<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 30, 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
PRE-EFFECTIVE AMENDMENT NO. [ ]
POST-EFFECTIVE AMENDMENT NO. 21 [X]
AND
REGISTRATION STATEMENT UNDER
THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 23 [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 OFFICE)
REGISTRANT'S TELEPHONE NUMBER: (212) 576-8149
SARA L. BADLER, ESQ.
51 MADISON AVENUE
NEW YORK, NEW YORK 10010
(NAME AND ADDRESS OF AGENT FOR SERVICE)
COPY TO:
JEFFREY L. STEELE
DECHERT PRICE & RHOADS
1775 EYE STREET, N.W.
SUITE 1100
WASHINGTON, D.C. 20006
IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE:
[ ] Immediately upon filing pursuant to paragraph (b) of Rule 485
[X] On May 1, 1999, pursuant to paragraph (b)(1)(v) of Rule 485
[ ] 60 days after filing pursuant to paragraph (a)(1) of Rule 485
[ ] on pursuant to paragraph (a)(1) of Rule 485
[ ] 75 days after filing pursuant to paragraph (a)(2) of Rule 485
[ ] on May 1, 1999 pursuant to paragraph (a)(1) of Rule 485
IF APPROPRIATE, CHECK THE FOLLOWING BOX:
[ ] This post-effective amendment designates a new effective date
for a previously filed post-effective amendment.
<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 Investment Strategies and Risks
3 Investment Objectives, Strategies and Risks: An Overview
4 Investment Objectives, Strategies and Risks: An Overview; More
About Investment Strategies and Risks
5 See Annual Reports
6 Know With Whom You're Investing
7 Sales Charges and Distribution Fees; 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 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 Management of the Company
21 Calculation of Performance; Quotation; Tax Information
22 Cover Page
</TABLE>
<PAGE> 4
MainStay
Institutional
Funds Inc.
PROSPECTUS
May 1, 1999
ASSET MANAGER FUND (FORMERLY KNOWN AS MULTI-ASSET FUND)
EAFE INDEX FUND
GROWTH EQUITY FUND
INDEXED EQUITY FUND
INTERNATIONAL EQUITY FUND
VALUE EQUITY FUND
BOND FUND
INDEXED BOND FUND
INTERNATIONAL BOND FUND
MONEY MARKET FUND
SHORT-TERM BOND FUND
[MAINSTAY INSTITUTIONAL FUNDS INC. LOGO]
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.
<PAGE> 5
What's Inside?
<TABLE>
<C> <S>
2 Investment Objectives, Principal Investment Strategies and
Principal Risks: An Overview
THE FUNDS
EQUITY
4 Asset Manager Fund
8 EAFE Index Fund
12 Growth Equity Fund
16 Indexed Equity Fund
20 International Equity Fund
24 Value Equity Fund
FIXED INCOME
28 Bond Fund
32 Indexed Bond Fund
36 International Bond Fund
40 Money Market Fund
44 Short-Term Bond Fund
48 More About Principal Investment Strategies and Principal
Risks
54 Shareholder Guide
54 Multi-Class Structure
54 Shareholder Service Fees
55 How to Open an Account
56 Investment Minimums
57 Buying, Selling and Exchanging Fund Shares
60 General Policies
61 Determining the Funds' Share Prices (NAV) and Valuation of
Securities
62 Fund Earnings
63 Understand the Tax Consequences
64 Know With Whom You're Investing
68 Financial Highlights
</TABLE>
<PAGE> 6
Investment Objectives,Principal Investment Strategies and Principal Risks: An
Overview
This prospectus discusses eleven 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 Subadviser that is responsible
for the day to day portfolio management of the Fund. Each Fund 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. In times of unusual or adverse conditions, for
temporary defensive purposes, each Fund may invest outside the scope of its
principal investment focus.
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. Equity securities may be purchased 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 ("ADRs")
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. Debt securities may be purchased 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 debt securities pay fixed rates of return while 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.
2
<PAGE> 7
The amount of interest paid is subject to many variables, including:
- - creditworthiness of the issuer
- - length of time to maturity of the security
- - market factors
- - the nature of the debt instrument
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, you could lose money by investing in the Fund.
YOU COULD LOSE MONEY
Before considering one or more investments, you should understand that you could
lose money.
NAV WILL FLUCTUATE
The value of Fund shares, also known as net asset value ("NAV"), will fluctuate
based on the value of a Fund's holdings. Security values change. Investment in
common stocks and other equity securities is particularly subject to the risk of
changing economic, stock market, industry and company conditions and the risks
inherent in management's ability to anticipate such changes which can adversely
affect the value of a Fund's holdings. In the case of debt securities, security
values usually change 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. Other factors that can affect security
values and Fund share prices are changes in:
- - company or industry conditions
- - how the market views the creditworthiness of an issuer
- - economic or market conditions
- - relative values of currencies, and
- - in the average maturity of a Fund's investments.
MORE INFORMATION
The next section of this prospectus gives you more detailed information about
the investment objectives, policies, principal investment strategies, principal
risks, past performance and expenses of each of the Funds offered in this
prospectus. Please review it carefully.
3
<PAGE> 8
- ---------------------------
"S&P 500(R)" is a trademark 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.
- ---------------------------
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.
Asset
Manager Fund
(formerly known as the Multi-Asset Fund)
The Asset Manager 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 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 Composite Stock Price Index ("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") (although the securities don't have to be in the BIG Index)
- - 10% to 60% of net assets in selected money market instruments
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 Subadviser. The presence of the constraints, however,
may restrict the Subadviser's ability to fully maximize total return. To
determine the best investment allocation, the Subadviser estimates risk, return
and correlation for the three asset groups based on a disciplined valuation
methodology. Even if this method occasionally indicates that the Fund should be
fully invested in only one asset group, the Subadviser 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, the Subadviser 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 BIG Index. The expected return for money
market instruments is the current yield on three month U.S. Treasury bills.
4
<PAGE> 9
ASSET MANAGER FUND
- ---------------------------
In a FORWARD CONTRACT, the Fund agrees to buy an issued security at a future
date at a price determined at the time of the commitment.
The Fund's allocations among the three asset groups is then structured to take
advantage of perceived imbalances in relative pricing. The Subadviser believes
that short-term imbalances occur periodically but tend to be corrected fairly
quickly. Although these allocations 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 invest in derivatives such as
stock index futures 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 also engage in
foreign currency exchange transactions using currencies, options, futures or
options on futures, or FORWARD CONTRACTS for any legally permissible purpose.
The average life of the securities in the fixed income sector of the Fund's
portfolio will approximate that of securities in the BIG Index, which will vary
from time to time. As of March 31, 1999, the average life of securities in the
BIG Index was 8.6 years.
PRINCIPAL 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
- - maturities
Overall, the Fund's performance depends on the Subadviser'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
issuers. These include losses due to:
- - fluctuating currency values
- - less liquid trading markets
- - great price volatility
- - political and economic instability
- - less publicly available information about issuers
- - changes in U.S. or foreign tax or currency laws
- - changes in monetary policy
The risks are likely to be greater in emerging market countries than in
developed market countries.
5
<PAGE> 10
ASSET MANAGER FUND
[BAR GRAPH]
<TABLE>
<S> <C>
1991 17.9
1992 7.09
1993 8.79
1994 -0.86
1995 26.81
1996 16.16
1997 26.69
1998 21.31
</TABLE>
ANNUAL RETURNS, INSTITUTIONAL
CLASS SHARES
(by calendar year 1991-1998)
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.
PAST PERFORMANCE
The bar chart and table indicate the risks of investing in the Fund. The bar
chart shows you how the Fund's performance has varied over the life of the Fund.
The table shows how the Fund's average annual total 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 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.
BEST AND WORST QUARTERLY RETURNS, INSTITUTIONAL CLASS SHARES
(1991-1998)
<TABLE>
<CAPTION>
RETURN QUARTER/YEAR
<S> <C> <C>
Highest return/best quarter 13.74% Q2/97
Lowest return/worst quarter -5.81% Q3/98
</TABLE>
AVERAGE ANNUAL TOTAL RETURNS
(as of 12/31/98)
<TABLE>
<CAPTION>
1 YEAR 5 YEARS SINCE INCEPTION*
<S> <C> <C> <C>
Asset Manager Fund
Institutional Class 21.31% 17.55% 15.10%
Institutional Service Class 21.00% 17.34% 14.97%
Average Lipper Flexible Portfolio Fund 14.20% 14.31% 14.65%
</TABLE>
* January 2, 1991.
6
<PAGE> 11
ASSET MANAGER FUND
FEES AND EXPENSES OF THE FUND
The table below describes the fees and expenses that you may pay if you buy and
hold shares of the Fund.
<TABLE>
<CAPTION>
INSTITUTIONAL
INSTITUTIONAL SERVICE
SHAREHOLDER FEES CLASS CLASS
(FEES PAID DIRECTLY FROM YOUR INVESTMENT)
<S> <C> <C>
Maximum Sales Charge (Load) Imposed on Purchases of Shares
(as a percentage of offering price) None None
Maximum Deferred Sales Charge (Load)
(as a percentage of redemption proceeds) None None
Exchange Fee None None
ANNUAL FUND OPERATING EXPENSES
(expenses that are deducted from Fund assets)
Management Fee .65% .65%
Distribution (12b-1) Fees None None
Shareholder Service Fees None .25%
Other Expenses .15% .15%
----- -----
Total Annual Fund Operating Expenses .80% 1.05%
</TABLE>
EXAMPLE
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 close your account at the end of each of the time periods
shown. 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.
<TABLE>
<CAPTION>
INSTITUTIONAL
INSTITUTIONAL SERVICE
EXPENSES AFTER CLASS CLASS
<S> <C> <C>
1 year $ 82 $ 107
3 years $255 $ 334
5 years $444 $ 579
10 years $990 $1,283
</TABLE>
7
<PAGE> 12
- ---------------------------
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 & Co. Incorporated.
- ---------------------------
INDEX FUNDS seek to match their respective indices, unlike other funds which
generally seek to beat an index or indices. No attempt is made to manage the
portfolio in the traditional sense using economic, financial and market
analysis.
EAFE Index Fund
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").
PRINCIPAL INVESTMENT STRATEGIES
The Fund normally invests at least 80% of its total assets in a statistically
selected sample of stocks in the EAFE Index, which is a capitalization-weighted
index of stock and stock-related securities, such as warrants and ADRs, from
countries outside the United States. This includes countries with established
economies as well as emerging market countries.
INVESTMENT PROCESS
Monitor Capital Advisors, Inc., the Fund's Subadviser, uses statistical
techniques to determine which stocks are to be purchased or sold to replicate
the EAFE Index to the extent feasible. From time to time, adjustments may be
made in the Fund's portfolio because of changes in the composition of the EAFE
Index, but such changes should be infrequent. The 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 NAV 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.
8
<PAGE> 13
EAFE INDEX FUND
PRINCIPAL 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
risks that differ from risks of investing in securities of U.S.-based issuers.
These include losses due to:
- - fluctuating currency values (the Fund does not hedge against the risk of
fluctuating currency exchange rates)
- - less liquid trading markets
- - greater price volatility
- - political and economic instability
- - less publicly available information about issuers
- - changes in U.S. or foreign tax or currency laws
- - changes in monetary policy
The risks are likely to be greater in emerging market countries than in
developed market countries.
The Fund's ability to mirror the EAFE Index may be affected by, among other
things:
- - transaction costs
- - changes in either the makeup of the EAFE Index or number of shares outstanding
for the components of the EAFE Index
- - the timing and amount of contributions to, and redemptions from, the Fund by
shareholders
9
<PAGE> 14
EAFE INDEX FUND
[BAR GRAPH]
<TABLE>
<S> <C>
1991 10.1
1992 -12.22
1993 28.97
1994 6.83
1995 9.03
1996 6.45
1997 0.4
1998 19.15
</TABLE>
ANNUAL RETURNS, INSTITUTIONAL
CLASS SHARES
(by calendar year 1991-1998)
PAST PERFORMANCE
The bar chart and table indicate the risks of investing in the Fund. The bar
chart shows you how the Fund's performance has varied over the life of the Fund.
The table shows how the Fund's average annual total 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 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.
BEST AND WORST QUARTERLY RETURNS, INSTITUTIONAL CLASS SHARES
(1991-1998)
<TABLE>
<CAPTION>
RETURN QUARTER/YEAR
<S> <C> <C>
Highest return/best quarter 19.85% Q4/98
Lowest return/worst quarter -13.87% Q3/98
</TABLE>
AVERAGE ANNUAL TOTAL RETURNS
(as of 12/31/98)
<TABLE>
<CAPTION>
1 YEAR 5 YEARS SINCE INCEPTION**
<S> <C> <C> <C>
EAFE Index Fund
Institutional Class 19.15% 8.20% 7.98%
Institutional Service
Class 18.83% 7.98% 7.84%
MSCI EAFE Index* 20.00% 9.19% 9.23%
</TABLE>
* The Morgan Stanley Capital International Europe, Australia and Far East
Index -- the MSCI EAFE Index -- is an unmanaged index generally considered to
be representative of the international stock market.
** January 2, 1991.
10
<PAGE> 15
EAFE INDEX FUND
FEES AND EXPENSES OF THE FUND
The table below describes the fees and expenses that you may pay if you buy and
hold shares of the Fund.
<TABLE>
<CAPTION>
INSTITUTIONAL
SHAREHOLDER FEES INSTITUTIONAL SERVICE
(FEES PAID DIRECTLY FROM YOUR INVESTMENT) CLASS CLASS
<S> <C> <C>
Maximum Sales Charge (Load) Imposed on Purchases of Shares
(as a percentage of offering price) None None
Maximum Deferred Sales Charge (Load)
(as a percentage of redemption proceeds) None None
Exchange Fee None None
ANNUAL FUND OPERATING EXPENSES
(expenses that are deducted from Fund assets)
Management Fee .95% .95%
Distribution (12b-1) Fees None None
Shareholder Service Fees None .25%
Other Expenses .43% .43%
----- -----
Total Annual Fund Operating Expenses(+) 1.38% 1.63%
</TABLE>
(+) 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 .51% for Institutional Class shares and
.51% for Institutional Service Class shares and total fund operating
expenses were .94% for Institutional Class shares and 1.19% for
Institutional Service Class shares. This waiver may be discontinued at
anytime.
EXAMPLE
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 close your account at the end of each of the time periods
shown. 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.
<TABLE>
<CAPTION>
INSTITUTIONAL
INSTITUTIONAL SERVICE
EXPENSES AFTER CLASS* CLASS*
<S> <C> <C>
1 year $ 140 $ 166
3 years $ 437 $ 514
5 years $ 755 $ 887
10 years $1,657 $1,933
</TABLE>
* Does not reflect fee waiver.
11
<PAGE> 16
- ---------------------------
"S&P 500(R)" is a trademark 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.
Growth Equity Fund
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 its 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
- - increasing return on investment
The Fund maintains a flexible approach towards investing in various types of
companies as well as types of securities, including common stocks, preferred
stocks, warrants and other equity securities, depending upon the economic
environment and the relative attractiveness of the various securities markets.
As a result, the Fund may invest in any other securities which, in the judgment
of MacKay-Shields Financial Corporation, the Fund's Subadviser, are ready for a
rise in price, or are expected to undergo an acceleration in growth of earnings.
The latter could occur because of special factors such as:
- - new management
- - new products
- - changes in consumer demand
- - changes in the economy
12
<PAGE> 17
GROWTH EQUITY FUND
PRINCIPAL 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.
13
<PAGE> 18
GROWTH EQUITY FUND
[BAR GRAPH]
<TABLE>
<S> <C>
1991 67
1992 5.63
1993 9.59
1994 -2.23
1995 37.88
1996 21.62
1997 24.73
1998 40.5
</TABLE>
ANNUAL RETURNS, INSTITUTIONAL
CLASS SHARES
(by calendar year 1991-1998)
PAST PERFORMANCE
The bar chart and table indicate the risks of investing in the Fund. The bar
chart shows you how the Fund's performance has varied over the life of the Fund.
The table shows how the Fund's average annual total 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 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.
BEST AND WORST QUARTERLY RETURNS, INSTITUTIONAL CLASS SHARES
(1991-1998)
<TABLE>
<CAPTION>
RETURN QUARTER/YEAR
<S> <C> <C>
Highest return/best quarter 27.97% Q4/98
Lowest return/worst quarter -13.41% Q2/92
</TABLE>
AVERAGE ANNUAL TOTAL RETURNS
(as of 12/31/98)
<TABLE>
<CAPTION>
1 YEAR 5 YEARS SINCE INCEPTION**
<S> <C> <C> <C>
Growth Equity Fund
Institutional Class 40.50% 23.50% 23.89%
Institutional Service
Class 40.18% 23.26% 23.74%
S&P 500 Index* 28.58% 24.06% 20.83%
</TABLE>
* The S&P 500 Index 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.
14
<PAGE> 19
GROWTH EQUITY FUND
FEES AND EXPENSES OF THE FUND
The table below describes the fees and expenses that you may pay if you buy and
hold shares of the Fund.
<TABLE>
<CAPTION>
INSTITUTIONAL
SHAREHOLDER FEES INSTITUTIONAL SERVICE
(FEES PAID DIRECTLY FROM YOUR INVESTMENT) CLASS CLASS
<S> <C> <C>
Maximum Sales Charge (Load) Imposed on Purchases of Shares
(as a percentage of offering price) None None
Maximum Deferred Sales Charge (Load)
(as a percentage of redemption proceeds) None None
Exchange Fee None None
ANNUAL FUND OPERATING EXPENSES
(expenses that are deducted from Fund assets)
Management Fees .85% .85%
Distribution (12b-1) Fees None None
Shareholder Service Fees None .25%
Other Expenses .09% .09%
----- -----
Total Annual Fund Operating Expenses .94% 1.19%
</TABLE>
EXAMPLE
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 close your account at the end of each of the time periods
shown. 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.
<TABLE>
<CAPTION>
INSTITUTIONAL
INSTITUTIONAL SERVICE
EXPENSES AFTER CLASS CLASS
<S> <C> <C>
1 year $ 96 $ 121
3 years $ 300 $ 378
5 years $ 520 $ 654
10 years $1,155 $1,443
</TABLE>
15
<PAGE> 20
- ---------------------------
INDEX FUNDS seek to match their respective indices, unlike other funds which
generally seek to beat an index or indices. No attempt is made to manage the
portfolio in the traditional sense using economic, financial and market
analysis.
Indexed Equity Fund
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 (the "S&P 500 Index").
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, to the extent feasible, as they are represented in
the S&P 500 Index.
INVESTMENT PROCESS
Monitor Capital Advisors, Inc., the Fund's Subadviser, 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. The correlation 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 NAV 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 S&P 500 Index futures which are used for
cash management purposes.
16
<PAGE> 21
INDEXED EQUITY FUND
- ---------------------------
"S&P 500(R)" is a trademark of The McGraw-Hill Companies, Inc. and has 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 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.
PRINCIPAL 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. 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 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
- - the timing and amount of contributions to, and redemptions from, the Fund by
shareholders
Consistent with its principal investment strategies, the Fund's investments
include S&P 500 Index futures which are a type of derivative. The Fund may lose
money using derivatives. The use of 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.
17
<PAGE> 22
INDEXED EQUITY FUND
[BAR GRAPH]
<TABLE>
<S> <C>
1991 29.8
1992 7.19
1993 9.41
1994 0.9
1995 36.88
1996 22.57
1997 32.88
1998 28.62
</TABLE>
ANNUAL RETURNS, INSTITUTIONAL
CLASS SHARES
(by calendar year 1991-1998)
PAST PERFORMANCE
The bar chart and table indicate the risks of investing in the Fund. The bar
chart shows you how the Fund's performance has varied over the life of the Fund.
The table shows how the Fund's average annual total 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 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.
BEST AND WORST QUARTERLY RETURNS, INSTITUTIONAL CLASS SHARES
(1991-1998)
<TABLE>
<CAPTION>
RETURN QUARTER/YEAR
<S> <C> <C>
Highest return/best quarter 21.48% Q4/98
Lowest return/worst quarter -9.94% Q3/98
</TABLE>
AVERAGE ANNUAL TOTAL RETURNS
(as of 12/31/98)
<TABLE>
<CAPTION>
1 YEAR 5 YEARS SINCE INCEPTION**
<S> <C> <C> <C>
Indexed Equity Fund
Institutional Class 28.62% 23.67% 20.34%
Institutional Service Class 28.24% 23.44% 20.20%
S&P 500* 28.58% 24.06% 20.83%
</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.
18
<PAGE> 23
INDEXED EQUITY FUND
FEES AND EXPENSES OF THE FUND
The table below describes the fees and expenses that you may pay if you buy and
hold shares of the Fund.
<TABLE>
<CAPTION>
INSTITUTIONAL
INSTITUTIONAL SERVICE
SHAREHOLDER FEES CLASS CLASS
(FEES PAID DIRECTLY FROM YOUR INVESTMENT)
<S> <C> <C>
Maximum Sales Charge (Load) Imposed on Purchases of Shares
(as a percentage of offering price) None None
Maximum Deferred Sales Charge (Load)
(as a percentage of redemption proceeds) None None
Exchange Fee None None
ANNUAL FUND OPERATING EXPENSES
(expenses that are deducted from Fund assets)
Management Fee .50% .50%
Distribution (12b-1) Fees None None
Shareholder Service fees None .25%
Other Expenses .06% .06%
----- -----
Total Annual Fund Operating Expenses(+) .56% .81%
</TABLE>
(+) 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 .24% for Institutional Class shares and
.24% for Institutional Service Class shares and total fund operating
expenses were .30% for Institutional Class shares and .55% for Institutional
Service Class shares. This waiver may be discontinued at anytime.
EXAMPLE
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 close your account at the end of each of
the time periods shown. 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.
<TABLE>
<CAPTION>
INSTITUTIONAL
INSTITUTIONAL SERVICE
EXPENSES AFTER CLASS* CLASS*
<S> <C> <C>
1 year $ 57 $ 83
3 years $179 $ 259
5 years $313 $ 450
10 years $701 $1,002
</TABLE>
* Does not reflect fee waiver.
19
<PAGE> 24
- ---------------------------
In a typical SWAP transaction, two parties agree to exchange the returns (or
differentials in rates of returns) earned or realized on particular investments
or instruments.
International
Equity Fund
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 its total assets in equity securities
of issuers, wherever organized, that 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 Subadviser, believes present favorable
opportunities.
INVESTMENT PROCESS
In pursuing the Fund's investment strategy, the Fund's Subadviser 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 Subadviser considers several factors, including:
- - prospects for currency exchange
- - interest rates
- - inflation
- - relative economic growth
- - 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 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.
20
<PAGE> 25
INTERNATIONAL EQUITY FUND
PRINCIPAL 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 issuers. These include losses due to:
- - fluctuating currency values
- - less liquid trading markets
- - greater price volatility
- - political and economic instability
- - less publicly available information about issuers
- - changes in U.S. or foreign tax or currency laws
- - changes in monetary policy
The risks are likely to be greater in emerging market countries than in
developed market countries.
The Fund's investments include derivatives, such as: options, futures and
forwards. 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.
21
<PAGE> 26
INTERNATIONAL EQUITY FUND
[BAR CHART]
<TABLE>
<S> <C>
1993 25.03
1994 8.36
1995 7.17
1996 12.09
1997 5.44
1998 22.41
</TABLE>
ANNUAL RETURNS, INSTITUTIONAL
CLASS SHARES
(by calendar year 1993-1998)
PAST PERFORMANCE
The bar chart and table indicate the risks of investing in the Fund. The bar
chart shows you how the Fund's performance has varied over the life of the Fund.
The table shows how the Fund's average annual total 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 Institutional Class and Institutional
Service Class shares, first offered on January 1, 1995, include the historical
performance of the Fund's predecessor separate account from its 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.
BEST AND WORST QUARTERLY RETURNS, INSTITUTIONAL CLASS SHARES
(1993-1998)
<TABLE>
<CAPTION>
RETURN QUARTER/YEAR
<S> <C> <C>
Highest return/best quarter 19.29% Q4/98
Lowest return/worst quarter -12.76% Q3/98
</TABLE>
AVERAGE ANNUAL TOTAL RETURNS
(as of 12/31/98)
<TABLE>
<CAPTION>
1 YEAR 5 YEARS SINCE INCEPTION**
<S> <C> <C> <C>
International Equity Fund
Institutional Class 22.41% 10.93% 11.29%
Institutional Service Class 22.20% 10.61% 11.04%
MSCI EAFE Index* 20.00% 9.19% 11.93%
</TABLE>
* The MSCI 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 Subadviser, 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.
22
<PAGE> 27
INTERNATIONAL EQUITY FUND
FEES AND EXPENSES OF THE FUND
The table below describes the fees and expenses that you may pay if you buy and
hold shares of the Fund.
<TABLE>
<CAPTION>
INSTITUTIONAL
INSTITUTIONAL SERVICE
SHAREHOLDER FEES CLASS CLASS
(FEES PAID DIRECTLY FROM YOUR INVESTMENT)
<S> <C> <C>
Maximum Sales Charge (Load) Imposed on Purchases of Shares
(as a percentage of offering price) None None
Maximum Deferred Sales Charge (Load) (as a percentage of
redemption proceeds) None None
Exchange Fee None None
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted
from Fund assets)
Management Fees .85% .85%
Distribution (12b-1) Fees None None
Shareholder Service Fees None .25%
Other Expenses .18% .18%
----- -----
Total Annual Fund Operating Expenses 1.03% 1.28%
</TABLE>
EXAMPLE
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 close your account at the end of each of the time periods
shown. 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.
<TABLE>
<CAPTION>
INSTITUTIONAL
INSTITUTIONAL SERVICE
EXPENSES AFTER CLASS CLASS
<S> <C> <C>
1 year $ 105 $ 130
3 years $ 328 $ 406
5 years $ 569 $ 702
10 years $1,259 $1,545
</TABLE>
23
<PAGE> 28
Value Equity Fund
The Value Equity Fund's investment objective is to seek maximum long-term total
return from a combination of capital growth and income.
PRINCIPAL INVESTMENT STRATEGIES
The Fund normally invests at least 65% of total assets in equity securities.
INVESTMENT PROCESS
The Fund is not designed or managed primarily to produce current income.
The Fund principally invests in common stocks which:
- - MacKay-Shield's Financial Corporation, the Fund's Subadviser, believes are
"undervalued" (selling below their value) when purchased
- - typically pay dividends, although there may be non-dividend paying stocks if
they meet the "undervalued" criteria
- - are listed on a national securities exchange or are traded in the over-
the-counter market
Usually, stocks deemed by the Subadviser to be at full value will be replaced
with new, "undervalued" stocks. When assessing whether a stock is undervalued,
the Subadviser considers many factors and will compare market price to:
- - the company's "book" value;
- - estimated value of the company's assets (liquidating value);
- - the company's cash flow; and
- - to a lesser extent, the Subadviser will also look at trends and forecasts such
as growth rates and future earnings.
24
<PAGE> 29
VALUE EQUITY FUND
PRINCIPAL 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 is that they may never reach
what the Subadviser 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).
25
<PAGE> 30
VALUE EQUITY FUND
[BAR GRAPH]
<TABLE>
<S> <C>
1991 36.6
1992 20.71
1993 14.9
1994 1.22
1995 29.42
1996 22.41
1997 22.63
1998 -8.1
</TABLE>
ANNUAL RETURNS, INSTITUTIONAL
CLASS SHARES
(by calendar year 1991-1998)
PAST PERFORMANCE
The bar chart and table indicate the risks of investing in the Fund. The bar
chart shows you how the Fund's performance has varied over the life of the Fund.
The table shows how the Fund's average annual total 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 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 very 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.
BEST AND WORST QUARTERLY RETURNS, INSTITUTIONAL CLASS SHARES
(1991-1998)
<TABLE>
<CAPTION>
RETURN QUARTER/YEAR
<S> <C> <C>
Highest return/best quarter 15.50% Q1/91
Lowest return/worst quarter -17.19% Q3/98
</TABLE>
AVERAGE ANNUAL TOTAL RETURNS
(as of 12/31/98)
<TABLE>
<CAPTION>
1 YEAR 5 YEARS SINCE INCEPTION**
<S> <C> <C> <C>
Value Equity Fund
Institutional Class -8.10% 12.56% 16.62%
Institutional Service
Class -8.30% 12.38% 16.50%
S&P 500* 28.58% 24.06% 20.83%
</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.
26
<PAGE> 31
VALUE EQUITY FUND
FEES AND EXPENSES OF THE FUND
The table below describes the fees and expenses that you may pay if you buy and
hold shares of the Fund.
<TABLE>
<CAPTION>
INSTITUTIONAL
SHAREHOLDER FEES INSTITUTIONAL SERVICE
(FEES PAID DIRECTLY FROM YOUR INVESTMENT) CLASS CLASS
<S> <C> <C>
Maximum Sales Charge (Load) Imposed on Purchases of Shares
(as a percentage of offering price) None None
Maximum Deferred Sales Charge (Load) (as a percentage of
redemption proceeds) None None
Exchange Fee None None
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted
from Fund assets)
Management Fee .85% .85%
Distribution (12b-1) Fees None None
Shareholder Service Fees None .25%
Other Expenses .13% .13%
---- -----
Total Annual Fund Operating Expenses .98% 1.23%
</TABLE>
EXAMPLE
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 close your account at the end of each of the time periods
shown. 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.
<TABLE>
<CAPTION>
INSTITUTIONAL
INSTITUTIONAL SERVICE
EXPENSES AFTER CLASS CLASS
<S> <C> <C>
1 year $ 100 $ 125
3 years $ 312 $ 390
5 years $ 542 $ 676
10 years $1,201 $1,489
</TABLE>
27
<PAGE> 32
- ---------------------------
FLOATERS (or securities with a floating rate of interest) are debt securities
with a variable interest rate that is tied to another interest rate, such as a
money-market index or Treasury bill rate. The interest on an INVERSE FLOATER (or
a security with an inverse floating rate of interest) resets in the opposite
direction from the interest rate to which the inverse floater is indexed.
- ---------------------------
MORTGAGE-RELATED (including mortgage-backed) SECURITIES are debt securities
whose values are based on underlying pools of mortgages. These securities may be
issued by U.S. governmental entities or private issuers.
Bond Fund
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 its 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
- - 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 Subadviser.
At least 65% percent of the Fund's total assets will be invested in debt
securities rated Baa or better by Moody's Investors Service, Inc. ("Moody's") or
BBB or better by Standard & Poor's ("S&P") when purchased, or if unrated,
determined by the Subadviser 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.
As part of the Fund's principal investment strategies, the Subadviser may use
investment practices such as MORTGAGE DOLLAR ROLLS and portfolio securities
lending.
INVESTMENT PROCESS
In pursuing the Fund's investment strategy, the Fund's Subadviser 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 Subadviser in
28
<PAGE> 33
BOND FUND
- ---------------------------
ASSET-BACKED SECURITIES are debt securities whose values are based on underlying
pools of receivables.
- ---------------------------
In a MORTGAGE DOLLAR ROLL, the Fund sells a mortgage-backed security from its
portfolio to another party and agrees to buy a similar security from the same
party at a set price at a later date.
- ---------------------------
ZERO COUPON BONDS are debt obligations issued without any requirement for the
periodic payment of interest. They are issued at a significant discount to their
face value and tend to be more volatile than conventional debt securities.
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.
Consistent with its principal investment strategy, the Fund may purchase debt
securities of U.S. issuers, including derivatives such as mortgage-related and
asset-backed securities. Commercial paper must be, when purchased, rated Prime-1
by Moody's or A-1 by S&P, or if unrated, determined by the Subadviser to be of
comparable quality. The Fund's principal investments may have fixed, FLOATING or
INVERSE FLOATING rates of interest.
PRINCIPAL RISKS
The values of debt securities fluctuate depending upon various factors,
including:
- - interest rates
- - issuer creditworthiness
- - market conditions
- - 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.-based issuers. These include losses due to:
- - fluctuating currency values
- - less liquid trading markets
- - greater price volatility
- - political and economic instability
- - less publicly available information about issuers
- - changes in U.S. or foreign tax or currency laws
- - changes in monetary policy
The Fund's investments include derivatives such as floaters, inverse floaters
and 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 use of derivatives such as floaters and inverse floaters 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. 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.
29
<PAGE> 34
BOND FUND
[BAR GRAPH]
<TABLE>
<S> <C>
1991 14
1992 6.39
1993 9.74
1994 -3.31
1995 17.88
1996 2.8
1997 8.57
1998 7.93
</TABLE>
ANNUAL RETURNS, INSTITUTIONAL
CLASS SHARES
(by calendar year 1991-1998)
PAST PERFORMANCE
The bar chart and table indicate the risks of investing in the Fund. The bar
chart shows you how the Fund's performance has varied over the life of the Fund.
The table shows how the Fund's average annual total 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 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.
BEST AND WORST QUARTERLY RETURNS, INSTITUTIONAL CLASS SHARES
(1991-1998)
<TABLE>
<CAPTION>
RETURN QUARTER/YEAR
<S> <C> <C>
Highest return/best quarter 6.00% Q2/95
Lowest return/worst quarter -2.71% Q1/94
</TABLE>
AVERAGE ANNUAL TOTAL RETURNS
(as of 12/31/98)
<TABLE>
<CAPTION>
1 YEAR 5 YEARS SINCE INCEPTION**
<S> <C> <C> <C>
Bond Fund
Institutional Class 7.93% 6.54% 7.82%
Institutional Service
Class 7.73% 6.34% 7.69%
Lehman Brothers
Gov't/Corporate Bond
Index* 9.47% 7.30% 8.87%
</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.
30
<PAGE> 35
BOND FUND
FEES AND EXPENSES OF THE FUND
The table below describes the fees and expenses that you may pay if you buy and
hold shares of the Fund.
<TABLE>
<CAPTION>
INSTITUTIONAL
SHAREHOLDER FEES INSTITUTIONAL SERVICE
(FEES PAID DIRECTLY FROM YOUR INVESTMENT) CLASS CLASS
<S> <C> <C>
Maximum Sales Charge (Load) Imposed on Purchases of Shares
(as a percentage of offering price) None None
Maximum Deferred Sales Charge (Load) (as a percentage of
redemption proceeds) None None
Exchange Fee None None
ANNUAL FUND OPERATING EXPENSES
(expenses that are deducted from Fund assets)
Management Fee .75% .75%
Distribution (12b-1) Fees None None
Shareholder Service Fees None .25%
Other Expenses .11% .11%
----- -----
Total Annual Fund Operating Expenses(+) .86% 1.11%
</TABLE>
(+) 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 .64% for Institutional Class shares and
.64% for Institutional Service Class shares, and total fund operating
expenses were .75% for Institutional Class shares and 1.00% for
Institutional Service Class shares. This waiver may be discontinued at any
time.
EXAMPLE
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 close your account at the end of each of the time periods
shown. 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.
<TABLE>
<CAPTION>
INSTITUTIONAL
INSTITUTIONAL SERVICE
EXPENSES AFTER CLASS* CLASS*
<S> <C> <C>
1 year $ 88 $ 113
3 years $ 274 $ 353
5 years $ 477 $ 612
10 years $1,061 $1,352
</TABLE>
* Does not reflect fee waiver.
31
<PAGE> 36
- ---------------------------
MORTGAGE-RELATED (including mortgage-backed) SECURITIES are debt securities
whose values are based on underlying pools of mortgages. These securities may be
issued by U.S. governmental entities or private issuers.
- ---------------------------
INDEX FUNDS seek to match their respective indices, unlike other funds which
generally seek to beat an index or indices. No attempt is made to manage the
portfolio in the traditional sense using economic, financial and market
analysis.
Indexed Bond Fund
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 its total assets in fixed income
securities in the BIG Index. The BIG Index includes investment grade corporate
bonds, U.S. dollar-denominated securities of foreign issuers, U.S. Treasury or
agency issues, MORTGAGE-RELATED 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 45.5%, corporate debt securities 23.2% and
mortgage-related securities 31.3%.
INVESTMENT PROCESS
Monitor Capital Advisors, Inc., the Fund's Subadviser, employs a stratified
sampling method to track performance of the BIG Index. Using this method, the
Fund invests in 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 NAV 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 average life of the securities in the Fund's portfolio will approximate that
of securities in the BIG Index, which will vary from time to time.
As of March 31, 1999, the average life of securities in the BIG Index
was 8.6 years.
32
<PAGE> 37
INDEXED BOND FUND
- ---------------------------
FLOATERS (or securities with a floating rate of interest) are debt securities
with a variable interest rate that is tied to another interest rate, such as a
money-market index or Treasury bill rate. The interest on an INVERSE FLOATER (or
a security with an inverse floating rate of interest) resets in the opposite
direction from the interest rate to which the inverse floater is indexed.
- ---------------------------
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.
PRINCIPAL RISKS
The values of debt securities fluctuate depending upon various factors,
including:
- - interest rates
- - issuer creditworthiness
- - market conditions
- - 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 the number of bonds
outstanding for the components of the BIG Index
- - timing and amount of contributions to and redemptions from the Fund by
shareholders
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. based issuers. These include losses due to:
- - fluctuating currency values
- - less liquid trading markets
- - greater price volatility
- - political and economic instability
- - less publicly available information about issuers
- - changes in U.S. or foreign tax or currency laws
- - changes in monetary policy
The risks are likely to be greater in emerging market countries than in
developed market countries.
The Fund's principal investments include derivatives such as floaters, inverse
floaters and mortgage-related 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.
33
<PAGE> 38
INDEXED BOND FUND
[BAR GRAPH]
<TABLE>
<S> <C>
1991 14.7
1992 7.09
1993 9.64
1994 -3.44
1995 18.07
1996 2.55
1997 9.01
1998 8.21
</TABLE>
ANNUAL RETURNS, INSTITUTIONAL
CLASS SHARES
(by calendar year 1991-1998)
PAST PERFORMANCE
The bar chart and table indicate the risks of investing in the Fund. The bar
chart shows you how the Fund's performance has varied over the life of the Fund.
The table shows how the Fund's average annual total 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 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.
BEST AND WORST QUARTERLY RETURNS, INSTITUTIONAL CLASS SHARES
(1991-1998)
<TABLE>
<CAPTION>
RETURN QUARTER/YEAR
<S> <C> <C>
Highest return/best quarter 5.97% Q2/95
Lowest return/worst quarter -2.98% Q1/94
</TABLE>
AVERAGE ANNUAL TOTAL RETURNS
(as of 12/31/98)
<TABLE>
<CAPTION>
1 YEAR 5 YEARS SINCE INCEPTION**
<S> <C> <C> <C>
Indexed Bond Fund
Institutional Class 8.21% 6.64% 8.04%
Institutional Service
Class 7.86% 6.46% 7.93%
Salomon Smith Barney Broad
Investment Grade Bond
Index* 8.71% 7.29% 8.70%
</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.
34
<PAGE> 39
INDEXED BOND FUND
FEES AND EXPENSES OF THE FUND
The table below describes the fees and expenses that you may pay if you buy and
hold shares of the Fund.
<TABLE>
<CAPTION>
INSTITUTIONAL
SHAREHOLDER FEES INSTITUTIONAL SERVICE
(FEES PAID DIRECTLY FROM YOUR INVESTMENT) CLASS CLASS
<S> <C> <C>
Maximum Sales Charge (Load) Imposed on Purchases of Shares
(as a percentage of offering price) None None
Maximum Deferred Sales Charge (Load) (as a percentage of
redemption proceeds) None None
Exchange Fee None None
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted
from Fund assets)
Management Fee .50% .50%
Distribution (12b-1) Fees None None
Shareholder Service Fees None .25%
Other Expenses .15% .15%
----- -----
Total Annual Fund Operating Expenses(+) .65% .90%
</TABLE>
(+) 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 .35% for Institutional Class shares and
.35% for Institutional Service Class shares and total fund operating
expenses were .50% for Institutional Class shares and .75% for Institutional
Service Class shares. This waiver may be discontinued at anytime.
EXAMPLE
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 close your account at the end of each of the time periods
shown. 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.
<TABLE>
<CAPTION>
INSTITUTIONAL
INSTITUTIONAL SERVICE
EXPENSES AFTER CLASS* CLASS*
<S> <C> <C>
1 year $ 66 $ 92
3 years $208 $ 287
5 years $362 $ 498
10 years $810 $1,108
</TABLE>
*Does not reflect fee waiver.
35
<PAGE> 40
- ---------------------------
MORTGAGE-RELATED (including mortgage-backed) SECURITIES are debt securities
whose values are based on underlying pools of mortgages. These securities may be
issued by U.S. governmental entities or private issuer.
- ---------------------------
ASSET-BACKED SECURITIES are debt securities whose values are based on underlying
pools of receivables.
International
Bond Fund
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 in debt securities of corporate issuers, located
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
Subadviser, believes present favorable opportunities.
The Fund's principal investments also include high yield 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 Subadviser to be of comparable quality and
MORTGAGE-RELATED and ASSET-BACKED SECURITIES. The Fund's principal investments
may have fixed, variable, FLOATING or INVERSE FLOATING rates of interest.
INVESTMENT PROCESS
In pursuing the Fund's investment strategy, the Fund's Subadviser 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 Subadviser considers several factors including prospects for:
- - currency exchange rates
- - interest rates
- - inflation
- - relative economic growth
- - 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.
36
<PAGE> 41
INTERNATIONAL BOND FUND
- ---------------------------
FLOATERS (or securities with a floating rate of interest) are debt securities
with a variable interest rate that is tied to another interest rate, such as a
money-market index or Treasury bill rate. The interest on an INVERSE FLOATER
resets in the opposite direction from the interest rate to which the inverse
floater is indexed.
- ---------------------------
In a typical SWAP transaction, two parties agree to exchange the returns (or
differentials in rates of returns) earned or realized on particular investments
or instruments.
Additionally, the Fund may buy and sell 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.
The average maturity of the Fund's portfolio is expected to be five to ten
years.
PRINCIPAL RISKS
The values of debt securities fluctuate depending upon various factors,
including:
- - interest rates
- - issuer creditworthiness
- - market conditions
- - maturities
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 issuers. These include losses due to:
- - fluctuating currency values
- - less liquid trading markets
- - greater price volatility
- - political and economic instability
- - less publicly available information about issuers
- - changes in U.S. or foreign tax or currency laws
- - changes in monetary policy
The risks are likely to be greater in emerging market countries than in
developed market countries.
The Fund's principal investments can include high yield debt 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, foreign currency options, foreign currency forward
contracts, securities and securities index options, swaps, futures contracts and
related options, and 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 use of derivatives (except for mortgage-related and
asset-backed securities) 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 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.
37
<PAGE> 42
INTERNATIONAL BOND FUND
[BAR GRAPH]
<TABLE>
<S> <C>
1991 18.73
1992 7.68
1993 14.56
1994 3.11
1995 18.46
1996 14.32
1997 2.62
1998 12.53
</TABLE>
ANNUAL RETURNS, INSTITUTIONAL
CLASS SHARES
(by calendar year 1991-1998)
PAST PERFORMANCE
The bar chart and table indicate the risks of investing in the Fund. The bar
chart shows you how the Fund's performance has varied over the life of the Fund.
The table shows how the Fund's average annual total 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 Institutional Class and Institutional
Service Class shares, first offered on January 1, 1995, include the historical
performance of the Fund's predecessor separate account from its 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.
BEST AND WORST QUARTERLY RETURNS, INSTITUTIONAL CLASS SHARES
(1991-1998)
<TABLE>
<CAPTION>
RETURN QUARTER/YEAR
<S> <C> <C>
Highest return/best quarter 9.57% Q4/91
Lowest return/worst quarter -3.77% Q1/92
</TABLE>
AVERAGE ANNUAL TOTAL RETURNS
(as of 12/31/98)
<TABLE>
<CAPTION>
1 YEAR 5 YEARS SINCE INCEPTION**
<S> <C> <C> <C>
International Bond Fund
Institutional Class 12.53% 10.03% 10.11%
Institutional Service
Class 12.30% 9.82% 9.99%
Salomon Smith Barney
Non-U.S. Dollar World
Government Bond Index* 17.79% 8.26% 10.48%
</TABLE>
* The Salomon Smith Barney 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
Subadviser, 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.
38
<PAGE> 43
INTERNATIONAL BOND FUND
FEES AND EXPENSES OF THE FUND
The table below describes the fees and expenses that you may pay if you buy and
hold shares of the Fund.
<TABLE>
<CAPTION>
INSTITUTIONAL
SHAREHOLDER FEES INSTITUTIONAL SERVICE
(FEES PAID DIRECTLY FROM YOUR INVESTMENT) CLASS CLASS
<S> <C> <C>
Maximum Sales Charge (Load) Imposed on Purchases of Shares
(as a percentage of offering price) None None
Maximum Deferred Sales Charge (Load) (as a percentage of
redemption proceeds) None None
Exchange Fee None None
ANNUAL FUND OPERATING EXPENSES
(expenses that are deducted from Fund assets)
Management Fee .80% .80%
Distribution (12b-1) Fees None None
Shareholder Service Fees None .25%
Other Expenses .28% .28%
----- -----
Total Annual Fund Operating Expenses(+) 1.08% 1.33%
</TABLE>
(+) 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 .67% for Institutional Class shares and
.67% for Institutional Service Class shares and total fund operating
expenses were .95% for Institutional Class shares and 1.20% for
Institutional Service Class shares. This waiver may be discontinued at any
time.
EXAMPLE
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 close your account at the end of each of the time periods
shown. 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.
<TABLE>
<CAPTION>
INSTITUTIONAL
INSTITUTIONAL SERVICE
EXPENSES AFTER CLASS* CLASS*
<S> <C> <C>
1 year $ 110 $ 135
3 years $ 343 $ 421
5 years $ 595 $ 729
10 years $1,317 $1,601
</TABLE>
*Does not reflect fee waiver.
39
<PAGE> 44
- ---------------------------
FLOATERS (or securities with a floating rate of interest) are debt securities
with a variable interest rate that is tied to another interest rate, such as a
money-market index or Treasury bill rate.
- ---------------------------
ASSET-BACKED SECURITIES are debt securities whose values are based on underlying
pools of receivables.
Money Market
Fund
The Money Market Fund's investment objective is to seek a high level of current
income while preserving capital and maintaining liquidity.
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. The securities in which the Fund
invests 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
- - corporate debt securities
The Fund may also invest in variable rate notes, FLOATERS and ASSET-BACKED
SECURITIES. 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 a 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.
40
<PAGE> 45
MONEY MARKET FUND
PRINCIPAL RISKS
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.
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 information about issuers
- - changes in U.S. or foreign tax or currency laws
The Fund's principal investments include derivatives such as variable rate
notes, floaters and asset-backed securities. If New York Life Insurance Company,
the Fund's Subadviser, 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.
41
<PAGE> 46
MONEY MARKET FUND
[BAR GRAPH]
<TABLE>
<S> <C>
1991 5.95
1992 3.66
1993 2.89
1994 3.88
1995 5.63
1996 5.11
1997 5.27
1998 5.25
</TABLE>
ANNUAL RETURNS, INSTITUTIONAL
CLASS SHARES
(by calendar year 1991-1998)
PAST PERFORMANCE
The bar chart and table indicate the risks of investing in the Fund. The bar
chart shows you how the Fund's performance has varied over the life of the Fund.
The table shows how the Fund's average annual total 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 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. FOR CURRENT YIELD INFORMATION, CALL
1-800-695-2126. As with all mutual funds, past performance is not necessarily an
indication of how the Fund will perform in the future.
BEST AND WORST QUARTERLY RETURNS, INSTITUTIONAL CLASS SHARES
(1991-1998)
<TABLE>
<CAPTION>
RETURN QUARTER/YEAR
<S> <C> <C>
Highest return/best quarter 1.62% Q1/91
Lowest return/worst quarter 0.70% Q2/93
</TABLE>
AVERAGE ANNUAL TOTAL RETURNS
(as of 12/31/98)
<TABLE>
<CAPTION>
1 YEAR 5 YEARS SINCE INCEPTION*
<S> <C> <C> <C>
Money Market Fund
Institutional Class 5.25% 5.03% 4.70%
Institutional Service Class 4.99% 4.84% 4.58%
7-day yield
Institutional Class: 4.86%
Institutional Service Class: 4.61%
Average Lipper Institutional Money
Market Fund 5.30% 5.15% 4.88%
</TABLE>
* January 2, 1991
42
<PAGE> 47
MONEY MARKET FUND
FEES AND EXPENSES OF THE FUND
The table below describes the fees and expenses that you may pay if you buy and
hold shares of the Fund.
<TABLE>
<CAPTION>
INSTITUTIONAL
SHAREHOLDER FEES INSTITUTIONAL SERVICE
(FEES PAID DIRECTLY FROM YOUR INVESTMENT) CLASS CLASS
<S> <C> <C>
Maximum Sales Charge (Load) Imposed on Purchases of Shares
(as a percentage of offering price) None None
Maximum Deferred Sales Charge (Load) (as a percentage of
redemption proceeds) None None
Exchange Fee None None
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted
from Fund assets)
Management Fee .50% .50%
Distribution (12b-1) Fees None None
Shareholder Service Fees None .25%
Other Expenses .13% .13%
----- -----
Total Annual Fund Operating Expenses(+) .63% .88%
</TABLE>
(+) 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 was .37% for Institutional Class Shares and .37%
for Institutional Service Class Shares, and total fund operating expenses
were .50% for Institutional Class Shares and .75% for Institutional Service
Class Shares. This waiver may be discontinued at any time.
EXAMPLE
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 close your account at the end of each of the time periods
shown. 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.
<TABLE>
<CAPTION>
INSTITUTIONAL
INSTITUTIONAL SERVICE
EXPENSES AFTER CLASS* CLASS*
<S> <C> <C>
1 year $ 64 $ 90
3 years $202 $ 281
5 years $351 $ 488
10 years $786 $1,084
</TABLE>
*Does not reflect fee waiver.
43
<PAGE> 48
- ---------------------------
MORTGAGE-RELATED (including mortgage-backed) SECURITIES are debt securities
whose values are based on underlying pools of mortgages. These securities may be
issued by U.S. governmental entities or private issuers.
- ---------------------------
ASSET-BACKED SECURITIES are debt securities whose values are based on underlying
pools of receivables.
Short-Term Bond Fund
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 its 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 rates) which have
price characteristics similar to short-term debt securities.
As part of the Fund's principal strategies, MacKay-Shields Financial
Corporation, the Fund's Subadviser, may use investment practices such as
MORTGAGE DOLLAR ROLLS and portfolio securities lending.
INVESTMENT PROCESS
In pursuing the Fund's investment strategy, the Subadviser 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 Subadviser 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
- - 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 the Subadviser, 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
Subadviser to be of comparable quality. The Fund's principal investments may
have fixed, variable, FLOATING or INVERSE FLOATING rates of interest. The
effective maturity of the Fund's portfolio will be less than three years.
44
<PAGE> 49
SHORT-TERM BOND FUND
- ---------------------------
FLOATERS (or securities with a floating rate of interest) are debt securities
with a variable interest rate that is tied to another interest rate, such as a
money-market index or Treasury bill rate. The interest on an INVERSE FLOATER (or
a security with an inverse floating rate of interest) resets in the opposite
direction from the interest rate to which the inverse floater is indexed.
- ---------------------------
In a MORTGAGE DOLLAR ROLL, the Fund sells a mortgage-backed security from its
portfolio to another party and agrees to buy a similar security from the same
party at a set price at a later date.
PRINCIPAL RISKS
The values of debt securities fluctuate depending upon various factors,
including:
- - interest rates
- - issuer creditworthiness
- - market conditions
- - maturities
The Fund's investments include derivatives such as mortgage-related and
asset-backed securities, floaters and inverse floaters. 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 use of derivatives such as floaters and inverse floaters
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. 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.
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<PAGE> 50
SHORT-TERM BOND FUND
[BAR GRAPH]
<TABLE>
<S> <C>
1991 11.3
1992 5.94
1993 5.67
1994 0.11
1995 10.27
1996 4.81
1997 6.13
1998 6.37
</TABLE>
ANNUAL RETURNS, INSTITUTIONAL
CLASS SHARES
(by calendar year 1991-1998)
PAST PERFORMANCE
The bar chart and table indicate the risks of investing in the Fund. The bar
chart shows you how the Fund's performance has varied over the life of the Fund.
The table shows how the Fund's average annual total 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 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.
BEST AND WORST QUARTERLY RETURNS, INSTITUTIONAL CLASS SHARES
(1991-1998)
<TABLE>
<CAPTION>
RETURN QUARTER/YEAR
<S> <C> <C>
Highest return/best quarter 3.44% Q4/91
Lowest return/worst quarter -0.68% Q1/94
</TABLE>
AVERAGE ANNUAL TOTAL RETURNS
(as of 12/31/98)
<TABLE>
<CAPTION>
1 YEAR 5 YEARS SINCE INCEPTION*
<S> <C> <C> <C>
Short-Term Bond Fund
Institutional Class 6.37% 5.49% 6.27%
Institutional Service Class 5.98% 5.27% 6.13%
Salomon Smith Barney 1-3
Year Treasury Index 6.98% 5.94% 6.61%
</TABLE>
* January 2, 1991.
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<PAGE> 51
SHORT-TERM BOND FUND
FEES AND EXPENSES OF THE FUND
The table below describes the fees and expenses that you may pay if you buy and
hold shares of the Fund.
<TABLE>
<CAPTION>
INSTITUTIONAL
SHAREHOLDER FEES INSTITUTIONAL SERVICE
(FEES PAID DIRECTLY FROM YOUR INVESTMENT) CLASS CLASS
<S> <C> <C>
Maximum Sales Charge (Load) Imposed on Purchases of Shares
(as a percentage of offering price) None None
Maximum Deferred Sales Charge (Load) (as a percentage of
redemption proceeds) None None
Exchange Fee None None
ANNUAL FUND OPERATING EXPENSES
(expenses that are deducted from Fund assets)
Management Fee .60% .60%
Distribution (12b-1) Fees None None
Shareholder Service Fees None .25%
Other Expenses .29% .29%
----- -----
Total Annual Fund Operating Expenses(+) .89% 1.14%
</TABLE>
(+) The Manager has voluntarily agreed to waive a portion of the fees otherwise
payable to it. This waiver may be discontinued at any time. With this
reduction, for the fiscal year ended December 31, 1998 the management fee
paid was 0.31% for Institutional Class shares and .31% for Institutional
Service Class shares, and total fund operating expenses were .60% for
Institutional Class shares and .85% for Institutional Service Class shares.
EXAMPLE
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 close your account at the end of each of the time periods
shown. 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.
<TABLE>
<CAPTION>
INSTITUTIONAL
INSTITUTIONAL SERVICE
EXPENSES AFTER CLASS* CLASS*
<S> <C> <C>
1 year $ 91 $ 116
3 years $ 284 $ 362
5 years $ 493 $ 628
10 years $1,096 $1,386
</TABLE>
*Does not reflect fee waiver.
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<PAGE> 52
More About Principal Investment Strategies and Principal Risks
Information about each Fund's principal investments, investment practices and
principal risks appears at the beginning of the prospectus. The information
below describes in greater detail the principal investments, investment
practices and principal risks pertinent to the Funds.
DERIVATIVE SECURITIES
The value of derivatives is based on certain underlying equity or fixed-income
securities, interest rates, currencies or indexes. Derivative securities 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 a
Subadviser is wrong about its expectations of changes in interest rates or
market conditions, the use of derivatives could result in a loss. A Fund could
also lose money if the counterparty to the transaction does not meet its
obligations. In addition, the leverage associated with inverse floaters, a type
of derivative, may result in greater volatility in their market value than other
income-producing securities.
MORTGAGE-RELATED AND ASSET-BACKED SECURITIES
Mortgage-related (including 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. A Subadviser's ability to
correctly forecast interest rates and other economic factors correctly will
impact the success of investments in mortgage-related 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
48
<PAGE> 53
to prepayment risk if interest rates fall 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.
SWAP AGREEMENTS
Certain Funds 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 Fund's Subadviser 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 Information in the SAI for
information regarding the tax considerations relating to swap agreements.
FOREIGN SECURITIES
Foreign investments could be more difficult to sell than U.S. investments. They
also may subject a 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.
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<PAGE> 54
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 attempt 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 Directors.
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 Subadviser will
consider all relevant facts and circumstances, including the creditworthiness of
the borrower.
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 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. For example, to gain
exposure to a particular market, the Fund may be able to purchase a futures
contract with respect to that market. When a Fund uses such techniques in an
attempt to reduce risk it is known as "hedging." If a Fund's Subadviser 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.
FORWARD COMMITMENTS
Debt securities are often sold on a forward commitment basis. The price (or
yield) of such securities is fixed at the time a commitment to purchase is made,
but delivery and payment for the securities take place at a later date. During
the period between purchase and settlement, no
50
<PAGE> 55
payment is made by the Fund and no interest accrues to the Fund. The market
value of the securities on the settlement date may be more or less than the
purchase price payable at settlement date.
RISKS OF INVESTING IN HIGH YIELD DEBT 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 a Subadviser 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.
TEMPORARY DEFENSIVE INVESTMENTS
In times of unusual or adverse conditions, for temporary defensive purposes,
each Fund may invest outside the scope of its principal investment focus. During
such times, a Fund may not invest in accordance with its investment objective or
investment strategies and, as a result, there is no assurance that the Fund will
achieve its investment objective. Under such conditions, each Fund (except the
Money Market Fund) may invest without limit in money market and other
investments (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 all
or a portion of its assets in equity securities of U.S. issuers, investment
grade notes and bonds, cash and cash equivalents. The International Bond Fund
may also invest without limit in U.S. dollars, foreign currencies or in foreign
currency-denominated money market instruments.
PORTFOLIO TURNOVER
Portfolio turnover measures the amount of trading a Fund does during the year.
The portfolio 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).
OTHER INFORMATION
Year 2000 Issue
The services provided to the Funds by the Manager, the Subadvisers and the
Funds' other service providers (including foreign subcustodians and securities
depositories) 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
51
<PAGE> 56
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 Subadvisers
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 Subadvisers
and the Funds' other service providers at this time but could have a material
adverse impact on the operations of the Funds, the Manager, the Subadvisers and
the Funds' other service providers. In addition, companies in which the Funds
invest may experience Year 2000 Issue difficulties which could adversely impact
their business and adversely affect the value of the securities issued by them.
52
<PAGE> 57
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53
<PAGE> 58
SHAREHOLDER
GUIDE
The following pages are intended to help you make the most of your investments
in the Funds.
MULTI-CLASS STRUCTURE
This prospectus offers Institutional Class and Institutional Service Class
shares of the Funds. These Classes differ only in their service expense and any
other specific expenses the Board of Directors may approve. Institutional
Service Class shares have an annual 0.25% shareholder service fee that the
Institutional Class shares do not have (see description below). You are eligible
to buy Institutional Class shares if you are:
- - an employer, association or other group retirement plan, employee benefit
trust, financial institution, endowment, foundation or corporation; or
- - in a Group IRA or Group Account and you bought shares before January 1, 1995.
You are eligible to buy Institutional Service Class shares if you are:
- - in a Group Account or Group IRA; or
- - a plan sponsor.
SHAREHOLDER SERVICE FEES
Shareholder Services Plan
The Company has adopted a Shareholder Services Plan with respect to the
Institutional Service Class 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 services rendered by New York Life, its affiliates or
independent third-party service providers, to the shareholders of the
Institutional Service Class of the Fund, a shareholder service fee at the rate
of 0.25% on an annualized basis of the average daily net asset value of the
Institutional Service Class of the Fund.
Each Fund may pay to service agents "service fees" as that term is defined in
the rules of the National Association of Securities Dealers, Inc. 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.
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<PAGE> 59
SHAREHOLDER GUIDE
Because service fees are on-going, over time they will increase the cost of an
investment in a Fund and may cost more than other types of sales charges.
HOW TO OPEN AN ACCOUNT
If you are participating in a company savings plan, such as a 401(k), profit
sharing plan, defined benefit plan or other employee-directed plan, your company
will provide you with the information you need to open an account and buy and
sell shares in the Funds.
If you are investing through a Group IRA or Group Account, you (or your plan
sponsor, if you are investing through a group or plan) can open an account and
make an investment. Return your completed application to MainStay Institutional
Funds Inc., 260 Cherry Hill Road, Parsippany, NJ 07054-1108, and mail the check
separately to MainStay Institutional Funds Inc., P.O. Box 8407, Boston, MA
02266-8407. Your check (and the application, if it's your first investment) must
be received within the next three business days after you place your order.
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<PAGE> 60
SHAREHOLDER GUIDE
INVESTMENT MINIMUMS*
One of the following minimums will apply to you, depending upon how you are
investing:
<TABLE>
<CAPTION>
INSTITUTIONAL CLASS SHARES INSTITUTIONAL SERVICE CLASS SHARES
<S> <C> <C>
FOR INSTITUTIONAL - Initial combined investment--at - Initial combined investment--at
INVESTORS: least $250,000, which may be spread least $250,000, which may be spread
over a thirteen-month period after over a thirteen-month period after
opening the account opening the account
- Each investment after that--at - Each investment after that--at
least $1,000 least $1,000
FOR A GROUP IRA: - Each additional investment--at - First investment--at least $5,000
(If you are investing least $100 (at least $1,000 in each Fund in
in an IRA offered which you are investing)
through a group) - Each investment after that--at
least $100
FOR A GROUP ACCOUNT: - Each additional investment--at - First investment--at least $25,000
(If you are a member least $1,000 (at least $1,000 in each Fund in
of a group that which you are investing)
participates in our - Each investment after that--at
Group IRA program) least $1,000
</TABLE>
- - The Company may also accept investments of smaller amounts at its discretion.
Tax deductible contributions to a regular IRA generally are limited to $2,000 a
year ($4,000 in the case of a spousal IRA). An investor in certain qualified
retirement plans may be able to open an account with a smaller minimum
investment.
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<PAGE> 61
SHAREHOLDER GUIDE
BUYING, SELLING AND EXCHANGING FUND SHARES
BUYING SHARES
If you are participating in a company savings plan, such as a 401(k), profit
sharing plan, defined benefit plan or other employee-directed plan, your company
will provide you with the information you need to open an account and buy shares
in the Funds.
If you are investing through a Group IRA or Group Account, the following
information will help you buy shares:
<TABLE>
<CAPTION>
HOW DETAILS
<S> <C> <C>
BY PHONE: Call MainStay Shareholder - Make your check or money order payable to
Services Inc., the Fund's "MainStay Institutional Funds Inc."
transfer agent ("MSS") at - Be sure to write on your check or money order
1-800-695-2126, to place your your account number, the name(s) of the
order between 8:30 am and 4 pm appropriate Fund(s) and Class of shares
Eastern time any day the New York - MSS must receive your check or money order
Stock Exchange is open. You must within three business days after you place your
pay the next NAV calculated after order
MSS receives your order in proper
form. This means that all
necessary information, signatures
and documentation has been
received. If the order is
received by 4 pm, the shares will
be priced at the current day's
NAV. Orders received after 4 pm
will get the next day's NAV.
BY WIRE: You or your registered The wire must include:
representative should call MSS at - your name
1-800-695-2126 for an account - your account number
number and wiring instructions. - name(s) of the Fund(s) and Class of shares
Your bank may charge a fee for the wire transfer.
BY MAIL: Address your order to: - Make your check or money order payable to
MainStay Institutional Funds Inc. "MainStay Institutional Funds Inc."
P.O. Box 8407 - Be sure to write on your check or money order
Boston, MA 02266-8407 your account number, the names(s) of the
appropriate Fund(s) and Class of shares
</TABLE>
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SHAREHOLDER GUIDE
SELLING SHARES
Shares may be redeemed (sold) in a number of ways. If you are participating in a
company plan, such as a 401(k), profit sharing, defined benefit or other
employee-directed plan, check with your Human Resources Department for
information on how your shares may be redeemed. For other investors, including
those in a Group IRA or Group Account, shares may be redeemed in any of the
following ways:
<TABLE>
<CAPTION>
HOW DETAILS
<S> <C> <C>
BY PHONE: Call MSS at 1-800-695-2126 to - This option is not available if your shares are
place your order between 8:30 am held in certificate form.
and 4 pm Eastern time any day the
New York Stock Exchange is open.
You will receive the next NAV
calculated after MSS receives
your order in proper form. This
means that all necessary
information, signatures and
documentation has been received.
If the order is received by 4 pm,
the shares will be priced at the
current day's NAV. Orders
received after 4 pm will get the
next day's NAV.
BY WIRE: Call MSS at 1-800-695-2126. - MSS must have your bank account information on
Eligible investors may sell file
shares and have proceeds - MSS will wire the proceeds of your sale to your
electronically credited to a bank within seven days (one business day for
designated bank account. You can the Money Market Fund)
place an order to sell shares and - Your bank may charge a fee for the wire
receive redemption proceeds by transfer
wire any day banks and the New - This option is not available if your shares are
York Stock Exchange are open. held in certificate form.
BY MAIL: Address your order to: Write a letter of instruction that includes:
MainStay Institutional Funds Inc. - your name and signature
260 Cherry Hill Road - your account number
Parsippany, NJ 07054-1108 - Fund name(s)
- dollar amount you want to sell
</TABLE>
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SHAREHOLDER GUIDE
- ---------------------------
CONVENIENT, YES . . .
BUT NOT RISK-FREE.
Telephone redemption privileges are convenient, they are not completely
risk-free. With telephone redemption privileges you give up some security. When
you sign the application to buy shares, you agree that neither the Company nor
MSS will be liable for following phone instructions that they reasonably believe
are genuine. When using the MainStay Audio Response System, you bear the risk of
any loss from your errors unless the Company or MSS fail to use established
safeguards for your protection. These safeguards are among those currently in
place at the Company:
- - all phone calls are tape recorded; and
- - a written confirmation of every transaction is sent to your address of record.
SYSTEMATIC WITHDRAWAL PLAN
If you are a shareholder in a Group IRA or Group Account, with at least $10,000
(based on the NAV per share) in your account, you may use our systematic
withdrawal plan.
You may arrange to make monthly withdrawals of at least $100 from any Fund. Each
withdrawal will be mailed to you by check or wired directly to your bank
account, whichever you select on your application. These withdrawals, like any
sale, may result in a gain or loss and, therefore, may be subject to taxation.
Consult your tax adviser about possible tax consequences.
Also remember, these withdrawals are not dividends or income. If you withdraw
more than your Fund is earning for you, eventually your account will be worth
less than your original investment, and, ultimately, you will redeem all of your
shares.
The Company may end this plan at any time after 30 days' written notice to you.
There will be no redemption, however, during any period in which the right of
redemption is suspended or the date of payment is postponed because the Exchange
is closed, trading on the Exchange is restricted or the SEC deems an emergency
to exist.
REDEMPTIONS-IN-KIND
The Company reserves the right to pay certain redemptions, either totally or
partially, by a distribution-in-kind of securities (instead of cash) from the
applicable Fund's portfolio.
FINANCIAL SERVICES FIRMS
You can also buy and sell Fund shares through a variety of financial services
firms such as brokers and financial advisors. The Funds have authorized these
firms to accept orders. When an authorized firm or its designee has received
your order, it is considered received by the Fund and will be priced at the
next-computed NAV.
Financial services firms may charge transaction fees or other fees. In addition,
the Funds, MSS or an affiliate of MSS may pay service fees to these firms or
other firms which perform services for shareholders. Please read their program
materials for any special provisions or additional service features that may
apply to your investment. Certain
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<PAGE> 64
SHAREHOLDER GUIDE
- ---------------------------
Selling and exchanging shares may result in a gain or loss and therefore may be
subject to taxation. Consult your tax advisor on the consequences.
- ---------------------------
Your order is in PROPER FORM when it includes all information, signatures,
documents and payments required to carry it out.
features of the Funds, such as the minimum initial or subsequent investment
amounts, may be modified.
Some of the firms through which the Funds are available include:
- - Charles Schwab & Co., Inc.
- - Fidelity Brokerage Services, Inc. FundsNetwork(TM) Program
- - Waterhouse Securities, Inc.
- - Datalynx
EXCHANGING SHARES
You exchange shares when you sell all or a portion of shares in one Fund and use
the proceeds to purchase shares in another Fund. You may exchange shares of the
same Class between Funds. Exchanges will be based upon each Fund's NAV per share
next computed following receipt of a properly executed exchange request. You may
request an exchange by calling 1-800-695-2126. You may also use the Systematic
Exchange Program described below.
SYSTEMATIC EXCHANGE PLAN
If you have 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 Fund to another Fund within the same Class of shares. The Fund from
which exchanges are made must have an account value of at least $10,000 at the
time the Systematic Exchange Program is established. For additional information,
call 1-800-695-2126.
The Company reserves the right to amend, restrict or end the exchange privilege.
MONEY MARKET FUND EXCHANGES
If you exchange all your shares in the Money Market Fund for shares in another
Fund, any dividends that have been declared but not yet distributed will be
credited to the new Fund account. If you exchange all your shares in the Money
Market Fund for shares in more than one Fund, undistributed dividends will be
credited to each of the new Funds according to the number of exchanged shares in
each Fund.
GENERAL POLICIES
The following policies apply to purchases and redemptions:
- - We buy and sell Fund shares at the next NAV calculated after we receive your
order in proper form.
- - You must purchase Fund shares in U.S. dollars with funds drawn from a U.S.
bank.
- - Except under certain circumstances, we do not accept third-party checks, and
we reserve the right to limit the number of checks processed at one time.
- - If your check does not clear, your order will be canceled and you will be
responsible for any losses or fees we incur as a result.
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SHAREHOLDER GUIDE
- - Wires are not accepted when the New York Stock Exchange or banks are closed.
- - We transmit the proceeds from any shares you sell within seven days after
receiving your request (one business day for the Money Market Fund).
- - If you hold certificates to the shares you wish to sell, you must return them
with your order--you cannot do this by phone.
- - If you buy shares by check and quickly decide to sell them, the Fund may
withhold payment for up to 15 days from the date of purchase to allow the
check to clear.
In the interests of all shareholders, we reserve the right to:
- - Reject your application or order to buy or redeem your Fund shares if your
application is incomplete or incorrect (particularly if you have failed to
include your Taxpayer I.D. information).
- - Suspend offering shares or reject purchase orders when, in management's
judgment, it is in a Fund's best interests.
- - Refuse any purchase or exchange requests that could adversely affect a Fund or
its operations, including those from any individual or group who, in the
Fund's judgment, is likely to engage in excessive trading.
- - Change or discontinue its exchange privilege, or temporarily suspend this
privilege without notice during extraordinary circumstances. You will receive
notice in writing if the Company revises or terminates the systematic
withdrawal plan or the exchange privileges.
- - 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.
- - Change minimum investment amounts.
DETERMINING THE FUNDS' SHARE PRICES (NAV) AND
THE VALUATION OF SECURITIES
We calculate the share price of each Fund (also known as its net asset value, or
NAV) at the close of trading on the New York Stock Exchange (usually 4 pm
Eastern time), except for the Money Market Fund, which is calculated at noon
every day the Exchange is open.
The value of the Funds' investments is based on current market value, except for
the value of the Money Market Fund, which is based on the amortized cost method
of valuation. Events affecting the values of securities in a Fund's portfolio
that occur between the time their prices are determined and the close of the
Exchange will not be reflected in the calculation of a Fund's NAV unless the
Fund's Subadviser deems that a particular event would materially affect NAV. In
this case, an adjustment in the valuing of the securities may be made.
61
<PAGE> 66
SHAREHOLDER GUIDE
Certain Funds invest in portfolio securities that are listed on foreign
exchanges that are open on days (such as U.S. holidays) when the Funds do not
compute their prices. This could cause the value of a Fund's portfolio
investments to be affected by trading on days when you cannot buy or sell
shares.
FUND EARNINGS
The 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. The Funds also earn
capital gains when they sell securities at a profit.
When the Funds pay dividends
The Money Market Fund declares dividends daily and pays them monthly. You begin
earning dividends the next business day after MSS receives your investment and
is open for business.
The other Funds in this prospectus declare and distribute any dividends at least
once a year.
When the Funds pay capital gains
At each fiscal year-end, each 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 receive your share of the Funds' earnings in one of two ways. You can
make your choice at the time of application, and change it as often as you like
by notifying your investment professional (if permitted by the broker-dealer) or
us directly. The two choices are:
1. Reinvest earnings in:
- - the same Fund, or
- - another Fund of your choice.
2. Take earnings in cash.
If you do not make one of these choices on your application, your earnings will
be automatically reinvested in the same Class of shares of the same Fund.
62
<PAGE> 67
SHAREHOLDER GUIDE
- ---------------------------
SEEK PROFESSIONAL ASSISTANCE.
Your investment professional can help you keep your investment goals coordinated
with your tax considerations. But for tax counsel, always rely on your tax
adviser. For additional information on taxation, see the SAI.
UNDERSTAND THE TAX CONSEQUENCES
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. Some 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 the 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
Income earned from investments in foreign countries (mainly International Bond,
International Equity, Indexed Bond, Asset Manager, and EAFE Index Funds) may be
withheld as income taxes by the countries in which it was earned. Whenever
possible, a Fund may elect to pass along tax credits or deductions to you for
foreign income taxes paid. There are no assurances that the Fund will be able to
do so, or that these credits or deductions will result in a tax benefit to you.
You should check with your tax adviser.
63
<PAGE> 68
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., formed in 1997, 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 Subadvisers. The Manager has also
delegated certain of its administrative responsibilities to New York Life
Insurance Company.
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 Subadvisers and New York Life Insurance
Company as the subadministrator.
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>
Asset Manager Fund .65%
EAFE Index Fund .51%
Growth Equity Fund .85%
Indexed Equity Fund .24%
International Equity Fund .82%
Value Equity Fund .85%
Bond Fund .64%
Indexed Bond Fund .35%
International Bond Fund .67%
Money Market Fund .37%
Short-Term Bond Fund .31%
</TABLE>
The Manager is not responsible for records maintained by the Funds' Custodian,
Transfer Agent, Dividend Disbursing and Shareholder Servicing Agent, or
Subadvisers. As of December 31, 1998, the Manager managed approximately $25.1
billion in assets.
64
<PAGE> 69
WHO MANAGES YOUR MONEY?
MacKay-Shields Financial Corporation, 9 West 57th St., New York, NY 10019, is
the Subadviser 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 $31 billion in assets.
New York Life Insurance Company, 51 Madison Avenue, New York, NY 10010, is the
Subadviser 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 $90.4 billion and managed approximately $19.0 billion in assets
for qualified retirement plans.
Monitor Capital Advisors, Inc., 504 Carnegie Center, Princeton, NJ 08540, is the
Subadviser to the EAFE Index Fund, Indexed Bond Fund, Indexed Equity Fund and
the Asset Manager 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 $4.5 billion in assets.
Under the supervision of the Manager, each Subadviser 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 Subadviser 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.
PORTFOLIO MANAGERS: BIOGRAPHIES
JEFFERSON C. BOYCE Mr. Boyce has managed the EAFE Index, Indexed Equity, Asset
Manager and Indexed Bond Funds since March 1999. Mr. Boyce has been the Chairman
and Chief Executive Officer of Monitor Capital since 1997. Prior to that he was
the Senior Vice President of Monitor Capital from 1992 to 1997. Mr. Boyce is
also a Senior Vice President at New York Life Insurance Company and serves as an
officer and/or director of various other subsidiaries and affiliated entities of
New York Life Insurance Company.
RUDOLPH C. CARRYL Mr. Carryl has managed the Growth Equity Fund since August
1992. Mr. Carryl is a Managing Director of MacKay-Shields.
65
<PAGE> 70
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.
CHRISTOPHER HARMS Mr. Harms has managed the Short-Term Bond and Bond Funds
since April 1999. He joined MacKay-Shields as a Director in 1991.
STEPHEN B. KILLIAN Mr. Killian has managed the Indexed Equity Fund since
February 1999 and the EAFE Index Fund since March 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 working
as a Partner and Senior Portfolio Manager at RhumbLine Advisers from 1992 to
1997.
DENIS P. 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.
EDWARD J. 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.
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 A. 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 and
equity portfolio manager at Prudential Investments from August 1991 to January
1999.
66
<PAGE> 71
EDMUND C. 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 B. SWANEY Mr. Swaney has managed the Asset Manager Fund since February
1999. 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.
67
<PAGE> 72
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.
68
<PAGE> 73
[This page intentionally left blank]
69
<PAGE> 74
FINANCIAL HIGHLIGHTS
EAFE INDEX FUND
<TABLE>
<CAPTION>
INSTITUTIONAL
INSTITUTIONAL SERVICE
CLASS CLASS
Year ended December 31
1998
<S> <C> <C>
Net asset value at beginning of year $10.24 $10.20
-------- -------
Net investment income 0.11 0.08
Net realized and unrealized gain (loss) on investments 1.84 1.83
Net realized and unrealized gain (loss) on foreign currency
transactions 0.00(a) 0.00(a)
-------- -------
Total from investment operations 1.95 1.91
-------- -------
LESS DIVIDENDS AND DISTRIBUTIONS:
From net investment income (0.11) (0.08)
From net realized gain on investments and foreign currency
transactions (0.72) (0.72)
In excess of net investment income (0.09) (0.09)
-------- -------
Total dividends and distributions (0.92) (0.89)
-------- -------
Net asset value at end of year $11.27 $11.22
======== =======
Total investment return 19.15% 18.83%
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA:
Net investment income 0.90% 0.65%
Net expenses 0.94% 1.19%
Expenses (before reimbursement) 1.38% 1.63%
Portfolio turnover rate 24% 24%
Net assets at end of year (in 000's) $65,087 $499
</TABLE>
GROWTH EQUITY FUND
<TABLE>
<CAPTION>
INSTITUTIONAL
INSTITUTIONAL SERVICE
CLASS CLASS
Year ended December 31
1998
<S> <C> <C>
Net asset value at beginning of year $25.43 $25.24
-------- -------
Net investment income (loss) (0.09)(b) (0.16)(b)
Net realized and unrealized gain (loss) on investments 10.35 10.26
-------- -------
Total from investment operations 10.26 10.10
-------- -------
LESS DIVIDENDS AND DISTRIBUTIONS:
From net investment income -- --
From net realized gain on investments (2.21) (2.21)
In excess of net investment income -- --
In excess of net realized gain on investments -- --
-------- -------
Total dividends and distributions (2.21) (2.21)
-------- -------
Net asset value at end of year $33.48 $33.13
======== =======
Total investment return 40.50% 40.18%
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA:
Net investment income (loss) (0.31%) (0.56%)
Net expenses 0.94% 1.19%
Portfolio turnover rate 29% 29%
Net assets at end of year (in 000's) $975,010 $15,814
</TABLE>
(a) Less than one cent per share.
(b) Per share data based on average shares outstanding during the period.
70
<PAGE> 75
FINANCIAL HIGHLIGHTS
EAFE INDEX FUND
<TABLE>
<CAPTION>
INSTITUTIONAL INSTITUTIONAL INSTITUTIONAL
INSTITUTIONAL SERVICE INSTITUTIONAL SERVICE INSTITUTIONAL SERVICE INSTITUTIONAL
CLASS CLASS CLASS CLASS CLASS CLASS CLASS
Year ended December 31
1997 1996 1995 1994
<S> <C> <C> <C> <C> <C> <C>
$14.00 $13.97 $13.56 $13.51 $12.63 $12.63 $12.03
-------- ------- -------- ------ -------- ------ --------
0.22 0.19 0.16 0.12 0.13 0.14 0.10
(0.28) (0.29) 0.71 0.73 1.11 1.05 0.70
(0.00)(a) (0.00)(a) (0.00)(a) (0.00)(a) (0.10) (0.10) 0.03
-------- ------- -------- ------ -------- ------ --------
(0.06) (0.10) 0.87 0.85 1.14 1.09 0.83
-------- ------- -------- ------ -------- ------ --------
(0.22) (0.19) (0.16) (0.12) (0.04) (0.04) (0.09)
(3.39) (3.39) (0.25) (0.25) (0.14) (0.14) (0.14)
(0.09) (0.09) (0.02) (0.02) (0.03) (0.03) --
-------- ------- -------- ------ -------- ------ --------
(3.70) (3.67) (0.43) (0.39) (0.21) (0.21) (0.23)
-------- ------- -------- ------ -------- ------ --------
$10.24 $10.20 $14.00 $13.97 $13.56 $13.51 $12.63
======== ======= ======== ====== ======== ====== ========
0.40% 0.08% 6.45% 6.37% 9.03% 8.63% 6.83%
1.04% 0.79% 1.11% 0.86% 1.01% 0.76% 0.57%
0.94% 1.19% 0.94% 1.19% 1.03% 1.28% 1.26%
1.26% 1.51% 1.23% 1.48% 1.24% 1.49% 1.26%
6% 6% 4% 4% 6% 6% 7%
$55,177 $439 $89,029 $396 $80,087 $257 $72,265
</TABLE>
GROWTH EQUITY FUND
<TABLE>
<CAPTION>
INSTITUTIONAL INSTITUTIONAL INSTITUTIONAL
INSTITUTIONAL SERVICE INSTITUTIONAL SERVICE INSTITUTIONAL SERVICE INSTITUTIONAL
CLASS CLASS CLASS CLASS CLASS CLASS CLASS
Year ended December 31
1997 1996 1995 1994
<S> <C> <C> <C> <C> <C> <C>
$21.99 $21.88 $18.84 $18.80 $13.68 $13.68 $14.40
-------- ------- -------- ------ -------- ------ --------
(0.08)(b) (0.14)(b) (0.06)(b) (0.11)(b) 0.02 (0.01) 0.01
5.45 5.43 4.14 4.12 5.16 5.14 (0.33)
-------- ------- -------- ------ -------- ------ --------
5.37 5.29 4.08 4.01 5.18 5.13 (0.32)
-------- ------- -------- ------ -------- ------ --------
-- -- -- -- (0.02) (0.01) (0.01)
(1.93) (1.93) (0.93) (0.93) -- -- (0.39)
-- -- -- -- (0.00)(a) (0.00)(a) --
-- -- -- -- (0.00)(a) (0.00)(a) (0.00)(a)
-------- ------- -------- ------ -------- ------ --------
(1.93) (1.93) (0.93) (0.93) (0.02) (0.01) (0.40)
-------- ------- -------- ------ -------- ------ --------
$25.43 $25.24 $21.99 $21.88 $18.84 $18.80 $13.68
======== ======= ======== ====== ======== ====== ========
24.73% 24.50% 21.62% 21.29% 37.88% 37.50% (2.23%)
(0.31%) (0.56%) (0.27%) (0.52%) 0.12% (0.13%) 0.04%
0.93% 1.18% 0.92% 1.17% 0.93% 1.18% 0.92%
36% 36% 22% 22% 33% 33% 37%
$700,070 $10,668 $541,212 $6,842 $412,129 $2,729 $284,388
</TABLE>
71
<PAGE> 76
FINANCIAL HIGHLIGHTS
INDEXED EQUITY FUND
<TABLE>
<CAPTION>
INSTITUTIONAL
INSTITUTIONAL SERVICE
CLASS CLASS
Year ended December 31
1998
<S> <C> <C>
Net asset value at beginning of year $27.05 $26.99
---------- -------
Net investment income 0.38 0.31
Net realized and unrealized gain (loss) on investments 7.36 7.31
---------- -------
Total from investment operations 7.74 7.62
---------- -------
LESS DIVIDENDS AND DISTRIBUTIONS:
From net investment income (0.38) (0.31)
From net realized gain on investments (1.02) (1.02)
In excess of net realized gain on investments -- --
---------- -------
Total dividends and distributions (1.40) (1.33)
---------- -------
Net asset value at end of year $33.39 $33.28
========== =======
Total investment return 28.62% 28.24%
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA:
Net investment income 1.29% 1.04%
Net expenses 0.30% 0.55%
Expenses (before reimbursement) 0.56% 0.81%
Portfolio turnover rate 8% 8%
Net assets at end of year (in 000's) $1,472,263 $36,442
</TABLE>
INTERNATIONAL EQUITY FUND
<TABLE>
<CAPTION>
INSTITUTIONAL
INSTITUTIONAL SERVICE
CLASS CLASS
Year ended December 31
1998
<S> <C> <C>
Net asset value at beginning of year $9.93 $9.85
---------- -------
Net investment income 0.13 0.11
Net realized and unrealized gain (loss) on investments 2.12 2.11
Net realized and unrealized gain (loss) on foreign currency
transactions (0.03) (0.03)
---------- -------
Total from investment operations 2.22 2.19
---------- -------
LESS DIVIDENDS AND DISTRIBUTIONS:
From net investment income and net realized gain on foreign
currency transactions (0.24) (0.22)
From net realized gain on investments -- --
In excess of net investment income (0.10) (0.10)
---------- -------
Total dividends and distributions (0.34) (0.32)
---------- -------
Net asset value at end of year $11.81 $11.72
========== =======
Total investment return 22.41% 22.20%
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA:
Net investment income 1.14% 0.89%
Net expenses 1.00% 1.25%
Expenses (before reimbursement) 1.03% 1.28%
Portfolio turnover rate 51% 51%
Net assets at end of year (in 000's) $140,630 $675
</TABLE>
(a) Less than one cent per share.
(b) Commencement of operations.
72
<PAGE> 77
FINANCIAL HIGHLIGHTS
INDEXED EQUITY FUND
<TABLE>
<CAPTION>
INSTITUTIONAL INSTITUTIONAL
INSTITUTIONAL SERVICE INSTITUTIONAL SERVICE INSTITUTIONAL
CLASS CLASS CLASS CLASS CLASS
Year ended December 31
1997 1996 1995
<S> <C> <C> <C> <C>
$21.05 $21.01 $17.82 $17.81 $13.53
-------- ------- -------- ------ --------
0.37 0.32 0.34 0.31 0.35
6.54 6.52 3.69 3.66 4.64
-------- ------- -------- ------ --------
6.91 6.84 4.03 3.97 4.99
-------- ------- -------- ------ --------
(0.37) (0.32) (0.34) (0.31) (0.34)
(0.54) (0.54) (0.46) (0.46) (0.36)
-- -- -- -- --
-------- ------- -------- ------ --------
(0.91) (0.86) (0.80) (0.77) (0.70)
-------- ------- -------- ------ --------
$27.05 $26.99 $21.05 $21.01 $17.82
======== ======= ======== ====== ========
32.88% 32.60% 22.57% 22.21% 36.88%
1.56% 1.31% 1.96% 1.71% 2.21%
0.30% 0.55% 0.44% 0.69% 0.50%
0.56% 0.81% 0.59% 0.84% 0.59%
3% 3% 8% 8% 4%
$966,217 $13,828 $617,716 $5,865 $354,420
<CAPTION>
INSTITUTIONAL
SERVICE INSTITUTIONAL
CLASS CLASS
Year ended December 31
1995 1994
<S> <C>
$13.53 $13.86
------ --------
0.33 0.33
4.64 (0.20)
------ --------
4.97 0.13
------ --------
(0.33) (0.33)
(0.36) (0.13)
-- 0.00(a)
------ --------
(0.69) (0.46)
------ --------
$17.81 $13.53
====== ========
36.70% 0.90%
1.96% 2.43%
0.75% 0.50%
0.84% 0.58%
4% 5%
$969 $244,685
</TABLE>
INTERNATIONAL EQUITY FUND
<TABLE>
<CAPTION>
INSTITUTIONAL
INSTITUTIONAL INSTITUTIONAL SERVICE INSTITUTIONAL
CLASS SERVICE INSTITUTIONAL CLASS INSTITUTIONAL SERVICE
CLASS CLASS CLASS CLASS
Year ended December 31 January 1, 1995(b) through
1997 1996 December 31, 1995
<S> <C> <C> <C> <C> <C>
$10.63 $10.58 $10.35 $10.33 $10.00 $10.00
-------- ------- -------- ------ -------- ------
1.14 1.11 0.64 0.62 0.36 0.35
(0.10) (0.10) 0.09 0.09 0.17 0.16
(0.49) (0.52) 0.51 0.48 0.18 0.17
-------- ------- -------- ------ -------- ------
0.55 0.49 1.24 1.19 0.71 0.68
-------- ------- -------- ------ -------- ------
(0.96) (0.93) (0.84) (0.82) (0.10) (0.09)
(0.29) (0.29) (0.12) (0.12) (0.26) (0.26)
-- -- -- -- (0.00)(a) (0.00)(a)
-------- ------- -------- ------ -------- ------
(1.25) (1.22) (0.96) (0.94) (0.36) (0.35)
-------- ------- -------- ------ -------- ------
$9.93 $9.85 $10.63 $10.58 $10.35 $10.33
======== ======= ======== ====== ======== ======
5.44% 4.88% 12.09% 11.59% 7.17% 6.86%
1.23% 0.98% 0.83% 0.58% 1.05% 0.80%
1.00% 1.25% 1.00% 1.25% 1.00% 1.25%
1.04% 1.29% 1.07% 1.32% 1.07% 1.32%
37% 37% 23% 23% 26% 26%
$113,774 $607 $126,280 $725 $96,714 $213
</TABLE>
73
<PAGE> 78
FINANCIAL HIGHLIGHTS
ASSET MANAGER FUND (FORMERLY KNOWN AS MULTI-ASSET FUND)
<TABLE>
<CAPTION>
INSTITUTIONAL
INSTITUTIONAL SERVICE
CLASS CLASS
Year ended December 31
1998
<S> <C> <C>
Net asset value at beginning of year $14.83 $14.81
-------- -------
Net investment income 0.43 0.39
Net realized and unrealized gain (loss) on investments 2.70 2.69
Net realized and unrealized gain (loss) on foreign currency
transactions 0.02 0.02
-------- -------
Total from investment operations 3.15 3.10
-------- -------
LESS DIVIDENDS AND DISTRIBUTIONS:
From net investment income (0.43) (0.39)
From net realized gain on investments (2.19) (2.19)
In excess of net realized gain on investments -- --
-------- -------
Total dividends and distributions (2.62) (2.58)
-------- -------
Net asset value at end of year $15.36 $15.33
======== =======
Total investment return 21.31% 21.00%
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA:
Net investment income 2.64% 2.39%
Net expenses 0.80% 1.05%
Expenses (before reimbursement) 0.80% 1.05%
Portfolio turnover rate 55% 55%
Net assets at end of year (in 000's) $500,449 $16,853
</TABLE>
VALUE EQUITY FUND
<TABLE>
<CAPTION>
INSTITUTIONAL
INSTITUTIONAL SERVICE
CLASS CLASS
Year ended December 31
1998
<S> <C> <C>
Net asset value at beginning of year $16.36 $16.35
-------- -------
Net investment income 0.18 0.14
Net realized and unrealized gain (loss) on investments (1.58) (1.57)
-------- -------
Total from investment operations (1.40) (1.43)
-------- -------
LESS DIVIDENDS AND DISTRIBUTIONS:
From net investment income (0.18) (0.14)
From net realized gain on investments (2.90) (2.90)
In excess of net realized gain on investments (0.12) (0.12)
-------- -------
Total dividends and distributions (3.20) (3.16)
-------- -------
Net asset value at end of year $11.76 $11.76
======== =======
Total investment return (8.10%) (8.30%)
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA:
Net investment income 1.04% 0.79%
Net expenses 0.98% 1.23%
Portfolio turnover rate 76% 76%
Net assets at end of year (in 000's) $800,993 $9,740
</TABLE>
(a) Less than one cent per share.
74
<PAGE> 79
FINANCIAL HIGHLIGHTS
ASSET MANAGER FUND (FORMERLY KNOWN AS MULTI-ASSET FUND)
<TABLE>
<CAPTION>
INSTITUTIONAL INSTITUTIONAL INSTITUTIONAL
INSTITUTIONAL SERVICE INSTITUTIONAL SERVICE INSTITUTIONAL SERVICE INSTITUTIONAL
CLASS CLASS CLASS CLASS CLASS CLASS CLASS
Year ended December 31
1997 1996 1995 1994
<S> <C> <C> <C> <C> <C> <C>
$13.19 $13.19 $11.79 $11.79 $10.67 $10.67 $11.67
-------- ------ -------- ------ -------- ------ -------
0.34 0.31 0.38 0.34 0.48 0.47 0.45
3.15 3.13 1.53 1.53 2.39 2.39 (0.55)
(0.00)(a) (0.00)(a) (0.00)(a) (0.00)(a) (0.01) (0.01) --
-------- ------ -------- ------ -------- ------ -------
3.49 3.44 1.91 1.87 2.86 2.85 (0.10)
-------- ------ -------- ------ -------- ------ -------
(0.34) (0.31) (0.38) (0.34) (0.48) (0.47) (0.45)
(1.51) (1.51) (0.13) (0.13) (1.18) (1.18) (0.42)
-- -- -- -- (0.08) (0.08) (0.03)
-------- ------ -------- ------ -------- ------ -------
(1.85) (1.82) (0.51) (0.47) (1.74) (1.73) (0.90)
-------- ------ -------- ------ -------- ------ -------
$14.83 $14.81 $13.19 $13.19 $11.79 $11.79 $10.67
======== ====== ======== ====== ======== ====== =======
26.69% 26.30% 16.16% 15.89% 26.81% 26.70% (0.86%)
2.27% 2.02% 2.99% 2.74% 4.03% 3.78% 3.63%
0.76% 1.01% 0.70% 0.95% 0.70% 0.95% 0.70%
0.76% 1.01% 0.75% 1.00% 0.77% 1.02% 0.75%
19% 19% 103% 103% 261% 261% 128%
$414,824 $9,889 $323,790 $5,508 $273,351 $3,536 $229,079
</TABLE>
VALUE EQUITY FUND
<TABLE>
<CAPTION>
INSTITUTIONAL INSTITUTIONAL INSTITUTIONAL
INSTITUTIONAL SERVICE INSTITUTIONAL SERVICE INSTITUTIONAL SERVICE INSTITUTIONAL
CLASS CLASS CLASS CLASS CLASS CLASS CLASS
Year ended December 31
1997 1996 1995 1994
<S> <C> <C> <C> <C> <C> <C>
$15.87 $15.85 $14.43 $14.43 $11.58 $11.58 $12.40
-------- ------- -------- ------- -------- ------ --------
0.23 0.16 0.25 0.23 0.21 0.20 0.17
3.31 3.32 2.98 2.96 3.20 3.20 (0.02)
-------- ------- -------- ------- -------- ------ --------
3.54 3.48 3.23 3.19 3.41 3.40 0.15
-------- ------- -------- ------- -------- ------ --------
(0.23) (0.16) (0.25) (0.23) (0.21) (0.20) (0.17)
(2.82) (2.82) (1.54) (1.54) (0.35) (0.35) (0.80)
-------- ------- -------- ------- -------- ------ --------
(3.05) (2.98) (1.79) (1.77) (0.56) (0.55) (0.97)
-------- ------- -------- ------- -------- ------ --------
$16.36 $16.35 $15.87 $15.85 $14.43 $14.43 $11.58
======== ======= ======== ======= ======== ====== ========
22.63% 22.28% 22.41% 22.10% 29.42% 29.32% 1.22%
1.30% 1.05% 1.70% 1.45% 1.64% 1.39% 1.50%
0.93% 1.18% 0.92% 1.17% 0.93% 1.18% 0.92%
66% 66% 50% 50% 51% 51% 43%
$984,220 $11,010 $821,725 $14,752 $603,749 $3,213 $396,537
</TABLE>
75
<PAGE> 80
FINANCIAL HIGHLIGHTS
BOND FUND
<TABLE>
<CAPTION>
INSTITUTIONAL
INSTITUTIONAL SERVICE
CLASS CLASS
Year ended December 31
1998
<S> <C> <C>
Net asset value at beginning of year $9.71 $9.68
-------- ------
Net investment income 0.57 0.54
Net realized and unrealized gain (loss) on investments 0.20 0.20
-------- ------
Total from investment operations 0.77 0.74
-------- ------
LESS DIVIDENDS:
From net investment income (0.57) (0.54)
-------- ------
Net asset value at end of year $9.91 $9.88
======== ======
Total investment return 7.93% 7.73%
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA:
Net investment income 5.57% 5.32%
Net expenses 0.75% 1.00%
Expenses (before reimbursement) 0.86% 1.11%
Portfolio turnover rate 335% 335%
Net assets at end of year (in 000's) $182,402 $4,290
</TABLE>
INDEXED BOND FUND
<TABLE>
<CAPTION>
INSTITUTIONAL
INSTITUTIONAL SERVICE
CLASS CLASS
Year ended December 31
1998
<S> <C> <C>
Net asset value at beginning of year $10.74 $10.74
-------- ------
Net investment income 0.69 0.66
Net realized and unrealized gain (loss) on investments 0.19 0.18
-------- ------
Total from investment operations 0.88 0.84
-------- ------
LESS DIVIDENDS AND DISTRIBUTIONS:
From net investment income (0.69) (0.66)
From net realized gain on investments -- --
-------- ------
Total dividends and distributions (0.69) (0.66)
-------- ------
Net asset value at end of year $10.93 $10.92
======== ======
Total investment return 8.21% 7.86%
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA:
Net investment income 6.37% 6.12%
Net expenses 0.50% 0.75%
Expenses (before reimbursement) 0.65% 0.90%
Portfolio turnover rate 14% 14%
Net assets at end of year (in 000's) $156,244 $3,881
</TABLE>
76
<PAGE> 81
FINANCIAL HIGHLIGHTS
BOND FUND
<TABLE>
<CAPTION>
INSTITUTIONAL INSTITUTIONAL INSTITUTIONAL
INSTITUTIONAL SERVICE INSTITUTIONAL SERVICE INSTITUTIONAL SERVICE INSTITUTIONAL
CLASS CLASS CLASS CLASS CLASS CLASS CLASS
Year ended December 31
1997 1996 1995 1994
<S> <C> <C> <C> <C> <C> <C>
$9.51 $9.49 $9.85 $9.83 $8.93 $8.93 $9.98
-------- ------ -------- ------ -------- ------- --------
0.61 0.59 0.62 0.60 0.68 0.67 0.72
0.20 0.19 (0.34) (0.34) 0.92 0.90 (1.05)
-------- ------ -------- ------ -------- ------- --------
0.81 0.78 0.28 0.26 1.60 1.57 (0.33)
-------- ------ -------- ------ -------- ------- --------
(0.61) (0.59) (0.62) (0.60) (0.68) (0.67) (0.72)
-------- ------ -------- ------ -------- ------- --------
$9.71 $9.68 $9.51 $9.49 $9.85 $9.83 $8.93
======== ====== ======== ====== ======== ======= ========
8.57% 8.21% 2.80% 2.62% 17.88% 17.55% (3.31%)
6.21% 5.96% 6.10% 5.85% 6.62% 6.37% 7.13%
0.75% 1.00% 0.75% 1.00% 0.75% 1.00% 0.75%
0.85% 1.10% 0.86% 1.11% 0.86% 1.11% 0.82%
338% 338% 398% 398% 470% 470% 478%
$183,846 $1,531 $177,009 $1,597 $193,518 $749 $202,970
</TABLE>
INDEXED BOND FUND
<TABLE>
<CAPTION>
INSTITUTIONAL INSTITUTIONAL INSTITUTIONAL
INSTITUTIONAL SERVICE INSTITUTIONAL SERVICE INSTITUTIONAL SERVICE INSTITUTIONAL
CLASS CLASS CLASS CLASS CLASS CLASS CLASS
Year ended December 31
1997 1996 1995 1994
<S> <C> <C> <C> <C> <C> <C>
$10.52 $10.52 $10.99 $10.99 $10.06 $10.06 $11.08
-------- ------ -------- ------ -------- ------ --------
0.73 0.70 0.76 0.74 0.82 0.81 0.65
0.22 0.22 (0.48) (0.48) 1.00 1.00 (1.03)
-------- ------ -------- ------ -------- ------ --------
0.95 0.92 0.28 0.26 1.82 1.81 (0.38)
-------- ------ -------- ------ -------- ------ --------
(0.73) (0.70) (0.75) (0.73) (0.82) (0.81) (0.64)
-- -- -- -- (0.07) (0.07) --
-------- ------ -------- ------ -------- ------ --------
(0.73) (0.70) (0.75) (0.73) (0.89) (0.88) (0.64)
-------- ------ -------- ------ -------- ------ --------
$10.74 $10.74 $10.52 $10.52 $10.99 $10.99 $10.06
======== ====== ======== ====== ======== ====== ========
9.01% 8.75% 2.55% 2.34% 18.07% 17.97% (3.44%)
6.60% 6.35% 6.21% 5.96% 6.38% 6.13% 6.13%
0.50% 0.75% 0.50% 0.75% 0.50% 0.75% 0.50%
0.65% 0.90% 0.65% 0.90% 0.63% 0.88% 0.61%
32% 32% 312% 312% 284% 284% 274%
$117,922 $3,015 $109,482 $2,764 $163,219 $471 $169,404
</TABLE>
77
<PAGE> 82
FINANCIAL HIGHLIGHTS
INTERNATIONAL BOND FUND
<TABLE>
<CAPTION>
INSTITUTIONAL
INSTITUTIONAL SERVICE
CLASS CLASS
Year ended December 31,
1998
<S> <C> <C>
Net asset value at beginning of year $10.05 $10.01
-------- --------
Net investment income 0.56 0.53
Net realized and unrealized gain (loss) on investments 0.71 0.71
Net realized and unrealized gain on foreign currency
transactions (0.01) (0.01)
-------- --------
Total from investment operations 1.26 1.23
-------- --------
LESS DIVIDENDS AND DISTRIBUTIONS:
From net investment income and net realized gain on foreign
currency transactions (0.63) (0.60)
From net realized gain on investments (0.12) (0.12)
-------- --------
Total dividends and distributions (0.75) (0.72)
-------- --------
Net asset value at end of year $10.56 $10.52
======== ========
Total investment return 12.53% 12.30%
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA:
Net investment income 5.61% 5.36%
Net expenses 0.95% 1.20%
Expenses (before reimbursement) 1.08% 1.33%
Portfolio turnover rate 299% 299%
Net assets at end of year (in 000's) $62,549 $234
</TABLE>
MONEY MARKET FUND
<TABLE>
<CAPTION>
INSTITUTIONAL
INSTITUTIONAL SERVICE
CLASS CLASS
Year ended December 31,
1998
<S> <C> <C>
Net asset value at beginning of year $1.00 $1.00
-------- --------
Net investment income 0.05 0.05
-------- --------
LESS DIVIDENDS AND DISTRIBUTIONS:
From net investment income (0.05) (0.05)
From net realized gain on investments -- --
-------- --------
Total dividends and distributions (0.05) (0.05)
-------- --------
Net asset value at end of year $1.00 $1.00
======== ========
Total investment return 5.25% 4.99%
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA:
Net investment income 5.12% 4.87%
Net expenses 0.50% 0.75%
Expenses (before reimbursement) 0.63% 0.88%
Net assets at end of year (in 000's) $194,338 $103,765
</TABLE>
(a) Commencement of operations.
(b) Less than one cent per share.
(+) Annualized.
78
<PAGE> 83
FINANCIAL HIGHLIGHTS
INTERNATIONAL BOND FUND
<TABLE>
<CAPTION>
INSTITUTIONAL
INSTITUTIONAL INSTITUTIONAL SERVICE INSTITUTIONAL
CLASS SERVICE INSTITUTIONAL CLASS INSTITUTIONAL SERVICE
CLASS CLASS CLASS CLASS
Year ended December 31 January 1, 1995(a) through
1997 1996 December 31, 1995
<S> <C> <C> <C> <C> <C>
$11.10 $11.07 $11.16 $11.14 $10.00 $10.00
-------- ------- -------- ------- ------- ------
1.01 0.98 1.21 1.19 0.70 0.70
(1.11) (1.13) 0.11 0.11 1.12 1.10
0.40 0.41 0.27 0.26 0.02 0.02
-------- ------- -------- ------- ------- ------
0.30 0.26 1.59 1.56 1.84 1.82
-------- ------- -------- ------- ------- ------
(0.99) (0.96) (1.37) (1.35) (0.55) (0.55)
(0.36) (0.36) (0.28) (0.28) (0.13) (0.13)
-------- ------- -------- ------- ------- ------
(1.35) (1.32) (1.65) (1.63) (0.68) (0.68)
-------- ------- -------- ------- ------- ------
$10.05 $10.01 $11.10 $11.07 $11.16 $11.14
======== ======= ======== ======= ======= ======
2.62% 2.27% 14.32% 14.08% 18.46% 18.26%
5.86% 5.61% 6.02% 5.77% 6.61% 6.36%
0.95% 1.20% 0.95% 1.20% 0.95% 1.20%
1.10% 1.35% 1.08% 1.33% 1.03% 1.28%
186% 186% 57% 57% 92% 92%
$48,613 $235 $51,980 $225 $44,388 $6
</TABLE>
MONEY MARKET FUND
<TABLE>
<CAPTION>
INSTITUTIONAL INSTITUTIONAL
INSTITUTIONAL SERVICE INSTITUTIONAL SERVICE INSTITUTIONAL
CLASS CLASS CLASS CLASS CLASS
Year ended December 31
1997 1996 1995
<S> <C> <C> <C> <C>
$1.00 $1.00 $1.00 $1.00 $1.00
-------- ------- -------- ------- -------
0.05 0.05 0.05 0.05 0.05
-------- ------- -------- ------- -------
(0.05) (0.05) (0.05) (0.05) (0.05)
(0.00)(b) (0.00)(b) -- -- --
-------- ------- -------- ------- -------
(0.05) (0.05) (0.05) (0.05) (0.05)
-------- ------- -------- ------- -------
$1.00 $1.00 $1.00 $1.00 $1.00
======== ======= ======== ======= =======
5.27% 5.01% 5.11% 4.85% 5.63%
5.18% 4.93% 5.00% 4.75% 5.48%
0.50% 0.75% 0.50% 0.75% 0.50%
0.61% 0.86% 0.67% 0.92% 0.73%
$190,319 $64,228 $110,760 $34,664 $67,869
<CAPTION>
INSTITUTIONAL
SERVICE INSTITUTIONAL
CLASS CLASS
Year ended December 31
1995 1994
<S> <C>
$1.00 $1.00
------ -------
0.05 0.04
------ -------
(0.05) (0.04)
-- --
------ -------
(0.05) (0.04)
------ -------
$1.00 $1.00
====== =======
5.46% 3.88%
5.23% 3.89%
0.75% 0.50%
0.98% 0.68%
$2,784 $65,106
</TABLE>
79
<PAGE> 84
FINANCIAL HIGHLIGHTS
SHORT-TERM BOND FUND
<TABLE>
<CAPTION>
INSTITUTIONAL
INSTITUTIONAL SERVICE
CLASS CLASS
Year ended December 31
1998
<S> <C> <C>
Net asset value at beginning of year $9.39 $9.38
------- -------
Net investment income 0.56 0.53
Net realized and unrealized gain (loss) on investments 0.04 0.03
------- -------
Total from investment operations 0.60 0.56
------- -------
LESS DIVIDENDS:
From net investment income (0.56) (0.53)
------- -------
Net asset value at end of year $9.43 $9.41
======= =======
Total investment return 6.37% 5.98%
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA:
Net investment income 5.95% 5.70%
Net expenses 0.60% 0.85%
Expenses (before reimbursement) 0.89% 1.14%
Portfolio turnover rate 125% 125%
Net assets at end of year (in 000's) $42,219 $1,273
</TABLE>
80
<PAGE> 85
FINANCIAL HIGHLIGHTS
SHORT-TERM BOND FUND
<TABLE>
<CAPTION>
INSTITUTIONAL INSTITUTIONAL INSTITUTIONAL
INSTITUTIONAL SERVICE INSTITUTIONAL SERVICE INSTITUTIONAL SERVICE INSTITUTIONAL
CLASS CLASS CLASS CLASS CLASS CLASS CLASS
Year ended December 31
1997 1996 1995 1994
<S> <C> <C> <C> <C> <C> <C>
$9.48 $9.46 $9.68 $9.67 $9.37 $9.37 $10.33
------- ------ ------- ------ ------- ------ -------
0.67 0.64 0.66 0.64 0.65 0.64 0.97
(0.09) (0.08) (0.20) (0.21) 0.31 0.30 (0.96)
------- ------ ------- ------ ------- ------ -------
0.58 0.56 0.46 0.43 0.96 0.94 0.01
------- ------ ------- ------ ------- ------ -------
(0.67) (0.64) (0.66) (0.64) (0.65) (0.64) (0.97)
------- ------ ------- ------ ------- ------ -------
$9.39 $9.38 $9.48 $9.46 $9.68 $9.67 $9.37
======= ====== ======= ====== ======= ====== =======
6.13% 5.98% 4.81% 4.46% 10.27% 10.07% 0.11%
6.24% 5.99% 5.85% 5.60% 6.38% 6.13% 5.90%
0.60% 0.85% 0.60% 0.85% 0.60% 0.85% 0.60%
0.82% 1.07% 0.79% 1.04% 0.82% 1.07% 0.72%
153% 153% 195% 195% 171% 171% 269%
$46,674 $1,485 $57,805 $1,316 $50,902 $1,128 $62,340
</TABLE>
81
<PAGE> 86
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.
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 1-800-695-2126.
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 http://www.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
[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.
02-017-0599
<PAGE> 87
[This page intentionally left blank]
<PAGE> 88
[This page intentionally left blank]
<PAGE> 89
USE BACK COVER FOR MAINSTAY INSTITUTIONAL FUNDS, INC.
<PAGE> 90
Money Market Fund Sweep Shares Prospectus
May 1, 1999
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").
INVESTMENT OBJECTIVES, PRINCIPAL INVESTMENT STRATEGIES AND PRINCIPAL RISKS: AN
OVERVIEW
Pursuant to its investment objective, the Fund invests for a high level of
current income and it invests, under normal market conditions, primarily in debt
or fixed income securities. The Fund is managed by MainStay Management, Inc. and
has a Subadviser that is responsible for the day to day portfolio management of
the Fund.
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, you could 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, principal investment strategies, principal
risks, past 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........................................................2
More About Principal Investment Strategies and Principal Risks.................5
Shareholder Guide..............................................................6
Distribution and Service Fees.............................................6
Buying and Selling Shares.................................................7
Fund Earnings.............................................................9
Understand the Tax Consequences..........................................10
Know With Whom You're Investing...............................................11
Financial Highlights..........................................................12
<PAGE> 91
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.
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
- - corporate debt securities
The Funds may also invest in variable rate notes, FLOATERS and ASSET-BACKED
SECURITIES. 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 a 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.
PRINCIPAL RISKS
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.
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 information about issuers
- - changes in U.S. or foreign tax or currency laws
The Fund's principal investments include derivatives such as variable rate
notes, floaters and asset-backed securities. If New York Life Insurance Company,
the Fund's Subadviser, 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.
FLOATERS (or securities with a floating rate of interest) are debt securities
with a variable interest rate that is tied to another interest rate, such as a
money-market index or Treasury bill rate.
ASSET-BACKED SECURITIES are debt securities whose values are based on underlying
pools of receivables.
2
<PAGE> 92
PAST PERFORMANCE
[BAR GRAPH]
<TABLE>
<S> <C>
91 5.95
92 3.66
93 2.89
94 3.88
95 5.63
96 5.11
97 5.27
98 5.25
</TABLE>
ANNUAL RETURNS, INSTITUTIONAL CLASS SHARES
(by calendar year 1991-1998)
The bar chart and table indicate the risks of investing in the Fund. The bar
chart shows you how the Fund's performance has varied over the life of the Fund.
The table shows 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 (January 2, 1991) up to December 31, 1994. The
Institutional Class shares and the Institutional 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. FOR CURRENT YIELD INFORMATION, CALL 1-800-695-2126. As with all
mutual funds, past performance is not necessarily an indication of how the Fund
will perform in the future.
<TABLE>
<CAPTION>
BEST AND WORST QUARTERLY RETURNS, INSTITUTIONAL
CLASS SHARES
(1991-1998)
<S> <C> <C>
RETURN QUARTER/YEAR
Highest Return/Best Quarter 1.62% Q1/1991
Lowest Return/Worst Quarter 0.70% Q2/1993
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS (AS OF 12/31/98)
SINCE
1 YEAR 5 YEARS INCEPTION*
<S> <C> <C> <C>
Money Market Fund
Sweep Shares 4.99% 4.84% 4.58%
7-day yield: 4.53%
The Average Lipper
Institutional Money
Market Fund 5.30% 5.15% 4.88%
* January 2, 1991
</TABLE>
3
<PAGE> 93
FEES AND EXPENSES OF THE FUND
The table below describes the fees and expenses that you may pay if you buy and
hold Sweep Shares.
<TABLE>
<CAPTION>
SHAREHOLDER FEES
(FEES PAID DIRECTLY FROM YOUR INVESTMENT)
<S> <C>
Maximum Sales Charge (Load) Imposed on Purchases of Shares
(as a percentage of offering price) None
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 0.13%
-----
Total Annual Fund Operating Expenses(+) 1.13%
=====
</TABLE>
<TABLE>
<S> <C>
* Because the distribution fee is an annual fee charged
against the assets of the Fund, long-term shareholders may
indirectly pay an amount that is more than the economic
equivalent of paying other types of sales charges.
(+) 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 0.37% and total fund operating expenses were 1.00%. This
waiver may be discontinued at anytime.
</TABLE>
EXAMPLE
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 close your account at the end of each of the time periods
shown. 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.
<TABLE>
<CAPTION>
MONEY MARKET FUND
EXPENSES AFTER SWEEP SHARES*
- -------------- -----------------
<S> <C>
1 year $ 115
3 years $ 359
5 years $ 622
10 years $1,375
</TABLE>
* Does not reflect fee waiver.
4
<PAGE> 94
More About Principal Investment Strategies and Principal Risks
Information about the Fund's principal investments, investment practices and
principal risks appears at the beginning of the prospectus. The information
below describes in greater detail the principal investments, investment
practices and principal risks pertinent to the Fund.
DERIVATIVE SECURITIES
The value of derivatives is based on certain underlying fixed-income securities,
interest rates or indexes. Derivative securities may be hard to sell and are
very sensitive to changes in the underlying security, interest rate or index. If
the Subadviser 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 Subadviser and the Fund's
other service providers (including foreign subcustodians and securities
depositaries) 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 Subadviser 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 Subadviser 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 Subadviser and the Fund's other service providers. In
addition, companies in which the Fund invests may experience Year 2000 Issue
difficulties which could adversely impact their business and adversely affect
the value of the securities issued by them.
5
<PAGE> 95
Shareholder Guide
The following pages are intended to help you make the most of your investment in
the Fund. You are eligible to buy Sweep Shares if you are a customer of a
financial institution that has made arrangements with NYLIFE Distributors, Inc.
for the purchase of Sweep Shares.
DISTRIBUTION AND SERVICE FEES
RULE 12b-1 PLAN
The Company has adopted a distribution plan pursuant to Rule 12b-1 under the
Investment Company Act of 1940 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. 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> 96
BUYING AND SELLING SHARES
HOW TO OPEN AN ACCOUNT
If you are participating in an account sweep arrangement with a financial
institution, that institution will provide you with the information you need to
open an account and buy Sweep Shares.
You should speak to your account representative at your financial institution to
open an account in the Fund in conjunction with your brokerage account.
A financial institution will establish a single omnibus account with the Fund's
transfer agent, 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.
HOW TO BUY SHARES
Shares (and fractions of shares) are purchased at market price (known as the net
asset value or NAV) on any day that 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. This means
that all necessary information, signatures and documentation has been received.
All investments must be in U.S. dollars.
No wires are accepted when the New York Stock Exchange or banks are closed.
MINIMUM INVESTMENTS*
The minimum required investment by a financial institution is:
- - Initial combined investment--at least $250,000, which may be spread over a
thirteen-month period after opening the account.
- - Each investment after that--at least $1,000.
Please check with your account representative for investment minimums and/or
other requirements that may apply to brokerage or other accounts through which
you own Sweep Shares.
*The Company may also accept investments of smaller amounts at its discretion.
HOW TO SELL SHARES
Check with your account representative for information on how your Sweep Shares
may be redeemed (sold).
Generally, if your financial institution offers an automatic sweep arrangement,
the sweep will automatically transfer from your Fund account sufficient amounts
to cover security purchases in your brokerage account.
The price of each share will be the next NAV determined after receipt of a
redemption request. The Fund imposes no charge for selling your shares. You
should check with your account representative to determine if your financial
institution imposes a charge for selling shares.
There will be no redemption, however, during any period in which the right of
redemption is suspended or date of payment is postponed because the New York
Stock Exchange is closed or trading on the Exchange is restricted or the SEC
deems an emergency to exist.
REDEMPTIONS-IN-KIND
The Fund reserves the right to pay certain redemptions, either totally or
partially, by a distribution-in-kind of securities (instead of cash) from the
Fund's portfolio. See the SAI for details.
CHECKWRITING SERVICES
You can sell shares of the Fund by writing checks for $100 or more. You need to
fill out special forms to set up checkwriting privileges. You cannot close your
account by writing a check.
7
<PAGE> 97
DETERMINING THE FUND'S SHARE PRICE (NAV) AND VALUATION OF THE FUND'S SECURITIES
You buy and sell shares at NAV. NAV is calculated at noon everyday the New York
Stock Exchange is open. It is intended that the Fund will maintain a stable NAV
of $1.00.
The Fund's investments are valued based on the amortized cost method of
valuation.
GENERAL POLICIES
Selling shares may result in a gain or loss and therefore may be subject to
taxation. Consult your tax adviser on the consequences.
In the interests of all shareholders, the Fund reserves the right to:
- - refuse any purchase request that could adversely affect a Fund or its
operations
- - change its minimum investment amounts
8
<PAGE> 98
FUND EARNINGS
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. The Fund also earns capital gains when it sells securities
at a profit.
WHEN THE FUND PAYS DIVIDENDS
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.
WHEN THE FUND PAYS CAPITAL GAINS
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.
9
<PAGE> 99
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. 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. Some capital gain
distributions are taxable as long-term capital gain, except to the extent
provided by an applicable tax exemption. Some distributions may be a return of
capital or, in some cases, capital gain. You will be advised each year about the
amount and nature of dividends paid to you. If you are not a tax-exempt
investor, purchasing shares shortly before the record date for dividend
declarations can result in a taxable return to you of a portion of the price you
paid for the shares.
The Fund may pay you in January for dividends declared in 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.
> 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.
10
<PAGE> 100
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., formed in 1997, 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 Subadviser. The Manager has also
delegated certain of its administrative responsibilities to New York Life
Insurance Company.
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 Subadviser and New York Life Insurance
Company as the subadministrator.
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 0.37% 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
Subadviser.
As of December 31, 1998, the Manager managed approximately $25.1 billion in
assets.
WHO MANAGES YOUR MONEY?
New York Life Insurance Company, 51 Madison Avenue, NY, New York 10010, is the
Subadviser 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 $90.4
billion and managed approximately $19.0 billion in assets for qualified
retirement plans.
Under the supervision of the Manager, the Subadviser 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 Subadviser 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.
11
<PAGE> 101
Financial Highlights
The financial highlights table is 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>
SWEEP SHARES
CLASS
-----------------
DECEMBER 8, 1998*
THROUGH
DECEMBER 31, 1998
-----------------
<S> <C>
Net asset value at beginning of period.... $ 1.00
------
Net investment income..................... 0.00(a)
------
Less dividends and distributions:
From net investment income.............. (0.00)(a)
From net realized gain on investments... --
------
Total dividends and distributions......... (0.00)(a)
------
Net asset value at end of period.......... $ 1.00
======
Total investment return................... 0.31%
Ratios (to average net
assets)/Supplemental Data:
Net investment income................... 4.62%+
Net expenses............................ 1.00%+
Expenses (before reimbursement)......... 1.13%+
Net assets at end of period (in 000's).... $6,957
</TABLE>
- --------
<TABLE>
<C> <S>
* Sweep Shares Class first offered on December 8, 1998
(a) Less than one cent per share.
+ Annualized.
</TABLE>
12
<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 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 1-800-695-2126.
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 http://www.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
<TABLE>
<S> <C>
[NYLIFE SECURITIES LOGO] MONEY MARKET
Money Market Fund Sweep Shares FUND SWEEP
Distributed by NYLIFE Distributors Inc., SHARES
Member NASD
300 Interpace Parkway, Building A
Parsippany, NJ 07054
---------------------------------------------------
13816-05/99 PROSPECTUS DATED
MAY 1, 1999
This Cover is Not Part of the Prospectus
</TABLE>
<PAGE> 104
MAINSTAY INSTITUTIONAL FUNDS INC.
51 MADISON AVENUE
NEW YORK, NEW YORK 10010
STATEMENT OF ADDITIONAL INFORMATION
DATE: MAY 1, 1999
This Statement of Additional Information supplements the information
contained in the Company's Prospectus dated May 1, 1999, as amended or
supplemented from time to time (the "Prospectus"), and should be read in
conjunction with the Prospectus. The Prospectus is available without charge by
writing to MainStay Institutional Funds Inc., 260 Cherry Hill Road, Parsippany,
New Jersey 07054-1108, 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 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 NYLIFE Distributors, Inc. (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.
Shareholder inquiries should be made by writing directly to MainStay
Institutional Funds Inc., 260 Cherry Hill Road, Parsippany, New Jersey
07054-1108, or by calling 1-800-695-2126. In addition, you can make inquiries
through your registered representatives.
The financial statements of each of 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, 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> 105
TABLE OF CONTENTS
<TABLE>
<S> <C>
ADDITIONAL INFORMATION ABOUT THE FUNDS............................................................................ 1
EAFE Index Fund.......................................................................................... 2
Growth Equity Fund....................................................................................... 2
Indexed Equity Fund...................................................................................... 3
International Equity Fund................................................................................ 3
Asset Manager Fund....................................................................................... 5
Value Equity Fund........................................................................................ 6
Bond Fund................................................................................................ 7
Indexed Bond Fund........................................................................................ 7
International Bond Fund.................................................................................. 8
Short-Term Bond Fund..................................................................................... 9
Money Market Fund........................................................................................ 10
INVESTMENT PRACTICES AND INSTRUMENTS COMMON TO
MULTIPLE FUNDS.................................................................................................... 13
Arbitrage................................................................................................ 13
Borrowing................................................................................................ 13
Commercial Paper......................................................................................... 14
Repurchase Agreements and Reverse Repurchase Agreements.................................................. 14
U.S. Government Securities............................................................................... 16
Corporate Debt Securities................................................................................ 16
Lending of Portfolio Securities.......................................................................... 17
Restricted Securities.................................................................................... 18
Municipal Securities..................................................................................... 18
Banking Industry and Savings and Loan Industry
Obligations.............................................................................................. 18
Floating and Variable Rate Securities.................................................................... 19
Foreign Securities....................................................................................... 20
Forward Foreign Currency Contracts....................................................................... 22
Foreign Index-Linked Instruments......................................................................... 26
American Depositary Receipts ("ADRs").................................................................... 27
When-Issued and Firm or Standby Commitment Agreements.................................................... 27
Mortgage-Related and Other Asset-Backed Securities....................................................... 28
Mortgage Dollar Rolls.................................................................................... 37
Brady Bonds.............................................................................................. 37
Loan Participation Interests............................................................................. 38
Risk Management Techniques............................................................................... 40
Options on Securities.................................................................................... 41
Options on Foreign Currencies............................................................................ 46
Futures Transactions..................................................................................... 48
Swap Agreements.......................................................................................... 59
Warrants ................................................................................................ 61
Short Sales Against the Box.............................................................................. 61
Risks Associated with Debt Securities.................................................................... 62
High Yield/High Risk Securities.......................................................................... 63
Zero Coupon Bonds........................................................................................ 65
SPECIAL CONSIDERATIONS FOR EAFE INDEX FUND, INDEXED EQUITY FUND,
ASSET MANAGER FUND AND INDEXED BOND FUND.......................................................................... 65
</TABLE>
i
<PAGE> 106
<TABLE>
<S> <C>
FUNDAMENTAL INVESTMENT RESTRICTIONS............................................................................... 66
NON-FUNDAMENTAL INVESTMENT RESTRICTIONS........................................................................... 68
DIRECTORS AND OFFICERS............................................................................................ 70
THE MANAGER, THE SUBADVISERS
AND THE DISTRIBUTOR............................................................................................... 80
Management Agreement..................................................................................... 80
Sub-Advisory Agreements.................................................................................. 82
Sub-Administration Agreement............................................................................. 84
Distribution Agreement................................................................................... 85
Service Fees............................................................................................. 86
PURCHASES AND REDEMPTIONS......................................................................................... 87
PORTFOLIO TRANSACTIONS AND BROKERAGE.............................................................................. 88
NET ASSET VALUE................................................................................................... 92
TAX INFORMATION................................................................................................... 95
PERFORMANCE INFORMATION........................................................................................... 104
OTHER INFORMATION................................................................................................. 109
Capitalization........................................................................................... 109
Effective Maturity....................................................................................... 109
Share Ownership of the Funds............................................................................. 109
Code of Ethics........................................................................................... 111
Independent Accountants.................................................................................. 112
Legal Counsel............................................................................................ 112
Transfer Agent........................................................................................... 112
Custodian................................................................................................ 112
Registration Statement................................................................................... 113
APPENDIX A: DESCRIPTION OF SECURITIES RATINGS..................................................................... 114
MOODY'S INVESTORS SERVICE, INC.................................................................................. 114
STANDARD & POOR'S............................................................................................... 117
</TABLE>
ii
<PAGE> 107
THE MAINSTAY INSTITUTIONAL FUNDS
MainStay Institutional Funds Inc. (the "Company") is an open-end
management investment company (or mutual fund) currently consisting of eleven
separate investment portfolios: Asset Manager Fund (formerly known as
Multi-Asset Fund), EAFE Index Fund, Growth Equity Fund, Indexed Equity Fund,
International Equity 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").
MainStay Management, Inc. (the "Manager") serves as the manager for the
Funds and has entered into Sub-Advisory agreements with Monitor Capital
Advisors, Inc. ("Monitor" or "Monitor Capital") with respect to the EAFE Index
Fund, Indexed Bond Fund, Indexed Equity Fund, and the Asset Manager Fund;
MacKay-Shields Financial Corporation ("MacKay-Shields") with respect to the
Bond Fund, Growth Equity Fund, International Bond Fund, International Equity
Fund, Short-Term Bond Fund, and the Value Equity Fund; and New York Life
Insurance Company with respect to the Money Market Fund ("New York Life" and
together with Monitor and MacKay-Shields, each a "Subadviser" and collectively
the "Subadvisers").
ADDITIONAL INFORMATION ABOUT THE FUNDS
The Prospectus discusses the investment objectives, principal
investment strategies and principal risks of the Funds. 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.
None of the Funds alone constitutes a complete investment program.
Investment decisions for each Fund are made independently from those of
the other accounts and investment companies that may be managed by a Subadviser.
However, if such other accounts or investment companies are prepared to invest
in, or desire to dispose of, securities in which one Fund invests at the same
time as another Fund managed by the same Subadviser, available investments or
opportunities for sales will be allocated equitably to each. In some cases, this
procedure may adversely affect the size of the position obtained for or disposed
of by a Fund or the price paid or received by a Fund.
1
<PAGE> 108
EAFE INDEX FUND
The EAFE Index Fund will generally invest in stocks in the Morgan
Stanley Capital International Europe, Australia and Far East Index ("EAFE
Index"), however, all EAFE Index companies within a country will be represented
in the Fund's portfolio of securities at the same time. The Fund may not
invest in certain stocks (numbering approximately 50) included in the EAFE
Index because corporate charters have provisions prohibiting ownership by
foreign investors.
In addition to the investments discussed in the Prospectus, 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 also 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.
There are a variety of risks associated with using options and futures.
For example, some options on foreign currencies could force the Subadviser 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 Subadviser 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. Furthermore, 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.
GROWTH EQUITY FUND
The Growth Equity 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 Subadviser to be of comparable
quality.
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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.
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. Use of these contracts do, however, involve risks.
See "Risk Management Techniques" and related sections in this SAI.
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 the Subadviser is of the opinion that a
security no longer has an appropriate appreciation potential or has reached its
anticipated level of performance, or when another security appears to offer
relatively greater appreciation potential or a relatively greater anticipated
level of performance.
However, certain requirements that must be satisfied in order for the
Fund to qualify as a regulated investment company for Federal income tax
purposes may limit the extent to which the Fund can sell securities and other
assets held for less than three months. (See "Tax Information" in the SAI.)
INDEXED EQUITY FUND
In addition to the investments discussed in the Prospectus, the
Indexed Equity Fund may invest up to 20% of total assets in options and futures
contracts to maintain cash reserves while being fully invested, to facilitate
trading or to reduce transaction costs. The Fund may also invest up to 10% of
its total assets in index swap agreements.
INTERNATIONAL EQUITY FUND
The International Equity Fund will primarily invest in a diversified
portfolio of securities, including common stocks, preferred stocks, warrants
and other comparable equity securities of corporations which do business mainly
outside of the United States.
The International Equity Fund may invest in ADRs, EDRs, GDRs (Global
Depository Receipts); IDRs (International Depositary Receipts) or other similar
securities convertible into securities of foreign issuers.
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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.
In selecting investments for the Fund, the Fund's Subadviser considers
factors such as prospects for currency exchange, interest and inflation rates,
relative economic growth, government policies influencing exchange rates and
business conditions, and the quality of individual issuers. MacKay-Shields will
also determine, using good faith judgment, (1) country allocation among the
international equity markets, (2) currency exposure (asset allocation across
currencies), and (3) diversified security holdings within each market.
The Fund may use futures and options contracts (1) in an effort to
manage cash flow and remain fully invested in the stock and currency markets,
instead of, or in addition to, buying and selling stocks and currencies; or (2)
in an effort to hedge against a decline in the value of securities or currencies
owned by it or an increase in the price of securities which it plans to
purchase. The Fund may also purchase and sell foreign currency exchange
contracts and foreign currency options for purposes of seeking to enhance
portfolio returns or to manage risk more efficiently.
MacKay-Shields also believes that active currency management can
enhance portfolio returns through opportunities arising from interest rate
differentials between instruments denominated in different currencies and/or
changes in value between currencies. Moreover, MacKay-Shields believes active
currency management can
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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. See "Risk Management Techniques" and related sections
of this SAI.
ASSET MANAGER FUND
Within the asset class constraints discussed in the prospectus, the
Asset Manager Fund may also invest up to 20% of total its assets in foreign
securities (defined as "traded primarily in a market outside the United States")
of developed and emerging market countries; up to 10% of total assets in
interest rate, index, and currency exchange rate swap agreements; and 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.
Within the asset class constraints discussed in the prospectus, the
Fund may also 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 Subadviser has positioned the
assets close to a minimum or maximum for one or more asset classes, and the
Fund's cash position changes because of investors buying or selling the Fund's
shares. To correct the situation, the Subadviser will move cash or reallocate
assets within seven days.
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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 used by the Subadviser to estimate returns on
domestic and foreign stock markets 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
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, the Fund's Subadviser,
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.
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 also invest up to 35% of its total assets in options on
common stocks and stock indices, stocks represented by ADRs or 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 Fund may invest, when purchased, must be, rated Baa or better by
Moody's or BBB or better by Standard & Poor's; or unrated but judged by the
Subadviser to be of comparable quality.
The Fund may also 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.
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BOND FUND
In addition to the investment discussed in the Prospectus, 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 also invest in interest rate and bond index futures
contracts, and options on these contracts, and options on debt securities.
The Subadviser will alter the average maturity of the portfolio in
accordance with the research and other methods.
INDEXED BOND FUND
The Indexed Bond Fund invests primarily in a representative sample of
the securities in the Salomon Smith Barney Broad Investment Grade Bond Index
(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 believes the indexing
approach is an effective method of the Fund's Subadviser 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 BIG Index in
both rising and falling markets.
The Indexed Bond 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 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 of the Fund.
INTERNATIONAL BOND FUND
The International Bond Fund may invest in any debt or debt-related
investment, domestic or foreign, denominated in foreign or U.S. currency.
However, 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, the Fund may also
invest in currencies on a spot or forward basis, securities or securities index
options, foreign currency options, futures contracts and related options on
futures contracts. The Fund also 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 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. See "Risk Management Techniques" and
related sections in this SAI.
In selecting investments for the Fund, the Fund's Subadviser considers
factors such as prospects for currency exchange, interest and inflation rates,
relative economic growth, government policies influencing exchange rates and
business conditions, and the 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.
Generally, the Fund's average maturity will be shorter when interest
rates worldwide or in a particular country are expected
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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 Short-Term Bond 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 also 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 Subadviser 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's Subadviser will
attempt to protect against risks stemming from differences in foreign exchange
rates. 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. See "Risk Management Techniques" and related sections in
this SAI.
The Fund may invest in interest rate and bond index futures contracts
and options on these contracts; and options on debt securities and in U.S.
dollar- or foreign currency-denominated obligations of foreign governments or
their subdivisions, agencies or instrumentalities, international agencies or
supranational entities.
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.
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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 Money Market 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 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 Subadviser, New York
Life Insurance Company, 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
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comparable quality to a security in the highest rating category as determined by
the Subadviser; (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. 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 invest up to 5% of its total assets in
securities that were "Second Tier" when acquired. The Fund may not invest more
than the greater of 1% of its total assets or $1 million, 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
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is downgraded or otherwise ceases to be of the quality that is eligible for the
Fund, New York Life Insurance, the Fund's Subadviser, 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 Subadviser and such other information
as it deems appropriate, shall cause the Fund to take such action as it deems
appropriate, and shall report promptly to the Board the action it has taken and
the reasons for such action.
Pursuant to the rule, the Fund uses the amortized cost method of
valuing its investments, which facilitates the maintenance of the Fund's per
share net asset value at $1.00. The amortized cost method, which is normally
used to value all of the Fund's portfolio securities, involves initially valuing
a security at its cost and thereafter amortizing to maturity any discount or
premium, regardless of the impact of fluctuating interest rates on the market
value of the instrument.
The Directors have also established procedures designed to stabilize,
to the extent reasonably possible, the Fund's price per share as computed for
the purpose of sales and redemptions at $1.00. Such procedures include review of
the Fund's portfolio by the Directors, at such intervals as they deem
appropriate, to determine whether the Fund's net asset value calculated by using
available market quotations or market equivalents (the determination of value by
reference to interest rate levels, quotations of comparable securities and other
factors) deviates from $1.00 per share based on amortized cost.
The extent of deviation between the Fund's net asset value based upon
available market quotations or market equivalents and $1.00 per share based on
amortized cost will be periodically examined by the Directors. If such deviation
exceeds 1/2 of 1%, the Directors will promptly consider what action, if any,
will be initiated. In the event the Directors determine that a deviation exists
which may result in material dilution or other unfair results to investors or
existing shareholders, they will take such corrective action as they regard to
be necessary and appropriate, including the sale of portfolio instruments prior
to maturity to realize capital gains or losses or to shorten average portfolio
maturity; withholding part or all of dividends or payment of distributions from
capital or capital gains; redemptions of shares in kind; or establishing a net
asset value per share by using available market quotations or equivalents. In
addition, in order to stabilize the net asset value per share at $1.00, the
Directors have the authority (1) to reduce or increase the number of shares
outstanding on a pro rata basis; and (2) to offset each shareholder's pro rata
portion of the
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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 may borrow money for temporary or emergency purposes, purchase
securities on a when-issued basis, and enter into firm or standby commitments to
purchase securities.
In addition, the weighted average portfolio maturity may not exceed 90
days.
INVESTMENT PRACTICES AND INSTRUMENTS COMMON TO MULTIPLE FUNDS
The Funds may engage in the following investment practices, or invest
in the following instruments to the extent permitted in the Prospectus and
elsewhere in this SAI.
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
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maintain continuous asset coverage (that is, total assets including borrowings,
less liabilities exclusive of borrowings) of 300% of the amount borrowed. If the
300% asset coverage should decline as a result of market fluctuations or other
reasons, a Fund may be required to sell some of its portfolio holdings within
three days to reduce the debt and restore the 300% asset coverage, even though
it may be disadvantageous from an investment standpoint to sell securities at
that time and could cause the Fund to be unable to meet certain requirements for
qualification as a regulated investment company for Federal tax purposes. To
avoid the potential leveraging effects of a Fund's borrowings, a Fund will repay
any money borrowed in excess of 5% of its total assets prior to purchasing
additional securities. Borrowing may exaggerate the effect on a Fund's net asset
value of any increase or decrease in the market value of the Fund's portfolio
securities. Money borrowed will be subject to interest costs which may or may
not be recovered by appreciation of the securities purchased. A Fund also may be
required to maintain minimum average balances in connection with such borrowing
or to pay a commitment or other fee to maintain a line of credit; either of
these requirements would increase the cost of borrowing over the stated interest
rate.
COMMERCIAL PAPER
Each Fund may invest in commercial paper. Each Fund will invest in
commercial paper 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 Subadviser 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 a
custodian appointed by the Fund. The Fund attempts to assure that the value of
the purchased securities, including any accrued interest, will at all times
exceed the value of the repurchase agreement. The repurchase price may be higher
than the
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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 Subadvisers seek to minimize
the risk of loss from repurchase agreements by analyzing the creditworthiness of
the obligor, in this case the seller of the Obligation. Apart from the risk of
bankruptcy or insolvency proceedings, there is also the risk that the seller may
fail to repurchase the security. However, if the market value of the Obligation
subject to the repurchase agreement becomes less than the repurchase price
(including accrued interest), the Fund will direct the seller of the Obligation
to deliver additional securities so that the market value of all securities
subject to the repurchase agreement equals or exceeds the repurchase price. No
Fund will invest more than 10% of its net assets (taken at current market value)
(15% in the case of the International Equity and International Bond Funds) in
repurchase agreements maturing in more than seven days.
Each Fund may enter into reverse repurchase agreements with banks or
broker-dealers, which involve 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 each 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.
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U.S. 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 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.
Corporate debt securities with a rating lower than BBB by S&P, and
corporate debt securities rated Baa or lower by Moody's, have speculative
characteristics and changes in economic conditions or individual corporate
developments are more likely to lead to a weakened capacity to make principal
and interest payments than in the case of high grade bonds. Should any
individual bond held by a Fund, other than the International Bond Fund or
International Equity Fund, fall below a rating of BBB by S&P or Baa by Moody's,
the Fund's Subadviser 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% of its net assets in debt
securities which are rated below investment grade.
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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 the market value of the securities loaned. The total market
value of securities loaned will not 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 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'
Subadvisers.
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 or breach its agreement with a Fund. However,
the loans would be made only to firms deemed by a Subadviser to be creditworthy
and approved by the Board, and when, in the judgment of a Subadviser, the
consideration which can be earned currently from securities loans of this type
justifies the attendant risk. If a Subadviser determines to make securities
loans, it is intended that the value of the securities loaned will not exceed
33% of the value of the total assets of the lending Fund. Under the guidelines
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adopted by the Board of Directors, a Fund is prohibited from lending more than
5% of the Fund's total assets to any one counterparty.
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 SECURITIES
The Bond Fund and Short-Term Bond Fund may purchase municipal
securities which are debt obligations of state and local governments, agencies
and authorities. Municipal securities, which may be issued in various forms,
including notes and bonds, are issued to obtain funds for various public
purposes. The other Funds may purchase municipal securities 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 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.
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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 its 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 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
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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, Asset Manager 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 S&P 500 and the BIG Index, respectively. The International Bond
Fund and International Equity Fund may invest, without limit, subject to the
other investment policies applicable to the Fund, in U.S. dollar-denominated
and non-dollar denominated foreign debt securities and in certificates of
deposit issued by foreign banks and foreign branches of United States banks, to
any extent deemed appropriate by MacKay-Shields. Securities acquired by the
International Bond Fund may be denominated in multi-national 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, 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
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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 (other than the Money
Market Fund) 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, Asset Manager Fund and Value Equity Fund may invest
in emerging market countries, which presents risks in greater degree than, and
in addition to, those presented by investment in foreign issuers in general. A
number of emerging market countries restrict, to varying degrees, foreign
investment in stocks. Repatriation of investment income, capital and the
proceeds of sales by foreign investors may require governmental registration
and/or approval in some emerging market countries. A number of the currencies of
developing countries have experienced significant declines against the U.S.
dollar in recent years and devaluation may occur subsequent to investments in
these currencies by the Funds. Inflation and rapid fluctuations in inflation
rates have had and may continue to have negative effects on the economies and
securities markets of certain emerging market countries.
Many of the emerging securities markets are relatively small, have low
trading volumes, suffer periods of relative illiquidity, and are characterized
by significant price volatility. There is a risk in emerging market countries
that a future economic or political crisis could lead to price controls, forced
mergers of companies, expropriation or confiscatory taxation, seizure,
nationalization or creation of government monopolies, any of which may have a
detrimental effect on the Funds' investments.
To different degrees, the Bond Fund, Indexed Bond Fund,
International Bond Fund, International Equity Fund and Short-Term
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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.
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. These contracts may be
used to gain exposure to a particular currency or to hedge against the risk of
loss due to changing currency exchange rates.
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, when hedging, 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.
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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.
Generally, 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 Subadviser 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 by entering into such
a contract. Generally, the Subadviser believes that the best interest of a Fund
will be served by entering into such a contract under various circumstances,
some of which are described below. For example, when a Fund enters into, or
anticipates going 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. dollars
price of the security. By entering into a forward contract for the purpose 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 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.
In addition, when the Subadviser believes that the currency of a
particular foreign country may suffer a substantial decline against the U.S.
dollar, it may enter into a forward contract to sell, for a fixed amount of
dollars, the amount of foreign currency approximating the value of some or all
of a Fund's portfolio securities denominated in such foreign currency. Such a
hedge (sometimes referred to as a "position hedge") will tend to offset both
positive and negative currency fluctuations, but will not offset changes in
security values caused by other factors. The Fund also may hedge the same
position by using another currency (or a basket of currencies) expected to
perform in a manner substantially similar to the hedged currency ("proxy"
hedge). The precise matching of the forward contract amounts and
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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).
A Fund also 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.
A Fund may also enter into currency transactions to profit from
changing exchange rates based upon the Subadviser's assessment of likely
exchange rate movements. These transactions will not necessarily hedge existing
or anticipated holdings of foreign securities and may result in a loss if the
Subadviser's currency assessment is incorrect.
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
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to enter into such transactions with regard to its foreign currency-denominated
securities and will not do so unless deemed appropriate by a Subadviser. 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.
Forward contracts are intended to minimize the risk of loss to a Fund
from adverse changes in the relationship between the U.S. dollar and foreign
currencies. Such contracts do not eliminate fluctuations in the underlying
prices of securities held by the Funds. Although such contracts tend to minimize
the risk of loss due to a decline in the value of a currency that has been sold
forward, and the risk of loss due to an increase in the value of a currency that
has been purchased forward, at the same time they tend to limit any potential
gain that might be realized should the value of such currency increase.
The Funds cannot assure that their use of forward contracts will always
be successful. Successful use of forward contracts depends on the Subadviser'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
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losses to the Fund if currencies do not perform as the Subadviser anticipates. A
Fund may also incur significant costs when converting assets from one currency
to another. Contracts to sell foreign currency would limit any potential gain
which might be realized by a Fund if the value of the hedged currency increases.
The Subadvisers 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 Subadvisers 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 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.
The Funds cannot assure that their use of forward contracts will always
be successful. Successful use of forward contracts depends on the Subadviser'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 Subadviser anticipates. A
Fund may also incur significant costs when converting assets from one currency
to another. Contracts to sell foreign currency would limit potential gain which
might be realized by a Fund if the value of the hedged currency increases.
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, Asset Manager Fund and
International Bond 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"). Foreign index-linked instruments 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
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point in time. Foreign index-linked instruments 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.
A foreign index may be based upon the exchange rate of a particular
currency or currencies or the differential between two currencies, or the level
of interest rates in a particular country or countries or the differential in
interest rates between particular countries. In the case of foreign index-linked
instruments linking the interest components to a foreign index, the amount of
interest payable will adjust periodically in response to changes in the level of
the foreign index during the term of the foreign index-linked instrument. The
risks of such investments would reflect the risks of investing in the index or
other instrument, the performance of which determines the return for the
instrument. Tax considerations may limit the Funds' ability to invest in foreign
index-linked instruments.
AMERICAN DEPOSITARY RECEIPTS ("ADRS")
ADRs (sponsored or unsponsored) are receipts typically issued by a U.S.
bank or trust company evidencing ownership of the underlying foreign securities.
Most ADRs are traded on a U.S. stock exchange. Issuers of unsponsored ADRs are
not contractually obligated to disclose material information in the U.S. and,
therefore, there may not be a correlation between such information and the
market value of the unsponsored ADR. European Depositary Receipts and
International Depositary Receipts are receipts typically issued by a European
bank or trust company evidencing ownership of the underlying foreign securities.
Global Depositary Receipts are receipts issued by either a U.S. or non-U.S.
banking institution evidencing ownership of the underlying foreign securities.
WHEN-ISSUED AND FIRM OR STANDBY COMMITMENT AGREEMENTS
Each Fund may from time to time purchase securities on a "when-issued"
or "firm commitment" or "standby commitment" basis. Debt securities are often
issued in this manner. The price of such securities, which may be expressed in
yield terms, is fixed at the time a commitment to purchase is made, but delivery
of and payment for the when-issued, or firm or standby commitment securities
take place at a later date. Normally, the settlement date occurs within one
month of the purchase (60 days for municipal bonds and notes). 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
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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
leveraging the Fund's assets. However, a Fund will not accrue any income on
these securities prior to delivery. The value of when-issued securities and firm
and standby commitment agreements may vary prior to and after delivery depending
on market conditions and changes in interest rate levels. There is a risk that a
party with whom a Fund has entered into such transactions will not perform its
commitment, which could result in a gain or loss to the Fund.
At the time the Company makes the commitment on behalf of a Fund to
purchase a security on a when-issued, or firm or standby commitment basis, it
will record the transaction and reflect the amount due and the value of the
security in determining the Fund's net asset value. The market value of the
when-issued, or firm or standby commitment securities may be more or less than
the purchase price payable at the settlement date. The Directors do not believe
that a Fund's net asset value or income will be exposed to additional risk by
the purchase of securities on a 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-related and asset-back securities, which include
mortgage-backed securities, are securities that 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 creditworthiness of the
parties involved. The ability of a Fund to successfully utilize these
instruments may depend in part upon the ability of the Fund's Subadviser to
forecast interest rates and other economic factors correctly. Some securities
may have a structure that makes their reaction to interest rate changes and
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other factors difficult to predict, making their value highly volatile. These
securities may also be subject to prepayment risk and if the security has been
purchased at a premium the amount of the premium would be lost in the event of
prepayment. The Money Market Fund may only invest in mortgage-backed and
asset-backed securities that meet the requirements of Rule 2a-7 under the 1940
Act. 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. The Money Market Fund
observes the strict SEC mandated requirements of Rule 2a-7. In addition, if any
such security is determined to be illiquid, a Fund will limit its investments in
these and other illiquid instruments to not more than 10% of its net assets (15%
in the case of the International Bond Fund and International Equity Fund).
Mortgage Pass-Through Securities. Mortgage pass-through securities,
which are securities interests in pools of mortgage-related securities, differ
from other forms of debt securities, which normally provide for periodic payment
of interest in fixed amounts with principal payments at maturity or specified
call dates. Instead, these securities provide a monthly payment which consists
of both interest and principal payments. In effect, these payments are a
"pass-through" of the monthly payments made by the individual borrowers on their
residential mortgage loans, net of any fees paid to the issuer or guarantor of
such securities. Additional payments are caused by repayments of principal
resulting from the sale of the underlying residential property, refinancing or
foreclosure, net of fees or costs which may be incurred. Some mortgage-related
securities (such as securities issued by the Government National Mortgage
Association ("GNMA")) 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. Some mortgage
pass-through certificates may include securities backed by adjustable-rate
mortgages which bear interest at a rate that will be adjusted periodically.
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
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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 prepayment has
been purchased at a premium, in the event of prepayment, the value of the
premium would be lost.
Payment of principal and interest on some mortgage pass-through
securities (but not the market value of the securities themselves) may be
guaranteed by the full faith and credit of the U.S. government (in the case of
securities guaranteed by GNMA); or guaranteed by agencies or instrumentalities
of the U.S. government (in the case of securities guaranteed by the Federal
National Mortgage Association ("FNMA") or the Federal Home Loan Mortgage
Corporation ("FHLMC"), which are supported only by the discretionary authority
of the U.S. government to purchase the agency's obligations).
The principal governmental guarantor of mortgage-related securities is
the GNMA. GNMA is a wholly-owned U.S. government corporation within the U.S.
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 ("FHA")-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 FNMA and the 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
and acts as a government instrumentality under authority granted by Congress.
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. FNMA is authorized to borrow from the U.S. Treasury to
meet its obligations.
FHLMC was created by Congress in 1970 for the purpose of increasing the
availability of mortgage credit for residential housing. It is a government-
sponsored corporation and acts as a government instrumentality under authority
granted by Congress. FHLMC was formerly owned by the twelve Federal Home Loan
Banks and is now owned entirely by private stockholders. FHLMC issues
Participation Certificates ("PCS") which represent interests in conventional
mortgages from FHLMC's national portfolio. FHLMC
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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.
If either fixed or variable rate pass-through securities issued by the
U.S. government or its agencies or instrumentalities are developed in the
future, the Funds, reserve the right to invest in them.
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. A Fund may buy mortgage-related
securities without insurance or guarantees if, through an examination of the
loan experience and practices of the originator/servicers and poolers, the
Fund's Subadviser determines that the securities meet the Fund's quality
standards. Although the market for such securities is becoming increasingly
liquid, securities issued by certain private organizations may not be readily
marketable. No Fund will purchase mortgage-related securities or any other
assets which in the opinion of the Fund's Subadviser are illiquid if, as a
result, more than 10% of the value of the Fund's net assets will be illiquid
(15% in the case of the International Bond or International Equity Funds).
Collateralized Mortgage Obligations ("CMOs"). A CMO is a hybrid between
a mortgage-backed bond and a mortgage pass-through security. Similar to a bond,
interest and prepaid principal is paid, in most cases, semiannually. CMOs may be
collateralized by whole mortgage loans, but are more typically collateralized by
portfolios of mortgage pass-through securities guaranteed by GNMA, FHLMC, or
FNMA, and their income streams.
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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 eligible 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 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 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
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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. Other mortgage-related securities
include securities other than those described above that directly or indirectly
represent a participation in, or are secured by and payable from, mortgage loans
on real property, including CMO residuals and stripped mortgaged-backed
securities, and may be structured in classes with rights to receive varying
proportions of principal and interest. Other mortgage-related securities may be
equity or debt 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, partnerships, trusts and special purpose
entities of the foregoing.
The Funds' Subadvisers 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
Subadviser 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,
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homebuilders, mortgage banks, commercial banks, investment banks and special
purpose entities of the foregoing.
The cash flow generated by the mortgage assets underlying a series of
CMOs is applied first to make required payments of principal and interest on the
CMOs and second to pay the related administrative expenses of the issuer. The
residual in a CMO structure generally represents the interest in any excess cash
flow remaining after making the foregoing payments. Each payment of such excess
cash flow to a holder of the related CMO residual represents income and/or a
return of capital. The amount of residual cash flow resulting from a CMO will
depend on, among other things, the characteristics of the mortgage assets, the
coupon rate of each class of CMO, prevailing interest rates, the amount of
administrative expenses and the prepayment experience on the mortgage assets. In
particular, the yield to maturity on CMO residuals is extremely sensitive to
prepayments on the related underlying mortgage assets, in the same manner as an
interest-only ("IO") class of stripped mortgage-backed securities. See "Stripped
Mortgage-Backed Securities." In addition, if a series of a CMO includes a class
that bears interest at an adjustable rate, the yield to maturity on the related
CMO residual will also be extremely sensitive to changes in the level of the
index upon which interest rate adjustments are based. As described below with
respect to stripped mortgage-backed securities, in certain circumstances, a
portfolio 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.
CMOs may offer a higher yield than U.S. government securities, but they
may also be subject to greater price fluctuation and credit risk. In addition,
CMOs typically will be issued in a variety of classes or series, which have
different maturities and are retired in sequence. Privately issued CMOs are not
government securities nor are they supported in any way by any governmental
agency or instrumentality. In the event of a
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default by an issuer of a CMO, there is no assurance that the collateral
securing such CMO will be sufficient to pay principal and interest. It is
possible that there will be limited opportunities for trading CMOs in the
over-the-counter market, the depth and liquidity of which will vary from time to
time.
Stripped Mortgage-Backed Securities. Stripped mortgage-backed
securities ("SMBS") are derivative multi-class mortgage securities. SMBS may be
issued by agencies or instrumentalities of the U.S. government, or by private
originators of, or investors in, mortgage loans, including savings and loan
associations, mortgage banks, commercial banks, investment banks and special
purpose entities of the foregoing.
SMBS are usually structured with two classes that receive different
proportions of the interest and principal distributions on a pool of mortgage
assets. A common type of SMBS will have one class receiving some of the interest
and most of the principal from the mortgage assets, while the other class will
receive most of the interest and the remainder of the principal. In the most
extreme case, one class will receive all of the interest (the IO class), while
the other class will receive all of the principal (the principal-only or "PO"
class). The yield to maturity on an IO class is extremely sensitive to the rate
of principal payments (including prepayments) on the related underlying mortgage
assets, and a rapid rate of principal payments may have a material adverse
effect on a Fund's yield to maturity from these securities. If the underlying
mortgage assets experience greater than anticipated prepayments of principal, a
Fund may fail to fully recoup its initial investment in these securities even if
the security is in one of the highest rating categories.
Although SMBS are purchased and sold by institutional investors through
several investment banking firms acting as brokers or dealers, these securities
were only recently developed. As a result, established trading markets have not
yet 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-Related Securities. As in the case with
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-related 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
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part upon the ability of a Subadviser to forecast interest rates and other
economic factors correctly. If a Subadviser incorrectly forecasts such factors
and has taken a position in mortgage-related securities that is or becomes
contrary to prevailing market trends, the Funds could be exposed to the risk of
a loss.
Investment in mortgage-related 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 overtime. The price of mortgage-related 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-related 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 enhance 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-related securities, issued by private institutions, is based on
the financial health of those institutions.
Other Asset-Backed Securities. The Funds' Subadvisers 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
("CARsSM"). CARsSM 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 CARsSM are passed-through monthly to
certificate holders, and are guaranteed up to certain amounts and for a
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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(SM) may be affected by early prepayment of principal on the underlying
vehicle sales contracts. If the letter of credit is exhausted, the trust may be
prevented from realizing the full amount due on a sales contract because of
state law requirements and restrictions relating to foreclosure sales of
vehicles and the obtaining of deficiency judgments following such sales or
because of depreciation, damage or loss of a vehicle, the application of Federal
and state bankruptcy and insolvency laws, or other factors. As a result,
certificate holders may experience delays in payments or losses if the letter of
credit is exhausted.
Consistent with a Fund's investment objective and policies, and in the
case of the Money Market Fund, the requirements of Rule 2a-7, a Fund 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-related securities.
MORTGAGE DOLLAR ROLLS
A mortgage dollar roll ("MDR") is a transaction in which a Fund sells
mortgage-related securities ("MBS") from its portfolio to a counter party 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
counter party.
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 may be collateralized or uncollateralized and are
issued in various currencies (primarily the U.S. dollar). Brady Bonds are not
considered U.S. Government securities. 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
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bonds, is equal to at least one year of interest payments or, in the case of
floating rate bonds, initially is equal to at least one year's interest payments
based on the applicable interest rate at that time and is adjusted at regular
intervals thereafter. Certain Brady Bonds are entitled to "value recovery
payments" in certain circumstances, which in effect constitute supplemental
interest payments but generally are not collateralized. Brady Bonds are often
viewed as having three or four valuation components: (i) the collateralized
repayment of principal at final maturity; (ii) the collateralized interest
payments; (iii) the uncollateralized interest payments; and (iv) any
uncollateralized repayment of principal at maturity (these uncollateralized
amounts constitute the "residual risk").
Brady Bonds involve various risk factors, including the history of
defaults with respect to commercial bank loans by public and private entities of
countries issuing Brady Bonds. Investments in Brady Bonds are to be viewed as
speculative. There can be no assurance that Brady Bonds in which the Fund may
invest will not be subject to restructuring arrangements or to requests for new
credit, which may cause the Fund to suffer a loss of interest or principal on
any of its holdings.
LOAN PARTICIPATION INTERESTS
The Funds may invest in participation interests in loans. A Fund's
investment in loan participation interests may take the form of participation
interests in, assignments of 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.
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In a typical corporate loan involving the sale of Participation
Interests, the agent bank administers the terms of the corporate loan agreement
and is responsible for the collection of principal and interest and fee payments
to the credit of all lenders which are parties to the corporate loan agreement.
The agent bank in such cases will be qualified under the 1940 Act to serve as a
custodian for a registered investment company such as the Company. A Fund
generally will rely on the agent bank or an intermediate Participant to collect
its portion of the payments on the corporate loan. The agent bank monitors the
value of the collateral and, if the value of the collateral declines, may take
certain action, including accelerating the corporate loan, giving the borrower
an opportunity to provide additional collateral or seeking other protection for
the benefit of the Participants in the corporate loan, depending on the terms of
the corporate loan agreement. Furthermore, unless under the terms of a
participation agreement a Fund has direct recourse against the borrower (which
is unlikely), the Fund will rely on the agent bank to use appropriate creditor
remedies against the borrower. The agent bank also is responsible for monitoring
compliance with covenants contained in the corporate loan agreement and for
notifying holders of corporate loans of any failures of compliance. Typically,
under corporate loan agreements, the agent bank is given broad discretion in
enforcing the corporate loan agreement, and is obligated to use only the same
care it would use in the management of its own property. For these services, the
borrower compensates the agent bank. Such compensation may include special fees
paid on structuring and funding the corporate loan and other fees paid on a
continuing basis.
A financial institution's employment as an agent bank may be terminated
in the event that it fails to observe the requisite standard of care or becomes
insolvent, or has a receiver, conservator, or similar official appointed for it
by the appropriate bank regulatory authority or becomes a debtor in a bankruptcy
proceeding. A successor agent bank generally will be appointed to replace the
terminated bank, and assets held by the agent bank under the corporate loan
agreement should remain available to holders of corporate loans. If, however,
assets held by the agent bank for the benefit of a Fund were determined by an
appropriate regulatory authority or court to be subject to the claims of the
agent bank's general or secured creditors, the Fund might incur certain costs
and delays in realizing payment on a corporate loan, or suffer a loss of
principal and/or interest. In situations involving intermediate Participants
similar risks may arise.
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
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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's Subadviser will conduct analysis and
evaluation of the financial condition of each such co-lender and participant to
ensure that the Participation Interest meets the Fund's qualitative standards.
There is a risk that there may not be a readily available market for loan
Participation Interests and, in some cases, this could result in a Fund
disposing of such securities at a substantial discount from face value or
holding such security until maturity. When a Fund is required to rely upon a
lending institution to pay the Fund principal, interest, and other amounts
received by the lending institution for the loan participation, the Fund will
treat both the borrower and the lending institution as an "issuer" of the loan
participation for purposes of certain investment restrictions pertaining to the
diversification and concentration of the Fund's portfolio. The Funds consider
Participation Interests not subject to puts to be illiquid.
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
exposure 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
Subadviser 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
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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 counter party to the transaction does not perform
as promised.
OPTIONS ON SECURITIES
Writing Call Options. Subject to any limitations stated in the
Prospectus or in this SAI, each Fund 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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During the option period, the covered call writer has, in return for
the premium received an option, given up the opportunity to profit from a price
increase in the underlying securities above the exercise price, but, as long as
its obligation as a writer continues, has retained the risk of loss should the
price of the underlying security decline.
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, except as
discussed below. 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. Once
an option writer has received an exercise notice, it cannot effect a closing
purchase transaction in order to terminate its obligation under the option and
must deliver or purchase the underlying securities at the exercise price.
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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, and limitations imposed on regulated investment
companies under Federal tax law, the International Bond Fund and International
Equity Fund may, to the extent determined appropriate by the Subadviser, engage
without limitation in the writing of options on their portfolio securities.
Writing Put Options. Subject to any limitations in the Prospectus or in
this SAI, each Fund 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 a
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.
A covered put writer assumes the risk that the market price for the
underlying security will fall below the exercise price, in which case the writer
would be required to purchase the security at a higher price than the
then-current market price of the security. In both cases, the writer has no
control over the time when it may be required to fulfill its obligation as a
writer of the option.
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. The Funds may also effect a closing purchase transaction, in the case
of a put option, to permit the Funds to maintain their holdings of the deposited
U.S. Treasury obligations, to write another put option
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to the extent that the exercise price thereof is secured by the deposited U.S.
Treasury obligations, or to utilize the proceeds from the sale of such
obligations to make other investments.
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, respectively. 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 put and 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 of 1986, as amended (the "Code") for qualification as
a regulated investment company and the Company's intention that each Fund
qualify as such.
Purchasing Options. Each Fund, as specified for the Fund in the
Prospectus, may purchase put or call options which are traded on an Exchange or
in the over-the-counter market. Options traded in the over-the-counter market
may not be as actively traded as those listed on an Exchange. Accordingly, it
may be more difficult to value such options and to be assured that they can be
closed out at any time. The Funds will engage in such transactions only with
firms the Subadvisers deem to be 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 a put option would entitle
the Fund, in exchange for the premium paid, to sell a security at a specified
price upon exercise of the option during the option period. 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 put options purchased by the Fund may
include, but are not limited to, "protective puts," in which the security to be
sold is identical or substantially identical to a security already held by the
Fund or to a security which the Fund has the right to purchase. The Fund would
ordinarily recognize a gain if the value of the securities decreased during the
option period below the exercise price sufficiently to cover the premium. The
Fund would
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recognize a loss if the value of the securities remained above the difference
between the exercise price and the premium.
The Funds may also purchase call options on securities, which 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. The purchase of a call option would entitle the Fund, in exchange
for the premium paid, to purchase a security at a specified price upon exercise
of the option during the option period. The Fund would ordinarily realize a gain
if the value of the securities increased during the option period above the
exercise price sufficiently to cover the premium. The Fund would have a loss if
the value of the securities remained below the sum of the premium and the
exercise price during the option period. 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. Exchange markets in the
U.S. government securities options are a relatively new and untested concept,
and it is impossible to predict the amount of trading interest that may exist
in such options. The same types of risk apply to over-the-counter trading in
options. There can be no assurance that viable markets will develop or continue
in the United States or abroad.
A Fund's purpose in selling covered options is to realize greater
income than would be realized on portfolio securities transactions alone. A Fund
may forego the benefits of appreciation on securities sold pursuant to call
options, or pay a higher price for securities acquired pursuant to put options
written by the Fund. 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.
The Fund would ordinarily realize a gain if the value of the securities
increased during the option period above the exercise price sufficiently to
cover the premium. The Fund would have a loss if the value of the securities
remained below the sum of the premium paid and the exercise price during the
option period.
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The ability of a Fund to successfully utilize options may depend in part upon
the ability of the Subadviser to forecast interest rates and other economic
factors correctly.
The hours of trading for options on securities may not conform to the
hours during which the underlying securities are traded. To the extent that the
options markets close before the markets for the underlying securities,
significant price and rate movements can take place in the underlying markets
that cannot be reflected in the options markets.
OPTIONS ON FOREIGN CURRENCIES
Subject to any limitation stated in the Prospectus or this SAI, each
Fund 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 its overall exposure to certain currencies; or in an effort to enhance
its return. A Fund may purchase and write put and call options on foreign
currencies for the purpose of protecting against declines in the dollar value of
foreign portfolio securities and against increases in the U.S. dollar cost of
foreign securities to be acquired. A Fund may also use foreign currency options
to protect against potential losses in positions denominated in one foreign
currency against another foreign currency in which the Fund's assets are or may
be invested. For example, a decline in the dollar value of a foreign currency in
which portfolio securities are denominated will reduce the dollar value of such
securities, even if their value in the foreign currency remains constant. In
order to protect against such declines 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
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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 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,
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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
exchanged-related 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
Subject to any limitations in the Prospectus or this SAI, 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 or to gain market experience to particular segments
of the market represented by the futures contract. 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 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
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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 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 at a future date. When interest
rates are changing and portfolio values are falling, futures contracts can
offset a decline in the value of a Fund's current portfolio securities. When
interest rates are changing and portfolio values are rising, the purchase of
futures contracts can secure better effective rates or purchase prices of the
Fund than might later be available in the market when the Fund makes anticipated
purchases. In the United States, futures contracts are traded on boards of trade
which have been designated "contract markets" by the CFTC. Futures contracts
trade on these markets through an "open outcry" auction on the exchange floor.
Currently, there are futures contracts based on a variety of instruments,
indexes and currencies, including long-term U.S. Treasury bonds, Treasury notes,
GNMA certificates, three-month U.S. Treasury bills, three-month domestic bank
certificates of deposit, a municipal bond index and various stock indexes.
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
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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.
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
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settlement price, unless such price does not appear to the Subadvisers 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
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
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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 the equity portion of a Fund's
securities portfolio with regard to market (systematic) risk, as distinguished
from stock-specific risk. The Funds may enter into stock index futures to the
extent that they have equity securities in their portfolio. Similarly, the Funds
may enter into futures on debt securities indexes (including the municipal bond
index) 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 the Subadviser 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
the Subadviser anticipates that exchange rates will rise, the Fund may purchase
a currency futures contract to protect against an increase in the price of
securities denominated in a particular currency the Fund intends to purchase.
Although the terms of currency futures contracts specify actual delivery or
receipt, in most instances the contracts are closed out before the settlement
date without the making or taking of delivery of the currency. Closing out of a
currency futures contract is effected by entering into an offsetting purchase or
sale transaction. To offset a currency futures contract sold by a Fund, the Fund
purchases a currency futures contract for the same aggregate amount of currency
and delivery date. If the price in the sale exceeds the price in the offsetting
purchase, the Fund is immediately paid the difference. Similarly, to close out a
currency futures contract purchased by the Fund, the Fund sells a
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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 the Subadviser 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.
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
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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 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.
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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.
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
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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 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
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futures, futures options or forward contracts. 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 been 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. It is also possible that, when a
Fund has sold stock index futures to hedge its portfolio against a decline in
the market, the market may advance while the value of the particular securities
held in the Fund's portfolio may decline. If this occurred, the Fund would incur
a loss on the futures contracts and also experience a decline in the value of
its portfolio securities.
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
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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.
In addition to the risk that apply to all options transactions, there
are several special risks relating to options on futures contracts. The ability
to establish and close out positions in such options will be subject to the
development and maintenance of a liquid market in the options. It is not certain
that such a market will develop. Although the Funds generally will purchase only
those options and futures contracts for which there appears to be an active
market, there is no assurance that a liquid market on an exchange will exist for
any particular option or futures contract at any particular time. In the event
no such market exists for particular options, it might not be possible to effect
closing transactions in such options with the result that a Fund would have to
exercise options it has purchased in order to realize any profit and would be
less able to limit its exposure to losses on options it has written.
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. If the price
of a futures contract changes more than the price of the securities or
currencies, the Fund will experience either a loss or a gain on the futures
contracts which will not be completely offset by changes in the price of the
securities or currencies which are the subject of the hedge. In addition, it is
not possible to hedge fully or perfectly against currency fluctuations affecting
the value of securities denominated in foreign currencies because the value of
such securities is likely to fluctuate as a result of independent factors not
related to currency fluctuations.
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
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mechanism and related guarantees; and are subject to the risk of governmental
actions affecting trading in, or the prices of, foreign securities. The value of
such positions also could be adversely affected by(i)other complex foreign
political, legal and economic factors;(ii)lesser availability than in the United
States of data on which to make trading decisions;(iii)delays in a Fund's
ability to act upon economic events occurring in foreign markets during
non-business hours in the United States;(iv)the imposition of different exercise
and settlement terms and procedures and margin requirements than in the United
States; and (v)lesser trading volume.
SWAP AGREEMENTS
The International Bond Fund, International Equity Fund and Asset
Manager 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 counter party 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
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amount owed or to be received under existing contracts with that party would
exceed 5% of the Fund's total assets. The EAFE Index Fund, Indexed Bond Fund,
Indexed Equity Fund and Asset Manager Fund may enter into swap agreements only
to the extent that obligations under such agreements represent not more than 10%
of the Fund's total assets.
Commonly used swap agreements include interest rate caps, under which,
in return for a premium, one party agrees to make payments to the other to the
extent that interest rates exceed a specified rate, or "cap"; interest rate
floors, under which, in return for a premium, one party agrees to make payments
to the other to the extent that interest rates fall below a specified level, or
"floor"; and interest rate collars, under which a party sells a cap and
purchases a floor or vice versa in an attempt to protect itself against interest
rate movements exceeding given minimum or maximum levels.
Whether a Fund's use of swap agreements will be successful in
furthering its investment objective will depend on the Subadviser'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 counter party. The Subadviser will cause a Fund
to enter into swap agreements only with counter parties that would be eligible
for consideration as repurchase agreement counter parties 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"). 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
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benefit plan, governmental entity, broker-dealer, futures commission merchant,
natural person, or regulated foreign person. To be eligible, natural persons and
most other entities must have total assets exceeding $10 million; commodity
pools and employee benefit plans must have assets exceeding $5 million. In
addition, an eligible swap transaction must meet three conditions. First, the
swap agreement may not be part of a fungible class of agreements that are
standardized as to their material economic terms. Second, the creditworthiness
of parties with actual or potential obligations under the swap agreement must be
a material consideration in entering into or determining the terms of the swap
agreement, including pricing, cost or credit enhancement terms. Third, swap
agreements may not be entered into and traded on or through a multilateral
transaction execution facility.
This exemption is not exclusive, and participants may continue to rely
on existing exclusions for swaps, such as the Policy Statement issued in July
1989 which recognized a safe harbor for swap transactions from regulation as
futures or commodity option transactions under the CEA or its regulations. The
Policy Statement applies to swap transactions settled in cash that (1) have
individually tailored terms, (2) lack exchange-style offset and the use of a
clearing organization or margin system, (3) are undertaken in conjunction with a
line of business, and (4) are not marketed to the public.
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 possible 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 by the Fund.
If the
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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 the Subadvisers believe are creditworthy. Short sales against the
box will be limited to no more than 25% of a Fund's total assets.
RISKS ASSOCIATED WITH DEBT SECURITIES
To the extent that a Fund invests in debt securities, it will be
subject to certain risks. The value of the debt securities held by a Fund, and
thus the net asset value of the shares of beneficial interest of the Fund,
generally will fluctuate depending on a number of factors, including, among
others, changes in the perceived creditworthiness of the issuers of those
securities, movements in interest rates, the average maturity of the Fund's
investments, changes in the relative values of the currencies in which the
Fund's investments are denominated relative to the U.S. dollar, and the extent
to which the Fund hedges its interest rate, credit and currency exchange rate
risks. Generally, a rise in interest rates will reduce the value of fixed income
securities held by a Fund, and a decline in interest rates will increase the
value of fixed income securities held by a Fund. Longer term debt securities
generally pay higher interest rates than do shorter term debt securities but
also may experience greater price volatility as interest rates change.
Since shares of the Funds represent an investment in securities with
fluctuating market prices, the value of shares of each Fund will vary as the
aggregate value of the Funds' portfolio securities increases or decreases.
Moreover, the value of lower rated debt securities that a Fund purchases may
fluctuate more than the value of higher rated debt securities. Lower rated debt
securities generally carry greater risk that the issuer will default on the
payment of interest and principal. Lower rated fixed income securities generally
tend to reflect short-term corporate and market developments to a greater extent
than higher rated securities which react primarily to fluctuations in the
general level of interest rates. Changes in the value of securities subsequent
to their acquisition will not
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affect cash income or yields to maturity to the Funds but will be reflected in
the net asset value of the Funds' shares.
Corporate debt securities may bear fixed, contingent, or variable rates
of interest and may involve equity features, such as conversion or exchange
rights or warrants for the acquisition of stock of the same or a different
issuer, participations based on revenues, sales or profits, or the purchase of
common stock in a unit transaction (where corporate debt securities and common
stock are offered as a unit).
When and if available, debt securities may be purchased at a discount
from face value. From time to time, each Fund may purchase securities not paying
interest or dividends at the time acquired if, in the opinion of the Subadviser,
such securities have the potential for future income (or capital appreciation,
if any).
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 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 Subadviser. 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
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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, 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
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each year are required to be distributed to shareholders and, such amounts will
be taxable to shareholders. Therefore, the Fund may have to sell some of its
assets to distribute cash to shareholders. These actions are likely to reduce
the Fund's assets and may thereby increase its expense ratios and decrease its
rate of return.
The use of credit ratings as the sole method for evaluating high
yield/high risk bonds also involves certain risks. For example, credit ratings
evaluate the safety of principal and interest payments, not the market value
risk of high yield/high risk bonds. Also, credit rating agencies may fail to
change credit ratings on a timely basis to reflect subsequent events.
ZERO COUPON BONDS
Zero coupon bonds are debt obligations issued without any requirement
for the periodic payment of interest. Zero coupon bonds are issued at a
significant discount from the face value. The discount approximates the total
amount of interest the bonds would accrue and compound over the period until
maturity at a rate of interest reflecting the market rate at the time of
issuance. Cash to pay dividends representing unpaid, accrued interest may be
obtained from sales proceeds of portfolio securities and Fund shares and from
loan proceeds. Because interest on zero coupon obligations is not paid to the
Fund on a current basis but is, in effect, compounded, the value of the
securities of this type is subject to greater fluctuations in response to
changing interest rates than the value of debt obligations which distribute
income regularly. Zero coupon bonds tend to be subject to greater market risk
than interest paying securities of similar maturities. The discount represents
income, a portion of which a Fund must accrue and distribute every year even
though the Fund receives no payment on the investment in that year. Zero coupon
bonds tend to be more volatile than conventional debt securities.
SPECIAL CONSIDERATIONS FOR EAFE INDEX FUND, INDEXED EQUITY FUND,
ASSET MANAGER FUND AND INDEXED BOND FUND
Standard & Poor's, "S&P 500", "S&P", "S&P 500", "Standard & Poor's 500"
and "500" are trademarks of The McGraw-Hill Companies, Inc. and have been
licensed for use by Monitor Capital. S&P does not sponsor, endorse, sell or
promote the Indexed Equity Fund or represent the advisability of investing in
the Fund.
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
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or in the fund particularly or the ability of the S&P 500 Index to track general
stock market performance. S&P's only relationship to Monitor is the licensing of
certain trademarks and trade names of S&P and of the S&P 500 Index which is
determined, composed and calculated by S&P without regard to Monitor or the
Fund. S&P has no obligation to take the needs of Monitor or the owners of the
Fund into consideration in determining, composing or calculating the S&P 500
Index. S&P is not responsible for and has not participated in the determination
of the prices and amount of the Fund or the timing of the issuance or sale of
the Fund or in the determination or calculation of the equation by which the
Fund is to be converted into cash. S&P has no obligation or liability in
connection with the administration, marketing or trading of the Fund.
S&P does not guarantee the accuracy and/or the completeness of the S&P
500 Index or any data included therein and S&P shall have no liability for any
errors, omissions, or interruptions therein. S&P makes no warranty, express or
implied, as to results to be obtained by Monitor, owners of the Fund, or any
other person or entity from the use of the S&P Index or any data included
therein. S&P makes no express or implied warranties, and expressly disclaims all
warranties of merchantability or fitness for a particular purpose or use with
respect to the S&P 500 Index or any data included therein. Without limiting any
of the foregoing, in no event shall S&P have any liability for any special,
punitive, indirect, or consequential damages (including lost profits), even if
notified of the possibility of such damages.
The inclusion of a security in the MSCI EAFE Index, Standard & Poor's
500 Composite Stock Price Index (the "S&P 500") or the BIG Index in no way
implies an opinion by the index sponsors, Morgan Stanley, Standard & Poor's or
Salomon Smith Barney, as to the attractiveness of that security as an
investment. The MainStay Institutional Funds that are managed as index funds
(EAFE Index Fund, Indexed Equity Fund and Indexed Bond Fund) are not sponsored
by or affiliated with the sponsors of their respective indexes.
The Indexed Equity Fund and, in part, the Asset Manager Fund are
managed to replicate the S&P 500. Because of the market-value weighting, as of
February 26, 1999, the 20 largest companies in the S&P 500 account for
approximately 33.48% of the Index. As of that date, the six largest weightings
in the S&P 500 as a percentage of net assets were: Microsoft Corporation
(3.71%); General Electric Company (3.26%); Coca Cola Co. (2.10%); Intel Corp.
(1.98%); Merck & Co. (1.93%); and Wal-Mart Stores (1.93%).
FUNDAMENTAL 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.
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Each Fund may not:
(1) invest in a security if, as a result of such investment, 25% or
more of its total assets would be invested in the securities of issuers in any
particular industry, except that this restriction does not apply to securities
issued or guaranteed by the U.S. government or its agencies or instrumentalities
(or repurchase agreements with respect thereto) and at such time that the 1940
Act is amended to permit a registered investment company to elect to be
"periodically industry concentrated," (i.e., a fund that does not concentrate
its investments in a particular industry would be permitted, but not required,
to invest 25% or more of its assets in a particular industry) the Funds elect to
be so classified and the foregoing limitation shall no longer apply with respect
to the Funds;
(2) invest in a security if, with respect to 75% of its total assets,
more than 5% of its total assets would be invested in the securities of any one
issuer, except that this restriction does not apply to securities issued or
guaranteed by the U.S. government, its agencies or instrumentalities (this
restriction is not applicable to the International Bond Fund);
(3) invest in a security if, with respect to 75% of its assets, it
would hold more than 10% of the outstanding voting securities of any one issuer,
except that this restriction does not apply to U.S. government securities (this
restriction is not applicable to the International Bond Fund);
(4) borrow money or issue senior securities, except that a Fund may (i)
borrow from banks or enter into reverse repurchase agreements, but only if
immediately after each borrowing there is asset coverage of 300%, and (ii) issue
senior securities to the extent permitted under the 1940 Act;
(5) lend any funds or other assets, except that a Fund may, consistent
with its investment objectives and policies: (i) invest in debt obligations
including bonds, debentures or other debt securities, bankers' acceptances and
commercial paper, even though the purchase of such obligations may be deemed to
be the making of loans; (ii) enter into repurchase agreements; and (iii) 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);
67
<PAGE> 174
(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.
NON-FUNDAMENTAL INVESTMENT RESTRICTIONS
In addition to the Company's fundamental investment restrictions, the
Directors of the Company have voluntarily adopted certain policies and
restrictions which are observed in the conduct of the affairs of the Funds.
These represent intentions of the Directors based upon current circumstances.
They differ from fundamental investment policies in that the following
additional investment restrictions may be changed or amended by action of the
Directors without requiring prior notice to or approval of shareholders.
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
68
<PAGE> 175
over-the-counter options, if as a result of the purchase or sale, the Fund's
aggregate holdings of restricted securities, repurchase agreements having a
duration of more than seven days, loan participation interests that are not
subject to puts, illiquid instruments, and over-the-counter options purchased by
the Fund and the assets used as cover for over-the-counter options written by
the Fund exceed 10% of the Fund's net assets (15% of net assets in the case of
the International Bond Fund and International Equity Fund);
(3) invest in other companies for the purpose of exercising control;
(4) purchase the securities of other investment companies, except to
the extent permitted by the 1940 Act or in connection with a merger,
consolidation, acquisition or reorganization;
(5) a Fund may not purchase securities on margin, except that the Fund
may obtain such short-term credits as are necessary for the clearance of
transactions, and provided that margin payments in connection with futures
contracts and options on futures contracts shall not constitute the purchase of
securities on margin;
(6) a Fund may not sell securities short, except for covered short
sales or unless it owns or has the right to obtain securities equivalent in kind
and amount to the securities sold short, and provided that transactions in
options, futures and forward contracts are deemed not to constitute short sales
of securities.
The Directors have the ultimate responsibility for determining whether
specific securities are liquid or illiquid. The Directors have delegated the
function of making day-to-day determinations of liquidity to the Subadvisers,
pursuant to guidelines approved by the Directors.
Each Subadviser 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
69
<PAGE> 176
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
Subadviser must conclude that the following conditions have been met:
(a) the 4(2) commercial paper is not traded flat or in
default as to principal or interest;
(b) the 4(2) commercial paper is rated:
(i) in one of the two highest rating categories by at least two
nationally recognized statistical rating organizations ("NRSROs"); or
(ii) if only one NRSRO rates the security, the 4(2) commercial paper is
rated in one of the two highest rating categories by that NRSRO; or
(iii) if the security is unrated, the Subadviser 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).
DIRECTORS AND OFFICERS
The Board of Directors oversees the Funds, the Manager and the
Subadvisers. Information pertaining to the Directors and Officers of the Company
is set forth below. Directors deemed to be "interested persons" of the Company
for purposes of the 1940 Act are indicated by an asterisk.
70
<PAGE> 177
<TABLE>
<CAPTION>
Principal
Name, Position(s) with Occupation(s) During
Address and Age the Company Past 5 Years
<S> <C> <C>
Stephen C. Roussin*, 35 Director and President, Chief Executive Officer and Trustee, The
51 Madison Avenue Chairman MainStay Funds, 1997-present; Senior Vice President,
New York, NY New York Life Insurance Company, 1997 to present;
10010 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.
</TABLE>
71
<PAGE> 178
<TABLE>
<CAPTION>
Principal
Name, Position(s) with Occupation(s) During
Address and Age the Company Past 5 Years
<S> <C> <C>
Patrick G. Boyle*, 45 Director Senior Vice President, Pension Department, New York
51 Madison Avenue Life Insurance Company, 1991 to present; Vice
New York, NY President, Pension Department, New York Life
10010 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 1998, 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 1998; Director, MBL Life Assurance Co., Inc.,
1997 to present.
Lawrence Glacken, 71 Director Retired, 1987 to present; Vice President, Investment
353 Canterbury Drive Banking, The First Boston Corporation, 1964-1987.
Ramsey, NJ 07446
</TABLE>
72
<PAGE> 179
<TABLE>
<CAPTION>
Principal
Name, Position(s) with Occupation(s) During
Address and Age the Company Past 5 Years
<S> <C> <C>
Robert P. Mulhearn, 52 Director Private Investor, 1987 to
60 Twin Brooks Road present; Managing Director,
Saddle River, NJ 07458 Morgan Stanley, 1979-1987.
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
51 Madison Avenue Insurance Company, 1990 to present; Pension Vice
New York, NY 10010 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>
73
<PAGE> 180
<TABLE>
<CAPTION>
Principal
Name, Position(s) with Occupation(s) During
Address and Age the Company Past 5 Years
<S> <C> <C>
Marc J. Brookman, 35 Executive Vice President, New York Life Insurance Company, 1998
51 Madison Avenue Vice President to present; Senior Vice President-Product
New York, NY 10010 Development, MainStay Institutional Funds, Inc. and
Retirement Plans, 1998 to present; National Sales
Director, Vice President, United Asset Management
Retirement Plan Services, 1996 to 1998; Regional
Sales Manager, Vice President, Oppenheimer Capital
Quest for Value, 1991 to 1995.
Jefferson C. Boyce, 41 Senior Vice Senior Vice President, New York Life Insurance
51 Madison Avenue President Company, 1994 to present; Senior Vice President, The
New York, NY 10010 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
</TABLE>
74
<PAGE> 181
<TABLE>
<CAPTION>
Principal
Name, Position(s) with Occupation(s) During
Address and Age the Company Past 5 Years
<S> <C> <C>
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>
75
<PAGE> 182
<TABLE>
<CAPTION>
Principal
Name, Position(s) with Occupation(s) During
Address and Age the Company Past 5 Years
<S> <C> <C>
Richard W. Zuccaro, 49 Tax Vice President Vice President, New York Life Insurance Company, 1995
51 Madison Avenue to present; Vice President -- Tax, New York Life
New York, NY 10010 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
</TABLE>
76
<PAGE> 183
<TABLE>
<CAPTION>
Principal
Name, Position(s) with Occupation(s) During
Address and Age the Company Past 5 Years
<S> <C> <C>
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>
77
<PAGE> 184
<TABLE>
<CAPTION>
Principal
Name, Position(s) with Occupation(s) During
Address and Age the Company Past 5 Years
<S> <C> <C>
Anthony W. Polis, 55 Treasurer Vice President, New York Life Insurance Company, 1988
51 Madison Avenue (Principal to present; Director, Vice President and Chief
New York, NY 10010 Financial and Financial Officer, NYLIFE Securities Inc., 1988 to
Accounting present; Vice President and Chief Financial Officer,
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.
</TABLE>
78
<PAGE> 185
<TABLE>
<CAPTION>
Principal
Name, Position(s) with Occupation(s) During
Address and Age the Company Past 5 Years
<S> <C> <C>
Sara L. Badler, 38 Secretary Assistant General Counsel, New York Life Insurance
51 Madison Avenue Company, 1996 to present; Associate Counsel, New York
New York, NY 10010 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 March 1999; 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.
As indicated in the above table, certain Directors and Officers also hold
positions with Monitor, MainStay Management, Inc., MacKay-Shields Financial
Corporation, New York Life Insurance Company, NYLIFE Securities, Inc. and/or
NYLIFE Distributors, Inc.
The Independent Directors of the Company receive from the Company an
annual retainer of $24,000 and a fee of $1,000 for each Board of Directors
meeting and for each Board committee meeting attended and are reimbursed for all
out-of-pocket expenses related to attendance at such meetings. Directors who are
affiliated with New York Life Insurance Company do not receive compensation from
the Company.
For the fiscal year ended December 31, 1998, the Directors received the
following compensation from the Company and from certain other investment
companies (as indicated) that have the same investment advisers as the Company
or an investment adviser that is an affiliated person of one of the Company's
investment advisers:
79
<PAGE> 186
<TABLE>
<CAPTION>
Total Compensation
From Registrant and
Aggregate Compensation Fund Complex Paid
Name and Position From Company Directors
<S> <C> <C>
Lawrence Glacken $ 30,000 $ 30,000
Director
Robert P. Mulhearn $ 30,000 $ 30,000
Director
Susan B. Kerley $ 31,000 $ 31,000
Director
</TABLE>
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 each of the
Funds.
THE MANAGER, THE SUBADVISERS
AND THE DISTRIBUTOR
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. MainStay Management, Inc. is a direct subsidiary of NYLIFE
Inc., which is a direct subsidiary of New York Life Insurance Company.
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 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.
80
<PAGE> 187
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 "Know
With Whom You're Investing," 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 a Subadviser;
(b) the fees to be paid to the Subadvisers pursuant to the Sub-Advisory
Agreements; and
(c) all expenses incurred by the Manager in connection with
administering the ordinary course of the Funds' business, other than those
assumed by the Company.
For its services, each Fund pays the Manager a monthly fee.
(See the Prospectus, "Know With Whom You're Investing".)
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 $ 562,217
Growth Equity Fund 670,493 6,963,032
Indexed Equity Fund 541,630 6,263,846
International Equity Fund 108,499 1,104,413
Asset Manager Fund 305,965 3,114,621
Value Equity Fund 941,883 7,963,179
Bond Fund 155,008 1,373,917
Indexed Bond Fund 68,007 744,747
International Bond Fund 43,865 440,402
Money Market Fund 142,675 1,386,536
Short-Term Bond Fund 32,585 260,453
</TABLE>
As of November 21, 1997, the Manager limited certain Funds' expenses.
In connection with the voluntary expense limitations, the Manager assumed the
following
81
<PAGE> 188
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 $ 257,925
Indexed Equity Fund 290,267* 3,269,934
International Equity Fund 13,689 36,690
Bond Fund 18,927 192,482
Indexed Bond Fund 19,676 222,581
International Bond Fund 14,104 70,444
Money Market Fund 37,695 383,039
Short-Term Bond Fund 14,826 127,949
</TABLE>
* Manager assumed $236,104, Monitor, the Fund's Subadviser, 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 each of
the Subadvisers, and 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, the Subadvisers manage the Funds' portfolios, including the
purchase, retention, disposition and loan of securities. As compensation for
service, the Manager, not the Funds, pays the Funds' Subadvisers a monthly fee
calculated on the basis of each Fund's average daily net assets at the following
annual rates:
<TABLE>
<CAPTION>
Percentage of Average
Fund Daily Net Assets
---- ---------------------
<S> <C>
EAFE Index Fund 0.15%
Growth Equity Fund 0.25%
Index Equity Fund 0.10%
International Equity Fund 0.35%
Asset Manager Fund 0.15%
Value Equity Fund 0.25%
Bond Fund 0.20%
Indexed Bond Fund 0.10%
International Bond Fund 0.30%
Money Market Fund 0.10%
Short-Term Bond Fund 0.15%
</TABLE>
82
<PAGE> 189
The Directors, including the Independent Directors, approved the
Sub-Advisory Agreements at an in-person meeting held September 9, 1997. On
November 17, 1997, the shareholders of each of the Funds approved the
Sub-Advisory Agreements with MacKay-Shields, Monitor and New York Life. The
Sub-Advisory Agreements will remain in effect for two years following their
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, the Manager, or
any Subadviser (as the term is defined in the 1940 Act).
The Subadvisers have authorized any of their directors, officers and
employees who have been elected or appointed as Directors or officers of the
Company to serve in the capacities in which they have been elected or appointed.
In connection with the services they render, the Subadvisers bear the salaries
and expenses of all of their personnel.
The Sub-Advisory Agreements provide that the Subadvisers shall not be
liable to a Fund for any error of judgment by a Subadviser or for any loss
sustained by a Fund except in the case of the Subadviser'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.
For the fiscal year ended December 31, 1998 and for the period from
November 21, 1997 to December 31, 1997, the amount of the sub-advisory fee paid
by the Manager to New York Life, MacKay-Shields or Monitor was as follows:
<TABLE>
<CAPTION>
Year Ended 11/21/97 through
Fund 12/31/98 12/31/97
<S> <C> <C>
EAFE Index Fund $ 88,771 $ 9,053
Growth Equity Fund 2,047,951 197,204
Index Equity Fund 1,252,770* 108,326*
International Equity Fund 454,158 44,677
Asset Manager Fund 718,759 70,607
Value Equity Fund 2,342,112 277,024
Bond Fund 366,373 41,336
Indexed Bond Fund 148,950 13,601
International Bond Fund 165,151 16,450
Money Market Fund 277,307 28,535
Short-Term Bond Fund 65,113 8,146
</TABLE>
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>
1/1/97 through 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
Index Equity Fund 719,601 502,686
International Equity Fund 406,316 395,717
Asset Manager Fund 508,530 461,408
</TABLE>
83
<PAGE> 190
<TABLE>
<S> <C> <C>
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>
*For the fiscal year ended December 31, 1998 and the period ended
December 31, 1997, the Subadviser for the Indexed Equity Fund waived or
reimbursed fees in the amounts of $626,385 and $54,163, respectively.
SUB-ADMINISTRATION AGREEMENT
The Manager has delegated certain of its administrative
responsibilities to New York Life Insurance Company pursuant to a
Sub-Administration Agreement between the Manager and New York Life. Under the
Sub-Administration Agreement, among other things, New York Life Insurance
Company responds to shareholder inquiries and prepares shareholder reports. For
these services, the Manager pays a percentage of its management fee to New York
Life Insurance Company.
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 and waived and/or
reimbursed by each Fund was as follows:
<TABLE>
<CAPTION>
1/1/97 through 11/20/97 Year Ended 12/31/96
-------------------------------------- -------------------------------------
Administration Administration Administration Administration
Fund Fee Paid Fee Waived Fee Paid Fee Waived
and/or and/or
Reimbursed Reimbursed
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
EAFE Index Fund $ 632,652 $ 229,592 $ 662,846 $ 238,764
- --------------------------------------------------------------------------------------------------------------------
Growth Equity Fund 3,394,512 N/A (1) 2,847,330 N/A (1)
- --------------------------------------------------------------------------------------------------------------------
Indexed Equity Fund 2,878,403 1,878,195 (4) 2,010,753 753,575 (2)
- --------------------------------------------------------------------------------------------------------------------
International Equity
Fund 580,451 35,792 565,311 82,203
- --------------------------------------------------------------------------------------------------------------------
Asset Manager Fund 1,695,098 N/A (1) 1,538,025 164,519 (3)
- --------------------------------------------------------------------------------------------------------------------
Value Equity Fund 4,819,937 N/A (1) 4,245,206 N/A (1)
- --------------------------------------------------------------------------------------------------------------------
Bond Fund 870,864 154,845 976,711 188,561
- --------------------------------------------------------------------------------------------------------------------
Indexed Bond Fund 421,641 161,693 495,190 189,996
- --------------------------------------------------------------------------------------------------------------------
International Bond
Fund 228,235 60,073 235,493 61,961
- --------------------------------------------------------------------------------------------------------------------
Money Market Fund 726,696 194,751 400,921 170,221
- --------------------------------------------------------------------------------------------------------------------
Short-Term Bond Fund 207,375 96,101 294,794 122,335
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
84
<PAGE> 191
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.
DISTRIBUTION AGREEMENT
NYLIFE Distributors Inc. serves as the Company's distributor and
principal underwriter (the "Distributor") pursuant to a Distribution Agreement,
dated January 1, 1994. Prior to that time, NYLIFE Securities Inc. ("NYLIFE
Securities"), an affiliated company, had acted as principal underwriter. NYLIFE
Securities sells shares of the Funds pursuant to a dealer agreement with the
Distributor. The Distributor is not obligated to sell any specific amount of the
Company's shares, and receives no compensation from the Company pursuant to the
Distribution Agreement.
The Company anticipates making a continuous offering of its shares,
although it reserves the right to suspend or terminate such offering at any
time. The Distribution Agreement was most recently approved by the Board of
Directors, including a majority of the Directors who are not "interested
persons" (as defined in the 1940 Act) of the Company or the Distributor, nor
have any direct or indirect financial interest in the operation of the
distribution plan or in any related agreement (the "Independent Directors") at a
meeting held on March 2, 1999.
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.
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<PAGE> 192
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 "Independent
Directors"), cast in person at a meeting called for the purpose of voting on
such amendments, and by a majority of the outstanding voting securities as
defined in the 1940 Act for the Institutional Service Class of the Fund.
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 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 Director, including
the Independent Directors, at a meeting held March 2, 1999. The Plan was
originally approved by the Directors, including the Independent Directors, at a
meeting held on September 13, 1994 and amended at a meeting held on March 4,
1997.
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
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<PAGE> 193
activities, and the purposes for which such expenditures were made.
PURCHASES AND REDEMPTIONS
Purchases and redemptions are discussed in the Prospectus under the
heading "Shareholder Guide," and that information is incorporated herein by
reference.
Certain clients of the Company's Subadvisers 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 Subadviser intends to
retain the security in the Fund as an investment. Assets so purchased by a Fund
will be valued in generally the same manner as they would be valued for purposes
of pricing the Fund's shares, if such assets were included in the Fund's assets
at the time of the purchase. The Fund reserves the right to amend or terminate
this practice at any time.
The Company determines the net asset value per share of each Fund on
each day the New York Stock Exchange is open for trading.
The Company reserves the right to suspend or postpone redemptions
during any period when: (a) trading on the New York Stock Exchange is
restricted, as determined by the SEC, or that Exchange is closed for other than
customary weekend and holiday closings; (b) the SEC has by order permitted such
suspension; or (c) an emergency, as determined by the SEC, exists, making
disposal of portfolio securities or valuation of net assets of one or more of
the Funds 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
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<PAGE> 194
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 Subadviser will seek the best execution of the
Fund's orders. The Subadviser 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. Consistent with the foregoing primary considerations, the Conduct
Rules of the NASD and such other policies as the Directors may determine, the
Subadvisers may consider sales of shares of the Funds as a factor in the
selection of broker-dealers to execute the Funds' portfolio transactions.
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
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<PAGE> 195
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.
Under each Sub-Advisory Agreement and as permitted by Section 28(e) of
the Securities Exchange Act of 1934 (the "1934 Act"), a Subadviser may cause a
Fund to pay a broker-dealer (except the Affiliated Broker) which provides
brokerage and research services to the Subadviser an amount of commission for
effecting a securities transaction for a Fund in excess of the amount other
broker-dealers would have charged for the transaction if the Subadviser
determines in good faith that the greater commission is reasonable in relation
to the value of the brokerage and research services provided by the executing
broker-dealer viewed in terms of either a particular transaction or the
Subadviser's overall responsibilities to the Company or to its other clients.
The term "brokerage and research services" includes advice as to the value of
securities, the advisability of investing in, purchasing, or selling
securities, and the availability of securities or of purchasers or sellers of
securities; furnishing analyses and reports concerning issuers, industries,
securities, economic factors and trends, portfolio strategy and the performance
of accounts; and effecting securities transactions and performing functions
incidental thereto such as clearance and settlement.
Although commissions paid on every transaction will, in the judgment of
the Subadvisers, be reasonable in relation to the value of the brokerage
services provided, commissions exceeding those which another broker might charge
may be paid to broker-dealers (except the Affiliated Broker) who were selected
to execute transactions on behalf of the Company and the Subadvisers' other
clients in part for providing advice as to the availability of securities or of
purchasers or sellers of securities and services in effecting securities
transactions and performing functions incidental thereto such as clearance and
settlement.
Broker-dealers may be willing to furnish statistical, research and
other factual information or services ("Research") to the Subadvisers for no
consideration other than brokerage or underwriting commissions. Securities may
be bought or sold through such broker-dealers, but at present, unless otherwise
directed by the Trust, a commission higher than one charged elsewhere will not
be paid to such a firm solely because it provided Research to a Subadviser.
Research provided by brokers is used for the benefit of all of the Subadvisers'
clients and not solely or necessarily for the benefit of the Company. The
Subadvisers' investment management personnel attempt to evaluate the quality of
Research provided by brokers. Results of this effort are sometimes used by the
Subadvisers as a consideration in the selection of brokers to execute portfolio
transactions.
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In certain instances there may be securities which are suitable for a
fund's portfolio as well as for that of another Fund or one or more of the other
clients of the Subadvisers. Investment decisions for a Fund and for the
Subadvisers' other clients are made with a view to achieving their respective
investment objectives. It may develop that a particular security is bought or
sold for only one client even though it might be held by, or bought or sold for,
other clients. Likewise, a particular security may be bought for one or more
clients when one or more other clients are selling that same security. Some
simultaneous transactions are inevitable when several clients receive investment
advice from the same investment adviser, particularly when the same security is
suitable for the investment objectives of more than one client. When two or more
clients are simultaneously engaged in the purchase or sale of the same security,
the securities are allocated among clients in a manner believed to be equitable
to each. It is recognized that in some cases this system could have a
detrimental effect on the price or volume of the security in a particular
transaction as far as a Fund is concerned. The Company believes that over time
its ability to participate in volume transactions will produce better executions
for the Funds.
The Sub-Advisory fee that the Manager pays on behalf of each Fund to
the Subadvisers will not be reduced as a consequence of the Subadvisers' receipt
of brokerage and research services. To the extent a Fund's portfolio
transactions are used to obtain such services, the brokerage commissions paid by
the Fund will exceed those that might otherwise be paid, by an amount which
cannot be presently determined. Such services would be useful and of value to
the Subadvisers in serving both the Funds and other clients and, conversely,
such services obtained by the placement of brokerage business of other clients
would be useful to the Subadvisers in carrying out their obligations to the
Funds.
For the years ended December 31, 1998, 1997 and 1996, each of the
following Funds paid brokerage commissions as follows:
<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> <C> <C>
EAFE Index Fund ..... $ 72,602 $ 20,593 $ N/A 0(0%)(1) 0(0%)(1) 0(0%)(1)
Growth Equity Fund .. 423,326 461,682 296,284 0(0%)(1) 0(0%)(1) 0(0%)(1)
Indexed Equity Fund.. 302,291 120,427 N/A 0(0%)(1) 0(0%)(1) 0(0%)(1)
International Equity
Fund ................ 230,372 407,665 290,329 0(0%)(1) 0(0%)(1) 0(0%)(1)
Asset Manager Fund .. 161,159 22,593 N/A 0(0%)(1) 0(0%)(1) 0(0%)(1)
Value Equity Fund ... 1,976,646 1,651,353 1,042,205 0(0%)(1) 0(0%)(1) 0(0%)(1)
Bond Fund ........... N/A N/A 768 0(0%)(1) 0(0%)(1) 0(0%)(1)
Short-Term Bond Fund. N/A 250 106 0(0%)(1) 0(0%)(1) 0(0%)(1)
</TABLE>
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<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 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> <C> <C>
EAFE Index Fund............. $ 28,623,991 $ 6,116,892(0%)(2) $ N/A N/A $ N/A N/A
Growth Equity Fund.......... 349,425,106 329,107,159(0%)(2) 182,941,279 423,326 461,682 290,265
Indexed Equity Fund......... 315,577,968 114,953,870(0%)(2) N/A N/A N/A N/A
International Equity Fund... 84,406,014 103,442,741(0%)(N/A) 70,163,300 230,372 407,665 290,329
Asset Manager Fund.......... 176,370,188 19,581,960(0%)(2) N/A N/A N/A N/A
Value Equity Fund........... 1,275,820,583 1,082,875,352(0%)(2) 656,491,378 1,976,646 1,651,353 1,037,247
Bond Fund................... N/A N/A(2) 17,690,332 N/A N/A 768
Short-Term Bond Fund........ N/A 3,202,719(0%)(2) 1,533,460 N/A 250 106
</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)
Bear Stearns Cos., Inc. (The) (2)
Legman Brothers Holdings Inc. (2)
Morgan Stanley, Dean Winter, Discover &
Company (2)
Morgan (J.P.) & Co. Inc. (2)
Marsh & McLennan Companies, Inc. (2)
Merrill Lynch & Co., Inc. (2)
Schawb (Charles) Corp. (The) (2)
Asset Manager Fund American Express Company (2)
Bear Stearns Cos., Inc. (The) (2)
Legman Brothers Holdings Inc. (2)
Morgan (J.P.) & Co. Inc. (2)
Marsh & McLennan Companies, Inc. (2)
Merrill Lynch & Co., Inc. (2)
Schwab (Charles) Corp. (The) (2)
Bear Stearns Cos., Inc. (The) (3)
Morgan Stanley, Dean Winter, Discover &
Company (3)
</TABLE>
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<TABLE>
<S> <C> <C>
Morgan (J.P.) & Co. Inc. (3)
PaineWebber Group, Inc. (3)
Value Equity Fund American Express Credit Corp. (1)
Bond Fund Salomon, Smith Barney Holdings Inc. (3)
Indexed Bond Fund American Express Credit Corp. (3)
Morgan Stanley, Dean Witter,
Discover & Company (3)
Money Market Fund Goldman, Sachs & Co. (1)
Merrill Lynch & Co., Inc. (1)
Morgan (J.P.) & Co. Inc. (1)
Morgan Stanley, Dean Winter, Discover &
Company (1)
Salomon Smith Barney Holdings Inc. (1)
Morgan Stanley, Dean Winter
Discover & Company (3)
</TABLE>
(1) Represents investment in commercial papers.
(2) Represents investment in common stock.
(3) Represents investment in corporate bonds.
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).
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.
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<PAGE> 199
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, 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 closing 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 Subadviser if the prices
are deemed by the Subadvisers 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 approved by the Board of Directors, which prices reflect
broker-dealer-supplied valuations or electronic data processing techniques
and/or matrix pricing if those prices are deemed by a Fund's Subadviser to be
representative of market values at the close of the first session of the New
York Stock Exchange; (f) by appraising exchange-traded options and futures
contracts at the last posted settlement 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 Subadviser to be representative of
market values, but excluding money market instruments with a remaining maturity
of 60 days or less and including restricted securities and securities for which
no market quotation is available, at fair value in accordance
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<PAGE> 200
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 60 days or less are valued by the
amortized cost method unless such method does not represent fair value. Forward
foreign currency exchange contracts held by the funds are valued at their
respective fair market values determined on the basis of the mean between the
last current bid and asked prices based on dealer or exchange quotations.
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 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 of net asset value does not take place
contemporaneously with the 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 generally will not be reflected in the Fund's calculation of net asset
values. However, a Subadviser, in consultation with the Manager, may, in its
judgment, determine that an adjustment to a Fund's net asset value should be
made because intervening events have caused the Fund's net asset value to be
materially inaccurate.
The proceeds received by each Fund for each issue or sale of its
shares, and all net investment income, realized and unrealized gain and proceeds
thereof, subject only to the rights
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<PAGE> 201
of creditors, will be specifically allocated to such Fund and constitute the
underlying assets of that Fund. The underlying assets of each Fund will be
segregated on the books of account, and will be charged with the liabilities in
respect to such Fund and with a share of the general liabilities of the Company.
Expenses with respect to any two or more Funds will be allocated in proportion
to the net asset values of the respective funds except where allocation of
direct expenses can otherwise be fairly made in the judgment of the MainStay
Management.
To the extent that any newly organized fund or class of shares
receives, on or before December 31, any seed capital, the net asset value of
such fund(s) or class(es) will be calculated as of December 31.
TAX INFORMATION
While it is anticipated that many shareholders of the Funds will be
tax-exempt institutions, the following discussion may be of general interest to
these shareholders as well as for those shareholders of the Funds who do not
have tax-exempt status. Although the discussion below refers in certain
instances to distributions and other transactions as being taxable to a
shareholder, tax-exempt shareholders will, of course, not be taxed to the extent
provided by applicable tax exemptions. The discussion herein relating to taxes
is presented for general informational purposes only. Since the tax laws are
complex and tax results can vary depending upon specific circumstances,
investors should consult tax advisers regarding investment in a Fund.
Each Fund intends to qualify annually and elect to be treated as a
regulated investment company under Subchapter M of the Internal Revenue Code of
1986, as amended (the "Code"). If a Fund so qualifies and elects, it generally
will not be subject to Federal income tax on its investment company taxable
income (which includes, among other items, dividends, interest, and the excess,
if any, of net short-term capital gains over net long-term capital losses) and
its net capital gains (net long-term capital gains in excess of net short-term
capital losses) that it distributes to its shareholders.
Each Fund intends to distribute, at least annually, to its shareholders
substantially all of its investment company taxable income and its net capital
gains. In determining amounts of capital gains to be distributed, any capital
loss carryovers from prior years will be applied against capital gains.
To qualify for treatment as a regulated investment company, a Fund
generally must, among other things: (a) derive in each taxable year at least 90%
of its gross income from dividends,
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<PAGE> 202
interest, payments with respect to securities loans, gains from the sale or
other disposition of securities or foreign currencies, and other income
(including gains from certain options, futures, and forward contracts) derived
with respect to its business of investing in securities or foreign currencies;
(b) diversify its holdings so that at the end of each quarter of the taxable
year, (i) at least 50% of the market value of a Fund's assets is represented by
cash, cash items, U.S. Government securities, the securities of other regulated
investment companies and other securities, with such other securities of any one
issuer limited for the purposes of this calculation to an amount not greater
than 5% of the value of the Fund's total assets and 10% of the outstanding
voting securities of such issuer, and (ii) not more than 25% of the value of its
total assets is invested in the securities of any one issuer (other than U.S.
Government securities or the securities of other regulated investment
companies), or of two or more issuers which the Fund controls and which are
engaged in the same or similar trades or businesses or related trades or
businesses; and (c) distribute in each taxable year at least 90% of the sum of
its investment company taxable income and its net tax-exempt interest income. If
a Fund does not meet all of these Code requirements, it will be taxed as an
ordinary corporation and its distributions (to the extent of available earnings
and profits) will be taxed to shareholders as ordinary income (except to the
extent a shareholder is exempt from tax).
The Treasury Department is authorized to issue regulations to provide
that foreign currency gains that are not directly related to a Fund's principal
business of investing in securities (or options and futures with respect to
securities) may be excluded from the income which qualifies for purposes of the
90% gross income requirement described above. To date, however, no such
regulations have been issued.
Amounts not distributed on a timely basis in accordance with a calendar
year distribution requirement are subject to a nondeductible 4% excise tax. To
prevent imposition of the excise tax, a Fund must distribute for the calendar
year an amount equal to the sum of (1) at least 98% of its ordinary taxable
income (excluding any capital gains or losses) for the calendar year, (2) at
least 98% of the excess of its capital gains over capital losses (adjusted for
certain ordinary losses) for the one-year period ending October 31 of such year,
and (3) all ordinary taxable income and capital gain net income (adjusted for
certain ordinary losses) for previous years that were not distributed during
such years. A distribution will be treated as paid on December 31 of the
calendar year if it is declared by a Fund in October, November or December of
that year to shareholders on a record date in such a month and paid by the Fund
during January of the following calendar year. Such a distribution will be
includable in the gross income of shareholders in the calendar
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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.
If a portion of a Fund's net investment income is derived from
dividends from domestic corporations, then a portion of such distributions may
be eligible for the corporate dividends-received deduction. The
dividends-received deduction is reduced to the extent shares of a Fund are
treated as debt-financed under the Code and is generally eliminated unless such
shares are deemed to have been held for more than 45 days. The 45-day holding
period must occur during the 90-day period beginning 45 days before the date on
which the shares become ex-dividend. In the case of dividends on certain
preferred stock, the holding period requirement is 90 days during a 180-day
period. In addition, the entire dividend (including the deducted portion) is
includable in the corporate shareholder's alternative minimum taxable income.
Finally, if such dividends are large enough to constitute "extraordinary
dividends" under Section 1059 of the Code and the applicable holding period
requirements are not met, the shareholder's basis in its shares could be reduced
by all or a portion of the amount of the dividends that qualifies for the
dividends-received deduction.
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, Asset Manager
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 a Fund's net capital gains, if any, designated by a
Fund as capital gain dividends, will generally be
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taxable to shareholders as long-term capital gains, regardless of how long a
shareholder has held the Fund's shares. Net capital gains from assets held for
one year or less will be taxed as ordinary income. Capital gain distributions
will not be eligible for the dividends-received deduction. All distributions are
includable in the gross income of a shareholder whether reinvested in additional
shares or received in cash. Shareholders will be notified annually as to the
Federal tax status of distributions.
A Fund's distributions with respect to a given taxable year may exceed
its current and accumulated earnings and profits 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
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distributions in the form of additional shares will have a cost basis for
Federal income tax purposes in each share received equal to the net asset value
of a share of a Fund on the reinvestment date.
Under the Code, gains or losses attributable to fluctuations in foreign
currency exchange rates which occur between the time a Fund accrues income or
other receivables or accrues expenses or other liabilities denominated in a
foreign currency and the time a Fund actually collects such receivables or pays
such 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
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income (in addition to taxable dividends actually received) his pro rata share
of the foreign income and similar taxes paid by a Fund, and will be entitled
either to claim a deduction (as an itemized deduction) for his pro rata share of
such foreign taxes in computing his taxable income or to use it as a foreign tax
credit against his U.S. Federal income taxes, subject to limitations. Foreign
taxes may not be deducted by a shareholder that is an individual in computing
the alternative minimum tax. 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, International Bond Fund, International Equity Fund, Asset Manager Fund and
Indexed Bond 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
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subject to a tax on a portion of the excess distribution, whether or not the
corresponding income is distributed by the Fund to shareholders. In general,
under the PFIC rules, an excess distribution is treated as having been realized
ratably over the period during which a Fund held the PFIC shares. A Fund itself
will be subject to tax on the portion, if any, of an excess 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
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income is actually received by the Funds, original issue discount on a taxable
debt security earned in a given year generally is treated for Federal income tax
purposes as interest and, 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 Fund's holding
period and the application of various loss deferral provisions of the Code.
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Each Fund is required to report to the IRS all distributions except in
the case of certain exempt shareholders. All such distribution and redemption
proceeds generally are subject to withholding of Federal income tax at a rate of
31% ("backup withholding") in the case of non-exempt shareholders if (1) the
shareholder fails to furnish the Fund with and to certify the shareholder's
correct taxpayer identification number, (2) the IRS notifies the Fund or
shareholder that the shareholder has failed to report properly certain interest
and dividend income to the IRS and to respond to notices to that effect, or (3)
when required to do so, the shareholder fails to certify that he is not subject
to backup withholding. If the withholding provisions are applicable, any such
distributions, whether reinvested in additional shares or taken in cash, will be
reduced by the amounts required to be withheld. Backup withholding is not an
additional tax and any amounts withheld may be credited against the
shareholder's U.S. Federal income tax liability. Investors may wish to consult
their tax advisers about the applicability of the backup withholding provisions.
The foregoing discussion relates only to Federal income tax law as
applicable to U.S. persons (i.e., U.S. citizens and residents and U.S. domestic
corporations, partnerships, trusts and estates). Distributions by the Funds also
may be subject to state and local taxes and their treatment under state and
local income tax laws may differ from the Federal income tax treatment.
Shareholders should consult their tax advisers with respect to particular
questions of Federal, state and local taxation. Shareholders who are not U.S.
persons should consult their tax advisers regarding U.S. and foreign tax
consequences of ownership of shares of the Funds including the likelihood that
distributions to them would be subject to withholding of U.S. tax at a rate of
30% (or at a lower rate under a tax treaty).
PERFORMANCE INFORMATION
The Company may, from time to time, include the yield and effective
yield of its Money Market Fund, the yield of the other Funds or Classes, and the
total return of all Funds or Classes in advertisements, sales literature, or
reports to shareholders or prospective investors. Due to the deduction of the
shareholder service fee, performance of the Institutional Service Class of each
Fund will be lower than the performance of the Institutional Class of the Fund.
Each of the Funds began offering Institutional Service Class shares on
January 1, 1995. Thus, the performance figures for 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, except for the International Equity and International Bond
Funds, which began offering both classes of shares on January 1, 1995.
Performance data for the International Bond Fund and the International Equity
Fund includes the historical performance of each Fund's predecessor separate
account from its inception up to December 31, 1994.
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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 365/7, with the resulting yield figure
carried to at least the nearest hundredth of one percent. "Effective yield" for
the Money Market Fund assumes that all dividends received during an annual
period have been reinvested. Calculation of "effective yield" begins with the
same "base period return" used in the calculation of yield, which is then
annualized to reflect weekly compounding pursuant to the following formula:
Effective Yield = [(Base Period Return + 1)(365/7)] - 1
The current and effective seven-day average yields as of December 31,
1998 for the Money Market Fund were 4.86% and 4.98%, respectively, for the
Institutional Class, and were 4.61% and 4.72%, respectively, for the
Institutional Service Class. Had certain expenses not been assumed by the
Manager, these yields would have been 4.69% and 4.80%, respectively, for the
Institutional Class, and 4.45% and 4.54%, respectively, for the Institutional
Service Class.
Quotations of yield for the other Funds will be based on all investment
income per share earned during a particular 30-day period (including dividends
and interest), less expenses accrued during the period ("net investment
income"), and are computed by dividing net investment income by the maximum
offering price per share on the last day of the period, according to the
following formula:
2[(a - b + 1)(6) - 1]
cd
where a = dividends and interest earned during the
period,
b = expenses accrued for the period (net of
reimbursements),
c = the average daily number of shares
outstanding during the period that were
entitled to receive dividends, and
d = the maximum offering price per share on the
last day of the period.
For the 30-day period ended December 31, 1998, the yield for the
Short-Term Bond Fund was 4.50% for the Institutional Class, and was 4.23% for
the Institutional Service Class.
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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.
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:
<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)........ 19.15% 8.20% 7.98%
Institutional Service Class(2). 18.83% 7.98% 7.84%
Growth Equity Fund
Institutional Class (1)........ 40.50% 23.50% 23.89%
Institutional Service Class(2). 40.18% 23.26% 23.74%
Indexed Equity Fund
Institutional Class (1)........ 28.62% 23.67% 20.34%
Institutional Service Class(2). 28.24% 23.44% 20.20%
International Equity Fund*
Institutional Class (3)........ 22.41% 10.93% 11.29%
Institutional Service Class(3). 22.20% 10.61% 11.04%
Asset Manager Fund (formerly Multi-Asset Fund)
Institutional Class (1)........ 21.31% 17.55% 15.10%
Institutional Service Class(2). 21.00% 17.34% 14.97%
Value Equity Fund
Institutional Class (1)........ -8.10% 12.56% 16.62%
Institutional Service Class(2). -8.30% 12.38% 16.50%
Bond Fund
Institutional Class (1)........ 7.93% 6.54% 7.82%
Institutional Service Class(2). 7.73% 6.34% 7.69%
Indexed Bond Fund
Institutional Class (1)........ 8.21% 6.64% 8.04%
Institutional Service Class(2). 7.86% 6.46% 7.93%
International Bond Fund*
Institutional Class (3)........ 12.53% 10.03% 10.11%
Institutional Service Class(3). 12.30% 9.82% 9.99%
Short-Term Bond Fund
Institutional Class (1)........ 6.37% 5.49% 6.27%
Institutional Service Class(2). 5.98% 5.27% 6.13%
</TABLE>
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(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 Subadviser to
both the International Bond Fund and the International Equity Fund,
served as investment adviser to both corresponding Separate Accounts,
and the objectives, policies, restrictions, guidelines and management
styles of the Separate Accounts were materially equivalent to those of
their corresponding Funds. Performance figures for the 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
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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 Manager and Subadviser, and other pertinent facts relating to the
management of the Fund by the Subadviser.
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, Business Week, 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 BIG
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 Smith Barney World Government
Benchmark Bond Index, the Salomon Smith Barney non-U.S. Dollar World Government
Bond Index, the Legman Brothers Municipal Bond Index and the Legman Brothers
Government Corporate Index; (ii) other groups of mutual funds tracked by
Morningstar Inc. or Lipper Inc., 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.
Advertisements for a Fund may also include general information about the
performance of unmanaged indexes with investment parameters similar to the
Fund's. 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
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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. In addition to the Institutional Class and the
Institutional Service Class, the Money Market Fund offers another class of
shares, the Sweep Shares. The Board of Directors may establish additional
portfolios (with different investment objectives and fundamental policies) at
any time in the future. Establishment and offering of additional portfolios will
not alter the rights of the Company's shareholders. When issued, shares are
fully paid, non-assessable, redeemable, and freely transferable.
EFFECTIVE MATURITY
Certain Funds may use an effective maturity for determining the
maturity of their portfolio. Effective maturity means the average expected
repayment date of the portfolio taking into account prospective calls, puts and
mortgage prepayments, in addition to the maturity dates of the securities in the
portfolio.
SHARE OWNERSHIP OF THE FUNDS
The following table sets forth the information concerning beneficial
and record ownership as of April 15, 1999, of the Funds' shares by each person
who beneficially or of record owned more than 5% of the voting securities of any
Fund:
<TABLE>
<CAPTION>
Percentage of
Outstanding
NAME AND ADDRESS OF SHAREHOLDER Fund Shares Owned(1) Shares(2)
<S> <C> <C> <C>
TRUSTEES OF THE NEW YORK LIFE INSURANCE COMPANY BOND 6,469,692 33.6%
RETIREMENT PLAN AND PENSION PLAN (COMPANY PLAN) EAFE INDEX 931,089 15.5%
51 MADISON AVENUE GROWTH EQUITY 5,554,508 18.8%
NEW YORK, NY 10010 INDEXED BOND 4,216,953 27.6%
INDEXED EQUITY 7,415,762 16.5%
INTERNATIONAL BOND 3,812,389 65.2%
INTERNATIONAL EQUITY 4,779,284 39.9%
VALUE EQUITY 23,355,420 37.3%
TRUSTEES OF THE NYLIC RETIREMENT PLAN (AGENTS) BOND 2,186,176 11.4%
51 MADISON AVENUE EAFE INDEX 744,878 12.4%
NEW YORK, NY 10010 GROWTH EQUITY 3,791,593 12.8%
INDEXED BOND 2,260,279 14.8%
INDEXED EQUITY 7,037,356 15.7%
INTERNATIONAL BOND 1,086,196 18.6%
INTERNATIONAL EQUITY 3,846,406 32.1%
VALUE EQUITY 16,285,031 26.0%
</TABLE>
109
<PAGE> 216
<TABLE>
<CAPTION>
Percentage of
Outstanding
NAME AND ADDRESS OF SHAREHOLDER Fund Shares Owned(1) Shares(2)
<S> <C> <C> <C>
NEW YORK LIFE INSURANCE COMPANY EAFE INDEX 1,126,940 22.1%
51 MADISON AVENUE INDEXED EQUITY 4,125,480 9.2%
NEW YORK, NY 10010 ASSET MANAGER 10,035,629 29.1%
TRUSTEES OF THE LONE STAR HOURLY
RETIREMENT PLAN, SHORT-TERM BOND 1,990,095 33.6%
DAY & ZIMMERMAN, INC.
1818 MARKET STREET
PHILADELPHIA, PA 19103
TRUSTEES OF THE VOGEL SHORT-TERM BOND 327,266 5.5%
EMPLOYEES PENSION TRUST
P.O. BOX 380
ORANGE CITY, IA 51041-0380
TRUSTEES OF THE NEW YORK LIFE INSURANCE COMPANY GROWTH EQUITY 6,096,757 20.6%
EMPLOYEE PROGRESS SHARING INVESTMENT PLAN TRUST INDEXED EQUITY 2,744,434 6.1%
51 MADISON AVENUE ASSET MANAGER 2,627,610 7.6%
NEW YORK, NY 10010 SHORT-TERM BOND 499,372 8.4%
TRUSTEES OF THE NEW LIFE INSURANCE GROWTH EQUITY 3,462,729 11.7%
COMPANY AGENTS PROGRESS SHARING INVESTMENT
PLAN TRUST
51 MADISON AVENUE
NEW YORK, NY 10010
NEW YORK LIFE INSURANCE COMPANY EMPLOYEES' BOND 1,376,090 7.1%
HEALTH AND LIFE BENEFIT TRUST - (LIFE BENEFITS)
51 MADISON AVENUE
NEW YORK, NY 10010
NEW YORK LIFE INSURANCE COMPANY AGENTS' BOND 1,131,511 5.9%
HEALTH AND LIFE BENEFIT TRUST (LIFE BENEFITS)
51 MADISON AVENUE
NEW YORK, NY 10010
FRANK G. AND FRIEDA K. BROTZ FAMILY FOUNDATION INDEXED BOND 1,395,024 9.1%
INC.
3518 LAKESHORE ROAD
SHEBOYGAN, WI 53083
PLASTICS ENGINEERING COMPANY EAFE INDEX 609,345 13.5%
P.O. BOX 758
SHEBOYGAM, WI 53082-0758
MERRILL LYNCH TRUST COMPANY INDEXED EQUITY 5,609,184 12.5%
TTEE FBO CHRYSLER 401(K) PLAN
265 DAVIDSON AVENUE
SOMERSET, NJ 08873
NYL TRUST COMPANY CLIENT ACCOUNTS BOND 1,798,739 9.3%
51 MADISON AVENUE, ROOM 117A GROWTH EQUITY 5,228,051 17.7%
NEW YORK, NY 10010 INDEXED BOND 4,531,166 29.6%
INDEXED EQUITY 10,997,686 24.5%
MONEY MARKET 121,614,722 63.5%
ASSET MANAGER 8,418,799 24.4%
VALUE EQUITY 8,858,182 14.1%
TRUSTEES OF THE HARVEST STATES COOPERATIVE INTERNATIONAL EQUITY 868,476 7.3%
COMBINED RETIREMENT FUND
P.O. BOX 64594
ST. PAUL, MN 55169
WILMINGTON TRUST COMPANY TTEE FOR GGL CUSTODIAN SHORT-TERM BOND 395,110 6.7%
WPG INC. RET PLAN A/C 35816-1-3
C/O MUT FNDS 1100 W. MARKET ST
WILMINGTON, DE 19890-0001
METHODIST HOME ENDOWMENT FUND INTERNATIONAL EQUITY 785,065 6.6%
1111 HERRING AVENUE
WACO, TX 76708
</TABLE>
110
<PAGE> 217
<TABLE>
<CAPTION>
Percentage of
Outstanding
NAME AND ADDRESS OF SHAREHOLDER Fund Shares Owned(1) Shares(2)
<S> <C> <C> <C>
CURRIE & CO. A PARTNERSHIP INTERNATIONAL BOND 421,627 7.2%
P.O. BOX 3199 CHURCH STREET STATION
NEW YORK, NY 10008
THE NORTHERN TRUST COMPANY AS TRUSTEE EAFE INDEX 919,237 15.3%
P30 BAKER HUGHES THRIFT PLAN 224B317
P.O. BOX 92956 __9DV
CHICAGO, IL 60675
TRUSTEES OF THE NEW YORK LIFE INSURANCE COMPANY BOND 6,469,692 33.6%
RETIREMENT PLAN AND PENSION PLAN (COMPANY PLAN) INDEXED BOND 4,216,953 27.6%
51 MADISON AVENUE INTERNATIONAL BOND 3,812,389 65.2%
NEW YORK, NY 10020 INTERNATIONAL EQUITY 4,779,284 39.9%
VALUE EQUITY 23,355,420 37.3%
TRUSTEES OF THE NYLIC RETIREMENT PLAN (AGENTS) INTERNATIONAL EQUITY 3,846,406 32.1%
51 MADISON AVENUE VALUE EQUITY 16,285,031 26.0%
NEW YORK, NY 10010
NEW YORK LIFE INSURANCE COMPANY ASSET MANAGER 10,035,629 29.1%
51 MADISON AVENUE
NEW YORK, NY 10010
TRUSTEES OF THE LONE STAR HOURLY
RETIREMENT PLAN, SHORT-TERM BOND 1,990,095 33.6%
DAY & ZIMMERMAN, INC.
1818 MARKET STREET
PHILADELPHIA, PA 19103
NEW YORK LIFE TRUST COMPANY INDEXED BOND 4,531,166 29.6%
CLIENT ACCOUNTS MONEY MARKET 121,614,722 63.5%
51 MADISON AVENUE, ROOM 117A
NEW YORK, NY 10010
</TABLE>
- ------------------------------------------------
(1) This information, not being within the knowledge of the Company,
has been furnished by each of the above persons. Beneficial ownership is as
defined under Section 13(d) of the Securities Exchange Act of 1934. Fractional
shares have been omitted.
(2) Only the ownership of at least one-tenth of one percent is listed.
NYLIFE Distributors, Inc. is a corporation organized under the laws of
Delaware. NYLIFE Inc. Distributors, Inc. is a wholly owned subsidiary of NYLIFE,
Inc. and an indirect wholly owned subsidiary of New York Life Insurance Company.
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 Subadviser unless such
power is the result of their position with the Company or Manager or Subadviser.
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.
111
<PAGE> 218
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP, 1177 Avenue of the Americas, New York,
New York 10036, has been selected as independent accountants of the Company. The
Fund's Annual Reports, which are incorporated by reference in this SAI, have
been incorporated in reliance on the reports of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
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.
TRANSFER AGENT
MainStay Shareholder Services Inc.("MSS") is the Funds' Transfer,
Dividend Disbursing and Shareholder Servicing Agent. MSS, whose address is 260
Cherry Hill Road, Parsippany, NJ 07054, is an indirect wholly owned subsidiary
of New York Life Insurance Company. MSS provides customer service, is
responsible for preparing and sending statements, confirms and checks, and keeps
certain financial and accounting records. MSS is paid a per account fee and
out-of-pocket expenses by the Funds. MSS has entered into an agreement with
Boston Financial Data Services ("BFDS"), whose address is 2 Heritage Drive,
North Quincy, MA 02171. BFDS will perform certain of the services for which MSS
is responsible. In addition, the Fund or MSS may contract with other service
organizations, including affiliates of MSS and broker-dealers and other
financial institutions, which will establish a single omnibus account for their
clients with the Fund. The service organizations will provide shareholder
services to the shareholders within the omnibus accounts and receive service
fees for those services from the Fund.
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.
112
<PAGE> 219
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.
113
<PAGE> 220
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.
114
<PAGE> 221
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.
MIG 4/VMIG 4: This designation denotes adequate quality. Protection
commonly regarded as required of an investment security
115
<PAGE> 222
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.
116
<PAGE> 223
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.
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,
117
<PAGE> 224
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 changing circumstances are
more likely to lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation.
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<PAGE> 225
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.
119
<PAGE> 226
MAINSTAY INSTITUTIONAL FUNDS INC.
MONEY MARKET FUND SWEEP SHARES
STATEMENT OF ADDITIONAL INFORMATION
DATE: MAY 1, 1999
This Statement of Additional Information supplements the information
contained in the Prospectus for the Money Market Fund Sweep Shares dated May 1,
1999, as amended or supplemented from time to time (the "Prospectus"), and
should be read in conjunction with the Prospectus. The Prospectus is available
without charge by writing to MainStay Institutional Funds Inc., 260 Cherry Hill
Road, Parsippany, New Jersey 07054-1108, 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.
Shareholder inquiries should be made by writing directly to MainStay
Institutional Funds Inc., 260 Cherry Hill Road, Parsippany, New Jersey
07054-1108, or by calling 1-800-695-2126. In addition, you can make inquiries
through your registered representative.
The Money Market 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> 227
TABLE OF CONTENTS
ADDITIONAL INFORMATION ABOUT THE FUND..................................... 1
Borrowing ..................................................... 4
Commercial Paper............................................... 5
Repurchase Agreements and Reverse Repurchase Agreements........ 5
U.S. 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................................... 19
Zero Coupon Bonds.............................................. 21
Risks Associated with Debt Securities.......................... 21
FUNDAMENTAL INVESTMENT RESTRICTIONS....................................... 22
NON-FUNDAMENTAL INVESTMENT RESTRICTIONS................................... 24
DIRECTORS AND OFFICERS.................................................... 26
THE MANAGER, THE SUBADVISERS AND THE DISTRIBUTOR.......................... 32
Management Agreement........................................... 32
Sub-Advisory Agreement......................................... 34
Sub-Administration Agreement................................... 35
Distribution Agreement......................................... 35
Service Fees................................................... 36
Distribution Fees.............................................. 37
ADDITIONAL INFORMATION.................................................... 38
PURCHASES AND REDEMPTIONS................................................. 39
PORTFOLIO TRANSACTIONS AND BROKERAGE...................................... 39
NET ASSET VALUE........................................................... 42
TAX INFORMATION........................................................... 43
PERFORMANCE INFORMATION................................................... 47
OTHER INFORMATION......................................................... 49
Capitalization................................................. 49
Beneficial Ownership of Shares................................. 49
Code of Ethics................................................. 50
Independent Accountants........................................ 50
Legal Counsel.................................................. 50
Transfer Agent................................................. 50
Custodian ..................................................... 51
- i -
<PAGE> 228
Registration Statement......................................... 51
APPENDIX A: DESCRIPTION OF SECURITIES RATINGS ............................ 52
MOODY'S INVESTORS SERVICE, INC........................................ 52
STANDARD & POOR'S..................................................... 55
- ii -
<PAGE> 229
ADDITIONAL INFORMATION ABOUT THE FUND
MainStay Institutional Funds Inc. (the "Company") is an open-end
management investment company (or mutual fund) 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.
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 Subadviser, New York Life Insurance Company (the
"Subadviser" 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
<PAGE> 230
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 Subadviser; (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
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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 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 Subadviser, 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 Subadviser 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
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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. 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
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appreciation of the securities purchased. The Fund also may be required to
maintain minimum average balances in connection with such borrowing or to pay a
commitment or other fee to maintain a line of credit; either of these
requirements would increase the cost of borrowing over the stated interest rate.
COMMERCIAL PAPER
The Fund may invest in commercial paper. The Fund will invest in
commercial paper only if rated at the time of investment Prime-1 by Moody's or
A-1 by S&P, or, if not rated by Moody's or S&P, if the Subadviser 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 a
custodian appointed by the Fund. The Fund attempts to assure that the value of
the purchased securities, including any accrued interest, will at all times
exceed the value of the repurchase agreement. 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 Subadviser 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
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proceedings, there is also the risk that the seller may fail to repurchase the
security. However, if the market value of the Obligation subject to the
repurchase agreement becomes less than the repurchase price (including accrued
interest), the Fund will direct the seller of the Obligation to deliver
additional securities so that the market value of all securities subject to the
repurchase agreement equals or exceeds the repurchase price. The Fund will not
invest more than 10% of its net assets (taken at current market value) in
repurchase agreements maturing in more than seven days.
The Fund may enter into reverse repurchase agreements with banks or
broker-dealers, which involve the sale of a security by the Fund and its
agreement to repurchase the instrument at a 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.
U.S. 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
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cash or U.S. government securities maintained on a current basis at an amount at
least equal to the market value of the securities loaned. The Fund would have
the right to call a loan and obtain the securities loaned at any time generally
on less than five days' notice. For the duration of a loan, the Fund would
continue to receive the equivalent of the interest or dividends paid by the
issuer on the securities loaned and would also receive compensation from the
investment of the collateral. The Fund would not, however, have the right to
vote any securities having voting rights during the existence of the loan, but
the Fund would call the loan in anticipation of an important vote to be taken
among holders of the securities or of the giving or withholding of their consent
on a material matter affecting the investment. The Company, on behalf of the
Fund, has entered into an agency agreement with Merrill Lynch Portfolio
Services, 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 Subadviser.
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 or breach its agreement with a Fund. However,
the loans would be made only to firms deemed by a Subadviser to be creditworthy
and approved by the Board, and when, in the judgment of the Subadviser, the
consideration which can be earned currently from securities loans of this type
justifies the attendant risk. If the Subadviser determines to make securities
loans, it is intended that the value of the securities loaned will not exceed
33% of the value of the total assets of the Fund. Under the guidelines adopted
by the Board of Directors, the Fund is prohibited from lending more than 5% of
the Fund's total assets to any one counterparty.
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.
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The Fund will not invest in any obligation of a domestic or foreign
bank unless (i) the bank has capital, surplus, and individual profits (as of the
date of the most recently published financial statements) in excess of $100
million, or the equivalent in other currencies, and (ii) in the case of a U.S.
bank, its deposits are insured by the Federal Deposit Insurance Corporation.
These limitations do not prohibit investments in the securities issued by
foreign branches of U.S. banks, provided such U.S. banks meet the foregoing
requirements.
FLOATING AND VARIABLE RATE SECURITIES
Floating and variable rate securities provide for a periodic
adjustment in the interest rate paid on the obligations. The terms of such
obligations must provide that interest rates are 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
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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 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 (60 days for municipal bonds and notes). 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
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when-issued, or firm or standby commitment securities may be more or less than
the purchase price payable at the settlement date. The Directors do not believe
that the Fund's net asset value or income will be exposed to additional risk by
the purchase of securities on a when-issued or firm commitment basis. The Fund
will establish a segregated account in which it will maintain liquid assets at
least equal in value to any commitments to purchase securities on a when-issued,
firm, or standby commitment basis. Such segregated securities either will mature
or, if necessary, be sold on or before the settlement date.
MORTGAGE-RELATED AND OTHER ASSET-BACKED SECURITIES
Mortgage-related and asset-back securities, which include
mortgage-backed securities, are securities that 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 creditworthiness of the
parties involved. The ability of a Fund to successfully utilize these
instruments may depend in part upon the ability of the Fund's Subadviser 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. 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
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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 ("GNMA")) 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. Some mortgage pass-through certificates may include
securities backed by adjustable-rate mortgages which bear interest at a rate
that will be adjusted periodically.
The principal governmental guarantor of mortgage-related securities
is GNMA. GNMA is a wholly owned U.S. government corporation within the U.S.
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 ("FHA")-insured or Veterans
Administration-guaranteed mortgages.
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 prepayment has been purchased at a premium, in the
event of prepayment, the value of the premium would be lost.
Payment of principal and interest on some mortgage pass-through
securities (but not the market value of the securities themselves) may be
guaranteed by the full faith and credit of the U.S. government (in the case of
securities guaranteed by GNMA); or guaranteed by agencies or instrumentalities
of the U.S. government (in the case of securities guaranteed by the Federal
National Mortgage Association ("FNMA") or the Federal Home Loan Mortgage
Corporation ("FHLMC"), which are supported only by the discretionary authority
of the U.S. government to purchase the agency's obligations).
Government-related guarantors (i.e., not backed by the full
faith and credit of the U.S. government) include the FNMA and the
FHLMC. FNMA is a government-sponsored corporation owned entirely
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by private stockholders. It is subject to general regulation by the Secretary of
Housing and Urban Development and acts as a government instrumentality under
authority granted by Congress. 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. FNMA is authorized to borrow from the
U.S. Treasury to meet its obligations.
FHLMC was created by Congress in 1970 for the purpose of increasing
the availability of mortgage credit for residential housing. It is a government
sponsored corporation and acts as a government instrumentality under authority
granted by Congress. FHLMC was formerly owned by the twelve Federal Home Loan
Banks and is now owned entirely by private stockholders. 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.
If either fixed or variable rate pass-through securities issued by
the U.S. government or its agencies or instrumentalities are developed in the
future, the Fund reserves the right to invest in them.
Commercial banks, savings and loan institutions, private mortgage
insurance companies, mortgage bankers and other secondary market issuers also
create pass-through pools of conventional residential mortgage loans. Such
issuers may, in addition, be the originators and/or servicers of the underlying
mortgage loans as well as the guarantors of the mortgage-related securities.
Pools created by such non-governmental issuers generally offer a higher rate of
interest than government and government-related pools because there are no
direct or indirect government or agency guarantees of payments in the former
pools. However, timely payment of interest and principal of these pools may be
supported by various forms of insurance or guarantees, including individual
loan, title, pool and hazard insurance and letters of credit. The insurance and
guarantees are issued by governmental entities, private insurers and the
mortgage poolers. Such insurance and guarantees and the creditworthiness of the
issuers thereof will be considered in determining whether a mortgage-related
security meets the Fund's investment quality standards. There can be no
assurance that the private insurers
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or guarantors can meet their obligations under the insurance policies or
guarantee arrangements. The Fund may buy mortgage-related securities without
insurance or guarantees if, through an examination of the loan experience and
practices of the originator/servicers and poolers, the Fund's Subadviser
determines that the securities meet the Fund's quality standards. Although the
market for such securities is becoming increasingly liquid, securities issued by
certain private organizations may not be readily marketable. The Fund will not
purchase mortgage-related securities or any other assets which in the opinion of
the Subadviser are illiquid if, as a result, more than 10% of the value of the
Fund's net assets will be illiquid.
Collateralized Mortgage Obligations ("CMOs"). A CMO is a hybrid
between a mortgage-backed bond and a mortgage pass-through security. Similar to
a bond, interest and prepaid principal is paid, in most cases, semiannually.
CMOs may be collateralized by whole mortgage loans, but are more typically
collateralized by portfolios of mortgage pass-through securities guaranteed by
GNMA, FHLMC, or FNMA, and their income streams.
CMOs are structured into multiple classes, each bearing a different
stated maturity. Actual maturity and average life will depend upon the
prepayment experience of the collateral. CMOs provide for a modified form of
call protection through a de facto breakdown of the underlying pool of mortgages
according to how quickly the loans are repaid. Monthly payment of principal
received from the pool of underlying mortgages, including prepayments, is first
returned to investors holding the shortest maturity class. Investors holding the
longer maturity classes receive principal only after the first class has been
retired. An investor is partially guarded against a sooner than desired return
of principal because of the sequential payments.
In a typical CMO transaction, a corporation ("issuer") issues
multiple series (e.g., A, B, C, Z) of CMO bonds ("Bonds"). Proceeds of the Bond
offering are used to purchase mortgages or mortgage pass-through certificates
("Collateral"). The Collateral is pledged to a third-party trustee as security
for the Bonds. Principal and interest payments from the Collateral are used to
pay principal on the Bonds in the order A, B, C, Z. The Series A, B, and C Bonds
all bear current interest. Interest on the Series Z Bond is accrued and added to
principal and a like amount is paid as principal on the Series A, B, or C Bond
currently being paid off. When the Series A, B, and C Bonds are paid in full,
interest and principal on the Series Z Bond begins to be paid currently. With
some CMOs, the issuer serves as a conduit to allow loan originators (primarily
builders or savings and loan associations) to borrow against their loan
portfolios.
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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 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. Other mortgage-related securities
include securities other than those described above that directly or indirectly
represent a participation in, or are secured by and payable from, mortgage loans
on real property, including CMO residuals or stripped mortgaged-backed
securities, and may be structured in classes with rights to receive varying
proportions of principal and interest. Other mortgage-related securities may be
equity or debt securities issued by agencies or
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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, partnerships,
trusts and special purpose entities of the foregoing.
The Subadviser expects that governmental, government-related or
private entities may create mortgage loan pools and other mortgage-related
securities offering mortgage pass-through and mortgage-collateralized
investments in addition to those described above. The mortgages underlying these
securities may include alternative mortgage instruments, that is, mortgage
instruments whose principal or interest payments may vary or whose terms to
maturity may differ from customary long-term fixed rate mortgages. As new types
of mortgage-related securities are developed and offered to investors, the
Subadviser 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
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<PAGE> 244
mortgage-backed securities, in certain circumstances the Fund may fail to recoup
fully its initial investment in a CMO residual.
CMO residuals are generally purchased and sold by institutional
investors through several investment banking firms acting as brokers or dealers.
The CMO residual market has only very recently developed and CMO residuals
currently may not have the liquidity of other more established securities
trading in other markets. Transactions in CMO residuals are generally completed
only after careful review of the characteristics of the securities in question.
In addition, CMO residuals may or, pursuant to an exemption therefrom, may not
have been registered under the Securities Act of 1933, as amended. CMO
residuals, whether or not registered under such Act, may be subject to certain
restrictions on transferability, and may be deemed "illiquid" and subject to a
portfolio's limitations on investment in illiquid securities. The Fund limits
its investment in CMO residuals to less than 5% of its net assets.
CMOs may offer a higher yield than U.S. government securities, but
they may also be subject to greater price fluctuation and credit risk. In
addition, CMOs typically will be issued in a variety of classes or series, which
have different maturities and are retired in sequence. Privately issued CMOs are
not government securities nor are they supported in any way by any governmental
agency or instrumentality. In the event of a default by an issuer of a CMO,
there is no assurance that the collateral securing such CMO will be sufficient
to pay principal and interest. It is possible that there will be limited
opportunities for trading CMOs in the over-the-counter market, the depth and
liquidity of which will vary from time to time.
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
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<PAGE> 245
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-Related Securities. As is the case
with 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-related 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 Subadviser to forecast
interest rates and other economic factors correctly. If the Subadviser
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
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<PAGE> 246
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 Subadviser expects that other
asset-backed securities (unrelated to mortgage loans) will be offered to
investors in the future. Several types of asset-backed securities have already
been offered to investors, including Certificates for Automobile Receivables
("CARSSM"). CARSSM 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 CARSSM 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 CARSSM 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 Fund 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-related securities.
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<PAGE> 247
LOAN PARTICIPATION INTERESTS
The Fund may invest in participation interests in loans. The Fund's
investment in loan participation interests may take the form of participation
interests in, assignments of or novations of a corporate loan ("Participation
Interests"). The Participation Interests may be acquired from an agent bank,
co-lenders or other holders of Participation Interests ("Participants"). In a
novation, the Fund would assume all of the rights of the lender in a corporate
loan, including the right to receive payments of principal and interest and
other amounts directly from the borrower and to enforce its rights as a lender
directly against the borrower. As an alternative, the Fund may purchase an
assignment of all or a portion of a lender's interest in a corporate loan, in
which case, the Fund may be required generally to rely on the assigning lender
to demand payment and enforce its rights against the borrower, but would
otherwise be entitled to all of such lender's rights in the corporate loan. The
Fund also may purchase a Participation Interest in a portion of the rights of a
lender in a corporate loan. In such a case, the Fund will be entitled to receive
payments of principal, interest and fees, if any, but generally will not be
entitled to enforce its rights directly against the agent bank or the borrower;
rather the Fund must rely on the lending institution for that purpose. The Fund
will not act as an agent bank, a guarantor or sole negotiator of a structure
with respect to a corporate loan.
In a typical corporate loan involving the sale of Participation
Interests, the agent bank administers the terms of the corporate loan agreement
and is responsible for the collection of principal and interest and fee payments
to the credit of all lenders which are parties to the corporate loan 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
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<PAGE> 248
agreement and for notifying holders of corporate loans of any failures of
compliance. Typically, under corporate loan agreements, the agent bank is given
broad discretion in enforcing the corporate loan agreement, and is obligated to
use only the same care it would use in the management of its own property. For
these services, the borrower compensates the agent bank. Such compensation may
include special fees paid on structuring and funding the corporate loan and
other fees paid on a continuing basis.
A financial institution's employment as an agent bank may be
terminated in the event that it fails to observe the requisite standard of care
or becomes insolvent, or has a receiver, conservator, or similar official
appointed for it by the appropriate bank regulatory authority or becomes a
debtor in a bankruptcy proceeding. A successor agent bank generally will be
appointed to replace the terminated bank, and assets held by the agent bank
under the corporate loan agreement should remain available to holders of
corporate loans. If, however, assets held by the agent bank for the benefit of
the Fund were determined by an appropriate regulatory authority or court to be
subject to the claims of the agent bank's general or secured creditors, the Fund
might incur certain costs and delays in realizing payment on a corporate loan,
or suffer a loss of principal and/or interest. In situations involving
intermediate Participants similar risks may arise.
When the Fund acts as co-lender in connection with a Participation
Interest or when the Fund acquires a Participation Interest the terms of which
provide that the Fund will be in privity of contract with the corporate
borrower, the Fund will have direct recourse against the borrower in the event
the borrower fails to pay scheduled principal and interest. In all other cases,
the Fund will look to the agent bank to enforce appropriate credit remedies
against the borrower. In acquiring Participation Interests the Fund's Subadviser
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
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<PAGE> 249
concentration of the Fund's portfolio. The Fund considers 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 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.
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.
RISKS ASSOCIATED WITH DEBT SECURITIES
To the extent that the Fund invests in debt securities, it will be
subject to certain risks. The value of the debt securities held by the Fund, and
thus the net asset value of the shares of beneficial interest of the Fund,
generally will fluctuate depending on a number of factors, including, among
others, changes in the perceived creditworthiness of the issuers of those
securities, movements in interest rates, the average maturity of the Fund's
investments, changes in the relative values of the currencies in which the
Fund's investments are denominated relative to the U.S. dollar, and the extent
to which the Fund hedges its interest rate, credit and currency exchange rate
risks. Generally, a rise in interest rates will reduce the
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<PAGE> 250
value of fixed income securities held by the Fund, and a decline in interest
rates will increase the value of fixed income securities held by a Fund. Longer
term debt securities generally pay higher interest rates than do shorter term
debt securities but also may experience greater price volatility as interest
rates change.
Since shares of the Fund represent an investment in securities with
fluctuating market prices, the value of shares of the Fund will vary as the
aggregate value of the the Fund's portfolio securities increases or decreases.
Moreover, the value of lower rated debt securities that the Fund purchases may
fluctuate more than the value of higher rated debt securities. Lower rated debt
securities generally carry greater risk that the issuer will default on the
payment of interest and principal. Lower rated fixed income securities generally
tend to reflect short-term corporate and market developments to a greater extent
than higher rated securities which react primarily to fluctuations in the
general level of interest rates. Changes in the value of securities subsequent
to their acquisition will not affect cash income or yields to maturity to the
Funds but will be reflected in the net asset value of the Fund's shares.
Corporate debt securities may bear fixed,contingent, or variable
rates of interest and may involve equity features, such as conversion or
exchange rights or warrants for the acquisition of stock of the same or a
different issuer, participations based on revenues, sales or profits, or the
purchase of common stock in a unit transaction (where corporate debt securities
and common stock are offered as a unit).
When and if available, debt securities may be purchased at a discount
from face value. From time to time, each Fund may purchase securities not paying
interest or dividends at the time acquired if, in the opinion of the Subadviser,
such securities have the potential for future income (or capital appreciation,
if any).
FUNDAMENTAL 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.
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<PAGE> 251
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 may not:
(1) invest in a security if, as a result of such investment, 25% or
more of its total assets would be invested in the securities of issuers in any
particular industry, except that this restriction does not apply to securities
issued or guaranteed by the U.S. government or its agencies or instrumentalities
(or repurchase agreements with respect thereto) and at such time that the 1940
Act is amended to permit a registered investment company to elect to be
"periodically industry concentrated," (i.e., a fund that does not concentrate
its investments in a particular industry would be permitted, but not required,
to invest 25% or more of its assets in a particular industry) the Fund elects to
be so classified and the foregoing limitation shall no longer apply with respect
to the Fund;
(2) invest in a security if, with respect to 75% of its total assets,
more than 5% of its total assets would be invested in the securities of any one
issuer, except that this restriction does not apply to securities issued or
guaranteed by the U.S. government, its agencies or instrumentalities;
(3) invest in a security if, with respect to 75% of its assets, it
would hold more than 10% of the outstanding voting securities of any one issuer,
except that this restriction does not apply to U.S. government securities;
(4) borrow money or issue senior securities, except that the Fund may
(i) borrow from banks or enter into reverse repurchase agreements, but only if
immediately after each borrowing there is asset coverage of 300%, and (ii) issue
senior securities to the extent permitted under the 1940 Act;
(5) lend any funds or other assets, except that the Fund may,
consistent with its investment objectives and policies: (i) invest in debt
obligations including bonds, debentures or other debt securities, bankers'
acceptances and commercial paper, even though the purchase of such obligations
may be deemed to be the making of loans; (ii) enter into repurchase agreements;
and (iii) lend its portfolio securities in accordance with applicable
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<PAGE> 252
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.
NON-FUNDAMENTAL INVESTMENT RESTRICTIONS
In addition to the Company's fundamental investment restrictions, the
Directors of the Company have voluntarily adopted certain policies and
restrictions which are observed in the conduct of the affairs of the Fund. These
represent intentions of the Directors based upon current circumstances. They
differ from fundamental investment policies in that the following additional
investment restrictions may be changed or amended by action of the Directors
without requiring prior notice to or approval of shareholders.
Unless otherwise indicated, all percentage limitations apply to the
Fund on an individual basis, and apply only at the time a transaction is entered
into. Accordingly, if a percentage restriction is adhered to at the time of
investment, a later increase or decrease in the percentage which results from a
relative change in values will not be considered a violation.
Under these restrictions, the Fund may not:
(1) purchase puts, calls, straddles, spreads and any combination
thereof if, as a result, the value of its aggregate investment in such classes
of securities would exceed 5% of its total assets;
- 24 -
<PAGE> 253
(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 Subadviser,
pursuant to guidelines approved by the Directors.
The Subadviser 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;
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<PAGE> 254
(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
Subadviser 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 Subadviser 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).
DIRECTORS AND OFFICERS
The Board of Directors oversees the Fund, the Manager and the
Subadviser. Information pertaining to the Directors and Officers of the Company
is set forth below. Directors deemed to be "interested persons" of the Company
for purposes of the 1940 Act are indicated by an asterisk.
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<PAGE> 255
<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 Chairman President, Chief Executive Officer and Trustee, The MainStay Funds,
51 Madison Avenue 1997- present; Senior Vice President, New York Life Insurance
New York, NY 10010 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
51 Madison Avenue Company, 1991 to present; Vice President, Pension Department, New
New York, NY 10010 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 1998, 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
1998, Director, MBL Life Assurance Co. Inc., 1997 to present.
Lawrence Glacken, 71 Director Retired, 1987 to present; Vice President, Investment Banking, The
353 Canterbury Drive First Boston Corporation, 1964-1987.
Ramsey, NJ 07446
Robert P. Mulhearn, 52 Director Private Investor, 1987 to present; Managing Director, Morgan Stanley,
60 Twin Brooks Road 1979-1987.
Saddle River, NJ 07458
</TABLE>
- 27 -
<PAGE> 256
<TABLE>
<CAPTION>
Name, Position(s) with Principal Occupation(s)
Address and Age the Company During Past 5 Years
- ------------------------- --------------------- -----------------------------------------------------------------------
<S> <C> <C>
Susan B. Kerley, 47 Director President, Global Research Associates, 1990 to present; Manager,
P.O. 9572 Special Investments, Rockefeller & Co., 1988-1990; Director of
New Haven, CT 06535 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,
51 Madison Avenue 1990 to present; Pension Vice President, Pension Department, New Yor
New York, NY 10010 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.
Marc J. Brookman, 35 Executive Vice President Vice President, New York Life Insurance Company, 1998 to present;
51 Madison Avenue Senior Vice President-Product Development, MainStay Institutional
New York, NY 10010 Funds Inc. and Retirement Plans 1998 to present; National States
Director, Vice President, United Asset Management Retirement Plan
Services, 1996 to 1998; Regional Sales Manager, Vice President,
Oppenheimer Capital Quest for Value, 1991 to 1995.
</TABLE>
-28-
<PAGE> 257
<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>
- 29 -
<PAGE> 258
<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;
51 Madison Avenue Vice President -- Tax, New York Life Insurance Company, 1986 to 1995;
New York, NY 10010 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>
- 30 -
<PAGE> 259
<TABLE>
<CAPTION>
Name, Position(s) with Principal Occupation(s)
Address and Age the Company During Past 5 Years
- ------------------------- --------------------- -----------------------------------------------------------------------
<S> <C> <C>
Anthony W. Polis, 55 Treasurer (Principal Vice President, New York Life Insurance Company, 1988 to present;
51 Madison Avenue Financial and Accounting Director, Vice President and Chief Financial Officer, NYLIFE
New York, NY 10010 Officer) 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
51 Madison Avenue present; Associate Counsel, New York Life Insurance Company, 1994 to
New York, NY 10010 1996; Secretary, MainStay VP Series Fund, Inc., 1997 to present;
Assistant Secretary, the MainStay Funds, 1994 to March, 1999;
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.
- 31 -
<PAGE> 260
COMPENSATION TABLE
As indicated in the above table, certain Directors and Officers also
holds positions with Monitor, MainStay Management, Inc., MacKay-Shields
Financial Corporation, New York Life Insurance Company, NYLIFE Securities Inc.
and/or NYLIFE Distributors Inc.
The Independent Directors of the Company receive from the Company an annual
retainer of $24,000 and a fee of $1,000 for each Board of Directors meeting and
for each Board committee meeting attended and are reimbursed for all
out-of-pocket expenses related to attendance at such meetings. Directors who are
affiliated with New York Life Insurance Company do not receive compensation from
the Company.
For the fiscal year ended December 31, 1998, the Directors received the
following compensation from the Company and from certain other investment
companies (as indicated) that have the same investment advisers as the Company
or an investment adviser that is an affiliated person of one of the Company's
investment advisers:
<TABLE>
<CAPTION>
Total Compensation From
Aggregate Compensation Registrant and Fund
Name and Position from Company(1) Complex Paid Directors
- ------------------- ---------------------- ------------------------
<S> <C> <C>
Lawrence Glacken $ 30,000 $ 30,000
Director
Robert P. Mulhearn $ 30,000 $ 30,000
Director
Susan B. Kerley $ 31,000 $ 31,000
Director
</TABLE>
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.
THE MANAGER, THE SUBADVISER AND THE DISTRIBUTOR
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.
- 32 -
<PAGE> 261
MainStay Management Inc. is a direct subsidiary of NYLIFE Inc., which is a
direct subsidiary of New York Life Insurance Company.
The Directors, including the Independent Directors, approved the
Management Agreement at an in-person meeting held on September 9, 1997. On
November 17, 1997, the shareholders of the Fund approved the Management
Agreement. The Management Agreement will remain in effect for two years
following its effective date, and will continue in effect thereafter only if
such continuance is specifically approved at least annually by the Directors or
by a vote of a majority of the outstanding voting securities of the Fund (as
defined in the 1940 Act and the rules thereunder) and, in either case by a
majority of the Directors who are not "interested persons" of the Company or of
the Manager (as the term is defined in the 1940 Act).
The Manager has authorized any of its directors, officers and
employees who have been elected or appointed as Directors of the Company to
serve in the capacities in which they have been elected or appointed.
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 "Know With
Whom You're Investing," 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 Subadviser;
(b) the fees to be paid to the Subadviser 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, "Know With Whom You're Investing.")
- 33 -
<PAGE> 262
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 $1,386,536.
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 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
Subadviser on behalf of the Fund, the Subadviser, 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 Subadviser 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 Subadviser (as the term is defined in the 1940
Act).
The Subadviser has authorized any of its directors, officers and
employees who have been elected or appointed as Directors or officers of the
Company to serve in the capacities in which they have been elected or appointed.
In connection with the services
- 34 -
<PAGE> 263
it renders, the Subadviser bears the salaries and expenses of all of their
personnel.
The Sub-Advisory Agreement provides that the Subadviser shall not be
liable to the Fund for any error of judgment by the Subadviser or for any loss
sustained by the Fund except in the case of the Subadviser'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.
For the fiscal year ended December 31, 1998 and for the period from
November 21, 1997 to December 31, 1997, the amount of the sub-advisory fees paid
by the Manager to New York Life were $277,307 and $28,535, respectively.
In previous years, prior to a change in management structure, the
Fund paid an advisory fee directly to New York Life. For the period January 1,
1997 through November 20, 1997 and fiscal year ended December 31, 1996, the
advisory fees paid by the Fund to New York Life were $181,674, and $100,230,
respectively.
SUB-ADMINISTRATION AGREEMENT
The Manager has delegated certain of its administrative
responsibilities to New York Life Insurance Company pursuant to a
Sub-Administration Agreement between the Manager and New York Life. Under the
Sub-Administration Agreement, among other things, New York Life Insurance
Company responds to shareholder inquiries and prepares shareholder reports.
For these services, the Manager pays a percentage of its management fees to New
York Life Insurance Company.
In previous years, prior to a change in management structure, the
Fund paid an administrative fee directly to New York Life as administrator. For
the period January 1, 1997 through November 20, 1997 and the fiscal year ended
December 31, 1996, the amount of the administration fee paid by the Fund to New
York Life was $726,696 and $400,921, respectively.
Also prior to the above-referenced change in management structure and
in connection with the voluntary expense limitation, New York Life, as
administrator, assumed expenses for the Fund for the period January 1, 1997
through November 20, 1997 and fiscal year ended December 31, 1996, in the
amounts of $194,751 and $170,221, respectively.
DISTRIBUTION AGREEMENT
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
- 35 -
<PAGE> 264
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 nor have any direct or indirect financial interest in
the operation of the distribution plan or in any related agreement (the
"Independent Directors") at a meeting held on March 2, 1999. The Distribution
Agreement is subject to annual approval by the Board of Directors. The
Distribution Agreement is terminable with respect to the Fund at any time,
without payment of a penalty, by vote of a majority of the Company's Directors
who are not "interested persons" (as defined in the 1940 Act) of the Company,
upon 60 days' written notice to the Distributor, by vote of a majority of the
outstanding voting securities of the Fund, upon 60 days' written notice to the
Distributor, or by the Distributor, upon 60 days' written notice to the Company.
The Distribution Agreement will terminate in the event of its assignment.
SERVICE FEES
The Company has adopted a Shareholder Services Plan with respect to
the Sweep Shares. Under the terms of the Plan, the Company is permitted to pay,
out of the Sweep Shares assets of the Fund, a fee in the amount of 0.25% on an
annualized basis of the average daily net assets attributable to the Sweep
Shares, to New York Life Insurance Company, its affiliates or independent third
party service providers, for providing services in connection with the
administration of plans or programs that use Fund shares as their funding
medium.
Under the terms of the Shareholder Services Plan, the Fund may pay to
service agents "service fees" as that term is defined in the rules of the
National Association of Securities Dealers for services provided to shareholders
of the Sweep Shares. These fees are for personal services, including assistance
in establishing and maintaining shareholder accounts and assisting shareholders
that have questions or other needs relating to their accounts.
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
- 36 -
<PAGE> 265
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 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.
- 37 -
<PAGE> 266
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 $106.78 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 himself or herself with the deadlines set by his or her institution.
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
- 38 -
<PAGE> 267
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
heading "Shareholder Guide" and that information is incorporated herein by
reference.
The Company determines the net asset value per share of the Fund on
each day the New York Stock Exchange is open for trading.
The Company reserves the right to suspend or postpone redemptions
during any period when: (a) trading on the New York Stock Exchange is
restricted, as determined by the SEC, or that Exchange is closed for other than
customary weekend and holiday closings; (b) the SEC has by order permitted such
suspension; or (c) an emergency, as determined by the SEC, exists, making
disposal of portfolio securities or valuation of net assets of the Fund not
reasonably practicable.
For shares of the Fund redeemed within any 90-day period, the Fund
reserves the right to pay the shareholder a maximum of $250,000 in cash, or cash
equal to 1% of the Fund's net assets, whichever is less. To protect the
remaining shareholders in the Fund, anything redeemed above this amount may not
be paid in cash, but could be paid entirely, or in part, in the same kinds of
securities held by the Fund. These securities would be valued at the same value
that was assigned to them in calculating the net asset value of the shares
redeemed. Even though it is highly unlikely that shares would ever actually be
redeemed in kind, shareholders would probably have to pay transaction costs to
sell the securities distributed in kind, should such a distribution occur.
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
- 39 -
<PAGE> 268
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 Subadviser will seek the best execution of the Fund's
orders. The Subadviser 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. Consistent with the foregoing primary considerations, the Conduct
Rules of the NASD and such other policies as the Directors may determine, the
Subadviser may consider sales of shares of the Funds as a factor in the
selection of broker-dealers to execute the Funds' portfolio transactions.
Under each Sub-Advisory Agreement and as permitted by Section 28(e)
of the Securities Exchange Act of 1934 (the "1934 Act"), a Subadviser may cause
a Fund to pay a broker-dealer (except the Affiliated Broker) which provides
brokerage and research services to the Subadviser an amount of commission for
effecting a securities transaction for a Fund in excess of the amount other
broker-dealers would have charged for the transaction if the Subadviser
determines in good faith that the greater commission is reasonable in relation
to the value of the brokerage and research services provided by the executing
broker-dealer viewed in terms of either a particular transaction or the
Subadviser's overall responsibilities to the Company or to its other clients.
The term "brokerage and research services" includes advice as to the value of
securities, the advisability of investing in, purchasing, or selling
securities, and the availability of securities or of purchasers or sellers of
securities; furnishing analyses and reports concerning issuers, industries,
securities, economic factors and trends, portfolio strategy and the performance
of accounts; and effecting securities transactions and performing functions
incidental thereto such as clearance and settlement.
Although commissions paid on every transaction will, in the
judgment of the Subadvisers, be reasonable in relation to the
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<PAGE> 269
value of the brokerage services provided, commissions exceeding those which
another broker might charge may be paid to broker-dealers (except the Affiliated
Broker) who were selected to execute transactions on behalf of the Company and
the Subadvisers' other clients in part for providing advice as to the
availability of securities or of purchasers or sellers of securities and
services in effecting securities transactions and performing functions
incidental thereto such as clearance and settlement.
Broker-dealers may be willing to furnish statistical, research and
other factual information or services ("Research") to the Subadvisers for no
consideration other than brokerage or underwriting commissions. Securities may
be bought or sold through such broker-dealers, but at present, unless otherwise
directed by the Trust, a commission higher than one charged elsewhere will not
be paid to such a firm solely because it provided Research to a Subadviser.
Research provided by brokers is used for the benefit of all of the Subadvisers'
clients and not solely or necessarily for the benefit of the Trust. The
Subadvisers' investment management personnel attempt to evaluate the quality of
Research provided by brokers. Results of this effort are sometimes used by the
Subadvisers as a consideration in the selection of brokers to execute portfolio
transactions.
In certain instances there may be securities which are suitable for a
fund's portfolio as well as for that of another Fund or one or more of the other
clients of the Subadvisers. Investment decisions for a Fund and for the
Subadvisers' other clients are made with a view to achieving their respective
investment objectives. It may develop that a particular security is bought or
sold for only one client even though it might be held by, or bought or sold for,
other clients. Likewise, a particular security may be bought for one or more
clients when one or more other clients are selling that same security. Some
simultaneous transactions are inevitable when several clients receive investment
advice from the same investment adviser, particularly when the same security is
suitable for the investment objectives of more than one client. When two or more
clients are simultaneously engaged in the purchase or sale of the same security,
the securities are allocated among clients in a manner believed to be equitable
to each. It is recognized that in some cases this system could have a
detrimental effect on the price or volume of the security in a particular
transaction as far as a Fund is concerned. The Trust believes that over time its
ability to participate in volume transactions will produce better executions for
the Funds.
The Sub-Advisory fee that the Manager pays on behalf of each
Fund to the Subadvisers will not be reduced as a consequence of
the Subadvisers' receipt of brokerage and research services. To
- 41 -
<PAGE> 270
the extent a Fund's portfolio transactions are used to obtain such services, the
brokerage commissions paid by the Fund will exceed those that might otherwise be
paid, by an amount which cannot be presently determined. Such services would be
useful and of value to the Subadvisers in serving both the Funds and other
clients and, conversely, such services obtained by the placement of brokerage
business of other clients would be useful to the Subadvisers in carrying out
their obligations to the Funds.
For the years ended December 31, 1998, 1997 and 1996 the Fund paid no
brokerage commissions on portfolio transactions for the Sweep Shares.
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:
<TABLE>
<CAPTION>
Broker-Dealer Market Value
<S> <C>
Morgan (J.P.) & Co. Inc. $ 12,429,541
Morgan Stanley, Dean Witter, Discover & Co. 226,131
Salomon Smith Barney Holdings Inc. 13,085,678
</TABLE>
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
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<PAGE> 271
obtained in a similar investment company which uses available market quotations
to value all of its portfolio securities.
To the extent that any newly organized class of shares receives, on
or before December 31, any seed capital, the net asset value of such class(es)
will be calculated as of December 31.
TAX INFORMATION
The discussion herein relating to taxes is presented for general
informational purposes only. Since the tax laws are complex and tax results can
vary depending upon specific circumstances, investors should consult tax
advisers regarding investment in the Fund.
The Fund intends to qualify annually and elect to be treated as a
regulated investment company under Subchapter M of the Internal Revenue Code of
1986, as amended (the "Code"). If the Fund so qualifies and elects, it generally
will not be subject to Federal income tax on its investment company taxable
income (which includes, among other items, dividends, interest, and the excess,
if any, of net short-term capital gains over net long-term capital losses) and
its net capital gains (net 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
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<PAGE> 272
the Fund controls and which are engaged in the same or similar trades or
businesses or related trades or businesses; and (C) distribute in each taxable
year at least 90% of the sum of its investment company taxable income and its
net tax-exempt interest income. If the Fund does not meet all of these Code
requirements, it will be taxed as an ordinary corporation and its distributions
(to the extent of available earnings and profits) will be taxed to shareholders
as ordinary income (except to the extent a shareholder is exempt from tax).
Amounts not distributed on a timely basis in accordance with a
calendar year distribution requirement are subject to a nondeductible 4% excise
tax. To prevent imposition of the excise tax, the Fund must distribute for the
calendar year an amount equal to the sum of (1) at least 98% of its ordinary
taxable income (excluding any capital gains or losses) for the calendar year,
(2) at least 98% of the excess of its capital gains over capital losses
(adjusted for certain ordinary losses) for the one-year period ending October 31
of such year, and (3) all ordinary taxable income and capital gain net income
(adjusted for certain ordinary losses) for previous years that were not
distributed during such years. A distribution will be treated as paid on
December 31 of the calendar year if it is declared by the Fund in October,
November or December of that year to shareholders on a record date in such a
month and paid by the Fund during January of the following calendar year. Such a
distribution will be includable in the gross income of shareholders in the
calendar year in which it is declared, rather than the calendar year in which it
is received.
If a portion of a Fund's net investment income is derived from
dividends from domestic corporations, then a portion of such distributions may
be eligible for the corporate dividends-received deduction. The
dividends-received deduction is reduced to the extent shares of a Fund are
treated as debt-financed under the Code and is generally eliminated unless such
shares are deemed to have been held for more than 45 days. The 45-day holding
period must occur during the 90-day period beginning 45 days before the date on
which the shares become ex-dividend. In the case of dividends on certain
preferred stock, the holding period requirement is 90 days during a 180-day
period. In addition, the entire dividend (including the deducted portion) is
includable in the corporate shareholder's alternative minimum taxable income.
Finally, if such dividends are large enough to constitute "extraordinary
dividends" under Section 1059 of the Code and the applicable holding period
requirements are not met, the shareholder's basis in its shares could be reduced
by all or
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a portion of the amount of the dividends that qualifies for the
dividends-received deduction.
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.
Dividends paid to shareholders out of the Fund's "net investment
company taxable income" will be taxable to shareholders as ordinary dividend
income, and to the extent attributable to dividends received from U.S.
corporations, may be eligible for the dividends received deduction in the hands
of shareholders. Distributions of the Fund's net capital gains, if any,
designated by the Fund as capital gain dividends, will generally be taxable to
shareholders as long-term capital gains, regardless of how long a shareholder
has held the Fund's shares. Net capital gains from assets held for one year or
less will be taxed as ordinary income. All distributions are includable in the
gross income of a shareholder whether reinvested in additional shares or
received in cash. Shareholders will be notified annually as to the Federal tax
status of distributions.
The Fund's distributions with respect to a given taxable year may
exceed its current and accumulated earnings and profits available for
distribution. In that event, distributions in excess of such earnings and
profits would be characterized as a return of capital to shareholders for
Federal income tax purposes, thus reducing each shareholder's cost basis in his
Fund shares. Distributions in excess of a shareholder's cost basis in his shares
would be treated as a gain realized from a sale of such shares.
Upon the taxable disposition (including a sale or redemption) of
shares of the Fund, a shareholder may realize a gain or loss depending generally
upon his basis in his shares. Such gain or loss will be treated as capital gain
or loss if the shares are capital assets in the shareholder's hands and will be
long-term or short-term, generally depending upon the shareholder's holding
period for the shares. However, a loss realized by a shareholder on the
disposition of shares of the Fund with respect to which capital gain dividends
have been paid will, to the extent of such capital gain dividends, be treated as
long-term capital loss if such shares have been held by the shareholder for six
months or less. Further, a loss realized on a disposition will be disallowed to
the extent the shares disposed of are replaced (whether by reinvestment of
distributions or otherwise) within a period of 61 days beginning 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
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adjusted to reflect the disallowed loss. Shareholders receiving distributions in
the form of additional shares will have a cost basis for Federal income tax
purposes in each share received equal to the net asset value of a share of the
Fund on the reinvestment date.
Foreign investing involves the possibility of confiscatory taxation,
foreign taxation of income earned in the foreign nation (including withholding
taxes on interest and dividends) or other foreign taxes imposed with respect to
investments in the foreign nation.
Some of the debt securities that may be acquired by the Fund may be
treated as debt securities that are originally issued at a discount. Original
issue discount can generally be defined as the difference between the price at
which a security was issued and its stated redemption price at maturity.
Although no cash income is actually received by the Fund, original issue
discount on a taxable debt security earned in a given year generally is treated
for Federal income tax purposes as interest and, therefore, such income would be
subject to the distribution requirements of the Code.
Some of the debt securities may be purchased by the Fund at a
discount which exceeds the original issue discount on such debt securities, if
any. This additional discount represents market discount for Federal income tax
purposes. The gain realized on the disposition of any debt security acquired
after April 30, 1993 or any taxable debt security acquired prior to May 1, 1993
having market discount will be treated as ordinary income to the extent it does
not exceed the accrued market discount on such debt security. Generally, market
discount accrues on a daily basis for each day the debt security is held by the
Fund at a constant rate over the time remaining to the debt security's maturity
or, at the election of the Fund, at a constant yield to maturity which takes
into account the semi-annual compounding of interest.
If the Fund holds zero coupon 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
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shareholder fails to furnish the Fund with and to certify the shareholder's
correct taxpayer identification number, (2) the IRS notifies the Fund or
shareholder that the shareholder has failed to report properly certain interest
and dividend income to the IRS and to respond to notices to that effect, or (3)
when required to do so, the shareholder fails to certify that he is not subject
to backup withholding. If the withholding provisions are applicable, any such
distributions, whether reinvested in additional shares or taken in cash, will be
reduced by the amounts required to be withheld. Backup withholding is not an
additional tax and any amounts withheld may be credited against the
shareholder's U.S. Federal income tax liability. Investors may wish to consult
their tax advisers about the applicability of the backup withholding provisions.
The foregoing discussion relates only to Federal income tax law as
applicable to U.S. persons (i.e., U.S. citizens and residents and U.S. domestic
corporations, partnerships, trusts and estates). Distributions by the Fund also
may be subject to state and local taxes and their treatment under state and
local income tax laws may differ from the Federal income tax treatment.
Shareholders should consult their tax advisers with respect to particular
questions of Federal, state and local taxation. Shareholders who are not U.S.
persons should consult their tax advisers regarding U.S. and foreign tax
consequences of ownership of shares of the Fund including the likelihood that
distributions to them would be subject to withholding of U.S. tax at a rate of
30% (or at a lower rate under a tax treaty).
PERFORMANCE INFORMATION
The Company may, from time to time, include the yield and effective
yield and total return of the Fund in advertisements, sales literature, or
reports to shareholders or prospective investors.
Current yield for the Fund will be based on the change in the value
of a hypothetical investment (exclusive of capital charges) over a particular
seven-day period, less a pro rata share of Fund expenses accrued over that
period (the "base period"), and stated as a percentage of the investment at the
start of the base period (the "base period return"). The base period return is
then annualized by multiplying by 365/7, with the resulting yield figure carried
to at least the nearest hundredth of one percent. "Effective yield" for the Fund
assumes that all dividends received during an annual period have been
reinvested. Calculation of "effective yield" begins with the same "base period
return" used in the calculation of yield, which
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is then annualized to reflect weekly compounding pursuant to the
following formula:
Effective Yield = [(Base Period Return + 1)(365/7)] - 1
The current and effective seven-day average yields as of December 31,
1998 for the Money Market Fund's Sweep Shares were 4.53% and 4.63%. Had certain
expenses not been assumed by the Manager, these yields would have been 4.36% and
4.46%.
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
Fund's Manager and Subadviser, and other pertinent facts relating to the
management of the Fund by the Subadviser.
From time to time the Fund may publish an indication of its past
performance as measured by independent sources such as Lipper Analytical
Services, Incorporated, Weisenberger Investment Companies Service, Donoghue's
Money Fund Report, Spot Market Prices, Barron's, BusinessWeek, Kiplinger's
Personal Finance, Financial World, Forbes, Money, Morningstar, Personal
Investor, Sylvia Porter's Personal Finance, and The Wall Street Journal.
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 Smith Barney 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 Smith Barney 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 Inc., widely
used independent research firms which rank mutual
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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. Advertisements
for a Fund may also include general information about the performances of
unmanaged indexes with investment parameters similar to the Fund's. Unmanaged
indexes may assume the reinvestment of dividends but generally do not reflect
deductions for administrative and management costs and expenses.
From time to time, advertisements for the Fund may include general
information about the services and products offered by the Fund, The MainStay
Funds and New York Life Insurance Company and its subsidiaries. For example,
such advertisements may include statistical information about those entities
including, but not limited to, the number of current shareholder accounts, the
amount of assets under management, sales information, the distribution channels
through which the entities' products are available, marketing efforts and
statements about this information by the entities' officers, directors and
employees.
OTHER INFORMATION
CAPITALIZATION
The Fund is a separate portfolio of the Company, an open-end
management investment company, incorporated under the laws of Maryland on
September 21, 1990. The Company was formerly known as New York Life
Institutional Funds Inc. On January 3, 1995 the name of the Company was changed
to its present form. In addition to the Sweep Shares, the Fund offers two other
classes of shares, the Institutional Class and the Institutional Service Class.
The Company also offers ten other portfolios, each of which has two classes of
shares. The Board of Directors may 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
The following table sets forth the information concerning beneficial
and record ownership as of April 15, 1999, of the Fund's shares by each person
who beneficially or of record owned more than 5% of the Money Market Sweep
Shares:
Percentage of
Names and Address Outstanding
of Shareholder Shares
---------------- ------------
BHC Securities 100%
1 Commerce Square
2005 Market Street
Philadelphia, PA 19103
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<PAGE> 278
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 Subadviser unless such
power is the result of their position with the Company or Manager or Subadviser.
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. The
Funds' Annual Reports, which are incorporated by reference in this SAI, have
been incorporated in reliance on the reports of PricewaterhouseCoopers LLP,
independent accountant, given on the authority of said firm as experts in
auditing and accounting.
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.
TRANSFER AGENT
MainStay Shareholder Services Inc.("MSS") is the Fund's Transfer,
Dividend Disbursing and Shareholder Servicing Agent. MSS, whose address is 260
Cherry Hill Road, Parsippany, NJ 07054, is an indirect wholly owned subsidiary
of New York Life Insurance Company. MSS provides customer service, is
responsible for preparing and sending statements, confirms and checks, and keeps
certain financial and accounting records. MSS is paid a per account fee and
out-of-pocket expenses by the Funds. MSS is paid a per account fee and
out-of-pocket expenses by the Funds. MSS has entered into an agreement with
Boston Financial Data Services ("BFDS"), whose address is 2 Heritage Drive,
North Quincy, MA
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<PAGE> 279
02171. BFDS will perform certain of the services for which MSS is responsible.
In addition, the Fund or MSS may contract with other service organizations,
including affiliates of MSS and broker-dealers and other financial
institutions, which will establish a single omnibus account for their clients
with the Fund. The service organizations will provide shareholder services to
the shareholders within the omnibus accounts and receive service fees for those
services from the Fund.
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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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> 284
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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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(12)
(7) Articles of Amendment
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, Asset Manager Fund (formerly
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 Asset Manager Fund
(formerly 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> 287
(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. Inapplicable
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 Money Market Fund Sweep
Shares(12)
(5) Plan of Distribution Pursuant to Rule 12b-1 for Money Market
Fund Sweep Shares(12)
n. Financial Data Schedules
o. (a) Multiple Class Plan(11)
(b) Form of Amended and Restated Multiple Class Plan(12)
- --------------
1. Filed with Registration Statement No. 33-36962 on September 21, 1990.
2. Filed with Pre-Effective Amendment No. 1 to Registration Statement No.
33-36962 on November 19, 1990.
3. Filed with Pre-Effective Amendment No. 2 to Registration Statement No.
33-36962 on December 26, 1990.
4. Filed with Post-Effective Amendment No. 4 to Registration Statement No.
33-36962 on November 2, 1992.
5. Filed with Post-Effective Amendment No. 6 to Registration Statement No.
33-36962 on April 29, 1994.
6. Filed with Post-Effective Amendment No. 7 to Registration Statement No.
33-36962 on October 14, 1994.
7. Filed with Post-Effective Amendment No. 8 to Registration Statement No.
33-36962 on December 29, 1994.
8. Filed with Post-Effective Amendment No. 10 to Registration Statement
No. 33-36962 on April 28, 1995.
9. Filed with Post-Effective Amendment No. 12 to Registration
C-2
<PAGE> 288
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%
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 100%
which owns 83.33% of NYLIFE
Structured Asset Management Company Ltd. Texas
New York Life Capital Corporation Delaware 100%
New York Life Insurance and Annuity Delaware 100%
Corporation
New York Life International Investment Inc. Delaware
which owns 100% of the shares of:
KOHAP New York Life Insurance Ltd. South Korea
and which owns 50.2% of the shares of:
P.T. Asuransi Jiwa Sewu - New York Life Indonesia
and which owns 49% of the shares of:
GEO New York Life, S.A. Mexico
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
Worldwide Holding, Inc.),
New York Life Worldwide Capital, Inc. Delaware
New York Life Worldwide Development, Inc. Delaware
</TABLE>
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<PAGE> 289
<TABLE>
<S> <C> <C>
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: U.K.
Windsor Construction Company Limited U.K. 100%
and 16.7% 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
NYLIFE Depositary Corporation which owns 16.67% of NYLIFE
Structured Asset Management Company Ltd. Delaware 100%
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 Delaware 100%
combined stock and 89.6% of the voting rights of:
Express Scripts, Inc., which owns 100% of the shares of: Delaware
Ivtx, Inc. Texas
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
Express Scripts Vision Corporation Delaware
and owns 100% of the shares of:
Avanti Corporate Health Systems Inc., which owns 100% Delaware
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 25% of the shares Delaware
of:
WellPath Community Health Plans, L.L.C. which owns North Carolina
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
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%
</TABLE>
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<PAGE> 290
<TABLE>
<S> <C> <C>
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 Ohio 0%
NYLIFE International Investment Asia Ltd. Mauritius 100%
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 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.
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<PAGE> 291
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.
C-6
<PAGE> 292
b.
<TABLE>
<CAPTION>
(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
Morris Corporate Center I
Building A, 300
Interpace Parkway
Parsippany, NJ 27054
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
</TABLE>
C-7
<PAGE> 293
<TABLE>
<S> <C> <C>
300 Interpace Parkway
Parsippany, NJ 07054
Lorito, Geraldine Assistant Vice President Assistant Treasurer
300 Interpace Parkway
Parsippany, NJ 07054
Gomez, Mark A. Assistant Secretary None
51 Madison Avenue
New York, NY 10010
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.
C-8
<PAGE> 294
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that this
Post-Effective Amendment No. 21 to the Registration Statement meets the
requirements for effectiveness pursuant to Rule 485(b) under the Securities Act
of 1933, as amended, and the Registrant has duly caused this Post-Effective
Amendment No. 21 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 29th day of April, 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. 21 to the Registrant's Registration Statement has
been signed below by the following persons in the capacities and on the dates
indicated.
Signature Title Date
- --------- ----- ----
- -------------------
Stephen C. Roussin* Chairperson and Director April 29, 1999
- --------------------
Patrick G. Boyle* Director April 29, 1999
- --------------------
Lawrence Glacken* Director April 29, 1999
- --------------------
Robert P. Mulhearn* Director April 29, 1999
- --------------------
Susan B. Kerley* Director April 29, 1999
C-9
<PAGE> 295
Signature Title Date
- --------- ----- ----
/S/ Linda M. Livornese April 29, 1999
- -------------------- President (Principal
Linda M. Livornese Executive Officer)
/S/ Anthony W. Polis April 29, 1999
- -------------------- Treasurer (Principal
Anthony W. Polis Financial and Accounting
Officer)
/S/ Jeffrey L. Steele
*By: --------------------
Jeffrey L. Steele
as Attorney-in-Fact
* Powers of Attorney filed with the initial Registration Statement No.
33-36962 on September 21, 1990, with Pre-Effective Amendment No. 2 to
the Registration Statement on December 26, 1990, 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.
C-10
<PAGE> 296
EXHIBITS
23 (a)(7) - - Articles of Amendment
23 (j) - - Consent of Independent Accountants
23 (n) - - Financial Data Schedules
C-11
<PAGE> 1
MAINSTAY INSTITUTIONAL FUNDS INC.
ARTICLES OF AMENDMENT
Mainstay Institutional Funds Inc., a Maryland corporation registered
under the Investment Company Act of 1940 and having its principal office in
Baltimore, Maryland (hereinafter called the "Company"), certifies to the State
Department of Assessments and Taxation of Maryland that:
FIRST, on March 2, 1999, the Board of Directors of the Company adopted
a resolution changing the name of one of the classes of stock of the Company
from "Multi-Asset Fund" to "Asset Manager Fund." The preferences, rights, voting
powers, restrictions, limitations as to dividends, qualifications, and terms and
conditions of redemption of the shares of the Asset Manager Fund, as set forth
in the Articles of Incorporation as heretofore amended, are not changed by these
Articles of Amendment.
SECOND, the amendment to the Articles of Incorporation as herein above
set forth is limited to change expressly permitted by Section 2-605 of the
General Corporation Law of Maryland to be made without action by the
stockholders, and has been duly advised and approved by a majority of the entire
Board of Directors.
IN WITNESS WHEREOF, Mainstay Institutional Funds Inc. has caused these
Articles of Amendment to be signed in its name on its behalf by its authorized
officers who acknowledge that these Articles of Amendment are the act of the
Company, that to the best of their knowledge, information and belief, all
matters and facts set forth herein relating to the authorization and approval of
these Articles of Amendment are true in all material respects and that this
statement is made under the penalties of perjury.
Dated this 26th day of April, 1999.
MAINSTAY INSTITUTIONAL FUND INC.
By: /s/ Linda M. Livornese
----------------------
Linda M. Livornese
President
Attest:
/s/ Sara L. Badler
- ------------------
Sara L. Badler
Secretary
<PAGE> 1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectuses and
Statements of Additional Information constituting parts of this Post-Effective
Amendment No. 21 to the registration statement on Form N-1A (the
"Registration Statement") of our report dated February 26, 1999, relating to
the financial statements and financial highlights appearing in the December 31,
1998 Annual Report to Shareholders of MainStay Institutional Funds, Inc., which
are also incorporated by reference into the Registration Statement. We also
consent to the reference to us under the heading "Financial Highlights" in the
Prospectuses and under the heading "Other Information-Independent Accountants"
in the Statements of Additional Information.
/s/ PRICEWATERHOUSECOOPERS LLP
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York
April 27, 1999
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<ARTICLE> 6
<RESTATED>
<CIK> 0000868307
<NAME> MAINSTAY INSTITUTIONAL FUNDS INC.
<SERIES>
<NUMBER> 011
<NAME> MAINSTAY INSTITUTIONAL MONEY MARKET FUND
<MULTIPLIER> 1
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<PERIOD-TYPE> 12-MOS
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<PERIOD-START> JAN-01-1998
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<INVESTMENTS-AT-COST> 307,215,446
<INVESTMENTS-AT-VALUE> 307,215,446
<RECEIVABLES> 1,095,184
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<OTHER-ITEMS-ASSETS> 0
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<OTHER-ITEMS-LIABILITIES> 3,276,105
<TOTAL-LIABILITIES> 3,276,105
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<SHARES-COMMON-STOCK> 194,365,010
<SHARES-COMMON-PRIOR> 190,323,265
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (27,255)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 305,059,034
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 15,605,964
<OTHER-INCOME> 0
<EXPENSES-NET> (1,591,529)
<NET-INVESTMENT-INCOME> 14,014,435
<REALIZED-GAINS-CURRENT> (22,863)
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 13,991,572
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (10,021,538)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 267,338,521
<NUMBER-OF-SHARES-REDEEMED> (273,376,385)
<SHARES-REINVESTED> 10,079,609
<NET-CHANGE-IN-ASSETS> 8,011,779
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (4,392)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 278,000
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,975,000
<AVERAGE-NET-ASSETS> 195,353,000
<PER-SHARE-NAV-BEGIN> 1.000
<PER-SHARE-NII> 0.050
<PER-SHARE-GAIN-APPREC> 0.000
<PER-SHARE-DIVIDEND> (0.050)
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<TABLE> <S> <C>
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<SERIES>
<NUMBER> 012
<NAME> INSTITUTIONAL SERVICE CLASS
<MULTIPLIER> 1
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<PERIOD-TYPE> 12-MOS
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<INVESTMENTS-AT-VALUE> 307,215,446
<RECEIVABLES> 1,095,184
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<TOTAL-ASSETS> 308,335,140
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<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 3,276,105
<TOTAL-LIABILITIES> 3,276,105
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 305,086,289
<SHARES-COMMON-STOCK> 64,228,251
<SHARES-COMMON-PRIOR> 103,764,649
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (27,255)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 305,059,034
<DIVIDEND-INCOME> 0
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<OTHER-INCOME> 0
<EXPENSES-NET> (1,591,529)
<NET-INVESTMENT-INCOME> 14,014,435
<REALIZED-GAINS-CURRENT> (22,863)
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<DISTRIBUTIONS-OF-INCOME> (3,989,833)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 92,388,730
<NUMBER-OF-SHARES-REDEEMED> (56,718,408)
<SHARES-REINVESTED> 3,866,077
<NET-CHANGE-IN-ASSETS> 49,538,138
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (4,392)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 278,000
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,975,000
<AVERAGE-NET-ASSETS> 81,912,000
<PER-SHARE-NAV-BEGIN> 1.000
<PER-SHARE-NII> 0.050
<PER-SHARE-GAIN-APPREC> 0.000
<PER-SHARE-DIVIDEND> (0.050)
<PER-SHARE-DISTRIBUTIONS> 0.000
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 1.000
<EXPENSE-RATIO> 0.750
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000868307
<NAME> MAINSTAY INSTITUTIONAL FUNDS INC.
<SERIES>
<NUMBER> 013
<NAME> SWEEP SHARES
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<INVESTMENTS-AT-COST> 307,215,446
<INVESTMENTS-AT-VALUE> 307,215,446
<RECEIVABLES> 1,095,184
<ASSETS-OTHER> 24,510
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<TOTAL-ASSETS> 308,335,140
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<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 3,276,105
<TOTAL-LIABILITIES> 3,276,105
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 305,086,289
<SHARES-COMMON-STOCK> 6,956,631
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (27,255)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 305,059,034
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 15,605,964
<OTHER-INCOME> 0
<EXPENSES-NET> (1,591,529)
<NET-INVESTMENT-INCOME> 14,014,435
<REALIZED-GAINS-CURRENT> (22,863)
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 13,991,572
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (3,064)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 7,085,440
<NUMBER-OF-SHARES-REDEEMED> (128,810)
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 20,945,138
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (4,392)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 278,000
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,975,000
<AVERAGE-NET-ASSETS> 678,000
<PER-SHARE-NAV-BEGIN> 1.000
<PER-SHARE-NII> 0.050
<PER-SHARE-GAIN-APPREC> 0.000
<PER-SHARE-DIVIDEND> (0.050)
<PER-SHARE-DISTRIBUTIONS> 0.000
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 1.000
<EXPENSE-RATIO> 1.000
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000868307
<NAME> MAINSTAY INSTITUTIONAL FUNDS INC.
<SERIES>
<NUMBER> 021
<NAME> INSTITUTIONAL CLASS
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 45,395,992
<INVESTMENTS-AT-VALUE> 45,613,911
<RECEIVABLES> 1,563,179
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