any, of net short-term capital gains over net long-term capital losses) and
its net capital gains (net long-term capital gains in excess of net short-term
capital losses) that it distributes to its shareholders.
To qualify for treatment as a regulated investment company, the Fund
generally must, among other things: (a) derive in each taxable year at least 90%
of its gross income from dividends, interest, payments with respect to
securities loans, gains from the sale or other disposition of securities or
foreign currencies, and other income (including gains from certain options,
futures, and forward contracts) derived with respect to its business of
investing in securities or foreign currencies; (b) diversify its holdings so
that at the end of each quarter of the taxable year, (i) at least 50% of the
market value of the Fund's assets is represented by cash, cash items, U.S.
Government securities, the securities of other regulated investment companies
and other securities, with such other securities of any one issuer limited for
the purposes of this calculation to an amount not greater than 5% of the value
of the Fund's total assets and 10% of the outstanding voting securities of such
issuer, and (ii) not more than 25% of the value of its total assets is invested
in the securities of any one issuer (other than U.S. Government securities or
the securities of other regulated investment companies), or of two or more
issuers which the Fund controls and which are engaged in the same or similar
trades or businesses or related trades or businesses; and (c) distribute in each
taxable year at least 90% of the sum of its investment company taxable income
and its net tax-exempt interest income. If the Fund does not meet all of these
Code requirements, it will be taxed as an ordinary corporation and its
distributions (to the extent of available earnings and profits) will be taxed to
shareholders as ordinary income (except to the extent a shareholder is exempt
from tax).
- 39 -
<PAGE> 275
Amounts not distributed on a timely basis in accordance with a calendar
year distribution requirement are subject to a nondeductible 4% excise tax. To
prevent imposition of the excise tax, the Fund must distribute for the calendar
year an amount equal to the sum of (1) at least 98% of its ordinary taxable
income (excluding any capital gains or losses) for the calendar year, (2) at
least 98% of the excess of its capital gains over capital losses (adjusted for
certain ordinary losses) for the one-year period ending October 31 of such year,
and (3) all ordinary taxable income and capital gain net income (adjusted for
certain ordinary losses) for previous years that were not distributed during
such years. A distribution will be treated as paid on December 31 of the
calendar year if it is declared by the Fund in October, November or December of
that year to shareholders on a record date in such a month and paid by the Fund
during January of the following calendar year. Such a distribution will be
includable in the gross income of shareholders in the calendar year in which it
is declared, rather than the calendar year in which it is received.
The Fund's deduction for interest expense may be restricted where the
Fund invests in obligations the interest on which is exempt in whole or in part
from Federal income tax.
[Distributions of net capital gains, if any, designated by the Fund as
capital gain dividends, will generally be taxable to shareholders as either "20%
Rate Gain" or "28% Rate Gain", depending upon the Fund's holding period for the
assets sold. "20% Rate Gains" arise from sales of assets held by the Fund for
more than 18 months and are subject to a maximum tax rate of 20%; "28% Rate
Gains" arise from sales of assets held by the Fund for more than one year but
not more than 18 months and are subject to a maximum tax rate of 28%. Net
capital gains from assets held for one year or less will be taxed as ordinary
income. Distributions will be subject to these capital gains rates regardless of
the length of time the Fund's shares have been held by a shareholder and will
not be eligible for the dividends-received deduction. All distributions are
includable in the gross income of a shareholder whether reinvested in additional
shares or received in cash. Shareholders will be notified annually as to the
Federal tax status of distributions.]
The Fund's distributions with respect to a given taxable year may exceed
its current and accumulated earnings and profits available for distribution. In
that event, distributions in excess of such earnings and profits would be
characterized as a return of capital to shareholders for Federal income tax
purposes, thus reducing each shareholder's cost basis in his Fund shares.
Distributions in excess of a shareholder's cost basis in
- 40 -
<PAGE> 276
his shares would be treated as a gain realized from a sale of such shares.
Upon the taxable disposition (including a sale or redemption) of shares
of the Fund, a shareholder may realize a gain or loss depending generally upon
his basis in his shares. Such gain or loss will be treated as capital gain or
loss if the shares are capital assets in the shareholder's hands and will be
long-term or short-term, generally depending upon the shareholder's holding
period for the shares. However, a loss realized by a shareholder on the
disposition of shares of the Fund with respect to which capital gain dividends
have been paid will, to the extent of such capital gain dividends, be treated as
long-term capital loss if such shares have been held by the shareholder for six
months or less. Further, a loss realized on a disposition will be disallowed to
the extent the shares disposed of are replaced (whether by reinvestment of
distributions or otherwise) within a period of 61 days beginning 30 days before
and ending 30 days after the shares are disposed of. In such a case, the basis
of the shares acquired will be adjusted to reflect the disallowed loss.
Shareholders receiving distributions in the form of additional shares will have
a cost basis for Federal income tax purposes in each share received equal to the
net asset value of a share of the Fund on the reinvestment date.
Foreign investing involves the possibility of confiscatory taxation,
foreign taxation of income earned in the foreign nation (including withholding
taxes on interest and dividends) or other foreign taxes imposed with respect to
investments in the foreign nation.
Some of the debt securities that may be acquired by the Fund may be
treated as debt securities that are originally issued at a discount. Original
issue discount can generally be defined as the difference between the price at
which a security was issued and its stated redemption price at maturity.
Although no cash income is actually received by the Fund, original issue
discount on a taxable debt security earned in a given year generally is treated
for Federal income tax purposes as interest and, therefore, such income would be
subject to the distribution requirements of the Code.
Some of the debt securities may be purchased by the Fund at a discount
which exceeds the original issue discount on such debt securities, if any. This
additional discount represents market discount for Federal income tax purposes.
The gain realized on the disposition of any debt security acquired after April
30, 1993 or any taxable debt security acquired prior to May 1, 1993 having
market discount will be treated as ordinary income to the
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<PAGE> 277
extent it does not exceed the accrued market discount on such debt security.
Generally, market discount accrues on a daily basis for each day the debt
security is held by the Fund at a constant rate over the time remaining to the
debt security's maturity or, at the election of the Fund, at a constant yield to
maturity which takes into account the semi-annual compounding of interest.
If the Fund holds zero coupons bonds in its portfolio it will recognize
income currently for Federal tax purposes in the amount of the unpaid, accrued
interest (determined under tax rules) and generally will be required to
distribute dividends representing such income to shareholders currently, even
through funds representing such income have not been received by the Fund.
The Fund is required to report to the IRS all distributions except in the
case of certain exempt shareholders. All such distribution and redemption
proceeds generally are subject to withholding of Federal income tax at a rate of
31% ("backup withholding") in the case of non-exempt shareholders if (1) the
shareholder fails to furnish the Fund with and to certify the shareholder's
correct taxpayer identification number, (2) the IRS notifies the Fund or
shareholder that the shareholder has failed to report properly certain interest
and dividend income to the IRS and to respond to notices to that effect, or (3)
when required to do so, the shareholder fails to certify that he is not subject
to backup withholding. If the withholding provisions are applicable, any such
distributions, whether reinvested in additional shares or taken in cash, will be
reduced by the amounts required to be withheld. Backup withholding is not an
additional tax and any amounts withheld may be credited against the
shareholder's U.S. Federal income tax liability. Investors may wish to consult
their tax advisers about the applicability of the backup withholding provisions.
The foregoing discussion relates only to Federal income tax law as
applicable to U.S. persons (i.e., U.S. citizens and residents and U.S. domestic
corporations, partnerships, trusts and estates). Distributions by the Fund also
may be subject to state and local taxes and their treatment under state and
local income tax laws may differ from the Federal income tax treatment.
Shareholders should consult their tax advisers with respect to particular
questions of Federal, state and local taxation. Shareholders who are not U.S.
persons should consult their tax advisers regarding U.S. and foreign tax
consequences of ownership of shares of the Fund including the likelihood that
distributions to them would be subject to withholding of U.S. tax at a rate of
30% (or at a lower rate under a tax treaty).
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PERFORMANCE INFORMATION
The Company may, from time to time, include the yield and effective yield
and total return of the Fund in advertisements, sales literature, or reports to
shareholders or prospective investors.
Current yield for the Fund will be based on the change in the value of a
hypothetical investment (exclusive of capital charges) over a particular
seven-day period, less a pro rata share of Fund expenses accrued over that
period (the "base period"), and stated as a percentage of the investment at the
start of the base period (the "base period return"). The base period return is
then annualized by multiplying by 365/7, with the resulting yield figure carried
to at least the nearest hundredth of one percent. "Effective yield" for the Fund
assumes that all dividends received during an annual period have been
reinvested. Calculation of "effective yield" begins with the same "base period
return" used in the calculation of yield, which is then annualized to reflect
weekly compounding pursuant to the following formula:
365/7
Effective Yield = [(Base Period Return + 1) ] - 1
The current and effective seven-day average yields as of December 31,
1998 for the Money Market Fund's Sweep Shares were __% and __%. Had certain
expenses not been assumed by the Manager, these yields would have been __% and
__%.
In addition, advertising for the Fund may indicate that investors may
consider diversifying their investment portfolios in order to seek protection of
the value of their assets against inflation. From time to time, advertising
materials for the Fund may refer to or discuss current or past business,
political, economic or financial conditions, including events as they relate to
those conditions, such as any U.S. monetary or fiscal policies and the current
rate of inflation. In addition, from time to time, advertising materials for the
Fund may include information concerning retirement and investing for retirement
and may refer to the approximate number of then-current Fund shareholders,
shareholder accounts and Fund assets.
From time to time, advertising and sales literature for the Fund may
discuss the investment philosophy, personnel and assets under management of the
Sub-Adviser, and other pertinent facts relating to the management of the Fund by
the Sub-Adviser.
From time to time the Fund may publish an indication of its past
performance as measured by independent sources such as
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<PAGE> 279
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 the Fund may be compared, in
advertisements, sales literature, and reports to shareholders, to: (i) unmanaged
indexes, such as the Standard & Poor's 500 Composite Stock Price Index, the
Salomon Brothers Broad Investment Grade Bond Index, the Morgan Stanley Capital
International indexes; the Dow Jones Industrial Average, Donoghue Money Market
Institutional Averages, the Merrill Lynch 1 to 3 Year Treasury Index, the
Salomon Brothers World Government Benchmark Bond Index, the Salomon Brothers
non-U.S. Dollar World Government Bond Index, the Lehman Brothers Municipal Bond
Index and the Lehman Brothers Government Corporate Index; (ii) other groups of
mutual funds tracked by Morningstar Inc. or Lipper Analytical Services, widely
used independent research firms which rank mutual funds by overall performance,
investment objectives and assets, or tracked by other services, companies,
publications or persons who rank mutual funds on overall performance or other
criteria; and (iii) the Consumer Price Index (measure for inflation) and other
measures of the performance of the economy to assess the real rate of return
from an investment in the Fund. Unmanaged indexes may assume the reinvestment of
dividends but generally do not reflect deductions for administrative and
management costs and expenses.
From time to time, advertisements for the Fund may include general
information about the services and products offered by the Fund, The MainStay
Funds and New York Life Insurance Company and its subsidiaries. For example,
such advertisements may include statistical information about those entities
including, but not limited to, the number of current shareholder accounts, the
amount of assets under management, sales information, the distribution channels
through which the entities' products are available, marketing efforts and
statements about this information by the entities' officers, directors and
employees.
OTHER INFORMATION
CAPITALIZATION
The Fund is a separate portfolio of the Company, an open-end management
investment company, incorporated under the laws of Maryland on September 21,
1990. The Company was formerly known as New York Life Institutional Funds Inc.
On January 3, 1995 the name of the Company was changed to its present form. In
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<PAGE> 280
addition to the Sweep Shares, the Fund offers two other classes of shares, the
Institutional Class and the Institutional Service Class. The Company also offers
ten other portfolios, each of which has two classes of shares. The Board of
Directors may establish additional portfolios (with different investment
objectives and fundamental policies), and classes thereof, at any time in the
future. Establishment and offering of additional portfolios or classes will not
alter the rights of the Company's shareholders. When issued, shares are fully
paid, non-assessable, redeemable, and freely transferable.
BENEFICIAL OWNERSHIP OF SHARES
As of April 1, 1999, the date of this Statement of Additional
Information, NYLIFE Distributors owned __________ Sweep Shares of the Money
Market Fund, representing __% of the outstanding shares. [NYLIFE Distributors is
deemed to be a control person for purposes of the 1940 Act.]
CODE OF ETHICS
The Company has adopted a Code of Ethics governing personal trading
activities of all Directors, officers of the Company and persons who, in
connection with their regular functions, play a role in the recommendation of
any purchase or sale of a security by the Company or obtain information
pertaining to such purchase or sale or who have the power to influence the
management or policies of the Company or the Manager or a Sub-Adviser unless
such power is the result of their position with the Company or Manager or
Sub-Adviser. Such persons are generally required to preclear all security
transactions with the Company's Compliance Officer or his designee and to report
all transactions on a regular basis. The Company has developed procedures for
administration of the Code of Ethics.
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers 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.
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<PAGE> 281
CUSTODIAN
The Bank of New York, 90 Washington Street, New York, NY 10286, is
custodian of the Funds' investments and has subcustodial agreements for holding
the Funds' foreign investments.
REGISTRATION STATEMENT
This Statement of Additional Information and the Prospectus do not
contain all the information included in the Company's registration statement
filed with the SEC under the Securities Act of 1933 with respect to the
securities offered hereby, certain portions of which have been omitted pursuant
to the rules and regulations of the SEC. The registration statement, including
the exhibits filed therewith, may be examined at the offices of the SEC in
Washington, D.C.
Statements contained herein and in the Prospectus as to the contents of
any contract or other documents referred to are not necessarily complete, and,
in each instance, reference is made to the copy of such contract or other
documents filed as an exhibit to the registration statement, each such statement
being qualified in all respects by such reference.
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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.
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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
midrange 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 noncallable United States government
obligations or noncallable 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.
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<PAGE> 284
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.
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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 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.
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<PAGE> 286
CCC: Debt rated CCC is currently vulnerable to nonpayment and is
dependent upon favorable business, financial and economic conditions for the
obligor. 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 a 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
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<PAGE> 287
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.
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MAINSTAY INSTITUTIONAL FUNDS INC.
PART C. OTHER INFORMATION
ITEM 23. EXHIBITS
a. Exhibits:
(1) Articles of Incorporation(1)
(2) Articles Supplementary(2)
(3) Articles of Amendment(4)
(4) Form of Articles Supplementary(6)
(5) Articles of Amendment(7)
(6) Form of Articles Supplementary
b. By-laws(1)
c. Specimen Certificates for Common Stock(3)
d. (1) 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)
(2) 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)
(3) 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)
(4) Form of Sub-Advisory Agreement between MainStay Management, Inc.,
on behalf of the Money Market Fund and New York Life Insurance
Company.(11)
e. Distribution Agreement(5)
f. Inapplicable
g. Form of Custodian Contract(6)
h. (1) Form of Transfer Agency and Service Agreement(2)
(2) Form of License Agreement(2)
<PAGE> 289
(3) Form of Service Agreement with New York Life Benefit
Services, Inc.(10)
(4) Form of Service Agreement with New York Life Insurance
Company(10)
i. Opinion and Consent of Counsel(3)
j. Consent of Independent Accountants*
k. 1998 Financial Statements*
l. Initial Subscription Agreement(3)
m. (1) Form of Account Application(3)
(2) Shareholder Services Plan(10)
(3) Amended and Restated Shareholder Services Plan(12)
(4) Shareholder Services Plan for Asset Management Money Fund(12)
(5) Plan of Distribution Pursuant to Rule 12b-1 for Asset
Management Money Fund(12)
n. (a) Multiple Class Plan(11)
(b) Form of Amended and Restated Multiple Class Plan(12)
- ---------------------
* To be filed by amendment.
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 21, 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
9. Financial Data Schedules*
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<PAGE> 290
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.
12. Filed with Post-Effective Amendment No. 19 to Registration Statement
No. 33-36962 on September 25, 1998.
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
The following chart indicates the persons controlled by New York Life:
<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
of the shares of:
Greystone Realty Management, Inc. Delaware 100%
NYLIFE Administration Corp. Texas 100%
MacKay-Shields Financial Corporation Delaware 100%
Madison Square Advisors, Inc. Delaware 100%
MSC Holding, Inc. (formerly Magnus Software
Corporation, Inc.) Georgia 85.43%
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
which owns 83.33% of NYLIFE
Structured Asset Management Company Ltd. Texas 100%
New York Life Capital Corporation Delaware 100%
New York Life Insurance and Annuity
Corporation Delaware 100%
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 Life Delaware
</TABLE>
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<TABLE>
<S> <C> <C>
Worldwide Holding, Inc.), which owns 100% of the
shares of:
New York Life Worldwide Capital, Inc.
New York Life Worldwide Development, Inc. Delaware
Delaware
New York Life Worldwide (Bermuda) Ltd., which owns 100% of
the shares of:
New York Life Insurance Worldwide Ltd. Bermuda
New York Life (U.K.) Ltd., which owns 100% of the shares
of: England
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, South Korea
which owns 100% of the shares of:
Windsor Life Assurance Company Limited Indonesia
and which 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 NYLIFE Delaware 100%
Structured Asset Management Company Ltd. Texas
New York Life Benefit Services, Inc. which owns 100% of ADQ Massachusetts 100%
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 the Canada
shares of:
ESI Canada, Inc. Canada
IVTx of Houston, Inc. Texas
IVTx of Dallas, Inc. Texas
PhyNet, Inc. Texas
Express Scripts Vision Corporation Delaware
and owns 100% of the shares of:
Avanti Corporate Health Systems Inc., which owns Delaware
100% of
Avanti of the District, Inc. Maryland
Avanti of New Jersey, Inc. New Jersey
and owns 80% of the shares of
Physicians Health Services Foundation, Inc. Maryland
Prime Provider Corp., which owns 100% of the shares of: New York
Prime Provider Corp. of Texas Texas
WellPath of Arizona Reinsurance Company Arizona
NYLCare NC Holdings, Inc. which owns 50% of the Delaware
shares of:
WellPath Community Health Plan Holdings, L.L.C. North Carolina
which owns 100% of WPCHP Holdings, Inc. and 99% of:
WellPath Preferred Services, L.L.C. Delaware
and
WellPath Select Holdings, L.L.C., which North Carolina
owns 100% of:
WellPath Select, Inc. North Carolina
WellPath of Carolina, Inc. North Carolina
</TABLE>
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<TABLE>
<S> <C> <C>
New York Life International Investment Asia, Ltd. Mauritius 100%
ETHIX Southeast, Inc. North Carolina
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 and 50% of the shares of NYLIFE Insurance
Agency of Ohio, 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 this entity, the shares of
which are held of record by separate accounts of NYLIAC (for the MainStay
VP Series Fund, Inc.). New York Life disclaims any beneficial ownership
and control of this entity.
** New York Life Foundation does not issue voting securities.
*** MacKay-Shields Financial Corporation and Monitor Capital Advisors, Inc.
serve as sub-advisers to this entity.
ITEM 25. 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.
Insofar as indemnification for liability arising under the Securities
Act of 1933 may be permitted to trustees, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a trustee, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such
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<PAGE> 293
trustee, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
ITEM 26. BUSINESS OR OTHER CONNECTIONS OF INVESTMENT ADVISERS
The business of MainStay Management, Inc. is summarized 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 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 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
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 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 27. 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.
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<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>
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
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
</TABLE>
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<TABLE>
<S> <C> <C>
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
Linda E. O'Sullivan Director and Senior Accountant Assistant Treasurer
300 Interspace Parkway
Parsippany, NJ 07054
</TABLE>
c. Inapplicable.
ITEM 28. 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 29. MANAGEMENT SERVICES.
Inapplicable.
ITEM 30. UNDERTAKINGS.
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.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this
Post-Effective Amendment No. 20 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 1st day of March, 1999.
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. 20 to the Registrant's Registration Statement has
been signed below by the following persons in the capacities and on the dates
indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
- --------------------
Stephen C. Roussin* Chairperson and Director March 1, 1999
- --------------------
Patrick G. Boyle* Director March 1, 1999
- --------------------
Lawrence Glacken* Director March 1, 1999
- --------------------
Robert P. Mulhearn* Director March 1, 1999
- --------------------
Susan B. Kerley* Director March 1, 1999
</TABLE>
<PAGE> 297
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
March 1, 1999
/s/ Linda M. Livornese President (Principal
- ------------------------ Executive Officer)
Linda M. Livornese
Treasurer (Principal March 1, 1999
- ------------------------ Financial and Accounting
/s/ Anthony W. Polis Officer)
Anthony W. Polis
*By: /s/ Jeffrey L. Steele
------------------------
Jeffrey L. Steele
as Attorney-in-Fact
</TABLE>
* 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, with Post-Effective
Amendment No. 7 to the Registration Statement on October 14, 1994, and
with Post-Effective Amendment No. 18 to the Registration Statement on
April 30, 1998, incorporated by reference within.
