<PAGE> 1
Mainstay(R) Institutional Funds Inc.
Prospectus
March 1, 2000
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
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.
[LOGO] Mainstay Investments
<PAGE> 2
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
52 Shareholder Guide
52 Multi-Class Structure
52 Shareholder Service Fees
53 How to Open an Account
54 Investment Minimums
55 Buying, Selling and Exchanging Fund Shares
58 General Policies
59 Determining the Funds' Share Prices (NAV) and Valuation of
Securities
60 Fund Earnings
61 Understand the Tax Consequences
62 Know With Whom You're Investing
66 Financial Highlights
</TABLE>
<PAGE> 3
2
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 LLC and has a Subadvisor 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.
<PAGE> 4
3
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
- - 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.
<PAGE> 5
4
- ---------------------------
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.
"S&P 500(R)," "S&P MIDCAP 400 INDEX," "S&P SMALLCAP 600 INDEX" and "S&P(R)" are
trademarks of The McGraw-Hill Companies, Inc. and have been licensed for use by
Monitor Capital Advisors LLC. Standard & Poors does not sponsor, endorse, sell
or promote the Fund or represent the advisability of investing in the Fund. Each
S&P Index is an unmanaged index and is considered generally representative of a
different capitalization segment 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.
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 as follows:
i. 15% to 80% of net assets in common stocks and related derivatives selected
to parallel the performance of the S&P 500 Composite Stock Price Index
(the "S&P 500 Index")
ii. 0% to 10% of net assets in common stocks selected to parallel the
performance of the S&P MidCap 400 Index
iii. 0% to 5% of net assets in common stocks selected to parallel the
performance of the S&P SmallCap 600 Index
iv. 0% to 5% of net assets in equity securities selected to parallel the
performance of the Morgan Stanley REIT Index (a measure of real estate
equity performance)
- - 10% to 60% of net assets in fixed income securities and related derivatives
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 selecting securities to parallel an equity index, the Fund invests in
securities comprising the index, in approximately the same weightings used by
the index, and where appropriate in related derivatives. In selecting securities
to parallel the BIG Index, the Fund invests in fixed income securities and
related derivatives that, in the aggregate, approximate the important
characteristics (duration, credit quality, maturity, and yield) of the BIG
Index.
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. At least 30% of the Fund's net assets
will be invested in U.S. equity securities.
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 LLC, the Fund's Subadvisor. The presence of the constraints, however,
may restrict the Subadvisor's ability to fully maximize total return. To
determine the best investment allocation, the Subadvisor estimates risk, return
and correlation for the three asset
<PAGE> 6
5
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.
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 Subadvisor 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 Subadvisor 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.
The Fund's allocations among the three asset groups is then structured to take
advantage of perceived imbalances in relative pricing. The Subadvisor 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 January 31, 2000, the average life of securities in the
BIG Index was 8.91 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. Historically, mid-
and small-cap stocks, such as those in the S&P MidCap 400 Index and the S&P
SmallCap 600 Index, have been more volatile than, and at times have performed
quite differently from, stocks in the S&P 500 Index.
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 Subadvisor'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
<PAGE> 7
6
ASSET MANAGER FUND
[BAR GRAPH]
<TABLE>
<CAPTION>
<S> <C>
91 17.90
92 7.09
93 8.79
94 -0.86
95 26.81
96 16.16
97 26.69
98 21.31
99 11.83
</TABLE>
ANNUAL RETURNS, INSTITUTIONAL
CLASS SHARES
(by calendar year 1991-1999)
- - 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 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
(1991-1999)
<TABLE>
<CAPTION>
RETURN QUARTER/YEAR
<S> <C> <C>
Highest return/best quarter 13.74% 2Q/97
Lowest return/worst quarter -5.81% 3Q/98
</TABLE>
AVERAGE ANNUAL TOTAL RETURNS
(as of 12/31/99)
<TABLE>
<CAPTION>
1 YEAR 5 YEARS SINCE INCEPTION*
<S> <C> <C> <C>
Asset Manager Fund
Institutional Class 11.83% 20.42% 14.73%
Institutional Service Class 11.53% 20.14% 14.59%
Asset Manager Composite Index** 12.61% 19.80% 15.26%
S&P 500 Index*** 21.04% 28.56% 21.22%
Salomon Smith Barney Broad Investment
Grade Bond Index**** -0.83% 7.74% 7.60%
Average Lipper Flexible Portfolio Fund 12.51% 16.82% 13.89%
</TABLE>
* January 2, 1991.
** The Asset Manager Composite Index is comprised of the S&P 500 Index, the
Salomon Smith Barney Broad Investment Grade Bond Index and 30-day Treasury
Bills weighted 60% / 30% / 10%, respectively, using monthly returns provided
by Ibbotson Associates.
*** The S&P 500 is an unmanaged index and is widely regarded as the standard
for measuring large-cap U.S. stock market performance. Results assume the
reinvestment of all income and capital gain distributions.
***** The Salomon Smith Barney Broad Investment Grade Bond Index is an unmanaged
index that is considered representative of the U.S. bond market.
<PAGE> 8
7
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 .13% .13%
----- -----
Total Annual Fund Operating Expenses .78% 1.03%
</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 $ 80 $ 105
3 years $249 $ 328
5 years $433 $ 569
10 years $966 $1,259
</TABLE>
<PAGE> 9
8
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, Australasia and Far East Index (the "EAFE
Index").
- ---------------------------
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.
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 LLC, the Fund's Subadvisor, 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.
<PAGE> 10
9
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
<PAGE> 11
10
EAFE INDEX FUND
[BAR GRAPH]
<TABLE>
<CAPTION>
<S> <C>
91 10.10
92 -12.22
93 28.97
94 6.83
95 9.03
96 6.45
97 0.40
98 19.15
99 26.22
</TABLE>
ANNUAL RETURNS, INSTITUTIONAL
CLASS SHARES
(by calendar year 1991-1999)
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
(1991-1999)
<TABLE>
<CAPTION>
RETURN QUARTER/YEAR
<S> <C> <C>
Highest return/best quarter 19.85% 4Q/98
Lowest return/worst quarter -13.87% 3Q/98
</TABLE>
AVERAGE ANNUAL TOTAL RETURNS
(as of 12/31/99)
<TABLE>
<CAPTION>
1 YEAR 5 YEARS SINCE INCEPTION**
<S> <C> <C> <C>
EAFE Index Fund
Institutional Class 26.22% 11.87% 9.87%
Institutional Service
Class 25.96% 11.60% 9.71%
MSCI EAFE Index* 26.96% 12.83% 11.07%
</TABLE>
* The Morgan Stanley Capital International Europe, Australasia 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.
<PAGE> 12
11
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 .37% .37%
----- -----
Total Annual Fund Operating Expenses(+) 1.32% 1.57%
</TABLE>
(+) The Manager has voluntarily agreed to waive a portion of the fees otherwise
payable to it. With this reduction, for the ten months ended October 31,
1999 the management fee paid was .57% for Institutional Class shares and
.57% 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 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 $ 134 $ 160
3 years $ 418 $ 496
5 years $ 723 $ 855
10 years $1,590 $1,867
</TABLE>
* Does not reflect fee waiver.
<PAGE> 13
12
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.
- ---------------------------
"S&P 500(R)" is a trademark of The McGraw-Hill Companies, Inc. The S&P 500 Index
is an unmanaged index and is widely regarded as the standard for measuring
large-cap U.S. stock market performance.
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 LLC, the Fund's Subadvisor, 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
<PAGE> 14
13
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.
<PAGE> 15
14
GROWTH EQUITY FUND
[BAR GRAPH]
<TABLE>
<CAPTION>
<S> <C>
91 67.00
92 5.63
93 9.59
94 -2.23
95 37.88
96 21.62
97 24.73
98 40.50
99 25.33
</TABLE>
ANNUAL RETURNS, INSTITUTIONAL
CLASS SHARES
(by calendar year 1991-1999)
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
(1991-1999)
<TABLE>
<CAPTION>
RETURN QUARTER/YEAR
<S> <C> <C>
Highest return/best quarter 27.97% 4Q/98
Lowest return/worst quarter -13.41% 2Q/92
</TABLE>
AVERAGE ANNUAL TOTAL RETURNS
(as of 12/31/99)
<TABLE>
<CAPTION>
1 YEAR 5 YEARS SINCE INCEPTION**
<S> <C> <C> <C>
Growth Equity Fund
Institutional Class 25.33% 29.79% 24.05%
Institutional Service
Class 25.03% 29.48% 23.88%
S&P 500 Index* 21.04% 28.56% 21.22%
</TABLE>
* The S&P 500 Index is an unmanaged index and is widely regarded as the
standard for measuring large-cap U.S. stock market performance. Results
assume the reinvestment of all income and capital gain distributions.
** January 2, 1991.
<PAGE> 16
15
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 .08% .08%
----- -----
Total Annual Fund Operating Expenses .93% 1.18%
</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 $ 95 $ 120
3 years $ 296 $ 375
5 years $ 515 $ 649
10 years $1,143 $1,432
</TABLE>
<PAGE> 17
16
- ---------------------------
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 LLC, the Fund's Subadvisor, 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.
<PAGE> 18
17
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 LLC. 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 Index is an unmanaged index and is widely
regarded as the standard for measuring large-cap U.S. stock market performance.
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.
<PAGE> 19
18
INDEXED EQUITY FUND
[BAR GRAPH]
<TABLE>
<CAPTION>
<S> <C>
91 29.80
92 7.19
93 9.41
94 0.90
95 36.88
96 22.57
97 32.88
98 28.62
99 20.83
</TABLE>
ANNUAL RETURNS, INSTITUTIONAL
CLASS SHARES
(by calendar year 1991-1999)
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
(1991-1999)
<TABLE>
<CAPTION>
RETURN QUARTER/YEAR
<S> <C> <C>
Highest return/best quarter 21.48% 4Q/98
Lowest return/worst quarter -9.94% 3Q/98
</TABLE>
AVERAGE ANNUAL TOTAL RETURNS
(as of 12/31/99)
<TABLE>
<CAPTION>
1 YEAR 5 YEARS SINCE INCEPTION**
<S> <C> <C> <C>
Indexed Equity Fund
Institutional Class 20.83% 28.21% 20.40%
Institutional Service Class 20.58% 27.92% 20.25%
S&P 500 Index* 21.04% 28.56% 21.22%
</TABLE>
* The S&P 500 is an unmanaged index and is widely regarded as the standard for
measuring large-cap U.S. stock market performance. Results assume the
reinvestment of all income and capital gain distributions.
** January 2, 1991.
<PAGE> 20
19
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 .05% .05%
----- -----
Total Annual Fund Operating Expenses(+) .55% .80%
</TABLE>
(+) The Manager has voluntarily agreed to waive a portion of the fees otherwise
payable to it. With this reduction, for the ten months ended October 31,
1999 the management fee paid was .25% for Institutional Class shares and
.25% 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 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 $ 56 $ 82
3 years $176 $ 255
5 years $307 $ 444
10 years $689 $ 990
</TABLE>
* Does not reflect fee waiver.
<PAGE> 21
20
- ---------------------------
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
LLC, the Fund's Subadvisor, believes present favorable opportunities.
INVESTMENT PROCESS
In pursuing the Fund's investment strategy, the Fund's Subadvisor 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 Subadvisor 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.
<PAGE> 22
21
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.
<PAGE> 23
22
INTERNATIONAL EQUITY FUND
[BAR CHART]
<TABLE>
<CAPTION>
<S> <C>
93 25.03
94 8.36
95 7.17
96 12.09
97 5.44
98 22.41
99 28.81
</TABLE>
ANNUAL RETURNS, INSTITUTIONAL
CLASS SHARES
(by calendar year 1993-1999)
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
(1993-1999)
<TABLE>
<CAPTION>
RETURN QUARTER/YEAR
<S> <C> <C>
Highest return/best quarter 19.97% 4Q/99
Lowest return/worst quarter -12.76% 3Q/98
</TABLE>
AVERAGE ANNUAL TOTAL RETURNS
(as of 12/31/99)
<TABLE>
<CAPTION>
1 YEAR 5 YEARS SINCE INCEPTION**
<S> <C> <C> <C>
International Equity Fund
Institutional Class 28.81% 14.84% 13.50%
Institutional Service Class 28.42% 14.44% 13.24%
MSCI EAFE Index* 26.96% 12.83% 13.84%
</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 LLC, the International Equity Fund's
Subadvisor, 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.
<PAGE> 24
23
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 .16% .16%
----- -----
Total Annual Fund Operating Expenses 1.01% 1.26%
</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 $ 103 $ 128
3 years $ 322 $ 400
5 years $ 558 $ 692
10 years $1,236 $1,523
</TABLE>
<PAGE> 25
24
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 Shields LLC, the Fund's Subadvisor, 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 Subadvisor to be at full value will be replaced
with new, "undervalued" stocks. When assessing whether a stock is undervalued,
the Subadvisor 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 Subadvisor will also look at trends and forecasts such
as growth rates and future earnings.
<PAGE> 26
25
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 Subadvisor 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).
<PAGE> 27
26
VALUE EQUITY FUND
[BAR GRAPH]
<TABLE>
<CAPTION>
<S> <C>
91 36.60
92 20.71
93 14.90
94 1.22
95 29.42
96 22.41
97 22.63
98 -8.1
99 9.22
</TABLE>
ANNUAL RETURNS, INSTITUTIONAL
CLASS SHARES
(by calendar year 1991-1999)
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
(1991-1999)
<TABLE>
<CAPTION>
RETURN QUARTER/YEAR
<S> <C> <C>
Highest return/best quarter 15.50% 1Q/91
Lowest return/worst quarter -17.19% 3Q/98
</TABLE>
AVERAGE ANNUAL TOTAL RETURNS
(as of 12/31/99)
<TABLE>
<CAPTION>
1 YEAR 5 YEARS SINCE INCEPTION**
<S> <C> <C> <C>
Value Equity Fund
Institutional Class 9.22% 14.29% 15.77%
Institutional Service
Class 8.98% 14.05% 15.64%
S&P 500* Index 21.04% 28.56% 21.22%
</TABLE>
* The S&P 500 is an unmanaged index and is widely regarded as the standard for
measuring large-cap U.S. stock market performance. Results assume the
reinvestment of all income and capital gain distributions.
** January 2, 1991.
<PAGE> 28
27
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 .11% .11%
---- -----
Total Annual Fund Operating Expenses .96% 1.21%
</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 $ 98 $ 123
3 years $ 306 $ 384
5 years $ 531 $ 665
10 years $1,178 $1,466
</TABLE>
<PAGE> 29
28
- ---------------------------
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.
- ---------------------------
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 LLC, the Fund's Subadvisor.
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 Subadvisor 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 Subadvisor 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 Subadvisor 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 Subadvisor in
<PAGE> 30
29
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 Subadvisor to be of
comparable quality. The Fund's principal investments may have fixed or 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 can invest 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 values
- - 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 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 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.
<PAGE> 31
30
BOND FUND
[BAR GRAPH]
<TABLE>
<CAPTION>
<S> <C>
91 14.00
92 6.39
93 9.74
94 -3.31
95 17.88
96 2.80
97 8.57
98 7.93
99 -2.47
</TABLE>
ANNUAL RETURNS, INSTITUTIONAL
CLASS SHARES
(by calendar year 1991-1999)
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
(1991-1999)
<TABLE>
<CAPTION>
RETURN QUARTER/YEAR
<S> <C> <C>
Highest return/best quarter 6.00% 2Q/95
Lowest return/worst quarter -2.71% 1Q/94
</TABLE>
AVERAGE ANNUAL TOTAL RETURNS
(as of 12/31/99)
<TABLE>
<CAPTION>
1 YEAR 5 YEARS SINCE INCEPTION**
<S> <C> <C> <C>
Bond Fund
Institutional Class -2.47% 6.73% 6.63%
Institutional Service
Class -2.72% 6.47% 6.48%
Lehman Brothers Aggregate
Index*** -0.82% 7.73% 7.56%
Lehman Brothers
Gov't/Corporate Bond
Index* -2.15% 7.61% 7.59%
</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.
*** The Lehman Brothers Aggregate Index (the "Aggregate Index") includes the
following other Lehman Brothers' indices: the Government Index, the
Corporate Index, the Mortgage-Backed Securities Index and the Asset-Backed
Securities Index. To qualify for inclusion in the Aggregate Index,
securities must be U.S. dollar-denominated and investment grade, and have a
fixed-rate coupon, a remaining maturity or average life of at least one
year, and a par amount outstanding of at least $150 million. Previously the
Bond Fund has used the Lehman Brothers Gov't/Corporate Bond Index as a
comparative broad-based securities market index. The Bond Fund has chosen
the Lehman Brothers Aggregate Index because it is more reflective of the mix
of securities that the Fund invests in.
<PAGE> 32
31
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 .10% .10%
----- -----
Total Annual Fund Operating Expenses(+) .85% 1.10%
</TABLE>
(+) The Manager has voluntarily agreed to waive a portion of the fees otherwise
payable to it. With this reduction, for the ten months ended October 31,
1999 the management fee paid was .65% for Institutional Class shares and
.65% 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 $ 87 $ 112
3 years $ 271 $ 350
5 years $ 471 $ 606
10 years $1,049 $1,340
</TABLE>
* Does not reflect fee waiver.
<PAGE> 33
32
- ---------------------------
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 January 31, 2000, the approximate weighting in the BIG Index was as
follows: U.S. Treasury and agency securities 43.3%, corporate debt securities
24.0% and mortgage-related securities 32.7%.
INVESTMENT PROCESS
Monitor Capital Advisors LLC, the Fund's Subadvisor, 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 January 31, 2000, the average life of securities in the BIG Index
was 8.91 years.
<PAGE> 34
33
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 can invest 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.
<PAGE> 35
34
INDEXED BOND FUND
[BAR GRAPH]
<TABLE>
<CAPTION>
<S> <C>
91 14.70
92 7.09
93 9.64
94 -3.44
95 18.07
96 2.55
97 9.01
98 8.21
99 -2.18
</TABLE>
ANNUAL RETURNS, INSTITUTIONAL
CLASS SHARES
(by calendar year 1991-1999)
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
(1991-1999)
<TABLE>
<CAPTION>
RETURN QUARTER/YEAR
<S> <C> <C>
Highest return/best quarter 5.97% 2Q/95
Lowest return/worst quarter -2.98% 1Q/94
</TABLE>
AVERAGE ANNUAL TOTAL RETURNS
(as of 12/31/99)
<TABLE>
<CAPTION>
1 YEAR 5 YEARS SINCE INCEPTION**
<S> <C> <C> <C>
Indexed Bond Fund
Institutional Class -2.18% 6.92% 6.86%
Institutional Service
Class -2.36% 6.70% 6.73%
Salomon Smith Barney Broad
Investment Grade Bond
Index* -0.83% 7.74% 7.60%
</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.
<PAGE> 36
35
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 .12% .12%
----- -----
Total Annual Fund Operating Expenses(+) .62% .87%
</TABLE>
(+) The Manager has voluntarily agreed to waive a portion of the fees otherwise
payable to it. With this reduction, for the ten months ended October 31,1999
the management fee paid was .38% for Institutional Class shares and .38% 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 $ 63 $ 89
3 years $199 $ 278
5 years $346 $ 482
10 years $774 $1,073
</TABLE>
* Does not reflect fee waiver.
<PAGE> 37
36
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.
- ---------------------------
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.
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 LLC, the Fund's Subadvisor, 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 Subadvisor 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 Subadvisor 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 Subadvisor 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.
<PAGE> 38
37
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.
<PAGE> 39
38
INTERNATIONAL BOND FUND
[BAR GRAPH]
<TABLE>
<CAPTION>
<S> <C>
91 18.73
92 7.68
93 14.56
94 3.11
95 18.46
96 14.32
97 2.62
98 12.53
99 -7.65
</TABLE>
ANNUAL RETURNS, INSTITUTIONAL
CLASS SHARES
(by calendar year 1991-1999)
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
(1991-1999)
<TABLE>
<CAPTION>
RETURN QUARTER/YEAR
<S> <C> <C>
Highest return/best quarter 9.57% 4Q/91
Lowest return/worst quarter -4.86% 2Q/99
</TABLE>
AVERAGE ANNUAL TOTAL RETURNS
(as of 12/31/99)
<TABLE>
<CAPTION>
1 YEAR 5 YEARS SINCE INCEPTION**
<S> <C> <C> <C>
International Bond Fund
Institutional Class -7.65% 7.63% 8.17%
Institutional Service
Class -7.85% 7.38% 8.05%
Salomon Smith Barney
Non-U.S. Dollar World
Government Bond Index* -5.07% 5.90% 8.80%
</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 LLC, the International Bond Fund's Subadvisor, 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.
<PAGE> 40
39
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 .27% .27%
----- -----
Total Annual Fund Operating Expenses(+) 1.07% 1.32%
</TABLE>
(+) The Manager has voluntarily agreed to waive a portion of the fees otherwise
payable to it. With this reduction, for the ten months ended October 31,
1999 the management fee paid was .68% for Institutional Class shares and
.68% 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 $ 109 $ 134
3 years $ 340 $ 418
5 years $ 590 $ 723
10 years $1,306 $1,590
</TABLE>
* Does not reflect fee waiver.
<PAGE> 41
40
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.
- ---------------------------
VARIABLE RATE NOTES are debt securities that provide for periodic adjustments in
their interest rate.
- ---------------------------
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.
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.
<PAGE> 42
41
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 Subadvisor, 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.
<PAGE> 43
42
MONEY MARKET FUND
[BAR GRAPH]
<TABLE>
<CAPTION>
<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
99 4.89
</TABLE>
ANNUAL RETURNS, INSTITUTIONAL
CLASS SHARES
(by calendar year 1991-1999)
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
(1991-1999)
<TABLE>
<CAPTION>
RETURN QUARTER/YEAR
<S> <C> <C>
Highest return/best quarter 1.62% 1Q/91
Lowest return/worst quarter 0.70% 2Q/93
</TABLE>
AVERAGE ANNUAL TOTAL RETURNS
(as of 12/31/99)
<TABLE>
<CAPTION>
1 YEAR 5 YEARS SINCE INCEPTION*
<S> <C> <C> <C>
Money Market Fund
Institutional Class 4.89% 5.23% 4.72%
Institutional Service Class 4.63% 4.99% 4.58%
7-day yield
Institutional Class: 5.51%
Institutional Service Class: 5.26%
Average Lipper Institutional Money
Market Fund 4.92% 5.32% 4.90%
</TABLE>
* January 2, 1991
<PAGE> 44
43
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 .12% .12%
----- -----
Total Annual Fund Operating Expenses(+) .62% .87%
</TABLE>
(+) The Manager has voluntarily agreed to waive a portion of the fees otherwise
payable to it. With this reduction for the ten months ended October 31,
1999, the management fee was .38% for Institutional Class Shares and .38%
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 $ 63 $ 89
3 years $199 $ 278
5 years $346 $ 482
10 years $774 $1,073
</TABLE>
*Does not reflect fee waiver.
<PAGE> 45
44
- ---------------------------
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 LLC, the Fund's
Subadvisor, may use investment practices such as MORTGAGE DOLLAR ROLLS and
portfolio securities lending.
INVESTMENT PROCESS
In pursuing the Fund's investment strategy, the Subadvisor 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 Subadvisor 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 Subadvisor, 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
Subadvisor to be of comparable quality. The Fund's principal investments may
have fixed, variable or FLOATING rates of interest. The effective maturity of
the Fund's portfolio will be less than three years.
<PAGE> 46
45
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.
- ---------------------------
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 and 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 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.
<PAGE> 47
46
SHORT-TERM BOND FUND
[BAR GRAPH]
<TABLE>
<CAPTION>
<S> <C>
91 11.30
92 5.94
93 5.67
94 0.11
95 10.27
96 4.81
97 6.13
98 6.37
99 2.40
</TABLE>
ANNUAL RETURNS, INSTITUTIONAL
CLASS SHARES
(by calendar year 1991-1999)
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
(1991-1999)
<TABLE>
<CAPTION>
RETURN QUARTER/YEAR
<S> <C> <C>
Highest return/best quarter 3.44% 4Q/91
Lowest return/worst quarter -0.68% 1Q/94
</TABLE>
AVERAGE ANNUAL TOTAL RETURNS
(as of 12/31/99)
<TABLE>
<CAPTION>
1 YEAR 5 YEARS SINCE INCEPTION*
<S> <C> <C> <C>
Short-Term Bond Fund
Institutional Class 2.40% 5.97% 5.83%
Institutional Service Class 2.25% 5.72% 5.70%
Salomon Smith Barney 1-3
Year Treasury Index 3.04% 6.46% 6.21%
</TABLE>
* January 2, 1991.
<PAGE> 48
47
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 .25% .25%
----- -----
Total Annual Fund Operating Expenses(+) .85% 1.10%
</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 ten months ended October 31, 1999 the management fee paid
was .35% for Institutional Class shares and .35% 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 $ 87 $ 112
3 years $ 271 $ 350
5 years $ 471 $ 606
10 years $1,049 $1,340
</TABLE>
* Does not reflect fee waiver.
<PAGE> 49
48
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
Subadvisor 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 Subadvisor'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
<PAGE> 50
49
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 Subadvisor 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.
<PAGE> 51
50
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 Subadvisor 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 Subadvisor 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
<PAGE> 52
51
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 Subadvisor 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).
<PAGE> 53
52
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.
<PAGE> 54
53
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.
<PAGE> 55
54
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.
<PAGE> 56
55
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 LLC, the Fund's transfer "MainStay Institutional Funds Inc."
agent ("MSS") at 1-800-695-2126, * Be sure to write on your check or money order
to place your order between 8:30 your account number, the name(s) of the
am and 4 pm Eastern time any day appropriate Fund(s) and Class of shares
the New York Stock Exchange is * MSS must receive your check or money order
open. You must pay the next NAV within three business days after you place your
calculated after MSS receives order
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>
<PAGE> 57
56
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>
<PAGE> 58
57
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
<PAGE> 59
58
SHAREHOLDER GUIDE
- ---------------------------
Selling and exchanging shares may result in a gain or loss and therefore may be
subject to taxation. Consult your tax adviser on the consequences.
- ---------------------------
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.
<PAGE> 60
59
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 Subadvisor deems that a particular event would materially affect NAV. In
this case, an adjustment in the valuing of the securities may be made.
<PAGE> 61
60
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.
<PAGE> 62
61
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.
<PAGE> 63
62
KNOW WITH WHOM
YOU'RE INVESTING
WHO RUNS THE FUNDS' DAY-TO-DAY BUSINESS?
MainStay Management LLC (the "Manager"), 300 Interpace Parkway, Building A,
Parsippany, NJ 07054, serves as the Funds' manager, handling business affairs
for the Funds. The Manager was formed in 1997 as a corporation organized under
the laws of Delaware and became a Delaware limited liability company in 1999.
The Manager 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 Subadvisors. 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 Subadvisors and New York Life Insurance
Company as the subadministrator.
For the fiscal period ended October 31, 1999, 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
FISCAL PERIOD ENDED
OCTOBER 31, 1999
<S> <C>
Asset Manager Fund .65%
EAFE Index Fund .57%
Growth Equity Fund .85%
Indexed Equity Fund .25%
International Equity Fund .85%
Value Equity Fund .85%
Bond Fund .65%
Indexed Bond Fund .38%
International Bond Fund .68%
Money Market Fund .38%
Short-Term Bond Fund .35%
</TABLE>
The Manager is not responsible for records maintained by the Funds' Custodian,
Transfer Agent, Dividend Disbursing and Shareholder Servicing Agent, or
Subadvisors. As of December 31, 1999, the Manager managed approximately $31.0
billion in assets.
<PAGE> 64
63
WHO MANAGES YOUR MONEY?
MacKay Shields LLC, 9 West 57th St., New York, NY 10019, is the Subadvisor 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. MacKay Shields became a Delaware limited liability
company in 1999. As of December 31, 1999, MacKay Shields managed over $34
billion in assets.
New York Life Insurance Company, 51 Madison Avenue, New York, NY 10010, is the
Subadvisor 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, 1999, New York Life had total assets of
approximately $95.0 billion and managed approximately $21.3 billion in assets
for qualified retirement plans.
Monitor Capital Advisors LLC, 504 Carnegie Center, Princeton, NJ 08540, is the
Subadvisor 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 LLC and an indirect wholly-owned subsidiary of New York
Life Insurance Company. Monitor Capital became a Delaware limited liability
company in 1999. As of December 31, 1999, Monitor Capital managed approximately
$5.82 billion in assets.
Under the supervision of the Manager, each Subadvisor 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 Subadvisor 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.
<PAGE> 65
64
MARK C. BOYCE Mark C. Boyce serves as Portfolio Manager of the Money Market
Fund. Mr. Boyce has managed the Money Market Fund since December 1999 and the
Money Markets Group of New York Life Insurance Company and its subsidiaries
since May 1997. He is a member of the fixed income portfolio management team at
New York Life Insurance Company. From 1992 to 1997, Mr. Boyce was an Investment
Vice President responsible for Structured Finance Investments at New York Life
Insurance Company.
RUDOLPH C. CARRYL Mr. Carryl has managed the Growth Equity Fund since August
1992. Mr. Carryl is a Senior Managing Director of MacKay-Shields. He joined
MacKay Shields as a Director in 1992 with twelve years of investment management
and research experience. Mr. Carryl was Research Director and Senior Portfolio
Manager at Value Line, Inc. from 1978 to 1992.
DAVID CLEMENT Mr. Clement has managed the Money Market Fund since inception and
is a member of the fixed income portfolio management team at New York Life
Insurance Company. Mr. Clement joined the Asset Management Group of New York
Life in 1990.
CHRISTOPHER HARMS Mr. Harms has managed the Short-Term Bond and Bond Funds
since April 1999. Mr. Harms is a Managing Director of MacKay Shields. He joined
MacKay Shields 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.
EDWARD J. MUNSHOWER Mr. Munshower has managed the Bond Fund since inception and
the Short-Term Bond Fund since 1993. Mr. Munshower is a Managing 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 Managing 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.
<PAGE> 66
65
RICHARD A. ROSEN Mr. Rosen has managed the Value Equity Fund since February
1999. Mr. Rosen is a Managing 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.
EDMUND C. SPELMAN Mr. Spelman has managed the Growth Equity Fund since February
1991. Mr. Spelman is a Senior 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.
<PAGE> 67
66
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.
<PAGE> 68
67
[This page intentionally left blank]
<PAGE> 69
68
FINANCIAL HIGHLIGHTS
ASSET MANAGER FUND (FORMERLY KNOWN AS MULTI-ASSET FUND)
<TABLE>
<CAPTION>
INSTITUTIONAL INSTITUTIONAL
INSTITUTIONAL SERVICE INSTITUTIONAL SERVICE
CLASS CLASS CLASS CLASS
January 1, 1999 through Year ended December 31
October 31, 1999* 1998
<S> <C> <C> <C> <C>
Net asset value at beginning of period $15.36 $15.33 $14.83 $14.81
-------- ------- -------- -------
Net investment income 0.41 0.39 0.43 0.39
Net realized and unrealized gain (loss) on investments 0.41 0.38 2.70 2.69
Net realized and unrealized gain (loss) on foreign currency
transactions (0.03) (0.03) 0.02 0.02
-------- ------- -------- -------
Total from investment operations 0.79 0.74 3.15 3.10
-------- ------- -------- -------
LESS DIVIDENDS AND DISTRIBUTIONS:
From net investment income (0.01) (0.00)(a) (0.43) (0.39)
From net realized gain on investments (1.57) (1.57) (2.19) (2.19)
In excess of net realized gain on investments -- -- -- --
-------- ------- -------- -------
Total dividends and distributions (1.58) (1.57) (2.62) (2.58)
-------- ------- -------- -------
Net asset value at end of period $14.57 $14.50 $15.36 $15.33
======== ======= ======== =======
Total investment return 5.58%(b) 5.31%(b) 21.31% 21.00%
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA:
Net investment income 3.40%+ 3.15%+ 2.64% 2.39%
Net expenses 0.78%+ 1.03%+ 0.80% 1.05%
Expenses (before reimbursement) 0.78%+ 1.03%+ 0.80% 1.05%
Portfolio turnover rate 18% 18% 55% 55%
Net assets at end of period (in 000's) $513,860 $29,087 $500,449 $16,853
</TABLE>
EAFE INDEX FUND
<TABLE>
<CAPTION>
INSTITUTIONAL INSTITUTIONAL
INSTITUTIONAL SERVICE INSTITUTIONAL SERVICE
CLASS CLASS CLASS CLASS
January 1, 1999 through Year ended December 31
October 31, 1999* 1998
<S> <C> <C> <C> <C>
Net asset value at beginning of period $11.27 $11.22 $10.24 $10.20
-------- ------- -------- -------
Net investment income 0.11 0.09 0.11 0.08
Net realized and unrealized gain (loss) on investments 1.39 1.38 1.84 1.83
Net realized and unrealized gain (loss) on foreign currency
transactions (0.11) (0.11) 0.00(a) 0.00(a)
-------- ------- -------- -------
Total from investment operations 1.39 1.36 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 (0.06) (0.06) (0.72) (0.72)
In excess of net investment income (0.01) (0.01) (0.09) (0.09)
-------- ------- -------- -------
Total dividends and distributions (0.07) (0.07) (0.92) (0.89)
-------- ------- -------- -------
Net asset value at end of period $12.59 $12.51 $11.27 $11.22
======== ======= ======== =======
Total investment return 12.31%(b) 12.08%(b) 19.15% 18.83%
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA:
Net investment income 1.14%+ 0.89%+ 0.90% 0.65%
Net expenses 0.94%+ 1.19%+ 0.94% 1.19%
Expenses (before reimbursement) 1.32%+ 1.57%+ 1.38% 1.63%
Portfolio turnover rate 19% 19% 24% 24%
Net assets at end of period (in 000's) $67,582 $549 $65,087 $499
</TABLE>
(*) The Fund changed its fiscal year end from December 31 to October 31.
(+) Annualized.
(a) Less than one cent per share.
(b) Total return is not annualized.
(c) Institutional Service Class commenced January 1, 1995.
<PAGE> 70
69
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(c) CLASS
Year ended December 31
1997 1996 1995 1994
<S> <C> <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>
EAFE INDEX FUND
<TABLE>
<CAPTION>
INSTITUTIONAL INSTITUTIONAL INSTITUTIONAL
INSTITUTIONAL SERVICE INSTITUTIONAL SERVICE INSTITUTIONAL SERVICE INSTITUTIONAL
CLASS CLASS CLASS CLASS CLASS CLASS(c) CLASS
Year ended December 31
1997 1996 1995 1994
<S> <C> <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>
<PAGE> 71
70
FINANCIAL HIGHLIGHTS
GROWTH EQUITY FUND
<TABLE>
<CAPTION>
INSTITUTIONAL INSTITUTIONAL
INSTITUTIONAL SERVICE INSTITUTIONAL SERVICE
CLASS CLASS CLASS CLASS
January 1, 1999 through Year ended December 31
October 31, 1999* 1998
<S> <C> <C> <C> <C>
Net asset value at beginning of period $33.48 $33.13 $25.43 $25.24
---------- ------- ---------- -------
Net investment income (loss) (0.14)(b) (0.21)(b) (0.09)(b) (0.16)(b)
Net realized and unrealized gain (loss) on investments 3.45 3.41 10.35 10.26
---------- ------- ---------- -------
Total from investment operations 3.31 3.20 10.26 10.10
---------- ------- ---------- -------
LESS DIVIDENDS AND DISTRIBUTIONS:
From net investment income -- -- -- --
From net realized gain on investments (0.34) (0.34) (2.21) (2.21)
In excess of net investment income -- -- -- --
In excess of net realized gain on investments -- -- -- --
---------- ------- ---------- -------
Total dividends and distributions (0.34) (0.34) (2.21) (2.21)
---------- ------- ---------- -------
Net asset value at end of period $36.45 $35.99 $33.48 $33.13
========== ======= ========== =======
Total investment return 9.96%(c) 9.74%(c) 40.50% 40.18%
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA:
Net investment income (loss) (0.49%)+ (0.74%)+ (0.31%) (0.56%)
Net expenses 0.93%+ 1.18%+ 0.94% 1.19%
Portfolio turnover rate 27% 27% 29% 29%
Net assets at end of period (in 000's) $1,049,756 $25,987 $975,010 $15,814
</TABLE>
INDEXED EQUITY FUND
<TABLE>
<CAPTION>
INSTITUTIONAL INSTITUTIONAL
INSTITUTIONAL SERVICE INSTITUTIONAL SERVICE
CLASS CLASS CLASS CLASS
January 1, 1999 through Year ended December 31
October 31, 1999* 1998
<S> <C> <C> <C> <C>
Net asset value at beginning of period $33.39 $33.28 $27.05 $26.99
---------- ------- ---------- -------
Net investment income 0.31 0.21 0.38 0.31
Net realized and unrealized gain (loss) on investments 3.60 3.62 7.36 7.31
---------- ------- ---------- -------
Total from investment operations 3.91 3.83 7.74 7.62
---------- ------- ---------- -------
LESS DIVIDENDS AND DISTRIBUTIONS:
From net investment income -- -- (0.38) (0.31)
From net realized gain on investments (0.31) (0.31) (1.02) (1.02)
In excess of net realized gain on investments -- -- -- --
---------- ------- ---------- -------
Total dividends and distributions (0.31) (0.31) (1.40) (1.33)
---------- ------- ---------- -------
Net asset value at end of period $36.99 $36.80 $33.39 $33.28
========== ======= ========== =======
Total investment return 11.80%(c) 11.60%(c) 28.62% 28.24%
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA:
Net investment income 1.06%+ 0.81%+ 1.29% 1.04%
Net expenses 0.30%+ 0.55%+ 0.30% 0.55%
Expenses (before reimbursement) 0.55%+ 0.80%+ 0.56% 0.81%
Portfolio turnover rate 7% 7% 8% 8%
Net assets at end of period (in 000's) $1,641,591 $61,647 $1,472,263 $36,442
</TABLE>
(*) The Fund changed its fiscal year end from December 31 to October 31.
(+) Annualized.
(a) Less than one cent per share.
(b) Per share data based on average shares outstanding during the period.
(c) Total return is not annualized.
(d) Institutional Service Class commenced January 1, 1995.
<PAGE> 72
71
FINANCIAL HIGHLIGHTS
GROWTH EQUITY FUND
<TABLE>
<CAPTION>
INSTITUTIONAL INSTITUTIONAL INSTITUTIONAL
INSTITUTIONAL SERVICE INSTITUTIONAL SERVICE INSTITUTIONAL SERVICE INSTITUTIONAL
CLASS CLASS CLASS CLASS CLASS CLASS(d) 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>
INDEXED EQUITY FUND
<TABLE>
<CAPTION>
INSTITUTIONAL INSTITUTIONAL INSTITUTIONAL
INSTITUTIONAL SERVICE INSTITUTIONAL SERVICE INSTITUTIONAL SERVICE INSTITUTIONAL
CLASS CLASS CLASS CLASS CLASS CLASS(d) CLASS
Year ended December 31
1997 1996 1995 1994
<S> <C> <C> <C> <C> <C> <C>
$21.05 $21.01 $17.82 $17.81 $13.53 $13.53 $13.86
-------- ------- -------- ------ -------- ------ --------
0.37 0.32 0.34 0.31 0.35 0.33 0.33
6.54 6.52 3.69 3.66 4.64 4.64 (0.20)
-------- ------- -------- ------ -------- ------ --------
6.91 6.84 4.03 3.97 4.99 4.97 0.13
-------- ------- -------- ------ -------- ------ --------
(0.37) (0.32) (0.34) (0.31) (0.34) (0.33) (0.33)
(0.54) (0.54) (0.46) (0.46) (0.36) (0.36) (0.13)
-- -- -- -- -- -- 0.00(a)
-------- ------- -------- ------ -------- ------ --------
(0.91) (0.86) (0.80) (0.77) (0.70) (0.69) (0.46)
-------- ------- -------- ------ -------- ------ --------
$27.05 $26.99 $21.05 $21.01 $17.82 $17.81 $13.53
======== ======= ======== ====== ======== ====== ========
32.88% 32.60% 22.57% 22.21% 36.88% 36.70% 0.90%
1.56% 1.31% 1.96% 1.71% 2.21% 1.96% 2.43%
0.30% 0.55% 0.44% 0.69% 0.50% 0.75% 0.50%
0.56% 0.81% 0.59% 0.84% 0.59% 0.84% 0.58%
3% 3% 8% 8% 4% 4% 5%
$966,217 $13,828 $617,716 $5,865 $354,420 $969 $244,685
</TABLE>
<PAGE> 73
72
FINANCIAL HIGHLIGHTS
INTERNATIONAL EQUITY FUND
<TABLE>
<CAPTION>
INSTITUTIONAL INSTITUTIONAL
INSTITUTIONAL SERVICE INSTITUTIONAL SERVICE
CLASS CLASS CLASS CLASS
January 1, 1999 through Year ended December 31
October 31, 1999* 1998
<S> <C> <C> <C> <C>
Net asset value at beginning of period $11.81 $11.72 $9.93 $9.85
---------- ------- -------- ------
Net investment income 0.10 0.05 0.13 0.11
Net realized and unrealized gain (loss) on investments 1.30 1.31 2.12 2.11
Net realized and unrealized gain (loss) on foreign currency
transactions (0.08) (0.08) (0.03) (0.03)
---------- ------- -------- ------
Total from investment operations 1.32 1.28 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 (0.03) (0.03) (0.10) (0.10)
---------- ------- -------- ------
Total dividends and distributions (0.03) (0.03) (0.34) (0.32)
---------- ------- -------- ------
Net asset value at end of period $13.10 $12.97 $11.81 $11.72
========== ======= ======== ======
Total investment return 11.23%(a) 10.96%(a) 22.41% 22.20%
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA:
Net investment income 1.00%+ 0.75%+ 1.14% 0.89%
Net expenses 1.01%+ 1.26%+ 1.00% 1.25%
Expenses (before reimbursement) 1.01%+ 1.26%+ 1.03% 1.28%
Portfolio turnover rate 35% 35% 51% 51%
Net assets at end of period (in 000's) $152,928 $671 $140,630 $675
</TABLE>
VALUE EQUITY FUND
<TABLE>
<CAPTION>
INSTITUTIONAL INSTITUTIONAL
INSTITUTIONAL SERVICE INSTITUTIONAL SERVICE
CLASS CLASS CLASS CLASS
January 1, 1999 through Year ended December 31
October 31, 1999* 1998
<S> <C> <C> <C> <C>
Net asset value at beginning of period $11.76 $11.76 $16.36 $16.35
---------- ------- -------- ------
Net investment income 0.09 0.06 0.18 0.14
Net realized and unrealized gain (loss) on investments 0.84 0.84 (1.58) (1.57)
---------- ------- -------- ------
Total from investment operations 0.93 0.90 (1.40) (1.43)
---------- ------- -------- ------
LESS DIVIDENDS AND DISTRIBUTIONS:
From net investment income (0.00)(b) (0.00)(b) (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 (0.00)(b) (0.00)(b) (3.20) (3.16)
---------- ------- -------- ------
Net asset value at end of period $12.69 $12.66 $11.76 $11.76
========== ======= ======== ======
Total investment return 7.91%(a) 7.65%(a) (8.10%) (8.30%)
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA:
Net investment income 0.84%+ 0.59%+ 1.04% 0.79%
Net expenses 0.96%+ 1.21%+ 0.98% 1.23%
Portfolio turnover rate 49% 49% 76% 76%
Net assets at end of period (in 000's) $741,300 $7,418 $800,993 $9,740
</TABLE>
(*) The Fund changed its fiscal year end from December 31 to October 31.
(+) Annualized.
(a) Total return is not annualized.
(b) Less than one cent per share.
(c) Commencement of operations.
(d) Institutional Service Class commenced January 1, 1995.
<PAGE> 74
73
FINANCIAL HIGHLIGHTS
INTERNATIONAL EQUITY FUND
<TABLE>
<CAPTION>
INSTITUTIONAL INSTITUTIONAL INSTITUTIONAL
INSTITUTIONAL SERVICE INSTITUTIONAL SERVICE INSTITUTIONAL SERVICE
CLASS CLASS CLASS CLASS CLASS CLASS
Year ended December 31 January 1, 1995(c) 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)(b) (0.00)(b)
-------- ------- -------- ------- -------- ------
(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
<CAPTION>
INSTITUTIONAL
CLASS
<S> <C>
$10.63
--------
1.14
(0.10)
(0.49)
--------
0.55
--------
(0.96)
(0.29)
--
--------
(1.25)
--------
$9.93
========
5.44%
1.23%
1.00%
1.04%
37%
$113,774
</TABLE>
VALUE 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>
$15.87 $15.85 $14.43 $14.43 $11.58
-------- ------- -------- ------- --------
0.23 0.16 0.25 0.23 0.21
3.31 3.32 2.98 2.96 3.20
-------- ------- -------- ------- --------
3.54 3.48 3.23 3.19 3.41
-------- ------- -------- ------- --------
(0.23) (0.16) (0.25) (0.23) (0.21)
(2.82) (2.82) (1.54) (1.54) (0.35)
-- -- -- -- --
-------- ------- -------- ------- --------
(3.05) (2.98) (1.79) (1.77) (0.56)
-------- ------- -------- ------- --------
$16.36 $16.35 $15.87 $15.85 $14.43
======== ======= ======== ======= ========
22.63% 22.28% 22.41% 22.10% 29.42%
1.30% 1.05% 1.70% 1.45% 1.64%
0.93% 1.18% 0.92% 1.17% 0.93%
66% 66% 50% 50% 51%
$984,220 $11,010 $821,725 $14,752 $603,749
<CAPTION>
INSTITUTIONAL
INSTITUTIONAL SERVICE INSTITUTIONAL
CLASS CLASS(d) CLASS
Year ended December 31
1995 1994
<S> <C> <C>
$15.87 $11.58 $12.40
-------- ------ --------
0.23 0.20 0.17
3.31 3.20 (0.02)
-------- ------ --------
3.54 3.40 0.15
-------- ------ --------
(0.23) (0.20) (0.17)
(2.82) (0.35) (0.80)
-- -- --
-------- ------ --------
(3.05) (0.55) (0.97)
-------- ------ --------
$16.36 $14.43 $11.58
======== ====== ========
22.63% 29.32% 1.22%
1.30% 1.39% 1.50%
0.93% 1.18% 0.92%
66% 51% 43%
$984,220 $3,213 $396,537
</TABLE>
<PAGE> 75
74
FINANCIAL HIGHLIGHTS
BOND FUND
<TABLE>
<CAPTION>
INSTITUTIONAL INSTITUTIONAL
INSTITUTIONAL SERVICE INSTITUTIONAL SERVICE
CLASS CLASS CLASS CLASS
January 1, 1999 through Year ended December 31
October 31, 1999* 1998
<S> <C> <C> <C> <C>
Net asset value at beginning of period $9.91 $9.88 $9.71 $9.68
-------- ------ -------- ------
Net investment income 0.47 0.47 0.57 0.54
Net realized and unrealized gain (loss) on investments (0.63) (0.66) 0.20 0.20
-------- ------ -------- ------
Total from investment operations (0.16) (0.19) 0.77 0.74
-------- ------ -------- ------
LESS DIVIDENDS:
From net investment income (0.00)(b) (0.00)(b) (0.57) (0.54)
-------- ------ -------- ------
Net asset value at end of period $9.75 $9.69 $9.91 $9.88
======== ====== ======== ======
Total investment return (1.61%)(a) (1.92%)(a) 7.93% 7.73%
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA:
Net investment income 5.55%+ 5.30%+ 5.57% 5.32%
Net expenses 0.75%+ 1.00%+ 0.75% 1.00%
Expenses (before reimbursement) 0.85%+ 1.10%+ 0.86% 1.11%
Portfolio turnover rate 245% 245% 335% 335%
Net assets at end of period (in 000's) $174,521 $3,742 $182,402 $4,290
</TABLE>
INDEXED BOND FUND
<TABLE>
<CAPTION>
INSTITUTIONAL INSTITUTIONAL
INSTITUTIONAL SERVICE INSTITUTIONAL SERVICE
CLASS CLASS CLASS CLASS
January 1, 1999 through Year ended December 31
October 31, 1999* 1998
<S> <C> <C> <C> <C>
Net asset value at beginning of period $10.93 $10.92 $10.74 $10.74
-------- ------ -------- ------
Net investment income 0.62 0.61 0.69 0.66
Net realized and unrealized gain (loss) on investments (0.79) (0.79) 0.19 0.18
-------- ------ -------- ------
Total from investment operations (0.17) (0.18) 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 period $10.76 $10.74 $10.93 $10.92
======== ====== ======== ======
Total investment return (1.56%)(a) (1.65%)(a) 8.21% 7.86%
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA:
Net investment income 6.42%+ 6.17%+ 6.37% 6.12%
Net expenses 0.50%+ 0.75%+ 0.50% 0.75%
Expenses (before reimbursement) 0.62%+ 0.87%+ 0.65% 0.90%
Portfolio turnover rate 31% 31% 14% 14%
Net assets at end of period (in 000's) $145,427 $3,345 $156,244 $3,881
</TABLE>
(*) The Fund changed its fiscal year end from December 31 to October 31.
(+) Annualized.
(a) Total return is not annualized.
(b) Less than one cent per share.
(c) Institutional Service Class commenced January 1, 1995.
<PAGE> 76
75
FINANCIAL HIGHLIGHTS
BOND FUND
<TABLE>
<CAPTION>
INSTITUTIONAL INSTITUTIONAL INSTITUTIONAL
INSTITUTIONAL SERVICE INSTITUTIONAL SERVICE INSTITUTIONAL SERVICE INSTITUTIONAL
CLASS CLASS CLASS CLASS CLASS CLASS(c) 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(c) 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>
<PAGE> 77
76
FINANCIAL HIGHLIGHTS
INTERNATIONAL BOND FUND
<TABLE>
<CAPTION>
INSTITUTIONAL INSTITUTIONAL
INSTITUTIONAL SERVICE INSTITUTIONAL SERVICE
CLASS CLASS CLASS CLASS
January 1, 1999 through Year ended December 31
October 31, 1999* 1998
<S> <C> <C> <C> <C>
Net asset value at beginning of period $10.56 $10.52 $10.05 $10.01
-------- ------ -------- -------
Net investment income 0.35 0.37 0.56 0.53
Net realized and unrealized gain (loss) on investments (0.62) (0.65) 0.71 0.71
Net realized and unrealized gain (loss) on foreign currency
transactions (0.30) (0.30) (0.01) (0.01)
-------- ------ -------- -------
Total from investment operations (0.57) (0.58) 1.26 1.23
-------- ------ -------- -------
LESS DIVIDENDS AND DISTRIBUTIONS:
From net investment income and net realized gain on foreign
currency transactions (0.04) (0.04) (0.63) (0.60)
From net realized gain on investments (0.13) (0.13) (0.12) (0.12)
In excess of net investment income (0.02) (0.03) -- --
-------- ------ -------- -------
Total dividends and distributions (0.19) (0.20) (0.75) (0.72)
-------- ------ -------- -------
Net asset value at end of period $9.80 $9.74 $10.56 $10.52
======== ====== ======== =======
Total investment return (5.33%)(c) (5.50%)(c) 12.53% 12.30%
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA:
Net investment income 4.36%+ 4.11%+ 5.61% 5.36%
Net expenses 0.95%+ 1.20%+ 0.95% 1.20%
Expenses (before reimbursement) 1.07%+ 1.32%+ 1.08% 1.33%
Portfolio turnover rate 251% 251% 299% 299%
Net assets at end of period (in 000's) $58,585 $199 $62,549 $234
</TABLE>
MONEY MARKET FUND
<TABLE>
<CAPTION>
INSTITUTIONAL INSTITUTIONAL
INSTITUTIONAL SERVICE INSTITUTIONAL SERVICE
CLASS CLASS CLASS CLASS
January 1, 1999 through Year ended December 31
October 31, 1999* 1998
<S> <C> <C> <C> <C>
Net asset value at beginning of period $1.00 $1.00 $1.00 $1.00
-------- ------ -------- -------
Net investment income 0.04 0.04 0.05 0.05
-------- ------ -------- -------
LESS DIVIDENDS AND DISTRIBUTIONS:
From net investment income (0.04) (0.04) (0.05) (0.05)
From net realized gain on investments -- -- -- --
-------- ------ -------- -------
Total dividends and distributions (0.04) (0.04) (0.05) (0.05)
-------- ------ -------- -------
Net asset value at end of period $1.00 $1.00 $1.00 $1.00
======== ====== ======== =======
Total investment return 3.96%(c) 3.74%(c) 5.25% 4.99%
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA:
Net investment income 4.68%+ 4.43%+ 5.12% 4.87%
Net expenses 0.50%+ 0.75%+ 0.50% 0.75%
Expenses (before reimbursement) 0.62%+ 0.87%+ 0.63% 0.88%
Net assets at end of period (in 000's) $246,713 $5,630 $194,338 $103,765
</TABLE>
(*) The Fund changed its fiscal year end from December 31 to October 31.
(+) Annualized.
(a) Commencement of operations.
(b) Less than one cent per share.
(c) Total return is not annualized.
(d) Institutional Service Class commenced January 1, 1995.
<PAGE> 78
77
FINANCIAL HIGHLIGHTS
INTERNATIONAL BOND FUND
<TABLE>
<CAPTION>
INSTITUTIONAL INSTITUTIONAL INSTITUTIONAL
INSTITUTIONAL SERVICE INSTITUTIONAL SERVICE INSTITUTIONAL SERVICE
CLASS CLASS 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(d) 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
INSTITUTIONAL SERVICE INSTITUTIONAL
CLASS CLASS(d) CLASS
Year ended December 31
1995 1994
<S> <C> <C>
$1.00 $1.00 $1.00
-------- ------ -------
0.05 0.05 0.04
-------- ------ -------
(0.05) (0.05) (0.04)
(0.00)(b -- --
-------- ------ -------
(0.05) (0.05) (0.04)
-------- ------ -------
$1.00 $1.00 $1.00
======== ====== =======
5.27% 5.46% 3.88%
5.18% 5.23% 3.89%
0.50% 0.75% 0.50%
0.61% 0.98% 0.68%
$190,319 $2,784 $65,106
</TABLE>
<PAGE> 79
78
FINANCIAL HIGHLIGHTS
SHORT-TERM BOND FUND
<TABLE>
<CAPTION>
INSTITUTIONAL INSTITUTIONAL
INSTITUTIONAL SERVICE INSTITUTIONAL SERVICE
CLASS CLASS CLASS CLASS
January 1, 1999 through Year ended December 31
October 31, 1999* 1998
<S> <C> <C> <C> <C>
Net asset value at beginning of period $9.43 $9.41 $9.39 $9.38
------- ------ ------- ------
Net investment income 0.47 0.45 0.56 0.53
Net realized and unrealized gain (loss) on investments (0.27) (0.27) 0.04 0.03
------- ------ ------- ------
Total from investment operations 0.20 0.18 0.60 0.56
------- ------ ------- ------
LESS DIVIDENDS:
From net investment income -- -- (0.56) (0.53)
------- ------ ------- ------
Net asset value at end of period $9.63 $9.59 $9.43 $9.41
======= ====== ======= ======
Total investment return 2.12%(a) 1.91%(a) 6.37% 5.98%
RATIOS (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA:
Net investment income 5.42%+ 5.17%+ 5.95% 5.70%
Net expenses 0.60%+ 0.85%+ 0.60% 0.85%
Expenses (before reimbursement) 0.85%+ 1.10%+ 0.89% 1.14%
Portfolio turnover rate 105% 105% 125% 125%
Net assets at end of period (in 000's) $48,150 $1,036 $42,219 $1,273
</TABLE>
(*) The Fund changed its fiscal year end from December 31 to October 31.
(+) Annualized.
(a) Total return is not annualized.
(b) Institutional Service Class commenced January 1, 1995.
<PAGE> 80
79
FINANCIAL HIGHLIGHTS
SHORT-TERM BOND FUND
<TABLE>
<CAPTION>
INSTITUTIONAL INSTITUTIONAL INSTITUTIONAL
INSTITUTIONAL SERVICE INSTITUTIONAL SERVICE INSTITUTIONAL SERVICE INSTITUTIONAL
CLASS CLASS CLASS CLASS CLASS CLASS(b) 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>
<PAGE> 81
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
Provide 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., attn: MainStay Marketing Dept, 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 1-202-942-8090). 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. 20549-0102.
MainStay Institutional Funds Inc.
SEC File Number: 811-6175
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.
[MAINSTAY INVESTMENTS LOGO]
[RECYCLE LOGO]
More information about the Funds is available free upon request
<PAGE> 82
Money Market Fund Sweep Shares Prospectus
March 1, 2000
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 LLC and
has a Subadvisor 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> 83
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 Subadvisor, 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.
VARIABLE RATE NOTES are debt securities that provide for periodic adjustments in
their interest rate.
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> 84
PAST PERFORMANCE
[BAR GRAPH]
<TABLE>
<CAPTION>
91 5.95
- -- ----
<S> <C>
92 3.66
93 2.89
94 3.88
95 5.63
96 5.11
97 5.27
98 5.25
99 4.89
</TABLE>
ANNUAL RETURNS, INSTITUTIONAL CLASS SHARES
(by calendar year 1991-1999)
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
(1991-1999)
<S> <C> <C>
RETURN QUARTER/YEAR
Highest Return/Best Quarter 1.62% 1Q/91
Lowest Return/Worst Quarter 0.70% 2Q/93
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS (AS OF 12/31/99)
<S> <C> <C> <C>
SINCE
1 YEAR 5 YEARS INCEPTION*
Money Market Fund
Sweep Shares 4.37% 4.94% 4.56%
7-day yield: 5.01%
The Average Lipper
Institutional Money
Market Fund 4.92% 5.32% 4.90%
* January 2, 1991
</TABLE>
3
<PAGE> 85
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 0.12%
-----
Total Annual Fund Operating Expenses(+) 1.12%
=====
</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
ten months ended October 31, 1999 the management fee paid
was 0.38% 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 $ 114
3 years $ 336
5 years $ 617
10 years $1,363
</TABLE>
* Does not reflect fee waiver.
4
<PAGE> 86
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 Subadvisor 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.
5
<PAGE> 87
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> 88
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 LLC ("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> 89
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> 90
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> 91
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> 92
Know With Whom You're Investing
WHO RUNS THE FUND'S DAY-TO-DAY BUSINESS?
MainStay Management LLC (the "Manager"), 300 Interpace Parkway, Building A,
Parsippany, NJ 07054, serves as the Fund's manager, handling business affairs
for the Fund. The Manager, formed in 1997 as a corporation organized under the
laws of Delaware, became a Delaware limited liability company in 1999. The
Manager 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 Subadvisor. 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 Subadvisor and New York Life Insurance
Company as the subadministrator.
For the fiscal period ended October 31, 1999, the Company, on behalf of the
Fund, paid the Manager an aggregate fee for services performed of 0.38% 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
Subadvisor.
As of December 31, 1999, the Manager managed approximately $31.0 billion in
assets.
WHO MANAGES YOUR MONEY?
New York Life Insurance Company, 51 Madison Avenue, NY, New York 10010, is the
Subadvisor 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, 1999, New York Life had total assets of approximately $95
billion and managed approximately $21.3 billion in assets for qualified
retirement plans.
Under the supervision of the Manager, the Subadvisor 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 Subadvisor 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> 93
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 SWEEP SHARES
CLASS CLASS
----------------- ------------------
JANUARY 1, 1999 DECEMBER 8, 1998**
THROUGH THROUGH
OCTOBER 31, 1999* DECEMBER 31, 1998
----------------- ------------------
<S> <C> <C>
Net asset value at beginning of period.... $ 1.00 $ 1.00
-------- ------
Net investment income..................... 0.04 0.00(a)
-------- ------
Less dividends and distributions:
From net investment income.............. (0.04) (0.00)(a)
From net realized gain on investments... -- --
-------- ------
Total dividends and distributions......... (0.04) (0.00)(a)
-------- ------
Net asset value at end of period.......... $ 1.00 $ 1.00
======== ======
Total investment return................... 3.53%(b) 0.31%
Ratios (to average net
assets)/Supplemental Data:
Net investment income................... 4.18%+ 4.62%+
Net expenses............................ 1.00%+ 1.00%+
Expenses (before reimbursement)......... 1.12%+ 1.13%+
Net assets at end of period (in 000's).... $152,268 $6,957
</TABLE>
- --------
<TABLE>
<C> <S>
* The Fund changed its fiscal year end from December 31 to
October 31.
** Sweep Shares Class first offered on December 8, 1998
(a) Less than one cent per share.
(b) Total return is not annualized
+ Annualized.
</TABLE>
12
<PAGE> 94
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 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.
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
Provide 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 1-202-942-8090). 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. 20549-0102.
MAINSTAY INSTITUTIONAL FUNDS INC.
SEC File Number: 811-6175
<PAGE> 95
<TABLE>
<S> <C>
[nylife logo] MONEY MARKET
Money Market Fund Sweep Shares FUND SWEEP
Distributed by NYLIFE Distributors Inc., SHARES
Member NASD ---------------------------------------------------
300 Interpace Parkway, Building A PROSPECTUS DATED
Parsippany, NJ 07054 MARCH 1, 2000
13316-03/00 This Cover is Not Part of the Prospectus
</TABLE>
<PAGE> 96
MAINSTAY INSTITUTIONAL FUNDS INC.
51 MADISON AVENUE
NEW YORK, NEW YORK 10010
STATEMENT OF ADDITIONAL INFORMATION
DATE: MARCH 1, 2000
This Statement of Additional Information supplements the information
contained in the Company's Prospectus dated March 1, 2000, 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 Statement of
Assets and Liabilities and the Portfolios of Investments for the ten months
ended October 31, 1999, the Statement of Operations for the ten months ended
October 31, 1999 and the year ended December 31, 1998, the Statement of
Changes in Net Assets for the ten months ended October 31, 1999 and the years
ended December 31, 1998 and 1997, the notes to the Financial Statements, and the
Report of the Independent Accountants, all of which are included in the
Company's 1999 Annual Report to Shareholders, are hereby incorporated by
reference into this Statement of Additional Information.
<PAGE> 97
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
ADDITIONAL INFORMATION ABOUT THE FUNDS ...........................................................................7
EAFE INDEX FUND..........................................................................................7
GROWTH EQUITY FUND.......................................................................................8
INDEXED EQUITY FUND......................................................................................8
INTERNATIONAL EQUITY FUND................................................................................8
ASSET MANAGER FUND.......................................................................................9
VALUE EQUITY FUND.......................................................................................10
BOND FUND...............................................................................................10
INDEXED BOND FUND.......................................................................................10
INTERNATIONAL BOND FUND.................................................................................11
SHORT-TERM BOND FUND....................................................................................11
MONEY MARKET FUND.......................................................................................12
INVESTMENT PRACTICES AND INSTRUMENTS COMMON TO MULTIPLE FUNDS ..................................................13
ARBITRAGE...............................................................................................13
BORROWING...............................................................................................14
COMMERCIAL PAPER........................................................................................14
REPURCHASE AGREEMENTS AND REVERSE REPURCHASE AGREEMENTS.................................................14
U.S. GOVERNMENT SECURITIES..............................................................................15
CORPORATE DEBT SECURITIES...............................................................................15
LENDING OF PORTFOLIO SECURITIES.........................................................................15
RESTRICTED SECURITIES...................................................................................16
MUNICIPAL SECURITIES....................................................................................16
BANKING INDUSTRY AND SAVINGS AND LOAN INDUSTRY OBLIGATIONS..............................................16
</TABLE>
2
<PAGE> 98
<TABLE>
<CAPTION>
<S> <C>
FLOATING AND VARIABLE RATE SECURITIES...................................................................16
FOREIGN SECURITIES......................................................................................17
FORWARD FOREIGN CURRENCY CONTRACTS......................................................................18
FOREIGN INDEX-LINKED INSTRUMENTS........................................................................20
AMERICAN DEPOSITARY RECEIPTS ("ADRS")...................................................................22
WHEN-ISSUED AND FIRM OR STANDBY COMMITMENT AGREEMENTS...................................................22
MORTGAGE-RELATED AND OTHER ASSET-BACKED SECURITIES......................................................22
MORTGAGE DOLLAR ROLLS...................................................................................27
BRADY BONDS.............................................................................................27
LOAN PARTICIPATION INTERESTS............................................................................27
REAL ESTATE INVESTMENT TRUSTS...........................................................................29
RISK MANAGEMENT TECHNIQUES..............................................................................29
OPTIONS ON SECURITIES...................................................................................29
OPTIONS ON FOREIGN CURRENCIES...........................................................................32
FUTURES TRANSACTIONS....................................................................................33
SWAP AGREEMENTS.........................................................................................38
WARRANTS................................................................................................40
SHORT SALES AGAINST THE BOX.............................................................................40
RISKS ASSOCIATED WITH DEBT SECURITIES...................................................................41
HIGH YIELD/HIGH RISK SECURITIES.........................................................................41
ZERO COUPON BONDS ......................................................................................42
</TABLE>
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SPECIAL CONSIDERATIONS FOR EAFE INDEX FUND, INDEXED EQUITY FUND,
ASSET MANAGER FUND AND INDEXED BOND FUND ......................................................................42
FUNDAMENTAL INVESTMENT RESTRICTIONS..............................................................................44
NON-FUNDAMENTAL INVESTMENT RESTRICTIONS..........................................................................45
DIRECTORS AND OFFICERS...........................................................................................46
THE MANAGER, THE SUBADVISORS.....................................................................................52
</TABLE>
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<TABLE>
<CAPTION>
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MANAGEMENT AGREEMENT....................................................................................52
SUB-ADVISORY AGREEMENTS.................................................................................55
SUB-ADMINISTRATION AGREEMENT............................................................................57
DISTRIBUTION AGREEMENT..................................................................................59
SERVICE FEES............................................................................................59
PURCHASES AND REDEMPTIONS........................................................................................60
PORTFOLIO TRANSACTIONS AND BROKERAGE.............................................................................60
NET ASSET VALUE................................................................................................. 63
TAX INFORMATION..................................................................................................64
PERFORMANCE INFORMATION..........................................................................................69
OTHER INFORMATION................................................................................................73
CAPITALIZATION..........................................................................................73
EFFECTIVE MATURITY......................................................................................73
SHARE OWNERSHIP OF THE FUNDS............................................................................73
CODE OF ETHICS..........................................................................................79
INDEPENDENT ACCOUNTANTS.................................................................................80
LEGAL COUNSEL...........................................................................................80
TRANSFER AGENT..........................................................................................80
CUSTODIAN...............................................................................................80
REGISTRATION STATEMENT..................................................................................80
APPENDIX A.......................................................................................................81
</TABLE>
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MOODY'S INVESTORS SERVICE, INC...................................................................................81
STANDARD & POOR'S................................................................................................82
</TABLE>
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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 LLC (the "Manager") serves as the manager for the
Funds and has entered into Sub-Advisory agreements with Monitor Capital Advisors
LLC ("Monitor" or "Monitor Capital") with respect to the EAFE Index Fund,
Indexed Bond Fund, Indexed Equity Fund, and the Asset Manager Fund; MacKay
Shields LLC ("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 "Subadvisor" and collectively the "Subadvisors").
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 Subadvisor.
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 Subadvisor, 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.
EAFE INDEX FUND
The EAFE Index Fund will generally invest in stocks in the Morgan Stanley
Capital International Europe, Australasia and Far East Index ("EAFE Index"),
however, not all EAFE Index companies within a country will be represented in
the Fund's portfolio of securities at the same time. The Fund may not invest in
certain stocks (numbering approximately 50) included in the EAFE Index because
corporate charters have provisions prohibiting ownership by foreign investors.
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 Subadvisor 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 Subadvisor 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
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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 Subadvisor to be of comparable quality.
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 Subadvisor 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".)
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.
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.
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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 Subadvisor 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 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 Subadvisor 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 Subadvisor will move cash or reallocate assets
within seven days.
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 Subadvisor 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.
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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 Subadvisor,
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 Subadvisor 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.
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 Subadvisor 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 Subadvisor 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 Subadvisor 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 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 Subadvisor 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 Subadvisor 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 Subadvisor, 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 comparable quality to a security in the highest rating
category as determined by the Subadvisor; (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 is
downgraded or otherwise ceases to be of the quality that is eligible for the
Fund, New York Life Insurance, the
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Fund's Subadvisor, 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 Subadvisor 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 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
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Fund, may be limited by the requirements imposed on each Fund to qualify as a
"regulated investment company" under the Internal Revenue Code of 1986, as
amended (the "Code").
BORROWING
A Fund may borrow from a bank up to a limit of 15% of its total assets, but
only for temporary or emergency purposes. This borrowing may be unsecured. The
1940 Act requires a Fund to maintain continuous asset coverage (that is, total
assets including borrowings, less liabilities exclusive of borrowings) of 300%
of the amount borrowed. If the 300% asset coverage should decline as a result of
market fluctuations or other reasons, a Fund may be required to sell some of its
portfolio holdings within three days to reduce the debt and restore the 300%
asset coverage, even though it may be disadvantageous from an investment
standpoint to sell securities at that time and could cause the Fund to be unable
to meet certain requirements for qualification as a regulated investment company
for Federal tax purposes. To avoid the potential leveraging effects of a Fund's
borrowings, a Fund will repay any money borrowed in excess of 5% of its total
assets prior to purchasing additional securities. Borrowing may exaggerate the
effect on a Fund's net asset value of any increase or decrease in the market
value of the Fund's portfolio securities. Money borrowed will be subject to
interest costs which may or may not be recovered by appreciation of the
securities purchased. A Fund also may be required to maintain minimum average
balances in connection with such borrowing or to pay a commitment or other fee
to maintain a line of credit; either of these requirements would increase the
cost of borrowing over the stated interest rate.
COMMERCIAL PAPER
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 Subadvisor 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 determined by the Manager or Subadvisor to be creditworthy. 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 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 Subadvisors 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
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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.
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 Subadvisor 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.
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
Metropolitan West Securities, 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'
Subadvisors.
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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 Subadvisor to be creditworthy and approved
by the Board, and when, in the judgment of a Subadvisor, the consideration
which can be earned currently from securities loans of this type justifies the
attendant risk. If a Subadvisor 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 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.
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
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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 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 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.
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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 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.
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.
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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 Subadvisor 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 Subadvisor 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 Subadvisor believes that the currency of a
particular foreign country may suffer a substantial decline against the U.S.
dollar, it may enter into a forward contract to sell, for a fixed amount of
dollars, the amount of foreign currency approximating the value of some or all
of a Fund's portfolio securities denominated in such foreign currency. Such a
hedge (sometimes referred to as a "position hedge") will tend to offset both
positive and negative currency fluctuations, but will not offset changes in
security values caused by other factors. The Fund also may hedge the same
position by using another currency (or a basket of currencies) expected to
perform in a manner substantially similar to the hedged currency ("proxy"
hedge). The precise matching of the forward contract amounts and the value of
the securities involved will not generally be possible since the future value of
such securities in foreign currencies will change as a consequence of market
movements in the value of those securities between the date the forward contract
is entered into and the date it matures. With respect to positions that
constitute "transaction" or "position" hedges (including "proxy" hedges), a Fund
will not enter into forward contracts to sell currency or maintain a net
exposure to such contracts if the consummation of such contracts would obligate
the Fund to deliver an amount of foreign currency in excess of the value of the
Fund's portfolio securities or other assets denominated in that currency (or the
related currency, in the case of a "proxy" hedge).
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 Subadvisor'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 Subadvisor'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 to enter into such
transactions with regard to its foreign currency-denominated securities and will
not do so unless deemed appropriate by a Subadvisor. 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
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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 Subadvisor'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 Subadvisor 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 Subadvisors 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 Subadvisors 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 Subadvisor'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 Subadvisor 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
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
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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.
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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 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 Subadvisor to forecast interest rates and
other economic factors correctly. Some securities may have a structure that
makes their reaction to interest rate changes and other factors difficult to
predict, making their value highly volatile. These securities may also be
subject to prepayment risk and if the security has been purchased at a premium
the amount of the premium would be lost in the event of prepayment. The Money
Market Fund may only invest in mortgage-backed and asset-backed securities that
meet the requirements of Rule 2a-7 under the 1940 Act. 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
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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 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 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.
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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 Subadvisor 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 Subadvisor are illiquid if, as a
result, more than 10% of the value of the Fund's net assets will be illiquid
(15% in the case of the International Bond or International Equity Funds).
Collateralized Mortgage Obligations ("CMOs"). A CMO is a hybrid between a
mortgage-backed bond and a mortgage pass-through security. Similar to a bond,
interest and prepaid principal is paid, in most cases, semiannually. CMOs may be
collateralized by whole mortgage loans, but are more typically collateralized by
portfolios of mortgage pass-through securities guaranteed by GNMA, FHLMC, or
FNMA, and their income streams.
CMOs are structured into multiple classes, each bearing a different stated
maturity. Actual maturity and average life will depend upon the prepayment
experience of the collateral. CMOs provide for a modified form of call
protection through a de facto breakdown of the underlying pool of mortgages
according to how quickly the loans are repaid. Monthly payment of principal
received from the pool of underlying mortgages, including prepayments, is first
returned to investors holding the shortest maturity class. Investors holding the
longer maturity classes receive principal only after the first class has been
retired. An investor is partially guarded against a sooner than desired return
of principal because of the sequential payments.
In a typical CMO transaction, a corporation ("issuer") issues multiple
series (e.g., A, B, C, Z) of CMO bonds ("Bonds"). Proceeds of the Bond offering
are used to purchase mortgages or 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
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,
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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' Subadvisors 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
Subadvisor will, consistent with the Fund's investment objectives, policies
and quality standards, consider making investments in such new types of
mortgage-related securities.
CMO Residuals. CMO residuals are derivative mortgage securities issued by
agencies or instrumentalities of the U.S. Government or by private originators
of, or investors in, mortgage loans, including savings and loan associations,
homebuilders, mortgage banks, commercial banks, investment banks and special
purpose entities of the foregoing.
The cash flow generated by the mortgage assets underlying a series of CMOs
is applied first to make required payments of principal and interest on the CMOs
and second to pay the related administrative expenses of the issuer. The
residual in a CMO structure generally represents the interest in any excess cash
flow remaining after making the foregoing payments. Each payment of such excess
cash flow to a holder of the related CMO residual represents income and/or a
return of capital. The amount of residual cash flow resulting from a CMO will
depend on, among other things, the characteristics of the mortgage assets, the
coupon rate of each class of CMO, prevailing interest rates, the amount of
administrative expenses and the prepayment experience on the mortgage assets. In
particular, the yield to maturity on CMO residuals is extremely sensitive to
prepayments on the related underlying mortgage assets, in the same manner as an
interest-only ("IO") class of stripped mortgage-backed securities. See "Stripped
Mortgage-Backed Securities." In addition, if a series of a CMO includes a class
that bears interest at an adjustable rate, the yield to maturity on the related
CMO residual will also be extremely sensitive to changes in the level of the
index upon which interest rate adjustments are based. As described below with
respect to stripped mortgage-backed securities, in certain circumstances, a
portfolio 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.
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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 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 part upon the ability of a Subadvisor to forecast
interest rates and other economic factors correctly. If a Subadvisor 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.
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Other Asset-Backed Securities. The Funds' Subadvisors 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
("CARs(SM)"). CARs(SM) represent undivided fractional interests in a trust
("trust") whose assets consist of a pool of motor vehicle retail installment
sales contracts and security interests in the vehicles securing the contracts.
Payments of principal and interest on CARs(SM) are passed-through monthly to
certificate holders, and are guaranteed up to certain amounts and for a certain
time period by a letter of credit issued by a financial institution unaffiliated
with the trustee or originator of the trust. An investor's return on CARs(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 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
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amounts directly from the borrower and to enforce its rights as a lender
directly against the borrower. As an alternative, a Fund may purchase an
assignment of all or a portion of a lender's interest in a corporate loan, in
which case, the Fund may be required generally to rely on the assigning lender
to demand payment and enforce its rights against the borrower, but would
otherwise be entitled to all of such lender's rights in the corporate loan. A
Fund also may purchase a Participation Interest in a portion of the rights of a
lender in a corporate loan. In such a case, the Fund will be entitled to receive
payments of principal, interest and fees, if any, but generally will not be
entitled to enforce its rights directly against the agent bank or the borrower;
rather the Fund must rely on the lending institution for that purpose. A Fund
will not act as an agent bank, a guarantor or sole negotiator of a structure
with respect to a corporate loan.
In a typical corporate loan involving the sale of Participation Interests,
the agent bank administers the terms of the corporate loan agreement and is
responsible for the collection of principal and interest and fee payments to the
credit of all lenders which are parties to the corporate loan agreement. The
agent bank in such cases will be qualified under the 1940 Act to serve as a
custodian for a registered investment company such as the Company. A Fund
generally will rely on the agent bank or an intermediate Participant to collect
its portion of the payments on the corporate loan. The agent bank monitors the
value of the collateral and, if the value of the collateral declines, may take
certain action, including accelerating the corporate loan, giving the borrower
an opportunity to provide additional collateral or seeking other protection for
the benefit of the Participants in the corporate loan, depending on the terms of
the corporate loan agreement. Furthermore, unless under the terms of a
participation agreement a Fund has direct recourse against the borrower (which
is unlikely), the Fund will rely on the agent bank to use appropriate creditor
remedies against the borrower. The agent bank also is responsible for monitoring
compliance with covenants contained in the corporate loan agreement and for
notifying holders of corporate loans of any failures of compliance. Typically,
under corporate loan agreements, the agent bank is given broad discretion in
enforcing the corporate loan agreement, and is obligated to use only the same
care it would use in the management of its own property. For these services, the
borrower compensates the agent bank. Such compensation may include special fees
paid on structuring and funding the corporate loan and other fees paid on a
continuing basis.
A financial institution's employment as an agent bank may be terminated in
the event that it fails to observe the requisite standard of care or becomes
insolvent, or has a receiver, conservator, or similar official appointed for it
by the appropriate bank regulatory authority or becomes a debtor in a bankruptcy
proceeding. A successor agent bank generally will be appointed to replace the
terminated bank, and assets held by the agent bank under the corporate loan
agreement should remain available to holders of corporate loans. If, however,
assets held by the agent bank for the benefit of a Fund were determined by an
appropriate regulatory authority or court to be subject to the claims of the
agent bank's general or secured creditors, the Fund might incur certain costs
and delays in realizing payment on a corporate loan, or suffer a loss of
principal and/or interest. In situations involving intermediate Participants
similar risks may arise.
When a Fund acts as co-lender in connection with a Participation Interest or
when a Fund acquires a Participation Interest the terms of which provide that
the Fund will be in privity of contract with the corporate borrower, the Fund
will have direct recourse against the borrower in the event the borrower fails
to pay scheduled principal and interest. In all other cases, the Fund will look
to the agent bank to enforce appropriate credit remedies against the borrower.
In acquiring Participation Interests a Fund's Subadvisor 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.
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REAL ESTATE INVESTMENT TRUSTS
The Asset Manager Fund may invest in securities issued by equity real estate
investment trusts ("REITs"). REITs pool investors' funds for investment
primarily in income-producing commercial real estate or real-estate related
loans. REITs are similar to holding companies in that they are essentially
holding companies that rely on professional managers to supervise their
investments. A REIT is not taxed on income distributed to shareholders if it
complies with several requirements relating to its organization, ownership,
assets, and income and the requirement that it distribute to its shareholders at
least 95% of its taxable income (other than net capital gains) for each taxable
year.
Investment in REITs may be subject to many of the same risks as a direct
investment in real estate. This is due to the fact that the value of the REIT
may be affected by the value of the real estate owned by the companies in which
it invests. These risks include changes in economic conditions, interest rates,
property values, property tax increases, overbuilding and increased competition,
environmental contamination zoning and natural disasters.
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
Subadvisor 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 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.
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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.
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.
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 Subadvisor,
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.
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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 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
Subadvisors 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 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
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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.
The ability of a Fund to successfully utilize options may depend in part upon
the ability of the Subadvisor 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 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
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premium. As a result of writing options on foreign currencies, a Fund also may
be required to forego all or a portion of the benefits which might otherwise
have been obtained from favorable movements in currency exchange rates.
A call option written on foreign currency by a Fund is "covered" if that
Fund owns the underlying foreign currency subject to the call or securities
denominated in that currency or has an absolute and immediate right to acquire
that foreign currency without additional cash consideration (or for additional
cash consideration held in a segregated account by its custodian) upon
conversion or exchange of other foreign currency held in its portfolio. A call
option is also covered if a Fund holds a call on the same foreign currency for
the same principal amount as the call written where the exercise price of the
call held (a) is equal to or less than the exercise price of the call written or
(b) is greater than the exercise price of the call written if the amount of the
difference is maintained by a Fund in liquid assets in a segregated account with
its custodian.
Options on foreign currencies to be written or purchased by a Fund will be
traded on U.S. and foreign exchanges or over-the-counter. Exchange-traded
options generally settle in cash, whereas options traded over-the-counter may
settle in cash or result in delivery of the underlying currency upon exercise of
the option. As with other kinds of option transactions, however, the writing of
an option on foreign currency will constitute only a partial hedge up to the
amount of the premium received and a Fund could be required to purchase or sell
foreign currencies at disadvantageous exchange rates, thereby incurring losses.
The purchase of an option on foreign currency may constitute an effective hedge
against exchange rate fluctuations, although, in the event of rate movements
adverse to a Fund's position, a Fund may forfeit the entire amount of the
premium plus related transaction costs.
There can be no assurance that a liquid market will exist when a Fund seeks
to close out an option position. Furthermore, if trading restrictions or
suspensions are imposed on the options markets, a Fund may be unable to close
out a position.
Currency options traded on U.S. or other exchanges may be subject to
position limits which may limit the ability of a Fund to reduce foreign currency
risk using such options. Over-the-counter options differ from traded options in
that they are two-party contracts with price and other terms negotiated between
buyer and seller and generally do not have as much market liquidity as
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
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.
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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
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 settlement price, unless such
price does not appear to the Subadvisors 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
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securities markets at that time to be less favorable than rates currently
available in the futures markets. If the anticipated rise in the price of the
securities should occur (with its concomitant reduction in yield), the increased
cost to the Fund of purchasing the securities will be offset, at least to some
extent, by the rise in the value of the futures position taken in anticipation
of the subsequent securities purchase. A Fund may also purchase futures
contracts as a substitute for the purchase of longer-term securities to lengthen
the average duration of the Fund's portfolio.
The Fund could accomplish similar results by selling securities with long
maturities and investing in securities with short maturities when interest rates
are expected to increase or by buying securities with long maturities and
selling securities with short maturities when interest rates are expected to
decline. However, by using futures contracts as a risk management technique,
given the greater liquidity in the futures market than in the cash market, it
may be possible to accomplish the same result more easily and more quickly.
Securities Index Futures. A securities index futures contract does not
require the physical delivery of securities, but merely provides for profits and
losses resulting from changes in the market value of the contract to be credited
or debited at the close of each trading day to the respective accounts of the
parties to the contract. On the contract's expiration date a final cash
settlement occurs and the futures positions are simply closed out. Changes in
the market value of a particular stock index futures contract reflect changes in
the specified index of equity securities on which the contract is based. A stock
index is designed to reflect overall price trends in the market for equity
securities.
Stock index futures may be used to hedge 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 Subadvisor
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 Subadvisor anticipates that exchange rates will rise, the
Fund may purchase a currency futures contract to protect against an increase in
the price of securities denominated in a particular currency the Fund intends to
purchase. Although the terms of currency futures contracts specify actual
delivery or receipt, in most instances the contracts are closed out before the
settlement date without the making or taking of delivery of the currency.
Closing out of a currency futures contract is effected by entering into an
offsetting purchase or sale transaction. To offset a currency futures contract
sold by a Fund, the Fund purchases a currency futures contract for the same
aggregate amount of currency and delivery date. If the price in the sale exceeds
the price in the offsetting purchase, the Fund is immediately paid the
difference. Similarly, to close out a currency futures contract purchased by the
Fund, the Fund sells a currency futures contract. If the offsetting sale price
exceeds the purchase price, the Fund realizes a gain, and if the offsetting sale
price is less than the purchase price, the Fund realizes a loss.
A risk in employing currency futures contracts to protect against the price
volatility of portfolio securities denominated in a particular currency is that
changes in currency exchange rates or in the value of the futures position may
correlate imperfectly with changes in the cash prices of a Fund's securities.
The degree of correlation may be distorted by the fact that the currency futures
market may be dominated by short-term traders seeking to profit from changes in
exchange rates. This would reduce the value of such contracts for hedging
purposes over a short-term period. Such distortions are generally minor and
would diminish as the contract approached maturity. Another risk is that the
Subadvisor 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.
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Options on Futures. For bona fide hedging and other appropriate risk
management purposes, the Funds also may purchase and write call and put options
on futures contracts which are traded on exchanges that are licensed and
regulated by the CFTC for the purpose of options trading, or, subject to
applicable CFTC rules, on foreign exchanges. A "call" option on a futures
contract gives the purchaser the right, in return for the premium paid, to
purchase a futures contract (assume a "long" position) at a specified exercise
price at any time before the option expires. A "put" option gives the purchaser
the right, in return for the premium paid, to sell a futures contract (assume a
"short" position), for a specified exercise price at any time before the option
expires.
Upon the exercise of a "call," the writer of the option is obligated to sell
the futures contract (to deliver a "long" position to the option holder) at the
option exercise price, which will presumably be lower than the current market
price of the contract in the futures market. Upon exercise of a "put," the
writer of the option is obligated to purchase the futures contract (deliver a
"short" position to the option holder) at the option exercise price, which will
presumably be higher than the current market price of the contract in the
futures market. When an entity exercises an option and assumes a long futures
position, in the case of a "call," or a short futures position, in the case of a
"put," its gain will be credited to its futures margin account, while the loss
suffered by the writer of the option will be debited to its account. However, as
with the trading of futures, most participants in the options markets do not
seek to realize their gains or losses by exercise of their option rights.
Instead, the writer or holder of an option will usually realize a gain or loss
by buying or selling an offsetting option at a market price that will reflect an
increase or a decrease from the premium originally paid.
Options on futures contracts can be used by a Fund to hedge substantially
the same risks and for the same duration and risk management purposes as might
be addressed or served by the direct purchase or sale of the underlying futures
contracts. If the Fund purchases an option on a futures contract, it may obtain
benefits similar to those that would result if it held the futures position
itself.
The purchase of put options on futures contracts is a means of hedging a
Fund's portfolio against the risk of rising interest rates, declining securities
prices or declining exchange rates for a particular currency. The purchase of a
call option on a futures contract represents a means of hedging against a market
advance affecting securities prices or currency exchange rates when the Fund is
not fully invested or of lengthening the average maturity or duration of a
Fund's portfolio. Depending on the pricing of the option compared to either the
futures contract upon which it is based or upon the price of the underlying
securities or currencies, it may or may not be less risky than ownership of the
futures contract or underlying securities or currencies.
In contrast to a futures transaction, in which only transaction costs are
involved, benefits received in an option transaction will be reduced by the
amount of the premium paid as well as by transaction costs. In the event of an
adverse market movement, however, the Fund will not be subject to a risk of loss
on the option transaction beyond the price of the premium it paid plus its
transaction costs, and may consequently benefit from a favorable movement in the
value of its portfolio securities or the currencies in which such securities are
denominated that would have been more completely offset if the hedge had been
effected through the use of futures.
If a Fund writes options on futures contracts, the Fund will receive a
premium but will assume a risk of adverse movement in the price of the
underlying futures contract comparable to that involved in holding a futures
position. If the option is not exercised, the Fund will realize a gain in the
amount of the premium, which may partially offset unfavorable changes in the
value of securities held by or to be acquired for the Fund. If the option is
exercised, the Fund will incur a loss in the option transaction, which will be
reduced by the amount of the premium it has received, but which may partially
offset favorable changes in the value of its portfolio securities or the
currencies in which such securities are denominated.
The writing of a call option on a futures contract constitutes a partial
hedge against declining prices of the underlying securities or the currencies in
which such securities are denominated. If the futures price at expiration is
below the exercise price, the Fund will retain the full amount of the option
premium, which provides a partial hedge against any decline that may have
occurred in the Fund's holdings of securities or the currencies in which such
securities are denominated.
The writing of a put option on a futures contract is analogous to the
purchase of a futures contract. For example, if the Fund writes a put option on
a futures contract on debt securities related to securities that the Fund
expects to acquire and the market price of such securities increases, the net
cost 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.
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While the holder or writer of an option on a futures contract may normally
terminate its position by selling or purchasing an offsetting option of the same
series, a Fund's ability to establish and close out options positions at fairly
established prices will be subject to the maintenance of a liquid market. The
Funds will not purchase or write options on futures contracts unless the market
for such options has sufficient liquidity such that the risks associated with
such options transactions are not at unacceptable levels.
Limitations on Purchase and Sale of Futures Contracts and Options on Futures
Contracts. A Fund will only enter into futures contracts or related options
which are standardized and traded on a U.S. or foreign exchange or board of
trade, or similar entity, or quoted on an automated quotation system. In
general, the Funds will engage in transactions in futures contracts and related
options only for bona fide hedging and other appropriate risk management
purposes, and not for speculation. The Funds will not enter into futures
contracts for which the aggregate contract amounts exceed 100% of the Fund's net
assets. In addition, with respect to positions in futures and related options
that do not constitute bona fide hedging positions, a Fund will not enter into a
futures contract or futures option contract if, immediately thereafter, the
aggregate initial margin deposits relating to such positions plus premiums paid
by it for open futures option positions, less the amount by which any such
options are "in-the-money," would exceed 5% of the Fund's total assets. A call
option is "in-the-money" if the value of the futures contract that is the
subject of the option exceeds the exercise price. A put option is "in-the-money"
if the exercise price exceeds the value of the futures contract that is the
subject of the option.
When purchasing a futures contract, a Fund will maintain with its custodian
(and mark-to-market on a daily basis) liquid assets that, when added to the
amounts deposited with a futures commission merchant as margin, are equal to the
market value of the futures contract. Alternatively, the Fund may "cover" its
position by purchasing a put option on the same futures contract with a strike
price as high or higher than the price of the contract held by the Fund.
When selling a futures contract, a Fund will maintain with its custodian
(and mark-to-market on a daily basis) liquid assets that, when added to the
amount deposited with a futures commission merchant as margin, are equal to the
market value of the instruments underlying the contract. Alternatively, the Fund
may "cover" its position by owning the instruments underlying the contract (or,
in the case of an index futures contract, a portfolio with a volatility
substantially similar to that of the index on which the futures contract is
based), or by holding a call option permitting the Fund to purchase the same
futures contract at a price no higher than the price of the contract written by
the Fund (or at a higher price if the difference is maintained in liquid assets
with the Fund's custodian).
When selling a call option on a futures contract, a Fund will maintain with
its custodian (and mark-to-market on a daily basis) liquid assets that, when
added to the amounts deposited with a futures commission merchant as margin,
equal the total market value of the futures contract underlying the call option.
Alternatively, the Fund may cover its position by entering into a long position
in the same futures contract at a price no higher than the strike price of the
call option, by owning the instruments underlying the futures contract, or by
holding a separate call option permitting the Fund to purchase the same futures
contract at a price not higher than the strike price of the call option sold by
the Fund.
When selling a put option on a futures contract, a Fund will maintain with
its custodian (and mark-to-market on a daily basis) liquid assets that equal the
purchase price of the futures contract, less any margin on deposit.
Alternatively, the Fund may cover the position either by entering into a short
position in the same futures contract, or by owning a separate put option
permitting it to sell the same futures contract so long as the strike price of
the purchased put option is the same or higher than the strike price of the put
option sold by the Fund.
The requirements for qualification as a regulated investment company
also may limit the extent to which a Fund may enter into futures, 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
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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
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 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
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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 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 Subadvisor'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 Subadvisor 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 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.
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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 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 Subadvisors believe are creditworthy. Short sales against the
box will be limited to no more than 25% of a Fund's total assets.
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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 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 Subadvisor,
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 Subadvisor. The lower the ratings of such
securities, the greater their risks render them like equity securities. Moody's
considers bonds it rates Baa to have speculative elements as well as investment
grade characteristics. The Funds may invest in securities which are rated D by
S&P or, if unrated, are of equivalent quality. Securities rated D may be in
default with respect to payment of principal or interest.
Investors should be willing to accept the risk associated with investment in
high yield/high risk securities. Investment in high yield/high risk bonds
involves special risks in addition to the risks associated with investments in
higher rated debt securities. High yield/high risk bonds may be regarded as
predominantly speculative with respect to the issuer's continuing ability to
meet principal and interest payments. Moreover, such securities may under
certain circumstances be less liquid than higher rated debt instruments.
Analysis of the creditworthiness of issuers of high yield/high risk bonds
may be more complex than for issuers of higher quality debt securities, and the
ability of the Fund to achieve its investment objective may, to the extent of
its investment in high yield/high risk bonds, be more dependent upon such
creditworthiness analysis than would be the case if the Fund were investing in
higher quality bonds.
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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 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(R), "S&P" 500(R), "S&P(R)", "Standard & Poor's 500",
"500", "S&P MidCap 400 Index" and "S&P SmallCap 600 Index" 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 the Asset Manager Fund or represent the advisability of investing in the
Funds.
THE INDEXED EQUITY FUND AND THE ASSET MANAGER FUND ARE NOT SPONSORED,
ENDORSED, SOLD OR PROMOTED BY STANDARD & POOR'S, A DIVISION OF THE MCGRAW-HILL
COMPANIES, INC. ("S&P").
42
<PAGE> 138
S&P makes no representation or warranty, express or implied, to the owners of
the Funds, or any member of the public regarding the advisability of investing
in securities generally or in the Funds particularly or the ability of the S&P
500 Index, the S&P MidCap 400 Index or the S&P SmallCap 600 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,
the S&P MidCap 400 Index or the S&P SmallCap 600 Index which are determined,
composed and calculated by S&P without regard to Monitor or the Funds. S&P has
no obligation to take the needs of Monitor or the owners of the Funds into
consideration in determining, composing or calculating the S&P 500 Index, the
S&P MidCap 400 Index or the S&P SmallCap 600 Index. S&P is not responsible for
and has not participated in the determination of the prices and amount of the
Funds or the timing of the issuance or sale of the Funds or in the determination
or calculation of the equation by which the Funds are to be converted into cash.
S&P has no obligation or liability in connection with the administration,
marketing or trading of the Funds.
S&P does not guarantee the accuracy and/or the completeness of the S&P 500
Index, S&P MidCap 400 Index, S&P SmallCap 600 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 Funds, 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,
S&P MidCap 400 Index, S&P SmallCap 600 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, the S&P 500 Index 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
parallel the S&P 500 Index. Because of the market-value weighting, as of
January 31, 2000, the 10 largest companies accounted for approximately 25% of
the Index. As of that date, the six largest weightings in the S&P 500 Index as
a percentage of net assets accounted for 18.66% of the Index.
The Asset Manager Fund also invests in common stocks selected to replicate
the S&P MidCap 400 Index, the S&P SmallCap 600 Index and the Morgan Stanley REIT
Index.
The S&P MidCap 400 Index consists of 400 domestic common stocks chosen for
market size, liquidity, and industry group representation. The S&P MidCap 400
Index is an unmanaged market-value weighted index in which each stock's weight
is proportionate to its market value. As of February 29, 2000, the range of
market capitalization of companies within the S&P MidCap 400 Index was $106
million to $51.3 billion.
The S&P SmallCap 600 Index consists of 600 domestic common stocks chosen for
market size, liquidity, and industry group representation (bid-asked spread,
ownership, share turnover and number of no trade days). The S&P SmallCap 600
Index is an unmanaged market-value weighted index in which each stock's weight
is proportionate to its market value. As of February 29, 2000, the range of
market capitalization of companies in the S&P SmallCap 600 Index was $33 million
to $7.8 billion.
The Morgan Stanley REIT Index is a capitalization-weighted index of the most
actively traded real estate investment trusts, and is designed to be a measure
of real estate equity performance. The Morgan Stanley REIT Index is calculated
by Morgan Stanley and Co., Inc. and reflects reinvestment of all applicable
dividends, capital gains and interest.
43
<PAGE> 139
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, and
the Funds objectives as described in the Prospectus, all other investment
policies and practices described may be changed by the Board of Directors
without the approval of shareholders.
Unless otherwise indicated, all of the percentage limitations below, and in
the investment restrictions recited in the Prospectus, apply to each Fund on an
individual basis, and apply only at the time a transaction is entered into.
Accordingly, if a percentage restriction is adhered to at the time of
investment, a later increase or decrease in the percentage which results from a
relative change in values or from a change in a Fund's net assets will not be
considered a violation.
Each Fund 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);
(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.
44
<PAGE> 140
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 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 Subadvisors,
pursuant to guidelines approved by the Directors.
Each Subadvisor 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;
45
<PAGE> 141
(iii) dealer undertaking to make a market in the 144A security; and
(iv) the nature of the 144A security and the nature of the market for the
144A security (i.e., the time needed to dispose of the security, the method of
soliciting offers, and the mechanics of transfer).
To make the determination that an issue of 4(2) commercial paper is liquid, a
Subadvisor 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 Subadvisor 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
Subadvisors. 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.
<TABLE>
<CAPTION>
PRINCIPAL
NAME, POSITION(S) WITH OCCUPATION(S) DURING
ADDRESS AND AGE THE COMPANY PAST 5 YEARS
<S> <C> <C>
Stephen C. Roussin*, 36 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 Director, New York Life Trust Company, 1997 to
present; Director, New York Life Benefit
Services LLC, 1997 to present; Director, NYLIFE
Securities, Inc., 1997 to present; Director, MainStay
Shareholder Services LLC, 1997 to present;
Director, Eagle Strategies Corp., 1997 to present;
Director, President and Chief Executive Officer,
MainStay Management LLC, 1997 to present;
Senior Vice President, Smith Barney, 1994 to 1997;
Division Sales Manager, Prudential Securities,
1989 to 1994.
</TABLE>
46
<PAGE> 142
<TABLE>
<CAPTION>
PRINCIPAL
NAME, POSITION(S) WITH OCCUPATION(S) DURING
ADDRESS AND AGE THE COMPANY PAST 5 YEARS
<S> <C> <C>
Patrick G. Boyle*, 46 Director Senior Vice President, Pension Department, New York
51 Madison Avenue Life Insurance Company, 1991 to present; Vice
New York, NY 10010 President, Pension Department, New York Life
Insurance Company, 1988-1991; Pension Vice President,
Pension Department, New York Life Insurance Company,
1986-1988; Assistant Vice President, Pension
Department, New York Life Insurance Company,
1985-1986; Director, NYLIFE Distributors Inc., 1993
to 1996; Chairman, Monitor Capital Advisors LLC,
1996 to 1998, and Director, 1991 to present;
Director, New York Life Benefit Services LLC, 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, 72 Director Retired, 1987 to present; Vice President, Investment
353 Canterbury Drive Banking, The First Boston Corporation, 1964-1987.
Ramsey, NJ 07446
Robert P. Mulhearn, 52 Director Private Investor, 1987 to present; Managing Director,
60 Twin Brooks Road Morgan Stanley, 1979-1987.
Saddle River, NJ 07458
Susan B. Kerley, 48 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, 48 President Vice President, Pension Department, New York Life
</TABLE>
47
<PAGE> 143
<TABLE>
<CAPTION>
Principal
Name, Position(s) with Occupation(s) During
Address and Age the Company Past 5 Years
<S> <C> <C>
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.
Marc J. Brookman, 36 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, 42 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 LLC, 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 LLC,
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, LLC, 1994
to present; Director, NYLIFE Depositary Corporation,
present; Director, NYLIFE SFD Holding Inc. (formerly
</TABLE>
48
<PAGE> 144
<TABLE>
<CAPTION>
PRINCIPAL
NAME, POSITION(S) WITH OCCUPATION(S) DURING
ADDRESS AND AGE THE COMPANY PAST 5 YEARS
<S> <C> <C>
NAFCO, Inc.), 1994 to present; Director, President
and Chief Executive Officer, NYLIFE Securities Inc.,
1996 to present; Chairman and Director, MainStay
Shareholder Services LLC, 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.
Richard W. Zuccaro, 50 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 LLC, 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),
</TABLE>
49
<PAGE> 145
<TABLE>
<CAPTION>
PRINCIPAL
NAME, POSITION(S) WITH OCCUPATION(S) DURING
ADDRESS AND AGE THE COMPANY PAST 5 YEARS
<S> <C> <C>
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 LLC, 1996 to present; Tax Vice
President, NYLINK Insurance Agency Incorporated, 1996
to present; Tax Vice President, MainStay Shareholder
Services LLC, 1997 to present.
John Flanagan, 53 Treasurer Vice President, New York Life Insurance Company,
51 Madison Avenue (Principal 1999 to present; Vice President and Chief
New York, NY 10010 Financial and Financial Officer, The MainStay Funds, 1999 to
Accounting present; Director, Vice President and Chief
Officer) Financial Officer, MainStay Management LLC, 1999
to present; Director, Vice President and Chief
Financial Officer, MainStay Shareholder Services
LLC, 1999 to present; Senior Vice President and
Chief Financial Officer, NYLIFE Distributors Inc.,
1999 to present; Treasurer, Strong Funds and
Senior Vice President, Strong Capital Management,
Inc., 1997 to 1998; Partner, predecessor to
PricewaterhouseCoopers LLP, 1994 to 1997.
Joseph McBrien, 51 Secretary Vice President and Associate General Counsel, New
51 Madison Avenue York Life Insurance Company, 1999 to
New York, NY 10010 present; Secretary, MainStay VP Series Fund,
Inc., 1999 to present; Secretary, The MainStay
Funds, 1999 to present; Secretary, MainStay
Management LLC, 1999 to present; Secretary,
MainStay Shareholder Services LLC, 1999 to
present; Secretary, Monitor Capital Advisors LLC,
1999 to present; Vice President and Counsel, State
Street Bank and Trust Company, 1997 to 1999;
Principal, McBrien Consulting, 1996 to 1997;
Senior Vice President and General Counsel, Lieber
& Company, 1986 to 1996; Senior Vice President and
General Counsel, Evergreen Asset Management Corp.,
1986 to 1996.
</TABLE>
50
<PAGE> 146
Principal
Name, Position(s) with Occupation(s) During
Address and Age the Company Past 5 Years[ ]
51 Madison Avenue
New York, NY 10010
* Messrs. Boyle and Roussin are Directors who are "interested persons" of
the Company as that term is defined in the 1940 Act.
51
<PAGE> 147
As indicated in the above table, certain Directors and Officers also
hold positions with Monitor, MainStay Management LLC, MacKay Shields LLC,
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 period ended October 31, 1999, 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 Registrant and
Aggregate Compensation Fund Complex Paid
Name and Position From Company Directors
<S> <C> <C>
Lawrence Glacken $ 24,000 $ 24,000
Director
Robert P. Mulhearn $ 23,000 $ 23,000
Director
Susan B. Kerley $ 23,000 $ 23,000
Director
</TABLE>
As of January 31, 2000, 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 SUBADVISORS
AND THE DISTRIBUTOR
MANAGEMENT AGREEMENT
Pursuant to the Management Agreement for the Funds dated November 21, 1997,
MainStay Management LLC (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 LLC is a direct subsidiary of NYLIFE
LLC, 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 Directors, including the Independent
Directors, approved an amendment to the Management Agreement at an in-person
meeting held on September 7, 1999 to reflect the conversion of MainStay
Management from a corporation to a limited liability company under the laws of
the State of Delaware.
52
<PAGE> 148
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 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 Subadvisor;
(b) the fees to be paid to the Subadvisors pursuant to the Sub-Advisory
Agreements;
(c) the fees to be paid to New York Life Insurance Company pursuant to
the Subadministration Agreement; and
(d) 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".)
53
<PAGE> 149
Commencing November 21, 1997 through December 31, 1997 , for the fiscal
year ended December 31, 1998 and for the ten months ended October 31, 1999,
the amount of the management fee paid by each Fund to the Manager was as
follows:
<TABLE>
<CAPTION>
November 21, 1997 Ten Months
through Year Ended Ended
December 31, 1997 December 31, 1998 October 31, 1999
----------------- ----------------- ----------------
<S> <C> <C> <C>
Asset Manager Fund $ 305,965 $ 3,114,621 $ 2,927,643
EAFE Index 57,337 562,217 561,256
Growth Equity Fund 670,493 6,963,032 7,314,578
Indexed Equity Fund 541,630 6,263,846 6,695,784
International Equity Fund 108,499 1,104,413 1,013,499
Value Equity Fund 941,883 7,963,179 5,585,920
Bond Fund 155,008 1,373,917 1,156,712
Indexed Bond Fund 68,007 744,747 662,306
International Bond Fund 43,865 440,402 393,177
Money Market Fund 142,675 1,386,536 1,470,982
Short-Term Bond Fund 32,585 260,453 264,919
</TABLE>
As of November 21, 1997, the Manager limited certain Funds' expenses. In
connection with the voluntary expense limitations, the Manager assumed the
following expenses for the period November 21, 1997 through December 31,
1997, for the fiscal year ended December 31, 1998, and for the ten months ended
October 31, 1999:
<TABLE>
<CAPTION>
November 21, 1997
through Year Ended Ten Months Ended
December 31, 1997 December 31, 1998 October 31, 1999
----------------- ----------------- ----------------
<S> <C> <C> <C>
EAFE Index Fund $ 42,915 $ 257,925 $ 223,379
Indexed Equity Fund 290,257* 3,269,934* 3,292,206*
International Equity Fund 13,689 36,690 ---
Bond Fund 18,927 192,482 159,149
Indexed Bond Fund 19,676 222,581 164,813
International Bond Fund 14,104 70,444 57,982
Money Market Fund 37,695 383,039 343,743
Short-Term Bond Fund 14,826 127,949 109,252
</TABLE>
54
<PAGE> 150
* For the ten months ended October 31, 1999, Manager assumed $2,622,628 and
Monitor, the Funds Sub-Advisor assumed $669,578. For the year ended December
31, 1998, Manager assumed $2,643,549 and Monitor assumed $626,385. For the
period November 21, 1997 through December 31, 1997, Manager assumed $236,104
and Monitor 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
Subadvisors, 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 Subadvisors 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' Subadvisors 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>
Asset Manager Fund 0.15%
EAFE Index Fund 0.15%
Growth Equity Fund 0.25%
Index Equity Fund 0.10%
International Equity Fund 0.35%
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>
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 Subadvisor (as the term is defined in the 1940 Act).
The Directors, including the Independent Directors, approved amendments to
the Sub-Advisory Agreements at an in-person meeting held on September 7, 1999 to
reflect the conversion of MainStay Management, MacKay Shields and Monitor from
corporations to limited liability companies under the laws of the State of
Delaware.
The Subadvisors 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 Subadvisors bear the salaries
and expenses of all of their personnel.
The Sub-Advisory Agreements provide that the Subadvisors shall not be
liable to a Fund for any error of judgment by a Subadvisor or for any loss
sustained by a Fund except in the case of the Subadvisor'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.
55
<PAGE> 151
For the 10 months ended October 31, 1999, 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>
Ten Months Ended Year Ended 11/21/97 through
October 31, 1999 12/31/98 12/31/97
---------------- -------- --------
<S> <C> <C> <C>
Asset Manager Fund $ 675,610 $ 718,759 $ 70,607
EAFE Index Fund 88,619 88,771 9,053
Growth Equity Fund 2,151,346 2,047,951 197,204
Indexed Equity Fund* 1,339,157* 1,252,770* 108,326*
International Equity Fund 417,323 454,158 44,677
Value Equity Fund 1,642,918 2,342,112 277,024
Bond Fund 308,456 366,373 41,336
Indexed Bond Fund 132,461 148,950 13,601
International Bond 147,441 165,151 16,450
Money Market Fund 294,196 277,307 28,535
Short-Term Bond Fund 66,230 65,113 8,146
</TABLE>
*For the ten months ended October 31, 1999, the fiscal year ended December
31, 1998 and the period ended December 31, 1997, the Subadvisor for the Indexed
Equity Fund waived or reimbursed fees in the amounts of $669,578, $626,385 and
$54,163, respectively.
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 , the amount of the advisory
fee paid by each Fund to New York Life, MacKay Shields or Monitor was as
follows:
<TABLE>
<CAPTION>
Fund 1/1/97 through 11/20/97
<S> <C>
EAFE Index Fund $ 118,622
</TABLE>
56
<PAGE> 152
<TABLE>
<S> <C>
Growth Equity Fund 1,414,379
Index Equity Fund 719,601
International Equity Fund 406,316
Asset Manager Fund 508,530
Value Equity Fund 2,008,307
Bond Fund 316,678
Indexed Bond Fund 105,411
International Bond Fund 136,941
Money Market Fund 181,674
Short-Term Bond Fund 69,125
</TABLE>
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,
calculated on the basis of each Fund's average daily net assets at the annual
rates set forth below. For the year ended December 31, 1998, the Manager paid
New York Life $1,109,299, and $383,039 was waived or reimbursed. For the ten
months ended October 31, 1999, the Manager paid New York Life $1,176,785, and
$343,743 was waived or reimbursed. The Directors, including the Independent
Directors, approved amendments to the Sub-Administration Agreement at an
in-person meeting held on September 7, 1999 to reflect the conversion of
MainStay Management from a corporation to a limited liability company under the
laws of the State of Delaware.
<TABLE>
<CAPTION>
Percentage of Average
Fund Daily Net Assets*
---- ---------------------
<S> <C>
Asset Manager 0.40%
Bond Fund 0.45%
EAFE Index Fund 0.70%
Growth Equity Fund 0.50%
Indexed Bond Fund 0.30%
Indexed Equity Fund 0.30%
International Bond Fund 0.40%
International Equity Fund 0.40%
Money Market Fund 0.30%
Short-Term Bond Fund 0.35%
Value Equity 0.50%
</TABLE>
- ---------
* Expense reimbursement due to voluntary expense limitations will be borne by
the Sub-Administrator (in the case of Indexed Equity, together with the
Manager).
In previous years, prior to a change in management structure, each Fund paid
an administrative fee directly to New York Life as administrator. Since the
restructuring, the Manager pays the sub-administration fee to New York Life. For
the period January 1, 1999 through
57
<PAGE> 153
October 31, 1999, the fiscal year ended December 31, 1998 and the period from
November 21, 1997 through December 31, 1997, the amount of the administration
fee paid and waived and/or reimbursed for each Fund was as follows:
<TABLE>
<CAPTION>
1/1/99 through 10/31/99 Year Ended 12/31/98 11/21/97 through 12/31/97
----------------------- ------------------- -----------------------
Administration Administration
Fee Waived Fee Waived Administration
Administration and/or Administration and/or Administration Fee Waived
Fund Fee Paid Reimbursed Fee Paid Reimbursed Fee Paid and/or Reimbursed
- ---- -------- ---------- -------- ---------- -------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Asset Manager Fund $2,252,033 $ N/A(1) $ 2,395,862 $ N/A(1) $ 235,357 $ N/A(1)
EAFE Index Fund 472,637 36,690 473,446 257,925 48,284 42,915
Growth Equity Fund 5,163,231 N/A(1) 5,621,068 N/A(1) 473,289 N/A(1)
Indexed Equity Fund 5,356,627 3,292,206(2) 5,011,077 3,269,934(3) 433,304 236,104
International Equity Fund 596,176 N/A(1) 649,656 36,690 63,822 13,689
Value Equity Fund 3,943,002 N/A(1) 5,621,068 N/A(1) 664,859 N/A(1)
Bond Fund 848,255 159,149 1,007,539 192,482 113,673 18,967
Indexed Bond Fund 529,845 164,813 595,798 222,581 54,405 19,676
International Bond Fund 245,735 57,982 275,251 70,444 27,415 14,104
Money Market Fund 1,176,788 343,743 1,109,229 383,039 114,140 37,696
Short-Term Bond Fund 198,689 109,252 195,341 127,949 24,439 14,826
</TABLE>
(1) Fund had no expense limitation during period.
(2) New York Life assumed $2,622,628.
(3) New York Life assumed $2,643,549.
Under the previous structure, for the period January 1, 1997 through November
20, 1997, the fee paid and waived and/or reimbursed has as follows:
<TABLE>
<CAPTION>
1/1/97 through 11/20/97
-----------------------
Administration
Fee Waived
Administration and/or
Fund Fee Paid Reimbursed
- ---- -------- ----------
<S> <C> <C>
Asset Manager Fund $1,695,098 $ N/A(1)
EAFE Index Fund 632,652 229,592
Growth Equity Fund 3,394,512 N/A(1)
Indexed Equity Fund 2,878,403 1,878,195(2)
International Equity Fund 580,451 35,792
Value Equity Fund 4,819,937 N/A(1)
Bond Fund 870,864 154,845
Indexed Bond Fund 421,641 161,693
International Bond Fund 228,235 60,073
Money Market Fund 726,696 194,751
Short-Term Bond Fund 207,375 96,101
</TABLE>
(1) Fund had no expense limitation during period.
(2) New York Life assumed $1,518,395, Monitor assumed $359,800.
DISTRIBUTION AGREEMENT
NYLIFE Distributors Inc. serves as the Comapany'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 acts 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 Comapany's shares, and receives no compensation from the Company pursuant to
the Distribution Agreement
58
<PAGE> 154
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.
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.
59
<PAGE> 155
The Plan provides that New York Life shall provide to the Directors, and the
Board shall review at least quarterly, a written report of the amounts expended
in connection with the performance of service activities, and the purposes for
which such expenditures were made.
PURCHASES AND REDEMPTIONS
Purchases and redemptions are discussed in the Prospectus under the heading
"Shareholder Guide," and that information is incorporated herein by reference.
Certain clients of the Company's Subadvisors 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 Subadvisor 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 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 Subadvisor will seek the best execution of the Fund's orders.
The Subadvisor 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
60
<PAGE> 156
considerations, the Conduct Rules of the NASD and such other policies as the
Directors may determine, the Subadvisors 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 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 Subadvisor may cause a Fund
to pay a broker-dealer (except the Affiliated Broker) which provides brokerage
and research services to the Subadvisor 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 Subadvisor 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 Subadvisor'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
Subadvisors, 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 Subadvisors' 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 Subadvisors 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 Subadvisor.
Research provided by brokers is used for the benefit of all of the Subadvisors'
clients and not solely or necessarily for the benefit of the Company. The
Subadvisors' investment management personnel attempt to evaluate the quality of
Research provided by brokers. Results of this effort are sometimes used by the
Subadvisors 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 Subadvisors. Investment decisions for a Fund and for the
Subadvisors' 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.
61
<PAGE> 157
The Sub-Advisory fee that the Manager pays on behalf of each Fund to the
Subadvisors will not be reduced as a consequence of the Subadvisors' 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
Subadvisors 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 Subadvisors in carrying out their obligations to the Funds.
For the ten months ended October 31, 1999 and the years ended December 31,
1998, and 1997, each of the following Funds paid brokerage commissions as
follows:
<TABLE>
<CAPTION>
TOTAL BROKERAGE COMMISSIONS
TOTAL BROKERAGE COMMISSIONS PAID PAID TO AFFILIATED PERSONS
TEN MONTHS YEAR YEAR TEN MONTHS YEAR YEAR
ENDED ENDED ENDED ENDED ENDED ENDED
10/31/99 12/31/98 12/31/97 10/31/99 12/31/98 12/31/97
<S> <C> <C> <C> <C> <C> <C>
Asset Manager Fund.......... $ 10,104 $ 161,159 $ 22,593 0(0%)(1) 0(0%)(1) 0(0%)(1)
EAFE Index Fund............. 56,634 72,602 20,593 0(0%)(1) 0(0%)(1) 0(0%)(1)
Growth Equity Fund.......... 491,121 423,326 461,682 0(0%)(1) 0(0%)(1) 0(0%)(1)
Indexed Equity Fund......... 171,747 302,291 120,427 0(0%)(1) 0(0%)(1) 0(0%)(1)
International Equity Fund... 325,822 230,372 407,665 0(0%)(1) 0(0%)(1) 0(0%)(1)
Value Equity Fund........... 1,556,063 1,976,646 1,651,353 0(0%)(1) 0(0%)(1) 0(0%)(1)
Short-Term Bond Fund........ N/A N/A 250 0(0%)(1) 0(0%)(1) 0(0%)(1)
</TABLE>
<TABLE>
<CAPTION>
TOTAL AMOUNT OF TRANSACTION TOTAL BROKERAGE
WHERE COMMISSIONS PAID COMMISSIONS PAID
TEN MONTHS YEAR YEAR TEN MONTHS YEAR YEAR
ENDED ENDED ENDED ENDED ENDED ENDED
10/31/99 12/31/98 12/31/97 10/31/99 12/31/98 12/31/97
<S> <C> <C> <C> <C> <C> <C>
Asset Manager Fund..... $ 10,528,527 $ 176,370,188 $ 19,581,960(0%)(2) $ N/A $ N/A $ N/A
EAFE Index Fund........ 32,365,794 28,623,991 6,116,892(0%)(2) N/A N/A N/A
Growth Equity Fund..... 440,538,560 349,425,106 329,107,159(0%)(2) 785,891 423,326 461,682
Indexed Equity Fund.... 207,061,153 315,577,968 114,953,870(0%)(2) N/A N/A N/A
International Equity
Fund................... 95,050,660 84,406,014 103,442,741(0%)(N/A) 346,449 230,372 407,665
Value Equity Fund...... 810,608,991 1,275,820,583 1,082,875,352(0%)(2) 2,023,439 1,976,646 1,651,353
Short-Term Bond Fund... N/A N/A 3,202,719(0%)(2) N/A N/A 250
</TABLE>
(1) Percent of total commissions paid.
(2) Percent of total transactions involving the payment of commissions effected
through affiliated persons.
The Bond Fund, Indexed Bond Fund, International Bond Fund and Money Market
Fund paid no brokerage commissions during the ten months ended October 31, 1999
and the years ended December 31, 1998 and 1997.
As of October 31, 1999, 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 Bear Stearns Cos., Inc. (The) 750,754(2)
Lehman Brothers Holdings Inc. 1,324,017(2)
Merrill Lynch & Co., Inc. 4,354,709(2)
Schwab (Charles) Corp. (The) 4,797,723(2)
Asset Manager Fund Bear Stearns Cos., Inc. (The) 73,784(2)
Lehman Brothers Holdings Inc. 130,722(2)
Merrill Lynch & Co., Inc. 429,709(2)
Paine Webber Group Inc. 88,101(2)
Schwab (Charles) Corp. (The) 470,754(2)
Growth Equity Fund Merrill Lynch & Co., Inc. 5,099,717(1)
Value Equity Fund American Express Credit Corp. 7,914,554(1)
Merrill Lynch & Co., Inc. 7,991,721(1)
Bond Fund American Express Credit Corp. 6,977,509(1)
Salomon Smith Barney Inc. 5,042,037(1)
Donaldson, Lufkind & Jenrette Inc. 2,122,800(3)
Lehman Brothers Holdings Inc. 460,642(3)
Salomon Smith Barney Inc. 679,119(3)
Indexed Bond Fund American Express Credit Corp. 1,990,000(3)
</TABLE>
62
<PAGE> 158
<TABLE>
<S> <C> <C>
Morgan Stanley, Dean Witter & Co. 933,750(3)
Money Market Fund Goldman, Sachs Group Inc. (The) 9,762,800(1)
Merrill Lynch & Co., Inc. 15,000,000(1)
Morgan (J.P.) & Co. Inc. 17,786,944(1)
Morgan Stanley, Dean Witter & Co. 4,004,751(1)
Salomon Smith Barney Inc. 5,000,000(1)
Morgan Stanley, Dean Witter & Co. 2,509,157(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.
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
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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 Subadvisor if the prices are deemed by the
Subadvisors 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 Subadvisor 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 Subadvisor
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 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 Subadvisor, 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 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 Manager.
TAX INFORMATION
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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, 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 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
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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 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 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
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losses attributable to fluctuations in the value of foreign currency between the
date of acquisition of the security or contract and the date of disposition also
are treated as ordinary gain or loss. These gains and losses, referred to under
the Code as "section 988" gains and losses, may increase or decrease the amount
of a Fund's investment company taxable income to be distributed to its
shareholders as ordinary income. For example, fluctuations in exchange rates may
increase the amount of income that a Fund must distribute in order to qualify
for treatment as a regulated investment company and to prevent application of an
excise tax on undistributed income. Alternatively, fluctuations in exchange
rates may decrease or eliminate income available for distribution. If section
988 losses exceed other investment company taxable income during a taxable year,
a Fund generally would not be able to make ordinary dividend distributions, or
distributions made before the losses were realized would be recharacterized as
return of capital to shareholders for Federal income tax purposes, rather than
as an ordinary dividend, reducing each shareholder's basis in his Fund shares.
Foreign investing involves the possibility of confiscatory taxation, foreign
taxation of income earned in the foreign nation (including withholding taxes on
interest and dividends) or other foreign taxes imposed with respect to
investments in the foreign nation.
Income received by a Fund from sources within a foreign country may be
subject to withholding and other income or similar taxes imposed by that
country. If more than 50% of the value of a Fund's total assets at the close of
its taxable year consists of securities of foreign corporations, the Fund will
be eligible and may elect to "pass-through" to the Fund's shareholders the
amount of foreign income and similar taxes paid by the Fund. Pursuant to the
Funds' current investment policies and practices, only the EAFE Index Fund and
the International Equity Fund are expected to invest in foreign securities
sufficient in amount to be eligible to permit this election to be made. Pursuant
to this election, a shareholder will be required to include in gross income (in
addition to taxable dividends actually received) his pro rata share of the
foreign income and similar taxes paid by a Fund, and will be entitled either to
claim a deduction (as an itemized deduction) for his pro rata share of such
foreign taxes in computing his taxable income or to use it as a foreign tax
credit against his U.S. Federal income taxes, subject to limitations. Foreign
taxes may not be deducted by a shareholder that is an individual in computing
the alternative minimum tax. 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 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
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shares are treated as excess distributions. Excess distributions are
characterized as ordinary income even though, absent application of the PFIC
rules, certain excess distributions might have been classified as capital gain.
A Fund may be eligible to elect alternative tax treatment with respect to
PFIC shares. Under an election that currently is available in some
circumstances, a Fund generally would be required to include in its gross income
its share of the earnings of a PFIC on a current basis, regardless of whether
distributions are received from the PFIC in a given year. If this election were
made, the special rules, discussed above, relating to the taxation of excess
distributions, would not apply. Alternatively, a Fund may elect to mark to
market its PFIC shares at the end of each taxable year, with the result that
unrealized gains would be treated as though they were realized and reported as
ordinary income. Any mark-to-market losses and any loss from an actual
disposition of PFIC shares would be deductible as ordinary losses to the extent
of any net mark-to-market gains included in income in prior years.
Because the application of the PFIC rules may affect, among other things,
the character of gains, the amount of gain or loss and the timing of the
recognition of income with respect to PFIC shares, as well as subject a Fund
itself to tax on certain income from PFIC shares, the amount that must be
distributed to shareholders, and which will be taxed to shareholders as ordinary
income or long-term capital gain, may be increased or decreased substantially as
compared to a fund that did not invest in PFIC shares.
A Fund may invest in municipal bonds or obligations issued or guaranteed by
a state, the interest on which may be exempt from Federal income tax. It is
expected that shareholders will be subject to tax on dividends distributed by a
Fund that are derived from tax-exempt interest income.
Some of the debt securities that may be acquired by a Fund may be treated as
debt securities that are originally issued at a discount. Original issue
discount can generally be defined as the difference between the price at which a
security was issued and its stated redemption price at maturity. Although no
cash income is actually received by the Funds, original issue discount on a
taxable debt security earned in a given year generally is treated for Federal
income tax purposes as interest and, 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 capital gain realized by a
Fund which is taxed as ordinary income when distributed to shareholders.
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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.
Each Fund is required to report to the IRS all distributions except in the
case of certain exempt shareholders. All such distribution and redemption
proceeds generally are subject to withholding of Federal income tax at a rate of
31% ("backup withholding") in the case of non-exempt shareholders if (1) the
shareholder fails to furnish the Fund with and to certify the shareholder's
correct taxpayer identification number, (2) the IRS notifies the Fund or
shareholder that the shareholder has failed to report properly certain interest
and dividend income to the IRS and to respond to notices to that effect, or (3)
when required to do so, the shareholder fails to certify that he is not subject
to backup withholding. If the withholding provisions are applicable, any such
distributions, whether reinvested in additional shares or taken in cash, will be
reduced by the amounts required to be withheld. Backup withholding is not an
additional tax and any amounts withheld may be credited against the
shareholder's U.S. Federal income tax liability. Investors may wish to consult
their tax advisers about the applicability of the backup withholding provisions.
The foregoing discussion relates only to Federal income tax law as
applicable to U.S. persons (i.e., U.S. citizens and residents and U.S. domestic
corporations, partnerships, trusts and estates). Distributions by the Funds also
may be subject to state and local taxes and their treatment under state and
local income tax laws may differ from the Federal income tax treatment.
Shareholders should consult their tax advisers with respect to particular
questions of Federal, state and local taxation. Shareholders who are not U.S.
persons should consult their tax advisers regarding U.S. and foreign tax
consequences of ownership of shares of the Funds including the likelihood that
distributions to them would be subject to withholding of U.S. tax at a rate of
30% (or at a lower rate under a tax treaty).
PERFORMANCE INFORMATION
The Company may, from time to time, include the yield and effective yield of
its Money Market Fund, the yield of the other Funds or Classes, and the total
return of all Funds or Classes in advertisements, sales literature, or reports
to shareholders or prospective investors. Due to the deduction of the
shareholder service fee, performance of the Institutional Service Class of each
Fund will be lower than the performance of the Institutional Class of the Fund.
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Each of the Funds began offering Institutional Service Class shares on
January 1, 1995. Thus, the performance figures for Institutional Service Class
shares prior to that date have been calculated based on the historical
performance of the Funds' Institutional Class shares from inception through
December 31, 1994, 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.
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 October 31, 1999
for the Money Market Fund were 5.15% and 5.28%, respectively, for the
Institutional Class, and were 4.90% and 5.02%, respectively, for the
Institutional Service Class. Had certain expenses not been assumed by the
Manager, these yields would have been 5.07% and 5.20%, respectively, for the
Institutional Class, and 4.82% and 4.94%, 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 October 31, 1999, the yield for the Short-Term
Bond Fund was 4.02% for the Institutional Class, and was 3.77% for the
Institutional Service Class.
Quotations of average annual total return for a Fund will be expressed in
terms of the average annual compounded rate of return of a hypothetical
investment in the Fund or Class over certain periods that will include a period
of one year (or, if less, up to the life of the Fund), calculated pursuant to
the following formula: P(1 + T)(n) = ERV (where P = a hypothetical initial
payment of $1,000, T = the total return for the period, n = the number of
periods, and ERV = the ending redeemable value of a hypothetical $1,000 payment
made at the beginning of the period). Quotations of total return may also be
shown for other periods. All total return figures reflect the deduction of a
proportional share of Fund or Class expenses on an annual basis, reflect fee
waivers or reimbursements in effect for each period and assume that all
dividends and distributions are reinvested when paid.
The average annual total return of the following Funds for the one-year and
five-year periods ended October 31, 1999 and the period from inception to
October 31, 1999 were as follows:
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<PAGE> 166
<TABLE>
<CAPTION>
FIVE YEARS AVERAGE ANNUAL
YEAR ENDED ENDED TOTAL RETURN
FUND 10/31/99 10/31/99 SINCE INCEPTION
<S> <C> <C> <C>
EAFE Index Fund
Institutional Class (1)......................... 22.68% 8.25% 8.62%
Institutional Service Class(2).................. 22.38% 7.98% 8.46%
Growth Equity Fund
Institutional Class (1)......................... 32.29% 25.65% 22.72%
Institutional Service Class(2).................. 32.01% 25.33% 22.56%
Indexed Equity Fund
Institutional Class (1)......................... 25.63% 25.68% 19.76%
Institutional Service Class(2).................. 25.32% 25.40% 19.61%
International Equity Fund*
Institutional Class (3)......................... 22.57% 11.14% 11.56%
Institutional Service Class(3).................. 22.31% 10.77% 11.30%
Asset Manager Fund (formerly Multi-Asset Fund)
Institutional Class (1)......................... 12.13% 18.89% 14.29%
Institutional Service Class(2).................. 11.73% 18.62% 14.14%
Value Equity Fund
Institutional Class (1)......................... 6.39% 13.16% 15.94%
Institutional Service Class(2).................. 6.12% 12.92% 15.79%
Bond Fund
Institutional Class (1)......................... -1.05% 7.00% 6.86%
Institutional Service Class(2).................. -1.27% 6.73% 6.71%
Indexed Bond Fund
Institutional Class (1)......................... -0.78% 7.17% 7.07%
Institutional Service Class(2).................. -0.93% 6.97% 6.95%
International Bond Fund*
Institutional Class (3)......................... -3.46% 7.81% 8.59%
Institutional Service Class(3).................. -3.69% 7.57% 8.47%
Short-Term Bond Fund
Institutional Class (1)......................... 2.51% 5.85% 5.91%
Institutional Service Class(2).................. 2.23% 5.59% 5.77%
</TABLE>
(1) The inception date of these Institutional Class shares is 1/2/91.
71
<PAGE> 167
(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 LLC, the current Subadvisor 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 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 Subadvisor, and other pertinent facts relating to the management of
the Fund by the Subadvisor.
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 available, marketing efforts and
statements about this information by the entities' officers, directors and
employees.
72
<PAGE> 168
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 January 31, 2000, of the Funds' shares by each person who
beneficially or of record owned more than 5% of the voting securities of any
Fund:
73
<PAGE> 169
<TABLE>
<CAPTION>
PERCENTAGE OF
OUTSTANDING
NAME AND ADDRESS OF SHAREHOLDER FUND SHARES OWNED SHARES
<S> <C> <C> <C>
FRANK G AND FRIEDA K BROTZ INDEXED BOND 926,479 6.7%
FAMILY FOUNDATION INC
C/O JEFFREY T MOHR
PO BOX 551
SHEBOYGAN WI 53082-0551
MACKAY SHIELDS LLC SHORT TERM BOND 198,105 5.7%
9 W 57TH ST FL 33
NEW YORK NY 10019-2701
MERRILL LYNCH TRUST CO INDEXED EQUITY 6,515,024 14.3%
TTEE FBO CHRYSLER 401(K) PLAN
C/O PHILIP B KOLB
265 DAVIDSON AVE
SOMERSET NJ 08873-4120
NEW YORK LIFE INS CO EMPLOYEES BOND 1,406,522 7.2%
HEALTH AND LIFE BENEFIT TRUST
C/O GEORGE J TRAPP
51 MADISON AVENUE
NEW YORK NY 10010-1603
NEW YORK LIFE TRUST COMPANY SHORT TERM BOND 43,586 37.4%
C/O WILLIAM ZALESKI BOND 200,551 64.7%
51 MADISON AVE RM #117A INDEXED BOND 186,921 58.6%
NEW YORK NY 10010-1603 ASSET MANAGER 1,506,491 74.0%
VALUE EQUITY 200,280 39.6%
GROWTH EQUITY 370,439 54.7%
INDEXED EQUITY 754,142 42.7%
EAFE 21,514 46.6%
PLASTICS ENGINEERING CO EAFE 880,884 14.1%
C/O JEFFREY T MOHR
PO BOX 758
SHEBOYGAN WI 53082-0758
PRIORITY SYSTEMS INC INTERNATIONAL EQUITY 5,315 12.3%
C/O ANDREW ORONS
PO BOX 4240
HARRISBURG PA 17111-0240
TRUSTEES OF THE VOGEL SHORT TERM BOND 317,401 9.2%
EMPLOYEES PENSION TRUST
C/O HAROLD PALS TRUSTEE
1110 ALBANY PLACE SOUTH
</TABLE>
74
<PAGE> 170
<TABLE>
<S> <C> <C> <C>
ORANGE CITY IA 51041-0380
NEW YORK LIFE PROGRESS-SHARING SHORT TERM BOND 586,006 17.0%
C/O LYNNE M COHN ASSET MANAGER 3,888,078 10.5%
51 MADISON AVE RM 513 GROWTH EQUITY 10,418,221 33.0%
NEW YORK NY 10010-1603 INDEXED EQUITY 3,054,222 6.7%
ASGHAR SHAIGANY, M.D. MONEY MARKET 204,473 11.7%
5632 ANNAPOLIS RD STE 12
BLADENSBURG MD 20710-2213
CHARLES SCHWAB & CO INC EAFE 474,102 7.6%
SPL CSTDY A/C FOR BNFT CUST
C/O STEVEN SEARS
ATTN MUTUAL FUNDS - 101 MONTGOMERY
SAN FRANCISCO CA 94104
CNA TRUST CUST SHORT TERM BOND 214,710 6.2%
FBO EFCO CORP 401K & PSP
1800 NE BROADWAY AVE
DES MOINES IA 50313-2644
DEBORAH A LANDON SHORT TERM BOND 20,744 17.8%
5 OLD ENGLISH RD
SLINGERLANDS NY 12159-3634
DESCO FEDERAL CREDIT UNION MONEY MARKET 91,622 5.3%
C/O RICHARD POWELL CEO
PO BOX 1546
PORTSMOUTH OH 45662-1546
FISERV SECURITIES, INC BOND 29,862 9.6%
FAO 40154887
ATTN: MUTUAL FUNDS
ONE COMMERCE SQUARE
2005 MARKET STREET SUITE 1200
PHILADELPHIA PA 19103-7084
FISERV SECURITIES, INC INDEXED BOND 16,077 5.0%
FAO 40050012
ATTN: MUTUAL FUNDS
ONE COMMERCE SQUARE
2005 MARKET STREET SUITE 1200
PHILADELPHIA PA 19103-7084
FISERV SECURITIES, INC INTERNATIONAL BOND 838 6.7%
FAO 40035615
ATTN: MUTUAL FUNDS
ONE COMMERCE SQUARE
</TABLE>
75
<PAGE> 171
<TABLE>
<S> <C> <C> <C>
2005 MARKET STREET SUITE 1200
PHILADELPHIA PA 19103-7084
FISERV SECURITIES, INC INTERNATIONAL BOND 1,094 8.7%
FAO 40162203
ATTN: MUTUAL FUNDS
ONE COMMERCE SQUARE
2005 MARKET STREET SUITE 1200
PHILADELPHIA PA 19103-7084
FISERV SECURITIES, INC INTERNATIONAL BOND 1,120 8.9%
FAO 40023882
ATTN: MUTUAL FUNDS
ONE COMMERCE SQUARE
2005 MARKET STREET SUITE 1200
PHILADELPHIA PA 19103-7084
FISERV SECURITIES, INC INTERNATIONAL BOND 2,042 16.3%
FAO 40021562
ATTN: MUTUAL FUNDS
ONE COMMERCE SQUARE
2005 MARKET STREET SUITE 1200
PHILADELPHIA PA 19103-7084
FISERV SECURITIES, INC INTERNATIONAL BOND 3,334 26.6%
FAO 40044144 INTERNATIONAL EQUITY 3,406 7.9%
ATTN: MUTUAL FUNDS
ONE COMMERCE SQUARE
2005 MARKET STREET SUITE 1200
PHILADELPHIA PA 19103-7084
FISERV SECURITIES, INC INTERNATIONAL EQUITY 2,177 5.1%
FAO 40059423
ATTN: MUTUAL FUNDS
ONE COMMERCE SQUARE
2005 MARKET STREET SUITE 1200
PHILADELPHIA PA 19103-7084
JAMES TUCKER INTERNATIONAL EQUITY 3,021 7.0%
NANCY D MILLER-TUCKER TEN ENT
1121 S. GLENSTONE AVE
SPRINGFIELD, MO 65804 - 0313
JANET CAREY TTEE SHORT TERM BOND 14,386 12.4%
FBO ZACHARY LAKE LANDON
U/W OF HERBERT D LANDON DECEASED
RR 3 BOX 290-4
</TABLE>
76
<PAGE> 172
<TABLE>
<S> <C> <C> <C>
DALLAS PA 18612-9452
JOAN F THOMPSON SHORT TERM BOND 7,227 6.2%
BRUCE BARRY AND BRIAN THOMPSON TOD
11129 72ND AVE NO
MAPLE GROVE MN 55369-7655
METHODIST HOME ENDOWMENT FUND INTERNATIONAL EQUITY 816,297 6.2%
C/O JOSEPH BAILEY
1111 HERRING AVE
WACO TX 76708-3696
MILLERS LP GAS INC MONEY MARKET 300,130 17.2%
10122 SMITH CALHOUN RD
PLAIN CITY OH 43064-8960
NEW YORK LIFE BOND 2,640,788 13.6%
SEPARATE ACCOUNTS
C/O CAROL MEYER
PO BOX 422
PARSIPPANY NJ 07054-0422
NEW YORK LIFE INS CO AGENTS BOND 1,338,321 6.9%
HEALTH AND LIFE BENEFIT TRUST
C/O GEORGE J TRAPP
51 MADISON AVENUE
NEW YORK NY 10010-1603
NEW YORK LIFE INSURANCE COMPANY ASSET MANAGER 11,896,456 32.1%
C/O RICHARD SCHWARTZ INDEXED EQUITY 4,366,344 9.6%
260 CHERRY HILL ROAD EAFE 1,444,229 23.0%
PARSIPPANY NJ 07054-1187
NEW YORK LIFE TRUST COMPANY MONEY MARKET 138,992,343 62.2%
CLIENT ACCOUNTS SHORT TERM BOND 202,854 5.9%
C/O WILLIAM ZALESKI BOND 1,332,633 6.8%
51 MADISON AVE RM #117A INDEXED BOND 3,165,345 22.7%
NEW YORK NY 10010-1603 ASSET MANAGER 10,060,281 27.2%
VALUE EQUITY 6,772,565 11.8%
GROWTH EQUITY 5,676,747 18.0%
INDEXED EQUITY 11,097,604 24.3%
NEW YORK LIFE TRUST COMPANY INTERNATIONAL BOND 767 6.1%
CUST FOR THE IRA OF
GEORGE S O'NEILL
116 MARK DRIVE
MORRISVILLE PA 19067-4810
NEW YORK LIFE TRUST COMPANY INTERNATIONAL EQUITY 2,998 7.0%
</TABLE>
77
<PAGE> 173
<TABLE>
<S> <C> <C> <C>
CUST FOR THE IRA OF
GENE R FEYEN
2556 BIRCHCREST SE
GRAND RAPIDS MI 49506-5419
NEW YORK LIFE TRUST COMPANY INTERNATIONAL EQUITY 3,276 7.6%
CUST FOR THE IRA ROLLOVER OF
EDWARD G MURPHY
585 S GREEN BAY RD
LAKE FOREST IL 60045-3071
NEW YORK LIFE TRUST COMPANY MONEY MARKET 91,206 5.2%
CUST FOR THE ROLLOVER IRA OF
WILLIAM G WINCH
11 ARROWHEAD TRAIL
TIJERAS NM 87059-7606
NEW YORK LIFE TRUST COMPANY MONEY MARKET 98,666 5.7%
CUST FOR THE ROLLOVER IRA OF
KENNETH LANDAU
13521 HAYNES ST
VAN NUYS CA 91401-1714
NEW YORK LIFE TRUST COMPANY MONEY MARKET 152,923 8.8%
CUST FOR THE ROLLOVER IRA OF
ROSE L STORIN
6602 78TH ST
MIDDLE VLG NY 11379-2715
NEW YORK LIFE TRUST COMPANY EAFE 3,269 7.1%
CUST FOR THE ROLLOVER IRA OF
DENNIS WEINER
434 RIDGEWOOD AVE
GLENRIDGE NJ 07028-1722
NEW YORK LIFE TRUST COMPANY INTERNATIONAL BOND 711 5.7%
CUST FOR THE ROLLOVER IRA OF
MARY RODRIGO
3269 GOA WAY
LAVALLETTE NJ 08735-1215
NEW YORK LIFE TRUST COMPANY INTERNATIONAL BOND 1,252 10.0%
CUST FOR THE ROLLOVER IRA OF
ANDREW L TIMMINS
2 FIRST ST
MORRISTOWN NJ 07960-2705
TRUSTEES OF LONE STAR SHORT TERM BOND 910,179 26.4%
HOURLY RETIREMENT PLAN
</TABLE>
78
<PAGE> 174
<TABLE>
<S> <C> <C> <C>
DAY & ZIMMERMANN INC
1818 MARKET STREET
PHILADELPHIA PA 19103-3638
TRUSTEES OF THE NEW YORK BOND 6,871,240 35.3%
LIFE INSURANCE CO RETIREMENT INDEXED BOND 4,535,982 32.6%
PLAN & PENSION PLAN VALUE EQUITY 23,564,127 41.0%
300 INTERPACE PKWY BLDG A GROWTH EQUITY 6,120,691 19.4%
PARSIPPANY NJ 07054-1100 INDEXED EQUITY 7,848,727 17.2%
EAFE 1,013,399 16.2%
INTERNATIONAL BOND 3,950,813 72.4%
INTERNATIONAL EQUITY 4,969,413 38.0%
TRUSTEES OF THE NYLIC BOND 2,321,864 11.9%
RETIREMENT PLAN (AGENTS) INDEXED BOND 2,431,171 17.5%
300 INTERPACE PKWY BLDG A VALUE EQUITY 16,430,557 28.6%
PARSIPPANY NJ 07054-1100 GROWTH EQUITY 4,178,078 13.2%
INDEXED EQUITY 7,448,228 16.3%
EAFE 810,719 12.9%
INTERNATIONAL BOND 1,125,635 20.6%
INTERNATIONAL EQUITY 3,999,424 30.6%
US BANK NA CUST INTERNATIONAL EQUITY 903,026 6.9%
CENEX HARVEST STATES
P O BOX 64010
ST PAUL MN 55164-0010
FISERV SECURITIES, INC MONEY MARKET 190,140,377 100.0%
ATTN: CASH SWEEPS DEPARTMENT
ONE COMMERCE SQUARE
2005 MARKET ST
PHILADELPHIA PA 19103-7042
</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 Distributors, Inc. is a wholly owned subsidiary of NYLIFE LLC
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 Subadvisor unless such
power is the result of their position with the Company or Manager or Subadvisor.
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. Subject to these restrictions, these persons are
79
<PAGE> 175
permitted to invest in securities, including securities that may be purchased or
held by the Funds. 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 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 LLC ("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.
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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<PAGE> 176
APPENDIX A
DESCRIPTION OF SECURITIES RATINGS
MOODY'S INVESTORS SERVICE, INC.
Corporate and Municipal Bond Ratings
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than the Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper-medium-grade obligations. Factors giving security
to principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa: Bonds which are rated Baa are considered as medium-grade obligations
(i.e., they are neither highly protected nor poorly secured). Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca: Bonds which are rated Ca represent obligations which are speculative in
a high degree. Such issues are often in default or have other marked
shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
Moody's applies numerical modifiers, 1, 2, and 3, in each generic rating
classified from Aa through Caa. The modifier 1 indicates that the issue ranks in
the higher end of its generic rating category; the modifier 2 indicates a
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).
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Municipal Short-Term Loan Ratings
MIG 1/VMIG 1: This designation denotes best quality. There is present strong
protection by established cash flows, superior liquidity support or demonstrated
broad-based access to the market for refinancing.
MIG 2/VMIG 2: This designation denotes high quality. Margins of protection
are ample although not so large as in the preceding group.
MIG 3/VMIG 3: This designation denotes favorable quality. All security
elements are accounted for but there is lacking the undeniable strength of the
preceding grades. Liquidity and cash flow protection may be narrow and market
access for refinancing is likely to be less well established.
MIG 4/VMIG 4: This designation denotes adequate quality. Protection commonly
regarded as required of an investment security is present and although not
distinctly or predominantly speculative, there is specific risk.
SG: This designation denotes speculative quality. Debt instruments in this
category lack margins of protection.
Corporate Short-Term Debt Ratings
Moody's short-term debt ratings are opinions of the ability of issuers to
repay punctually senior debt obligations which have an original maturity not
exceeding one year, unless explicitly noted.
Moody's employs the following three designations, all judged to be
investment grade, to indicate the relative repayment ability of rated issuers:
PRIME-1: Issuers rated Prime-1 (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-1 repayment
ability will often be evidenced by many of the following characteristics:
leading market positions in well-established industries; high rates of return on
funds employed; conservative capitalization structure with moderate reliance on
debt and ample asset protection; broad margins in earnings coverage of fixed
financial charges and high internal cash generation; and well-established access
to a range of financial markets and assured sources of alternate liquidity.
PRIME-2: Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
PRIME-3: Issuers rated Prime-3 (or supporting institutions) have an
acceptable ability for repayment of senior short-term obligations. The effect of
industry characteristics and market compositions may be more pronounced.
Variability in earnings and profitability may result in changes in the level of
debt protection measurements and may require relatively high financial leverage.
Adequate alternate liquidity is maintained.
NOT PRIME: Issuers rated Not Prime do not fall within any of the Prime
rating categories.
STANDARD & POOR'S
Corporate and Municipal Long-Term Debt Ratings
Investment Grade
AAA: Debt rated AAA has the highest rating assigned by Standard & Poor's.
The obligor's capacity to meet its financial commitment on the obligation is
extremely strong.
AA: Debt rated AA differs from the highest rated issues only in small
degree. The obligor's capacity to meet its financial commitment on the
obligation is very strong.
A: Debt rated A is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories. However, the obligor's capacity to meet its financial commitment on
the obligation is still strong.
BBB: Debt rated BBB exhibits adequate protection parameters. However,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity of the obligor to meet its financial commitment on the
obligation.
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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, 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.
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.
MONEY MARKET FUND SWEEP SHARES
STATEMENT OF ADDITIONAL INFORMATION
DATE: MARCH 1, 2000
This Statement of Additional Information supplements the information
contained in the Prospectus for the Money Market Fund Sweep Shares dated March
1, 2000 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 statements, including the Statement
of Assets and Liabilities and the Portfolio of Investments for the ten months
ended October 31, 1999, the Statement of Operations for the ten months ended
October 31, 1999 and the year ended December 31, 1998, the Statement of Changes
in Net Assets for the ten months ended October 31, 1999 and the years ended
December 31, 1998 and 1997, the notes to the Financial Statements, and the
Report of the Independent Accountants, all of which are included in the
Company's 1999 Annual Report to Shareholders, are hereby incorporated by
reference into this Statement of Additional Information.
<PAGE> 180
TABLE OF CONTENTS
<TABLE>
<S> <C>
ADDITIONAL INFORMATION ABOUT THE FUND.................................. 4
BORROWING..................................................... 6
COMMERCIAL PAPER.............................................. 7
REPURCHASE AGREEMENTS AND REVERSE REPURCHASE AGREEMENTS....... 7
U.S. GOVERNMENT SECURITIES.................................... 8
LENDING OF PORTFOLIO SECURITIES............................... 8
BANKING INDUSTRY AND SAVINGS AND LOAN INDUSTRY OBLIGATIONS.... 9
FLOATING AND VARIABLE RATE SECURITIES......................... 9
FOREIGN SECURITIES............................................ 9
WHEN-ISSUED AND FIRM OR STANDBY COMMITMENT AGREEMENTS......... 10
MORTGAGE-RELATED AND OTHER ASSET-BACKED SECURITIES............ 10
LOAN PARTICIPATION INTERESTS.................................. 17
ZERO COUPON BONDS............................................. 19
RISKS ASSOCIATED WITH DEBT SECURITIES......................... 19
FUNDAMENTAL INVESTMENT RESTRICTIONS.................................... 20
NON-FUNDAMENTAL INVESTMENT RESTRICTIONS................................ 21
DIRECTORS AND OFFICERS................................................. 24
COMPENSATION TABLE............................................ 29
THE MANAGER, THE SUBADVISOR AND THE DISTRIBUTOR....................... 30
MANAGEMENT AGREEMENT.......................................... 30
SUB-ADVISORY AGREEMENT........................................ 32
SUB-ADMINISTRATION AGREEMENT.................................. 33
DISTRIBUTION AGREEMENT........................................ 33
SERVICE FEES.................................................. 34
DISTRIBUTION FEES............................................. 35
ADDITIONAL INFORMATION................................................. 35
PURCHASES AND REDEMPTIONS.............................................. 36
PORTFOLIO TRANSACTIONS AND BROKERAGE................................... 36
NET ASSET VALUE........................................................ 39
TAX INFORMATION........................................................ 39
PERFORMANCE INFORMATION................................................ 42
OTHER INFORMATION...................................................... 44
CAPITALIZATION................................................ 44
BENEFICIAL OWNERSHIP OF SHARES................................ 44
CODE OF ETHICS................................................ 44
INDEPENDENT ACCOUNTANTS....................................... 45
LEGAL COUNSEL................................................. 45
TRANSFER AGENT................................................ 45
CUSTODIAN..................................................... 45
REGISTRATION STATEMENT........................................ 45
APPENDIX A DESCRIPTION OF SECURITIES RATINGS........................... 46
MOODY'S INVESTORS SERVICE, INC................................ 46
</TABLE>
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STANDARD & POOR'S............................................. 48
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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
Subadvisor, New York Life Insurance Company (the "Subadvisor" or "New York
Life"), shall determine whether a security presents minimal credit risk under
procedures adopted by the Company's Board of Directors. A money market
instrument will be considered to be of the highest quality (1) if rated in the
highest rating category (i.e., Aaa or Prime-1 by Moody's, AAA or A-1 by S&P's)
by (i) any two nationally recognized statistical rating organizations ("NRSROs")
or, (ii) if rated by only one NRSRO, by that NRSRO; (2) if issued by an issuer
that has received a short-term rating from an NRSRO with respect to a class of
debt obligations that is comparable in priority and security, and that are rated
in the highest rating category by (i) any two NRSROs or, (ii) if rated by only
one NRSRO, by that NRSRO; (3) an unrated security that is of comparable quality
to a security in the highest rating category as determined by the Subadvisor;
(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
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securities plus accrued interest "Demand Feature" or obligations of a person
other than the issuer of the security, under certain circumstances, to undertake
to pay the principal amount of the underlying security plus interest
"Guarantee," the Guarantee has received a rating from an NRSRO or the Guarantee
is issued by a guarantor that has received a rating from an NRSRO with respect
to a class of debt obligations that is comparable in priority and security to
the Guarantee, with certain exceptions, and (ii) the issuer of the Demand
Feature or Guarantee, or another institution, has undertaken promptly to notify
the holder of the security in the event that the Demand Feature or Guarantee is
substituted with another Demand Feature or Guarantee; (5) if it is a security
issued by a money market fund registered with the Securities and Exchange
Commission ("SEC") under the 1940 Act; or (6) if it is a Government Security.
With respect to 5% of its total assets, measured at the time of investment, the
Fund may also invest in money market instruments that are in the second-highest
rating category for short-term debt obligations (i.e., rated Aa or Prime-2 by
Moody's or AA or A-2 by S&P).
The Fund may not invest more than 5% of its total assets, measured at
the time of investment, in securities of any one issuer, except that the Fund
may exceed this 5% limitation with respect to 25% of its total assets for up to
three business days after the purchase of "First Tier" securities of any one
issuer and except that this limitation shall not apply to U.S. government
securities or securities subject to certain Guarantees. The Fund may invest up
to 5% of its total assets in securities that were "Second Tier" when acquired.
Immediately after the acquisition of any Demand Feature or Guarantee, the Fund,
with respect to 75% of its total assets, shall not have invested more than 10%
of its assets in securities issued by or subject to Demand Features or
Guarantees from the institution that issued the Demand Feature or Guarantee,
with certain exceptions. In addition, immediately after the acquisition of any
Demand Feature or Guarantee (or a security after giving effect to the Demand
Feature or Guarantee) that is not within the highest rating category by NRSROs,
the Fund shall not have invested more than 5% of its total assets in securities
issued by or subject to Demand Features or Guarantees from the institution that
issued the Demand Feature or Guarantee. The Fund may not invest more than the
greater of 1% of its total assets or one million dollars, measured at the time
of investment, in "Second Tier" securities of any one issuer, except that this
limitation 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 Subadvisor, 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 Subadvisor 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.
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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 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
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by appreciation of the securities purchased. The Fund also may be required to
maintain minimum average balances in connection with such borrowing or to pay a
commitment or other fee to maintain a line of credit; either of these
requirements would increase the cost of borrowing over the stated interest rate.
COMMERCIAL PAPER
The Fund may invest in commercial paper. The Fund will invest in
commercial paper only if rated at the time of investment Prime-1 by Moody's or
A-1 by S&P, or, if not rated by Moody's or S&P, if the Subadvisor 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 determined to be creditworthy by the Manager or Subadvisor. 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 Subadvisor seeks to minimize
the risk of loss from repurchase agreements by analyzing the creditworthiness of
the obligor, in this case the seller of the Obligation. Apart from the risk of
bankruptcy or insolvency proceedings, there is also the risk that the seller may
fail to repurchase the security. However, if the market value of the Obligation
subject to the repurchase agreement becomes less than the repurchase price
(including accrued interest), the Fund will direct the seller of the Obligation
to deliver additional securities so that the market value of all securities
subject to the repurchase agreement equals or exceeds the repurchase price. The
Fund will not invest more than 10% of its net assets (taken at current market
value) in repurchase agreements maturing in more than seven days.
The Fund may enter into reverse repurchase agreements with banks or
broker-dealers, which involve the sale of a security by the Fund and its
agreement to repurchase the instrument at a specified time and price. The Fund
will maintain a segregated account consisting of liquid
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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 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 Subadvisor.
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 Subadvisor to be creditworthy
and approved by the Board, and when, in the judgment of the Subadvisor, the
consideration which can be earned currently from securities loans of this type
justifies the attendant risk. If the Subadvisor 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
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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.
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
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taxation of income earned in the foreign nation (including withholding taxes on
interest and dividends) or other foreign taxes imposed with respect to
investments in the foreign nation, foreign exchange controls (which may include
suspension of the ability to transfer currency from a given country), default in
foreign government securities, political or social instability or diplomatic
developments which could affect investments in securities of issuers in those
nations. In addition, in many countries there is less publicly available
information about issuers than is available in reports about companies in the
United States. Foreign companies are not generally subject to uniform accounting
and auditing and financial reporting standards, and auditing practices and
requirements may not be comparable to those applicable to U.S. companies. In
many foreign countries, there is less government supervision and regulation of
business and industry practices, stock exchanges, brokers and listed companies
than in the United States. Foreign securities transactions may be subject to
higher brokerage and custodial costs than domestic securities transactions. In
addition, the foreign securities markets of many of the countries in which the
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
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
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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 Subadvisor 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 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.
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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 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 or guarantors can meet their obligations
under the insurance policies or guarantee arrangements. The Fund may buy
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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 Subadvisor 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 Subadvisor are illiquid if, as a
result, more than 10% of the value of the Fund's net assets will be illiquid.
Collateralized Mortgage Obligations ("CMOs"). A CMO is a hybrid between
a mortgage-backed bond and a mortgage pass-through security. Similar to a bond,
interest and prepaid principal is paid, in most cases, semiannually. CMOs may be
collateralized by whole mortgage loans, but are more typically collateralized by
portfolios of mortgage pass-through securities guaranteed by GNMA, FHLMC, or
FNMA, and their income streams.
CMOs are structured into multiple classes, each bearing a different
stated maturity. Actual maturity and average life will depend upon the
prepayment experience of the collateral. CMOs provide for a modified form of
call protection through a de facto breakdown of the underlying pool of mortgages
according to how quickly the loans are repaid. Monthly payment of principal
received from the pool of underlying mortgages, including prepayments, is first
returned to investors holding the shortest maturity class. Investors holding the
longer maturity classes receive principal only after the first class has been
retired. An investor is partially guarded against a sooner than desired return
of principal because of the sequential payments.
In a typical CMO transaction, a corporation ("issuer") issues multiple
series (e.g., A, B, C, Z) of CMO bonds ("Bonds"). Proceeds of the Bond offering
are used to purchase mortgages or mortgage pass-through certificates
("Collateral"). The Collateral is pledged to a third-party trustee as security
for the Bonds. Principal and interest payments from the Collateral are used to
pay principal on the Bonds in the order A, B, C, Z. The Series A, B, and C Bonds
all bear current interest. Interest on the Series Z Bond is accrued and added to
principal and a like amount is paid as principal on the Series A, B, or C Bond
currently being paid off. When the Series A, B, and C Bonds are paid in full,
interest and principal on the Series Z Bond begins to be paid currently. With
some CMOs, the issuer serves as a conduit to allow loan originators (primarily
builders or savings and loan associations) to borrow against their loan
portfolios.
The Fund will not invest in any privately issued CMOs that do not meet
the requirements of Rule 3a-7 under the 1940 Act if, as a result of such
investment, more than 5% of the Fund's net assets would be invested in any one
CMO, more than 10% of the Fund's net assets would be invested in CMOs and other
investment 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
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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 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 Subadvisor 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 Subadvisor 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.
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Each payment of such excess cash flow to a holder of the related CMO residual
represents income and/or a return of capital. The amount of residual cash flow
resulting from a CMO will depend on, among other things, the characteristics of
the mortgage assets, the coupon rate of each class of CMO, prevailing interest
rates, the amount of administrative expenses and the prepayment experience on
the mortgage assets. In particular, the yield to maturity on CMO residuals is
extremely sensitive to prepayments on the related underlying mortgage assets, in
the same manner as an interest-only ("IO") class of stripped mortgage-backed
securities. See "Stripped Mortgage-Backed Securities." In addition, if a series
of a CMO includes a class that bears interest at an adjustable rate, the yield
to maturity on the related CMO residual will also be extremely sensitive to
changes in the level of the index upon which interest rate adjustments are
based. As described below with respect to stripped mortgage-backed securities,
in certain circumstances the Fund may fail to recoup fully its initial
investment in a CMO residual.
CMO residuals are generally purchased and sold by institutional
investors through several investment banking firms acting as brokers or dealers.
The CMO residual market has only very recently developed and CMO residuals
currently may not have the liquidity of other more established securities
trading in other markets. Transactions in CMO residuals are generally completed
only after careful review of the characteristics of the securities in question.
In addition, CMO residuals may or, pursuant to an exemption therefrom, may not
have been registered under the Securities Act of 1933, as amended. CMO
residuals, whether or not registered under such Act, may be subject to certain
restrictions on transferability, and may be deemed "illiquid" and subject to a
portfolio's limitations on investment in illiquid securities. The Fund limits
its investment in CMO residuals to less than 5% of its net assets.
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 principal payments (including prepayments) on the related underlying mortgage
assets, and a rapid rate of principal payments may have a material
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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 Subadvisor to forecast
interest rates and other economic factors correctly. If the Subadvisor
incorrectly forecasts such factors and has taken a position in mortgage-backed
securities that is or becomes contrary to prevailing market trends, the Fund
could be exposed to the risk of a loss.
Investment in mortgage-backed securities poses several risks, including
prepayment, market, and credit risk. Prepayment risk reflects the chance that
borrowers may prepay their mortgages faster than expected, thereby affecting the
investment's average life and perhaps its yield. Whether or not a mortgage loan
is prepaid is almost entirely controlled by the borrower. Borrowers are most
likely to exercise their prepayment options at a time when it is least
advantageous to investors, generally prepaying mortgages as interest rates fall,
and slowing payments as interest rates rise. Besides the effect of prevailing
interest rates, the rate of prepayment and refinancing of mortgages may also be
affected by home value appreciation, ease of the refinancing process and local
economic conditions.
Market risk reflects the chance that the price of the security may
fluctuate over time. The price of mortgage-backed securities may be particularly
sensitive to prevailing interest rates, the length of time the security is
expected to be outstanding, and the liquidity of the issue. In a period of
unstable interest rates, there may be decreased demand for certain types of
mortgage-backed securities, and the Fund invested in such securities wishing to
sell them may find it difficult to find a buyer, which may in turn decrease the
price at which they may be sold.
Credit risk reflects the chance that the Fund may not receive all or
part of its principal because the issuer or credit enhancer has defaulted on its
obligations. Obligations issued by U.S. government-related entities are
guaranteed as to the payment of principal and interest, but are not backed by
the full faith and credit of the U.S. government. The performance of private
label mortgage-backed securities, issued by private institutions, is based on
the financial health of those institutions.
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Other Asset-Backed Securities. The Subadvisor 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.
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
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payments on the corporate loan. The agent bank monitors the value of the
collateral and, if the value of the collateral declines, may take certain
action, including accelerating the corporate loan, giving the borrower an
opportunity to provide additional collateral or seeking other protection for the
benefit of the Participants in the corporate loan, depending on the terms of the
corporate loan agreement. Furthermore, unless under the terms of a participation
agreement the Fund has direct recourse against the borrower (which is unlikely),
the Fund will rely on the agent bank to use appropriate creditor remedies
against the borrower. The agent bank also is responsible for monitoring
compliance with covenants contained in the corporate loan agreement and for
notifying holders of corporate loans of any failures of compliance. Typically,
under corporate loan agreements, the agent bank is given broad discretion in
enforcing the corporate loan agreement, and is obligated to use only the same
care it would use in the management of its own property. For these services, the
borrower compensates the agent bank. Such compensation may include special fees
paid on structuring and funding the corporate loan and other fees paid on a
continuing basis.
A financial institution's Employment as an agent bank may be terminated
in the event that it fails to observe the requisite standard of care or becomes
insolvent, or has a receiver, conservator, or similar official appointed for it
by the appropriate bank regulatory authority or becomes a debtor in a bankruptcy
proceeding. A successor agent bank generally will be appointed to replace the
terminated bank, and assets held by the agent bank under the corporate loan
agreement should remain available to holders of corporate loans. If, however,
assets held by the agent bank for the benefit of the Fund were determined by an
appropriate regulatory authority or court to be subject to the claims of the
agent bank's general or secured creditors, the Fund might incur certain costs
and delays in realizing payment on a corporate loan, or suffer a loss of
principal and/or interest. In situations involving intermediate Participants
similar risks may arise.
When the Fund acts as co-lender in connection with a Participation
Interest or when the Fund acquires a Participation Interest the terms of which
provide that the Fund will be in privity of contract with the corporate
borrower, the Fund will have direct recourse against the borrower in the event
the borrower fails to pay scheduled principal and interest. In all other cases,
the Fund will look to the agent bank to enforce appropriate credit remedies
against the borrower. In acquiring Participation Interests the Fund's Subadvisor
will conduct analysis and evaluation of the financial condition of each such
co-lender and participant to ensure that the Participation Interest meets the
Fund's qualitative standards. There is a risk that there may not be a readily
available market for loan Participation Interests and, in some cases, this could
result in the Fund disposing of such securities at a substantial discount from
face value or holding such security until maturity. When the Fund is required to
rely upon a lending institution to pay the Fund principal, interest, and other
amounts received by the lending institution for the loan participation, the Fund
will treat both the borrower and the lending institution as an "issuer" of the
loan participation for purposes of certain investment restrictions pertaining to
the diversification and concentration of the Fund's portfolio. The Fund
considers Participation Interests not subject to puts to be illiquid.
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
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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 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 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
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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 Subadvisor,
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 and the Fund's objective
as described in the Prospectus, all other investment policies and practices
described may be changed by the Board of Directors without the approval of
shareholders.
Unless otherwise indicated, all of the percentage limitations below,
and in the investment restrictions recited in the Prospectus, apply to the Fund
on an individual basis, and apply only at the time a transaction is entered
into. Accordingly, if a percentage restriction is adhered to at the time of
investment, a later increase or decrease in the percentage which results from a
relative change in values will not be considered a violation.
THE FUND 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;
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<PAGE> 199
(5) lend any funds or other assets, except that the Fund may,
consistent with its investment objectives and policies: (i) invest in debt
obligations including bonds, debentures or other debt securities, bankers'
acceptances and commercial paper, even though the purchase of such obligations
may be deemed to be the making of loans; (ii) enter into repurchase agreements;
and (iii) lend its portfolio securities in accordance with applicable guidelines
established by the Securities and Exchange Commission and any guidelines
established by the Company's Directors;
(6) purchase or sell real estate (although it may purchase securities
secured by real estate or interests therein, or securities issued by companies
which invest in real estate, or interests therein);
(7) purchase or sell commodities or commodities contracts, except that,
subject to restrictions described in the Prospectus and in this Statement of
Additional Information, (i) the Fund may enter into futures contracts on
securities, currencies or on indexes of such securities or currencies, or any
other financial instruments and options on such futures contracts; (ii) the Fund
may enter into spot or forward foreign currency contracts and foreign currency
options; or
(8) act as an underwriter of securities of other issuers, except to the
extent that in connection with the disposition of portfolio securities, it may
be deemed to be an underwriter under the Federal securities laws.
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;
(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
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<PAGE> 200
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 Subadvisor,
pursuant to guidelines approved by the Directors.
The Subadvisor takes into account a number of factors in determining
whether a Rule 144A security being considered for purchase by the Fund is
liquid, including at least the following:
(i) the frequency and size of trades and quotes for the Rule 144A
security relative to the size of the Fund's holding;
(ii) the number of dealers willing to purchase or sell the 144A
security and the number of other potential purchasers;
(iii) dealer undertaking to make a market in the 144A security; and
(iv) the nature of the 144A security and the nature of the market for
the 144A security (i.e., the time needed to dispose of the security, the method
of soliciting offers, and the mechanics of transfer).
To make the determination that an issue of 4(2) commercial paper is
liquid, the Subadvisor 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:
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<PAGE> 201
(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 Subadvisor has determined that
the security is of equivalent quality based on factors commonly used by rating
agencies; and
(c) there is a viable trading market for the specific security, taking
into account all relevant factors (e.g., whether the security is the subject of
a commercial paper program that is administered by an issuing and paying agent
bank and for which there exists a dealer willing to make a market in the
security, the size of trades relative to the size of the Fund's holding or
whether the 4(2) commercial paper is administered by a direct issuer pursuant to
a direct placement program).
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<PAGE> 202
DIRECTORS AND OFFICERS
The Board of Directors oversees the Fund, the Manager and the
Subadvisor. 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.
<TABLE>
<CAPTION>
Name, Position(s) with Principal Occupation(s)
Address and Age the Company During Past 5 Years
--------------- ----------- -------------------
<S> <C> <C>
Stephen C. Roussin,* 36 Director and President, Chief Executive Officer and Trustee, The
51 Madison Avenue Chairman Mainstay Funds, 1997 to present; Director, New York Life
New York, NY 10010 Trust Company, 1997 to present; Director, New York Life
Benefit Services LLC, 1997 to present; Director, NYLIFE
Securities, Inc., 1997 to present; Director, MainStay
Shareholder Services LLC, 1997 to present; Director,
Eagle Strategies Corp., 1997 to present; Director,
President and Chief Executive Officer, MainStay
Management LLC, 1997 to present; Senior Vice President,
Smith Barney, 1994 to 1997; and Division Sales Manager,
Prudential Securities, 1989 to 1994.
</TABLE>
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<PAGE> 203
<TABLE>
<S> <C> <C>
Patrick G. Boyle,* 46 Director Senior Vice President, Pension Department, New York Life
51 Madison Avenue Insurance Company, 1991 to present; Vice President,
New York, NY 10010 Pension Department, New York Life Insurance Company,
1988-1991; Pension Vice President, Pension Department,
New York Life Insurance Company, 1986-1988; Assistant
Vice President, Pension Department, New York Life
Insurance Company, 1985-1986; Director, NYLIFE
Distributors Inc., 1993 to 1996; Chairman, Monitor
Capital Advisors LLC, 1996 to 1998, and Director, 1991 to
present; Director, New York Life Benefit Services LLC,
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, 72 Director Retired, 1987 to present; Vice President, Investment
353 Canterbury Drive Banking, The First Boston Corporation, 1964-1987.
Ramsey, NJ 07446
Robert P. Mulhearn, 52 Director Private Investor, 1987 to present; Managing Director,
60 Twin Brooks Road Morgan Stanley, 1979-1987.
Saddle River, NJ 07458
Susan B. Kerley, 48 Director President, Global Research Associates, 1990 to present;
P.O. 9572 Manager, Special Investments, Rockefeller & Co.,
New Haven, CT 06535 1988-1990; Director of Research, Rogers, Casey and
Barksdale, 1983-1988; Director, Citifunds, 1991 to
present.
</TABLE>
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<PAGE> 204
<TABLE>
<CAPTION>
<S> <C> <C>
Linda M. Livornese, 48 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.
Marc J. Brookman, 36 Executive Vice Vice President, New York Life Insurance Company, 1998 to
51 Madison Avenue President present; Senior Vice President-Product Development,
New York, NY 10010 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.
</TABLE>
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<PAGE> 205
<TABLE>
<S> <C> <C>
Jefferson C. Boyce, 42 Senior Vice Senior Vice President, New York Life Insurance Company,
President 1994 to present; Director, Monitor Capital Advisors LLC,
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
LLC, 1994 to present; Director, NYLIFE Depositary
Corporation, 1994 to present; Director, NYLIFE Realty
Inc., 1994 to present; Director, NYLIFE SFD Holding Inc.
(formerly NAFCO, Inc.), 1994 to present; Director,
President and Chief Executive Officer, NYLIFE Securities
Inc., 1996 to present; Chairman and Director, MainStay
Shareholder Services Inc., 1997 to present; Chief
Administrative Officer, Pension, Mutual Funds, Structured
Finance, Corporate Quality, Human Resources and Employees'
Health Departments, New York Life Insurance Company, 1992
to 1994; Vice President, Pension Department, New York Life
Insurance Company, 1989 to 1992.
</TABLE>
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<PAGE> 206
<TABLE>
<S> <C> <C>
Richard W. Zuccaro, 50 Tax Vice Vice President, New York Life Insurance Company, 1995 to
51 Madison Avenue President present; Vice President -- Tax, New York Life Insurance
New York, NY 10010 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 LLC, 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 LLC, 1996 to present;
Tax Vice President, NYLINK Insurance Agency Incorporated,
1996 to present; Tax Vice President, MainStay Shareholder
Services LLC, 1997 to present.
</TABLE>
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<PAGE> 207
<TABLE>
<S> <C> <C>
John Flanagan, 53 Treasurer Vice President, New York Life Insurance Company 1999 to
51 Madison Avenue (Principal present; Vice President and Chief Financial Officer, The
New York, NY 10010 Financial and MainStay Funds, 1999 to present; Director, Vice President
Accounting and Chief Financial Officer, MainStay Management LLC, 1999
Officer) to present; Director, Vice President and Chief Financial
Officer, MainStay Shareholder Services LLC, 1999 to
present; Senior Vice President and Chief Financial
Officer, NYLIFE Distributors Inc., 1999 to present,
Treasurer, Strong Funds and Senior Vice President, Strong
Capital Management, Inc. from 1997 to 1998; Partner,
predecessor to PricewaterhouseCoopers LLP, from 1994 to
1997.
Joseph McBrien, 51 Secretary Vice President and Associate General Counsel, New York
51 Madison Avenue Life Insurance Company, 1999 to present; Secretary,
New York, NY 10010 MainStay VP Series Fund, Inc., 1999 to present; Secretary,
The MainStay Funds, 1999 to present; Secretary, MainStay
Management LLC, 1999 to present; Secretary, MainStay
Shareholder Services LLC, 1999 to present; Secretary,
Monitor Capital Advisors LLC, 1999 to present; Vice
President and Counsel, State Street Bank and Trust
Company, 1997 to 1999; Principal, McBrien Consulting, 1996
to 1997; Senior Vice President and General Counsel, Lieber
& Company 1986 to 1996; Senior Vice President and General
Counsel, Evergreen Asset Management Corp., 1986 to 1996.
</TABLE>
* Messrs. Boyle and Roussin are Directors who are "interested persons" of the
Company as that term is defined in the 1940 Act.
COMPENSATION TABLE
As indicated in the above table, certain Directors and Officers also
hold positions with Monitor, MainStay Management LLC, MacKay Shields
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<PAGE> 208
LLC, 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 period ended October 31, 1999, 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 $24,000 $24,000
Director
Robert P. Mulhearn $23,000 $23,000
Director
Susan B. Kerley $23,000 $23,000
Director
</TABLE>
As of January 31, 2000, 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 SUBADVISOR AND THE DISTRIBUTOR
MANAGEMENT AGREEMENT
Pursuant to the Management Agreement for the Fund dated November 21,
1997, MainStay Management LLC (the "Manager"), subject to the supervision of the
Directors of the Company and in conformity with the stated policies of the Fund,
administers the Fund's business affairs and investment advisory
responsibilities.
The Manager is a direct subsidiary of NYLIFE LLC, 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
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<PAGE> 209
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 Directors, including the Independent
Directors, approved amendments to the Management Agreement, the Sub-Advisory
Agreement and the Sub-Administration Agreement at an in-person meeting held on
September 7, 1999, to reflect the conversion of MainStay Management from a
corporation to a limited liability company under the laws of the State of
Delaware.
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 Subadvisor;
(b) the fees to be paid to the Subadvisor pursuant to the Sub-Advisory
Agreement;
(c) the fees to be paid to New York Life Insurance Company pursuant to
the Subadministration Agreement; and
(d) 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.")
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. For the ten months
ended October 31, 1999, the Fund paid the Manager Management fees of $1,470,982.
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
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<PAGE> 210
$37,695 for the period November 21, 1997 through December 31, 1997, $383,039 for
the year ended December 31, 1998, and $343,743 for the ten months ended October
31, 1999.
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
Subadvisor on behalf of the Fund, the Subadvisor, 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 Subadvisor 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 Subadvisor (as the term is defined in the 1940
Act).
The Subadvisor 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 it renders, the Subadvisor bears the salaries
and expenses of all of their personnel.
The Sub-Advisory Agreement provides that the Subadvisor shall not be
liable to the Fund for any error of judgment by the Subadvisor or for any loss
sustained by the Fund except in the case of the Subadvisor'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 ten months ended October 31, 1999, the amount of Sub-Advisory
fees payable by the Manager to New York Life was $294,196 and 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.
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<PAGE> 211
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. For the year ended December 31, 1998, the Manager
paid New York Life $1,109,299 and $383,039 was waived or reimbursed, in
connection with the Fund. For the ten months ended October 31, 1999, the
Manager paid New York Life $1,176,785 and $343,743 was waived or reimbursed.
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, the amount of the
administration fee paid by the Fund to New York Life was $726,696. 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
in the amount of $194,751.
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 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
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<PAGE> 212
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 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.
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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.
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. For the ten months ended October 31, 1999, the Fund's Sweep Shares paid
$258,999 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 LLC. 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
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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 LLC 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 LLC by bank wire. Money transmitted by a check drawn on a
member of the Federal Reserve System is converted to Federal funds in one
business day following receipt. Checks drawn on banks which are not members of
the Federal Reserve System may take longer. All payments (including checks from
individual investors) must be in United States dollars.
PURCHASES AND REDEMPTIONS
Purchases and redemptions are discussed in the Prospectus under the
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 stated commission, although the price
of the security usually
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<PAGE> 215
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 Subadvisor will seek the best execution of the Fund's
orders. The Subadvisor 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
Subadvisor 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 Subadvisor may cause a
Fund to pay a broker-dealer (except the Affiliated Broker) which provides
brokerage and research services to the Subadvisor 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 Subadvisor
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
Subadvisor'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 Subadvisors, 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 Subadvisors' 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 Subadvisors 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
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than one charged elsewhere will not be paid to such a firm solely because it
provided Research to a Subadvisor. Research provided by brokers is used for the
benefit of all of the Subadvisors' clients and not solely or necessarily for the
benefit of the Trust. The Subadvisors' investment management personnel attempt
to evaluate the quality of Research provided by brokers. Results of this effort
are sometimes used by the Subadvisors 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 Subadvisors. Investment decisions for a Fund and for the
Subadvisors' 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 Subadvisors will not be reduced as a consequence of the Subadvisors' 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 Subadvisors 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 Subadvisors in carrying out their obligations to the
Funds.
For the fiscal period ended October 31, 1999 and the year ended
December 31, 1998, the Fund paid no brokerage commissions on portfolio
transactions for the Sweep Shares.
As of October 31, 1999, the Fund held commercial paper of the following
issuers with whose broker-dealer subsidiaries or affiliates the Fund regularly
conducts business:
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<PAGE> 217
<TABLE>
<CAPTION>
Broker-Dealer Market Value
------------- ------------
<S> <C>
Goldman Sachs Group Inc. (The) $ 9,962,800
Merrill Lynch & Co. Inc. $15,000,000
Morgan (J.P.) & Co. Inc. $17,786,944
Salomon Smith Barney Holdings Inc. $ 5,000,000
</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
obtained in a similar investment company which uses available market quotations
to value all of its portfolio securities.
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
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<PAGE> 218
dividends, interest, payments with respect to securities loans, gains from the
sale or other disposition of securities or foreign currencies, and other income
(including gains from certain options, futures, and forward contracts) derived
with respect to its business of investing in securities or foreign currencies;
(b) diversify its holdings so that at the end of each quarter of the taxable
year, (i) at least 50% of the market value of the Fund's assets is represented
by cash, cash items, U.S. Government securities, the securities of other
regulated investment companies and other securities, with such other securities
of any one issuer limited for the purposes of this calculation to an amount not
greater than 5% of the value of the Fund's total assets and 10% of the
outstanding voting securities of such issuer, and (ii) not more than 25% of the
value of its total assets is invested in the securities of any one issuer (other
than U.S. Government securities or the securities of other regulated investment
companies), or of two or more issuers which the Fund controls and which are
engaged in the same or similar trades or businesses or related trades or
businesses; and (c) distribute in each taxable year at least 90% of the sum of
its investment company taxable income and its net tax-exempt interest income. If
the Fund does not meet all of these Code requirements, it will be taxed as an
ordinary corporation and its distributions (to the extent of available earnings
and profits) will be taxed to shareholders as ordinary income (except to the
extent a shareholder is exempt from tax).
Amounts not distributed on a timely basis in accordance with a calendar
year distribution requirement are subject to a nondeductible 4% excise tax. To
prevent imposition of the excise tax, the Fund must distribute for the calendar
year an amount equal to the sum of (1) at least 98% of its ordinary taxable
income (excluding any capital gains or losses) for the calendar year, (2) at
least 98% of the excess of its capital gains over capital losses (adjusted for
certain ordinary losses) for the one-year period ending October 31 of such year,
and (3) all ordinary taxable income and capital gain net income (adjusted for
certain ordinary losses) for previous years that were not distributed during
such years. A distribution will be treated as paid on December 31 of the
calendar year if it is declared by the Fund in October, November or December of
that year to shareholders on a record date in such a month and paid by the Fund
during January of the following calendar year. Such a distribution will be
includable in the gross income of 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 a portion of the amount of the dividends that qualifies for the
dividends-received deduction.
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<PAGE> 219
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 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.
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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
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
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of Fund expenses accrued over that period (the "base period"), and stated as a
percentage of the investment at the start of the base period (the "base period
return"). The base period return is then annualized by multiplying by 365/7,
with the resulting yield figure carried to at least the nearest hundredth of one
percent. "Effective yield" for the Fund assumes that all dividends received
during an annual period have been reinvested. Calculation of "effective yield"
begins with the same "base period return" used in the calculation of yield,
which is then annualized to reflect weekly compounding pursuant to the following
formula:
Effective Yield = [(Base Period Return + 1)(365/7)] - 1
The current and effective seven-day average yields as of October 31,
1999 for the Money Market Fund's Sweep Shares were 4.65% and 4.76%. Had certain
expenses not been assumed by the Manager, these yields would have been 4.57% and
4.67%.
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 Subadvisor, and other pertinent facts relating to the
management of the Fund by the Subadvisor.
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 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
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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 January 31, 2000, of the Fund's shares by each person
who beneficially or of record owned more than 5% of the Money Market Sweep
Shares:
<TABLE>
<CAPTION>
Names and Address Percentage of
of Shareholder Outstanding Shares
-------------- ------------------
<S> <C>
FISERV Securities, Inc. 100%
Attn: Cash Sweeps Department
One Commerce Square
2005 Market Street
Philadelphia, PA 19103-7042
</TABLE>
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,
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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 Subadvisor unless such power is the result of their position with the
Company or Manager or Subadvisor. 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. Subject to these
restrictions, these persons are permitted to invest in securities, including
securities that may be purchased or held by the Funds. 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 LLC ("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 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
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<PAGE> 224
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.
APPENDIX A DESCRIPTION OF SECURITIES RATINGS
MOODY'S INVESTORS SERVICE, INC.
Corporate and Municipal Bond Ratings
Aaa: Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than the Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper-medium-grade obligations. Factors giving
security to principal and interest are considered adequate but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa: Bonds which are rated Baa are considered as medium-grade
obligations (i.e., they are neither highly protected nor poorly secured).
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well-assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
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<PAGE> 225
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 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
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<PAGE> 226
Moody's short-term debt ratings are opinions of the ability of issuers
to repay punctually senior debt obligations which have an original maturity not
exceeding one year, unless explicitly noted.
Moody's employs the following three designations, all judged to be
investment grade, to indicate the relative repayment ability of rated issuers:
PRIME-1: Issuers rated Prime-1 (or supporting institutions) have a
superior ability for repayment of senior short-term debt obligations. Prime-1
repayment ability will often be evidenced by many of the following
characteristics: leading market positions in well-established industries; high
rates of return on funds employed; conservative capitalization structure with
moderate reliance on debt and ample asset protection; broad margins in earnings
coverage of fixed financial charges and high internal cash generation; and
well-established access to a range of financial markets and assured sources of
alternate liquidity.
PRIME-2: Issuers rated Prime-2 (or supporting institutions) have a
strong ability for repayment of senior short-term debt obligations. This will
normally be evidenced by many of the characteristics cited above but to a lesser
degree. Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
PRIME-3: Issuers rated Prime-3 (or supporting institutions) have an
acceptable ability for repayment of senior short-term obligations. The effect of
industry characteristics and market compositions may be more pronounced.
Variability in earnings and profitability may result in changes in the level of
debt protection measurements and may require relatively high financial leverage.
Adequate alternate liquidity is maintained.
NOT PRIME: Issuers rated Not Prime do not fall within any of the Prime
rating categories.
STANDARD & POOR'S
Corporate and Municipal Long-Term Debt Ratings
Investment Grade
AAA: Debt rated AAA has the highest rating assigned by Standard &
Poor's. The obligor's capacity to meet its financial commitment on the
obligation is extremely strong.
AA: Debt rated AA differs from the highest rated issues only in small
degree. The obligor's capacity to meet its financial commitment on the
obligation is very strong.
A: Debt rated A is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories. However, the obligor's capacity to meet its financial commitment on
the obligation is still strong.
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<PAGE> 227
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, 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
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<PAGE> 228
A-1: A short-term obligation rated 'A-1' is rated in the highest
category by Standard & Poor's. The obligor's capacity to meet its financial
commitment on the obligation is strong. Within this category, certain
obligations are designated with a plus sign(+). This indicates that the
obligor's capacity to meet its financial commitment on these obligations is
extremely strong.
A-2: A short-term obligation rated 'A-2' is somewhat more susceptible
to the adverse effects of changes in circumstances and economic conditions than
obligations in higher rating categories. However, the obligor's capacity to meet
its financial commitment on the obligation is satisfactory.
A-3: A short-term obligation rated 'A-3' exhibits adequate protection
parameters. However, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation.
B: A short-term obligation rated 'B' is regarded as having significant
speculative characteristics. The obligor currently has the capacity to meet its
financial commitment on the obligation; however, it faces major ongoing
uncertainties which could lead to the obligor's inadequate capacity to meet its
financial commitment on the obligation.
C: A short-term obligation rated 'C' is currently vulnerable to
nonpayment and is dependent upon favorable business, financial, and economic
conditions for the obligor to meet its financial commitment on the obligation.
D: A short-term obligation rated 'D' is in payment default. The 'D'
rating category is used when payments on an obligation are not made on the date
due even if the applicable grace period has not expired, unless Standard &
Poor's believes that such payments will be made during such grace period. The
'D' rating also will be used upon the filing of a bankruptcy petition or the
taking of a similar action if payments on an obligation are jeopardized.
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<PAGE> 229
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 LLC.(11)
(2) Form of (composite) Sub-Advisory Agreement between MainStay
Management LLC, 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
LLC.(11)
(3) Form of (composite) Sub-Advisory Agreement between MainStay
Management LLC, 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 LLC.(11)
<PAGE> 230
(4) Form of Sub-Advisory Agreement between MainStay Management
LLC, 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)
(3) Form of Service Agreement with New York Life Benefit Services
LLC(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 (filed herewith)
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. Inapplicable
o. (a) Multiple Class Plan(11)
(b) form of Amended and Restated Multiple Class Plan(12)
* 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
<PAGE> 231
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.
** Powers of Attorney filed herewith.
1. Filed with Registration Statement No. 33-36962 on September 21, 1990.
2. Filed with Pre-Effective Amendment No. 1 to Registration Statement No.
33-36962 on November 19, 1990.
3. Filed with Pre-Effective Amendment No. 2 to Registration Statement No.
33-36962 on December 26, 1990.
4. Filed with Post-Effective Amendment No. 4 to Registration Statement No.
33-36962 on November 2, 1992.
5. Filed with Post-Effective Amendment No. 6 to Registration Statement No.
33-36962 on April 29, 1994.
6. Filed with Post-Effective Amendment No. 7 to Registration Statement No.
33-36962 on October 14, 1994.
7. Filed with Post-Effective Amendment No. 8 to Registration Statement No.
33-36962 on December 29, 1994.
8. Filed with Post-Effective Amendment No. 10 to Registration Statement
No. 33-36962 on April 28, 1995.
9. Filed with Post-Effective Amendment No. 12 to Registration Statement
No. 33-36962 on February 28, 1996.
10. Filed with Post-Effective Amendment No. 14 to Registration Statement
No. 33-36962 on May 1, 1997.
11. Filed with Post-Effective Amendment No. 17 to Registration Statement
No. 33-36962 on May 1, 1997.
12. Filed with Post-Effective Amendment No. 19 to Registration Statement
No. 33-36962 on September 25, 1998.
<PAGE> 232
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
The following chart indicates the persons controlled by New York Life.
Ownership is 100% unless otherwise indicated. Subsidiaries of other subsidiaries
are indicated accordingly.
Name of Organization (Jurisdiction)(1)
MainStay VP Series Fund, Inc. (Maryland)(2)
The MainStay Funds (Massachusetts)(2)
New York Life Asset Management LLC (Delaware)
MacKay Shields LLC (Delaware)
MacKay Shields Domestic General Partner LLC (Delaware)
Madison Square Advisors LLC (Delaware)
NYLCAP Manager LLC (Delaware)
New York Life Capital Partners LLC (Delaware)
MainStay Management LLC (Delaware)
MainStay Shareholder Services LLC (Delaware)
Monitor Capital Advisors LLC (Delaware)
New York Life Asset Management Operating Company LLC (Delaware)
New York Life Benefit Services LLC (Delaware)
New York Life International Investment Asia Ltd. (Mauritius)
NYLIFE Distributors Inc. (Delaware)
New York Life Insurance and Annuity Corporation (Delaware)
New York Life International, Inc. (Delaware)
GEO New York Life, S.A. (Mexico)
New York Life Insurance Ltd. (South Korea)
La Buenos Aires New York Life Seguros de Vida S.A. (Argentina) 40%
La Buenos Aires New York Life Seguros de Retiro S.A. (Argentina) 40%
Maxima S.A. AFJP (Argentina) 40%
New York Life Insurance Worldwide Ltd. (Hong Kong) [incorporated in
Bermuda]
New York Life International Holdings Ltd. (Mauritius)
1 By including the indicated corporation in this list, New York 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.
2 This entity is registered investment company for which New York Life
and/or its subsidiaries perform investment management, administrative,
distribution and underwriting services. It is not a subsidiary of
New York Life but is included for informational purposes only.
<PAGE> 233
New York Life International India Fund LLC (Mauritius) (90%)
New York Life Insurance (Philippines), Inc.
New York Life Worldwide Capital, Inc. (DE)
NYLife Thailand, Inc. (Thailand)
NYLI-VB Asset Management Co. LLC (Mauritius) (90%)
P.T. Asuransi Jiwa Sewu-New York Life (50.2%) (Indonesia)
Seguros Monterrey, S.A.
Corporativo Seguros
Centro Nacional de Servicios y Operaciones
Centro de Capacitacion Monterrey
Fianzas Monterrey, S.A.
Operadora FMA
Max New York Life Insurance Company PVD Ltd. (26%)
New York Life Settlement Corporation
New York Life Irrevocable Trust of 1996(3)
NYLIFE LLC (Delaware)
Avanti Corporate Health Systems, Inc. (Delaware)
Avanti of the District, Inc. (Maryland)
Eagle Strategies Corp. (Arizona)
New York Life Capital Corporation (Delaware)
New York Life (U.K.) Ltd. (England)(4) (99.97%)
Life Assurance Holding Corporation Limited (23%) (South Korea)
Windsor Life Assurance Company Limited (Indonesia)
Windsor Construction Company Limited
New York Life International Investment Inc. (Delaware)
Monetary Research Ltd. (Bermuda)
NYL Management Limited (formerly Quorum Capital Management
Limited) (England)
New York Life International Investment Asia Ltd. (Mauritius)
New York Life Trust Company (New York)
NYLCare NC Holdings, Inc. (Delaware)
WellPath Community Health Plans LLC (North Carolina) (NYLCare
NC Holdings, Inc. owns 25%; Duke Medical Strategies, Inc. owns
remaining 75%)
3 An unaffiliated trust formed solely for the purpose of holding shares
of New York Life Settlement Corporation. It is not a subsidiary of New
York Life but is included for informational purposes only.
4 One Share is held in the name of a Nominee as required by British law.
<PAGE> 234
ETHIX Southeast, Inc. (North Carolina)
WPCHP Holdings, Inc. (formerly Sanus-New England,
Inc.) (Delaware)
WellPath Preferred Services LLC (99.9%;
WPCHP Holdings, Inc. owns other 0.1%)
(Delaware)
WellPath Select Holdings LLC (99.9%; WPCHP
Holdings, Inc. owns other 0.1%) (North
Carolina)
WellPath Select, Inc. (formerly WellPath
Community Health Plans, Inc.)
NYLIFE Administration Corp. (Delaware)
NYLIFE Structured Asset Management Company Ltd.
NYLIFE HealthCare Management, Inc. (Delaware)
Express Scripts, Inc. (39.4% of total combined stock and 89.6%
of the voting rights) (Delaware)
Express Scripts Vision Corporation (Delaware)
ESI Canada Holdings, Inc. (Canada)
ESI Canada, Inc. (Canada)
ESI/VRX Sales Development Co.
Diversified Pharmaceutical Services (P.R.), Inc.
Diversified Pharmaceutical Services, Inc.
Diversified NY IPA, Inc.
Express Scripts Specialty Distribution Services, Inc.
ESI Utilization Management Co.
ESI Claims, Inc.
ESI Mail Pharmacy Services, Inc.
Great Plains Reinsurance Company
IVTx, Inc.
Practice Patterns Science, Inc.
Value Health, Inc.
ValueRx of Michigan, Inc.
NYLIFE Refinery Inc.
NYLIFE Securities Inc. (Delaware)
NYLINK Insurance Agency Incorporated (Delaware)
NYLINK Insurance Agency of Alabama, Incorporated (Alabama)
NYLINK Insurance Agency of Hawaii, Incorporated (Hawaii)
NYLINK Insurance Agency of Idaho, Incorporated (Idaho)(5) (4)
NYLINK Insurance Agency of Massachusetts, Incorporated (Massachusetts)
NYLINK Insurance Agency of Montana, Incorporated (Montana)
NYLINK Insurance Agency of Nevada, Incorporated (Nevada)
NYLINK Insurance Agency of New Mexico, Incorporated (New Mexico)
5 These entities are unaffiliated insurance agencies for which New York
Life and its subsidiaries perform administrative services. They are not
subsidiaries of New York Life but are included for informational
purposes only.
<PAGE> 235
NYLINK Insurance Agency of Ohio, Incorporated (Ohio) (4)
NYLINK Insurance Agency of Oklahoma, Incorporated (Oklahoma) (4)
NYLINK Insurance Agency of Texas, Incorporated (Texas) (4)
NYLINK Insurance Agency of Washington, Incorporated (Washington)
NYLINK Insurance Agency of Wyoming, Incorporated (Wyoming)
NYLTEMPS Inc.
Prime Provider Corp.
Prime Provider Corp. of Texas
WellPath of Arizona Reinsurance company (formerly Sanus Reinsurance Company)
NYLIFE Insurance Company of Arizona (Arizona)
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.
ITEM 26. BUSINESS OR OTHER CONNECTIONS OF INVESTMENT ADVISERS
The business of MainStay Management LLC is summarized in the Prospectus
incorporated by reference in 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 LLC is currently listed in the investment adviser
registration on Form ADV for MainStay Management LLC (File No. 801-54912) and is
hereby incorporated herein by reference thereto.
<PAGE> 236
The business of MacKay Shields is summarized in the Prospectus
incorporated by reference in Part A of this Registration Statement, which
summary is incorporated herein by reference.
The business of Monitor Capital Advisors LLC is summarized in the
Prospectus incorporated by reference in 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 LLC is currently listed in the investment adviser
registration on Form ADV for Monitor Capital Advisors LLC (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 incorporated by reference in 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)
NYLIAC Variable Universal Life Separate I
NYLIAC Multi-Funded Annuity Separate Account I
NYLIAC Multi-Funded Separate Account II
NYLIAC Variable Annuity Separate Account I
NYLIAC Annuity Separate Account II
NYLIAC Variable Annuity Separate Account III
NYLIAC Variable Life Insurance Separate Account
NYLIAC Corporate Sponsored Variable Universal Life Separate Account I
NYLIAC Institutionally Owned Life Insurance Separate Account
<PAGE> 237
b.
<TABLE>
<CAPTION>
(1) (2) (3)
Name and Principal Position(s)and Office(s) Position(s) and
Business Address with NYLIFE Distributors, Inc. Office(s) with 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
504 Carnegie Center
2nd Floor
Princeton, NJ 08540
Roussin, Stephen C. Senior Vice President Director and Chairman
300 Interpace Parkway and Director
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
Levy, Richard D. Director None
51 Madison Avenue
New York, NY 10010
Adasse, Louis H. Corporate Vice President None
51 Madison Avenue,
New York, NY 10010
Flanagan, John A. Senior Vice President and Treasurer, Chief
300 Interpace Parkway Chief Financial Officer Financial and
Parsippany, NJ 07054 Accounting Officer
</TABLE>
<PAGE> 238
<TABLE>
<S> <C> <C>
Calhoun, Jay S. Senior Vice President None
51 Madison Avenue and Treasurer
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
Krystel, David J. Vice President None
51 Madison Avenue
New York, NY 10010
McInerney, Barbara Vice President None
51 Madison Avenue
New York, NY 10010
Leier, Albert W. Assistant Vice President None
300 Interpace Parkway
Parsippany, NJ 07054
Arizmendi, Arphiela Assistant Vice President Assistant Treasurer
300 Interpace Parkway
Parsippany, NJ 07054
Cirillo, Antoinette B. Assistant Vice President Assistant Treasurer
300 Interpace Parkway
Parsippany, NJ 07054
Lorito, Geri Assistant Vice President Assistant Treasurer
300 Interpace Parkway
Parsippany, NJ 07054
Gomez, Mark A. Secretary None
</TABLE>
<PAGE> 239
<TABLE>
<S> <C> <C>
51 Madison Avenue
New York, NY 10010
Whittaker, Lori S. Assistant Secretary None
51 Madison Avenue
New York, NY 10010
</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 LLC and NYLIFE Distributors Inc., 300 Interpace Parkway,
Parsippany NJ 07054, at the offices of Monitor Capital Advisors LLC, 504
Carnegie Center, Princeton, NJ 08540-6242, and at the offices of MacKay Shields
LLC, 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.
<PAGE> 240
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
and the Investment Company Act of 1940, as amended, the Registrant certifies
that this Post-Effective Amendment No. 23 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. 23 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 February, 2000.
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. 23 to the Registrant's Registration Statement has
been signed below by the following persons in the capacities and on the dates
indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ STEPHEN C. ROUSSIN
- -----------------------
Stephen C. Roussin* Chairperson and Director February 28, 2000
/s/ PATRICK G. BOYLE
- ---------------------
Patrick G. Boyle* Director February 28, 2000
/s/ LAURENCE GLACKEN
- ---------------------
Lawrence Glacken* Director February 28, 2000
</TABLE>
<PAGE> 241
<TABLE>
<S> <C> <C>
/s/ ROBERT P. MULHEARN
- -----------------------
Robert P. Mulhearn* Director February 28, 2000
/s/ SUSAN B. KERLEY
- ---------------------
Susan B. Kerley* Director February 28, 2000
/s/ LINDA M. LIVORNESE
- -----------------------
Linda M. Livornese President (Principal February 29, 2000
Executive Officer)
/s/ JOHN A. FLANAGAN
- -----------------------
John A. Flanagan Treasurer (Principal February 28, 2000
Financial and Accounting
Officer)
*By: /s/ John A. Flanagan
------------------------
John A. Flanagan
as Attorney-in-Fact
Power of Attorney filed herewith
</TABLE>
<PAGE> 242
EXHIBIT LIST
23(j) Consent of Independent Accountants.
24 Powers of Attorney for Registrant.
