<PAGE>
As filed with the Securities and Exchange Commission on August 8, 1997
File No. 33-2610
File No. 811-4550
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933 [X]
Post-Effective Amendment No. 38 [X]
and
REGISTRATION STATEMENT
UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 40 [X]
THE MAINSTAY FUNDS
------------------
(Exact Name of Registrant as Specified in Charter)
51 Madison Avenue
New York, New York 10010
----------------------------------------
(Address of Principal Executive Offices)
(212) 576-5773
----------------------------------------
(Registrant's Telephone Number, including Area Code)
with a copy to:
A. Thomas Smith III, Esq. Jeffrey L. Steele, Esq.
The MainStay Funds Dechert Price & Rhoads
51 Madison Avenue 1500 K Street, N.W.
New York, New York 10010 Washington, DC 20005
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(Name and Address of Agent for Service)
It is proposed that this filing will become effective (check appropriate box)
[ ] Immediately upon filing pursuant to [ ] on ( ) pursuant to paragraph
paragraph (b), or (b), or
[ ] 60 days after filing pursuant to [ ] on ( ) pursuant to paragraph
paragraph (a)(1), or (a)(1), or
[X] 75 days after filing pursuant to [ ] on ( ) pursuant to paragraph
paragraph (a)(2), or (a)(2), of Rule 485.
On January 9, 1986 the Registrant registered an indefinite number of shares
of all series then existing or subsequently established under the Securities Act
of 1933 pursuant to Rule 24f-2, which it expressly reaffirms. The Rule 24f-2
Notice for the Registrant's fiscal year ended December 31, 1996 was filed on
February 25, 1997.
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<PAGE>
PROSPECTUS AND STATEMENT OF
ADDITIONAL INFORMATION RELATING TO
MAINSTAY STRATEGIC VALUE FUND
CROSS REFERENCE SHEET
The enclosed Prospectus and Statement of Additional Information relate only
to the MainStay Strategic Value Fund, a series of The MainStay Funds (the
"Trust"), and contain information relating only to that series. The Prospectus
and Statement of Additional Information for other series of the Trust are not
being amended or otherwise affected by the information contained in this
amendment. Information relating to those series of the Trust for which
information is not being filed in this post-effective amendment is incorporated
by reference from Post-Effective Amendment No. 37, which was filed on April 30,
1997.
ITEMS REQUIRED BY FORM N-1A
---------------------------
Item Number in Part A Prospectus Caption
--------------------- ------------------
1 Cover Page
2 Tell Me the Key Facts - Analyze the Cost of
Investing: Two Kinds of Fees; If you invest
$1,000, you might pay
3 Tell Me the Details - Performance and Yield
Information
4 Tell Me the Key Facts - Description of the Fund;
General Investment Considerations; Tell Me the
Details - The Trust; Other Information About the
Fund; Description of Investments and Investment
Practices; Investment Restrictions
5 Tell Me the Key Facts - Description of the Fund;
Know With Whom You're Investing; Tell Me the
Details - The Trust; Manager, Sub-Adviser and
Distributor
5A Not Applicable
6 Tell Me the Key Facts - Decide whether to pay a
sales charge now, later or maybe never; Decide How
to Receive Your Earnings; Understand the Tax
Consequences; Know Your Rights as a Shareholder;
Tell Me the Details - The Trust; Alternative Sales
Arrangements; Portfolio Transactions; Tax
Information
7 Tell Me the Key Facts - Decide whether to pay a
sales charge now, later or maybe never; Consider
Reducing
<PAGE>
Your Sales Charge; Open an Account and
Buy Shares; Know with Whom You're Investing; Tell
Me the Details - Manager, Sub-Adviser and
Distributor; How to Purchase Shares of the Fund;
Alternative Sales Arrangements
8 Tell Me the Key Facts - Know How to Sell and
Exchange Shares; Tell Me the Details -
Redemptions, Repurchases and Exchanges
9 Not Applicable
Item Number in Part B Statement of Additional Information Caption
--------------------- -------------------------------------------
10 Cover Page
11 Table of Contents
12 Organization and Capitalization
13 Investment Practices and Instruments; Additional
Fundamental Investment Restrictions; Additional
Non-Fundamental Investment Restrictions
14 Trustees and Officers
15 Trustees and Officers; Other Information
16 The Manager, the Sub-Adviser and the Distributor
17 Portfolio Transactions and Brokerage
18 Organization and Capitalization
19 Shareholder Investment Account; Redemption and
Repurchase; Net Asset Value
20 Tax Status
21 The Manager, the Sub-Adviser and the Distributor
22 Calculation of Performance Quotations; Tax Status
23 Financial Statements
-2-
<PAGE>
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MainStay Strategic Value Fund Prospectus October __, 1997
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MainStay Strategic Value Fund, a separate series of The MainStay Funds, seeks to
provide maximum long-term total return from a combination of common stocks,
convertible securities and high yield securities.
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Read This!
================================================================================
This Fund is not federally insured or guaranteed by the U.S. government--even if
you're investing through a bank. Shares of the Fund are not deposits or
obligations of, or guaranteed or insured by any financial institution, the
Federal Deposit Insurance Corporation or any other government agency.
Investments in the Fund are subject to investment risks, including possible loss
of principal.
No guarantees. There are no guarantees that the Fund will meet its objective.
All mutual funds involve risk, including the potential to lose some or all of
your original investment. Except for money market funds, the price of a mutual
fund share will fluctuate and, when sold, may be higher or lower than your
original purchase price.
These securities have not been approved or disapproved by the Securities and
Exchange Commission or any state securities commission, nor has the Securities
and Exchange Commission or any state securities commission passed upon the
accuracy or adequacy of this prospectus. Any representation to the contrary is a
criminal offense.
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Please read this Prospectus carefully before you invest and keep it for future
reference. It includes information you should know before investing. We hope you
will easily find and understand the information you need but if you have any
suggestions for improvement--or if you need any help--please ask your Registered
Representative.
For even more details, write to NYLIFE Distributors Inc., 300 Interpace Parkway,
Parsippany, N.J. 07054, call 1-800-MAINSTAY (1-800-624-6782), or visit our
website at http://www.mainstayfunds.com.
The Statement of Additional Information (SAI) is incorporated by reference into
this Prospectus and also has been filed with the Securities and Exchange
Commission (SEC). For a free copy of the current SAI write to NYLIFE
Distributors Inc. or call 1-800-MAINSTAY. The SEC maintains a website
(http://www.sec.gov) that contains the SAI, material incorporated by reference,
and other information regarding registrants that file electronically with the
SEC.
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MainStay offers 14 additional mutual funds.
================================================================================
Growth
================================================================================
Capital Appreciation Fund
Equity Index Fund
International Equity Fund
================================================================================
Growth & Income
================================================================================
Convertible Fund
Total Return Fund
Value Fund
================================================================================
Income
================================================================================
Government Fund
High Yield Corporate Bond Fund
International Bond Fund
Money Market Fund
Strategic Income Fund
================================================================================
Tax Free
================================================================================
California Tax Free Fund
New York Tax Free Fund
Tax Free Bond Fund
[LOGO] MainStay(R) Funds
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2
<PAGE>
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What's Inside?
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<TABLE>
<CAPTION>
================================================================================
Tell Me Quickly page
================================================================================
<S> <C>
The Fund ......................................................................1
A Quick Overview...Understanding MainStay Funds ...............................4
================================================================================
Tell Me the Key Facts
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Analyze the Costs of Investing: Two Kinds of Fees .............................6
If You Invest $1,000, You Might Pay ...........................................6
Sales Charges and Operating Expenses ..........................................7
Description of the Fund .......................................................8
General Investment Considerations .............................................9
Decide Whether to Pay a Sales Charge Now, Later...or Maybe Never .............10
Consider Reducing Your Sales Charge ..........................................11
Open an Account and Buy Shares ...............................................12
Know How to Sell and Exchange Shares .........................................14
Decide How to Receive Your Earnings ..........................................16
Understand the Tax Consequences ..............................................17
Know With Whom You're Investing ..............................................18
Know Your Rights as a Shareholder ............................................20
================================================================================
Tell Me the Details
================================================================================
The Trust ....................................................................21
Other Information about the Fund .............................................21
Description of Investments and Investment Practices ..........................22
Investment Restrictions ......................................................25
Manager, Sub-Adviser and Distributor .........................................26
How to Purchase Shares of the Fund ...........................................27
Alternative Sales Arrangements ...............................................29
Redemptions and Exchanges ....................................................31
Tax-Deferred Retirement Plans ................................................32
Net Asset Value ..............................................................32
Portfolio Transactions .......................................................33
Tax Information ..............................................................33
Appendix A: Description of Securities Ratings ................................34
</TABLE>
3
<PAGE>
================================================================================
Tell Me Quickly
================================================================================
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A Quick Overview...
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Investing in a mutual fund may seem complicated; but it may be easier when you
go through a Registered Representative. He or she can do many of the
administrative tasks--and help you confidently manage the rest.
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1
================================================================================
Set your investment priorities
================================================================================
Decide if they are:
o protecting what you have
o receiving income from dividends
o participating in the potential for greater investment returns
o a combination of any of the above.
How much risk of losing money are you willing to take; how aggressive are you
willing to be to try to make money? This two-part question may be the most
difficult question in the world of investing. Start with your gut feeling--then
talk it over with your registered representative. This is also an appropriate
time to talk about your investment goals. Your Registered Representative may
have some ideas you haven't considered.
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2
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Study the Fund's objectives, policies and risks
================================================================================
Focus on the Fund in relation to your objectives. Read about the people who
manage the Fund. Understand the types of securities in which the Fund invests
and the risks associated with those investments.
Talk with your registered representative.
For key facts about and risks of the Fund, see page 8. For more detailed
information, see "Tell Me the Details" in this prospectus and see the SAI.
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3
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Evaluate the Funds fees and expenses
================================================================================
Understand one-time and ongoing fees.
See the tables on page 7 for the Fund's one-time and ongoing fees and the impact
of those costs on a $1,000 investment.
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7
================================================================================
Open an account/Buy shares
================================================================================
To open an account, fill out an application, and have your Registered
Representative place the order. He or she can be invaluable here.
Make sure to provide complete information, including who will own the account,
and certify your Social Security Number or Taxpayer I.D. Number. This is also
the time to decide how you want to receive earnings (in cash or additional
shares) and whether you want telephone privileges and to make other choices that
will affect how you access your investments. (You may also place the order
directly with MainStay.)
For more on opening an account (including opening an account directly) see pages
12-13.
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8
================================================================================
See how many shares your money will buy
================================================================================
You can calculate the number of shares of the Fund your money buys using a
simple equation: (1) subtract the amount of any sales charge; then (2) divide
the remaining amount of your investment by the price of one share of the Fund.
The Fund's share price ("NAV" or "net asset value") is calculated at the close
of business of the New York Stock Exchange, normally 4:00 PM Eastern time, each
business day. The number of shares you receive is based on the NAV next
calculated after your order is received. You'll receive written confirmation of
your purchase.
To learn more, see pages 13 and 32.
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9
================================================================================
Ongoing fees
================================================================================
Every mutual fund pays fees for services. These may include distribution and
marketing, investment management and shareholder services. Fees may be charged
on different schedules but the Fund accrues for these expenses daily. You're not
charged directly; the Fund pays the fees to the firms who provide the services,
and then deducts the amounts from the Fund's assets. This, consequently, reduces
the NAV of your shares.
To learn more, see page 7.
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4
<PAGE>
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...Understanding MainStay Funds
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4
================================================================================
Decide how much to invest
================================================================================
You may invest in as many Mainstay Funds as you want. Your initial investment in
the Fund must be at least $500, then $50 thereafter. For information on other
series of the Trust, including charges and expenses, call 1-800-MAINSTAY for a
free prospectus.
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5
================================================================================
Decide when to pay the sales charge: now or later
================================================================================
There may be a sales charge on share purchases. You may choose to pay it when
you invest (and you'll own "Class A" shares); or defer it until you sell,
according to a sliding scale based on the number of years you own the shares
(you'll own "Class B" shares). The sliding scale drops from 5% in the first year
to 0% after six years.
Deferring the sales charge allows you to buy more shares; but you'll pay higher
ongoing fees than Class A shareholders, which will reduce any earnings paid to
you.
For a list of the pros and cons of each choice, see page 10.
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6
================================================================================
Consider resucing the sales charge
================================================================================
There are also many ways to reduce or eliminate your sales charges, including
combining purchases, signing up for a letter of intent or others. There are no
sales charges for reinvesting earnings.
See page 11 for details.
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10
================================================================================
Each dividends and capital gains
================================================================================
The Fund may earn money primarily through interest payments or capital
appreciation of the securities it owns. The Fund distributes these earnings to
you on a quarterly basis, based on the number of shares you own.
You may elect to have earnings sent to you or have them automatically reinvested
in more shares (with no sales charge).
To learn more, see page 16.
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11
================================================================================
Exchange shares/Redeem shares
================================================================================
You generally may redeem your shares on any business day. The Fund will redeem
shares at the current NAV and send you a check. If you wish, you may exchange
shares of one MainStay Fund for shares of another. You can only exchange shares
of the same class. An exchange is considered a sale of one Fund and a purchase
of another and may have tax consequences.
If you own Class B shares you may pay a charge when you redeem your shares,
depending on the length of time you've held the shares. MainStay provides a
number of convenient ways to redeem your shares.
If you buy $1 million or more of Class A shares and redeem them within a year of
the purchase, you will pay a sales charge.
To learn more, see pages 14-15.
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12
================================================================================
Manage your taxes/Align your goals
================================================================================
If you've made a profit on your investment--either through dividends,
distributions or capital gains, you may have to pay taxes at tax time (consult
your tax adviser).
Be aware that the Fund may earn 1997 income that will be paid to you in January,
1998, but will apply to your 1997 tax return.
To learn more, see page 17.
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13
================================================================================
Know your rights/Stay informed
================================================================================
Most of all, you have the right to ask questions-- and have them answered
intelligently. You may call your Registered Representative at any time.
MainStay will send you a quarterly statement, a confirmation of each transaction
and an annual and semiannual report on the Fund's status and investments.
To learn more, see page 20.
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5
<PAGE>
================================================================================
Tell Me The Key Facts
================================================================================
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Analyze the Costs of Investing: Two Kinds of Fees
- --------------------------------------------------------------------------------
To help you understand the costs of investing in the Fund, we've provided
expense information based on the Fund's estimated expenses for its first year of
operation. Because the expenses are estimated, you should only use these figures
as hypothetical examples of what you might actually pay.
One-time fees. You may pay one-time transaction fees: a sales charge
(commission) for each separate investment or redemption, as applicable. See
pages 10 and 29-31 for more details.
Ongoing fees. The Fund pays ongoing operating fees to the manager, custodian and
other professionals who provide services to the Fund. These fees are billed to
the Fund and then factored into the share price. They're not billed to you
separately; but they do reduce the value of each share you own. See pages 18 and
26-27 for more details.
The Rule 12b-1 fees shown on page 7 pay, for example, commissions and
marketing/promotional expenses. Management fees go to the manager for providing
administrative and advisory services; the manager also pays a portion of these
fees to the sub-adviser for providing portfolio management services. See pages
26-27 for more details. "Other" includes legal, auditing, custodian and other
fees. See pages 26-27 for more details on fees.
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Why read about costs? Costs are important: they lower your earnings. For
example, a fund with higher costs must perform better just to equal the return
of a fund with lower costs. All things being equal, therefore, a lower-cost fund
will begin with an advantage.
Lower fees alone, however, will not guarantee better total return performance.
For example, a fund with no up-front sales charge may actually have higher
ongoing expenses. It may also leave you without a registered representative to
advise you. You should be sure you understand the nature of different costs.
Investing a million? The up-front sales charge is waived on investments of $1
million or more in Class A shares of the Fund. But, there will be a contingent
deferred sales charge of 1% on redemptions (sales of shares) made within a year
of the purchase date.
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- --------------------------------------------------------------------------------
If You Invest $1,000, You Might Pay...
- --------------------------------------------------------------------------------
The "Examples" on the following page are provided to help you understand the
various costs and expenses that an investor in the Fund will bear directly or
indirectly.
The examples are based on a hypothetical 5% annual return on an investment of
$1,000 and redemption at the end of each period; and the estimated annual fund
operating expenses reflected in the chart under "Sales Charges and Operating
Expenses." Each pie chart illustrates the expenses that would be paid by a
shareholder for shares held for a period of five years with the same
assumptions.
The actual return on your investment, of course, may be more or less than 5%;
and the actual expenses may also be more or less than those shown, depending on
a variety of factors, including the performance of the Fund. The figures in the
following chart, therefore, do not represent how your investment will perform.
They are strictly hypothetical examples.
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[GRAPHIC] TAKE NOTE: The lowest sales charge won't always
be the least expensive option.
The deferred sales charge (Class B shares) declines the longer you stay invested
in the Fund (from 5% in year one to 0% after six years). However, if your sales
charge drops to 0%, your cost over time might be more than the cost of paying
the full up-front sales charge. Take a look at the examples on the following
page: you pay higher 12b-1 fees (which are ongoing fees) if you defer the sales
charge.
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6
<PAGE>
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Sales Charges and Operating Expenses Examples
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<TABLE>
<CAPTION>
====================================================================================================================================
STRATEGIC VALUE FUND CLASS A CLASS B CLASS A CLASS B
====================================================================================================================================
Assuming Redemption
Shareholder Transaction Expenses Assuming No at the End of
Redemption Each Period
---------- -------------------
<S> <C> <C> <C> <C> <C> <C>
Maximum Sales Charge Imposed on Purchase of Expenses after 1 year $73 $26 $76
Shares (as a percentage of offering price) 5.50% None Expenses after 3 years $109 $80 $110
Expenses after 5 years $149 $137 $157
Deferred Sales Charge Expenses after 10 years $258 $291 $291
(as a percentage of redemption proceeds)(1) None 5.00%
Annual Fund Operating Expenses
(as a percentage of average net assets) [PIE CHART DEPICTING [PIE CHART DEPICTING
INFORMATION BELOW INFORMATION BELOW
APPEARS HERE] APPEARS HERE]
Management Fee(s) 0.75% 0.75% $ 55 up-front sales charge $ 20 deferred sales charge
12b-1 Fees2 0.25% 1.00% 38 management fees 40 management fees
Other Expenses 0.83% 0.83% 13 12b-1 fees 55 12b-1 fees
----- ----- 43 other expenses 44 other expenses
Total Fund Operating Expenses 1.83% 2.58% -------------------------- --------------------------
===== ===== $149 total sales charges $157 total sales charges
and expenses and expenses
</TABLE>
(1) Generally, Class A shares of the Fund are not subject to a contingent
deferred sales charge upon redemption. However, because front-end sales
charges are waived on investments in Class A shares of $1 million or more,
a contingent deferred sales charge of 1.00% will be imposed on redemptions
of such investments effected within one year of the date of purchase. With
respect to Class B shares, the amount of the contingent deferred sales
charge will depend on the number of years since the shareholder made the
purchase payment from which an amount is being redeemed. See "Alternative
Sales Arrangements--Deferred Sales Charge Alternative--Class B
Shares--Contingent Deferred Sales Charge, Class B."
(2) Under rules of the National Association of Securities Dealers, Inc. (the
"NASD"), a distribution fee of up to 0.75% of average annual net assets is
treated as a sales charge for certain purposes under those rules. 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 the maximum front-end sales charge permitted by
rules of the NASD. For a description of the distribution plans adopted by
the Fund, see "The Distributor."
7
<PAGE>
================================================================================
Stategic Value Fund
The Fund's objective is:
================================================================================
to seek maximum long-term total return from a combination of common stocks,
convertible securities and high yield securities. Certain of the Fund's
investments are speculative.
Who should invest? Investors who seek maximum total return by investing in
multiple market sectors.
See page 21 for more details about the Fund.
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================================================================================
The Fund invests in:
================================================================================
Under normal market conditions, in three asset classes, limited by the
following:
...30% to 80% of net assets in common stocks which:
o the Sub-Adviser believes were "undervalued" (selling below their value)
when purchased;
o typically pay dividends, although there may be non-dividend-paying stocks
if they meet the "undervalued" criteria;
o are listed on a national securities exchange or are traded in the
Over-the-Counter (OTC) market.
...10% to 40% of net assets in convertible securities (such as preferred stocks,
bonds, debentures, corporate notes, and others which can be converted into
common stock or the cash value of a basket or index of equity securities).
...10% to 40% of net assets in corporate debt securities: all types of foreign
and domestic debt securities ordinarily in the lower rating categories of
Moody's (Baa to B) and S&P (BBB to B) or judged to be of comparable
creditworthiness by the Fund's Sub-Adviser. Within these limitations, the Fund
may also invest in:
...not more than 20% of net assets in securities that are: rated CCC or below by
Moody's or S&P or judged by the Sub-Adviser to be of comparable quality.
...U.S. government securities, cash or cash equivalents;
...other investments suitable for most or all MainStay Funds. (See pages - ,
General Investment Considerations and pages - , Description of Investments and
Investment Practices, for details.)
At times, the actual allocation for each asset class may differ from the
limitations set forth above, due to market fluctuations or cash entering or
leaving the Fund. This could happen for instance, if the Sub-Adviser has
positioned the assets close to a minimum or maximum for one or more asset
classes, and the Fund's cash position changes because of investors buying or
selling the Fund's shares. To correct the situation, the Sub-Adviser intends to
move cash or reallocate assets within seven days.
Generally, the Sub-Adviser seeks out undervalued securities in all asset
classes. Usually, stocks deemed to be at full value will be replaced with new,
"undervalued" stocks. Assessing whether a stock is undervalued, the Sub-Adviser
considers many factors and will compare the market price to the company's "book"
value, estimated value of the company's assets (liquating value), and cash flow.
To a lesser extent, the Sub-Adviser will also look at trends and forecasts such
as growth rates and future earnings.
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WHO'S MANAGING YOUR MONEY?
DENIS LAPLAIGE, STEVEN TANANBAUM AND NEIL FEINBERG OF MACKAY-SHIELDS FINANCIAL
CORPORATION.
Denis Laplaige, who is primarily responsible for the value portion of the Fund's
portfolio is President, Managing Director and Chief Investment Officer of
MacKay-Shields. Mr. Laplaige joined MacKay-Shields in 1982, became a Director in
1988, Managing Director in 1991, a member of the Board of Directors in 1993 and
Chief Investment Officer in 1996.
Steven Tananbaum, who is primarily responsible for the high yield portion of the
Fund's portfolio, is a Director of MacKay-Shields. Mr. Tananbaum joined
MacKay-Shields in 1989. Previously, he worked as a high yield and merger
associate intern in the corporate finance department of Kidder Peabody.
Neil Feinberg, who is primarily responsible for the convertible portion of the
Fund's portfolio, is a Director of MacKay-Shields and has been a portfolio
manager since he joined the firm in 1992. For the previous three years, he was
an analyst for National Securities and Research Corporation; and for the prior
four years he worked as a CPA/auditor for Peat Marwick Main & Company.
- --------------------------------------------------------------------------------
Risks? The NAV of the Fund's shares will fluctuate depending on a number of
factors, including the Sub-Adviser's ability to consistently and correctly
determine the relative attractiveness of the asset classes. Prices change not
only in response to economic factors but to psychological factors as well and
these factors are difficult to interpret and quantify. It is therefore possible
for the Fund to have a lower overall investment in stocks during a period of
rising stock prices, or a small investment in bonds during a period of rising
bond prices.
The risks of investing in particular types of debt securities also may vary. For
example, securities rated below BBB or Baa (sometimes called "junk bonds") are
not considered "investment grade" and run greater risks of price fluctuations,
loss of principal and interest, default or bankruptcy by the issuer, and other
risks which is why these securities are considered speculative.
Investments in foreign securities could be more volatile and more difficult to
sell than U.S. securities, and involve additional risks, including currency
fluctuations and political and economic instabilities.
For additional information regarding risks associated with investment in the
Fund, see pages 22 - 25, Description of Investments and Investment Practices.
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8
<PAGE>
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General Investment Considerations
- --------------------------------------------------------------------------------
================================================================================
SOME IMPORTANT POINTS TO UNDERSTAND ABOUT INVESTING IN MUTUAL FUNDS
================================================================================
[GRAPHIC] The share price of a Fund isn't always stable
The value of the securities in the Fund and the share price (NAV) of the Fund
will fluctuate. Many factors can affect the value of securities, including:
o conditions in the securities markets;
o business success of the companies that issued the securities;
o creditworthiness of the companies that issued the securities;
o interest rates;
o average maturity of the Fund's nonequity or debt investments;
o foreign currency exchange rates (where applicable); and
o other factors.
Funds aren't guaranteed
Remember, mutual funds are not guaranteed or federally insured, even if you buy
them through a bank. MainStay recommends that you speak with your Registered
Representative to learn about other smart ways to help protect your money based
on the level of risk you are willing to take.
Fundamental investment objective
The investment objective of the Fund is fundamental, which means it can't be
changed without shareholder approval.
Read the prospectus
You need to consider as many factors as possible when making an investment
decision--which is why it's important to read the prospectus.
TEMPORARY DEFENSIVE MEASURES
In times of unusual or adverse market conditions, for temporary defensive
purposes, the Fund may invest without limit in cash and cash equivalents (as
defined on page 22 under "Description of Investments and Investment Practices--
Cash Equivalents").
FUND DIVERSIFICATION
The Fund is "diversified" for the purposes of the Investment Company Act of
1940, as amended ("1940 Act").
INVESTMENTS IN ILLIQUID AND RESTRICTED SECURITIES
The Fund has a nonfundamental policy that it will not invest more than 15% of
its net assets in "illiquid" securities. These are securities subject to legal
or contractual restrictions on resale (other than restricted securities eligible
for resale pursuant to Rule 144A under the Securities Act of 1933), repurchase
agreements maturing in more than seven days, certain options traded over the
counter or other securities which legally or in the opinion of the Sub-Adviser
are deemed illiquid. There may be undesirable delays and added costs in selling
restricted securities.
- --------------------------------------------------------------------------------
The effects of trading costs on your total return
"Portfolio turnover" is the term used in the industry for measuring the amount
of trading activity that occurs in a fund's portfolio during the year. A 100%
turnover rate, for example, means that, on average, every security in the
portfolio has been replaced once during the year. The Fund estimates that its
annual portfolio turnover rate will not exceed 130%.
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).
A fund with consistently higher total returns and higher turnover rates than
another fund may actually be achieving better performance precisely because the
managers are active traders. You should be aware that the "total return" figure
(also found as a line item in a fund's "Financial Highlights" table) already
includes portfolio turnover costs.
- --------------------------------------------------------------------------------
9
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- --------------------------------------------------------------------------------
Decide Whether to Pay a Sales Charge Now, Later...or Maybe Never
- --------------------------------------------------------------------------------
MainStay gives you the choice to either pay a sales charge up-front (Class A
shares), or pay a sales charge at the "back-end" when you sell (Class B shares).
Your Registered Representative can help you determine which type of sales charge
would work better for you, based on how much and how long you wish to invest,
and other factors listed in the table below.
Most of the characteristics are the same
Both Class A and Class B shares represent an interest in the same investments,
give you the same rights, and are identical in all other respects, except each
bears its own service and distribution expenses (Rule 12b-1 fees), and any other
specific class expenses the Board may approve.
================================================================================
WHAT ARE THE DIFFERENCES IF YOU...
...PAY UP-FRONT (CLASS A SHARES)?
================================================================================
Since some of your investment goes to pay a sales charge up-front, you start off
owning fewer shares. But, you're usually better off paying up front if you:
o plan to own the shares for an extended period of time, since the Rule 12b-1
fees on Class B shares will eventually exceed the cost of the up-front
sales charge; or
o qualify for a reduced sales charge (see page 11, "Consider Reducing Your
Sales Charge," for details).
You pay lower ongoing Rule 12b-1 fees--which means there's more net income to
pay you higher dividends per share.
You pay no sales charge when you redeem/sell your shares (except if you bought
more than $1 million of shares and redeemed within 1 year, see page 11).
================================================================================
VS ...PAY WHEN YOU REDEEM/SELL (CLASS B SHARES)?
================================================================================
You pay no up-front sales charge; your full investment goes toward buying
shares, so you start off owning more shares.
The ongoing Rule 12b-1 fees are higher, which means:
o you receive lower dividends;
o your NAV will generally be lower; and,
o therefore, total performance per share will be lower than the Class A
shares (but you'll own more shares).
You may pay a sales charge if you sell shares within the next 6 years (there are
exceptions; see page 30, "Deferred Sales Charge Class B Shares - Contingent
Deferred Sales Charge, Class B");
o the sales charge drops from 5% in the first year to 0% after six years;
o it's assumed you're selling the shares you've owned the longest, so you pay
the lowest possible sales charge;
o if you sell the Fund's shares, the sales charge will be based on the lower
of the current NAV of Fund shares less dividends and distributions paid or
the price you originally paid for those shares.
- --------------------------------------------------------------------------------
If there aren't enough shares...
When you sell Class B shares, the Fund is permitted to sell additional Class B
shares to cover the cost of the sales charge. If you don't own enough extra
Class B shares to do this, the sales charge will be taken from the proceeds of
your sale, reducing the amount paid to you.
If it's automatic reinvestment...
You don't pay any sales charge (Class A or Class B) on shares bought through the
automatic reinvestment of dividends or capital gains. The full amount goes
toward buying more shares.
- --------------------------------------------------------------------------------
10
<PAGE>
================================================================================
Consider Reducing Your Sales Charge
================================================================================
THE REINVESTMENT PRIVILEGE MAY HELP YOU AVOID SALES CHARGES
When you sell shares, you have the right--for 30 days--to reinvest any or all of
the money in any MainStay Fund without paying another sales charge (as long as
those shares haven't been reinvested once already). If you paid a sales charge
when you redeemed (Class B shares), you'll receive a pro rata credit for
reinvesting.
Note: Reinvestment won't relieve you of any tax consequences on gains realized
from the sale; the deductions for losses may, however, be denied and, in some
cases, sales charges may not be taken into account in computing gains or losses
if the reinvestment privilege is exercised.
COMBINING PURCHASES LOWERS THE CHARGE
Generally, you can reduce a sales charge on purchases of Class A shares based on
how much you've already invested. The sales charge will be calculated on the
total net asset value of all the MainStay Fund Class A shares you own (excluding
Mainstay Money Market Fund shares). This is helpful because the more you invest
with MainStay, the smaller the sales charge. (See "Alternative Sales
Arrangements," page 29.)
Make your actions known
To receive the discount, you must convey the information about the shares you
already own at the time you buy. This privilege of "Rights of Accumulation" may
be ended or altered at any time.
REGULAR WITHDRAWALS TO PAY PREMIUMS
You won't pay a sales charge upon selling (Class B shares) if you redeem shares
under the Systematic Withdrawal Plan to pay scheduled monthly premiums on
insurance issued by New York Life or an affiliate.
SIGN A LETTER OF INTENT (LOI)
If you qualify, you can sign a letter stating your intention to invest at least
$100,000 within the next 24 months in Class A shares of one or more MainStay
Funds and to pay the up-front sales charge. The current sales charge will be
based on the total amount you intend to invest (the more you invest, the smaller
the sales charge). See "Alternative Sales Arrangements," page 29. For more
information on LOIs, call your Registered Representative or MainStay Shareholder
Services, Inc. ("MSS") at 1-800-MAINSTAY.
INVEST $1,000,000 OR MORE
If you invest $1,000,000 or more in Class A shares of one or more MainStay
Funds, and don't sell the shares for at least one year, the up-front sales
charge is waived. If you sell the shares within one year, you will pay a sales
charge of 1% upon sale. See page 29, "Reduced Sales Charges on Class A
shares--Contingent Deferred Sales Charge, Class A," for details. (This rule
doesn't apply to exchanges between MainStay Funds.) Purchases of $1,000,000 or
more must be for Class A shares and will not be accepted for Class B shares.
- --------------------------------------------------------------------------------
[GRAPHIC] Take note: Sales charges are sometimes waived
There are many other situations, including purchases by certain retirement
plans, which entitle you to a waiver of the sales charge. (For purchases at NAV,
see page 29 for the full listing.)
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11
<PAGE>
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Open an Account and...
- --------------------------------------------------------------------------------
RELY ON YOUR REGISTERED REPRESENTATIVE
MainStay Funds are called "load" funds, meaning you pay a sales charge for the
ongoing assistance and advice of your Registered Representative.
"No-load" (no commission) funds generally require you to buy their shares on
your own, directly from them.
HAVE YOUR REGISTERED REPRESENTATIVE
PLACE THE ORDER
Your Registered Representative can enter your order immediately by calling
NYLIFE Distributors Inc. (the "Distributor"), help you complete the application
correctly and send it in for you.
The Distributor must receive payment within 3 business days or MainStay will
cancel your order. You and/or the broker/dealer may also be liable for any
losses or fees incurred.
YOU MUST INVEST AT LEAST THE MINIMUM AMOUNT
o To open an account: $500
o Each time after that: $50
The minimum initial investment is waived for purchases by Trustees of the Trust,
New York Life and its subsidiaries and their employees, officers, directors or
agents.
Fill out the application completely...
...with your Registered Representative's help.
Be sure to include the:
o name(s) you want to appear on the account;
o choice of Class A or Class B shares;
o amount of the investment;
o your certified Social Security Number or Taxpayer I.D. Number;
o financial information;
o employer information;
o other requested information.
================================================================================
HOW TO BUY SHARES
================================================================================
[GRAPHIC OF A CHECK]
[PARTIALLY INSERTED] SEND A CHECK TO YOUR REGISTERED REPRESENTATIVE WITH THE
[ INTO AN ENVELOPE ] APPLICATION
You'll pay the next NAV that's set after your order is received and accepted,
plus any sales charge if purchasing Class A shares. Your check must be in U.S.
dollars and drawn on a U.S. bank. Include the account number and class of shares
(Class A or Class B) you wish to buy. If the check doesn't clear, your order
will be cancelled and you could be liable for losses or fees. We also reserve
the right to limit the number of checks processed at one time.
You may send additional investments (minimum $50 each check) directly to: The
MainStay Funds, PO Box 8401, Boston, MA 02266-8401. Please include your account
number and class of shares with all checks.
[GRAPHIC OF ] HAVE YOUR REGISTERED REPRESENTATIVE ORDER BY TELEPHONE...
[A TELEPHONE]
... between 9:00 AM and 4:00 PM Eastern time on any day the New York Stock
Exchange is open. You'll pay the next NAV that's set after your order is
received and accepted, plus any sales charge for Class A shares. Have your
Registered Representative call the Distributor. Purchase orders effected by
telephone are subject to a purchase minimum of $5,000. The Distributor must
receive your payment (and the application, if it's your initial investment)
within the next 3 business days or the order will be cancelled. All calls are
recorded.
12
<PAGE>
================================================================================
...Buy Shares
================================================================================
MAKE SURE YOU ARE USING THE PROPER FORMS
Your order to buy is only accepted when received by the Shareholder Servicing
Agent with all information, signatures, documents and payments required to carry
it out. Federal law requires you to provide a certified Taxpayer I.D. Number
when you open an account.
BUY SHARES AT THE CURRENT MARKET PRICE
(known as the net asset value, or NAV) on days the New York Stock Exchange is
open.
The NAV--the price of a share that is used for buying and selling--is determined
each day that the New York Stock Exchange is open. NAV is calculated at the
close of business of the New York Stock Exchange (normally at 4:00 PM Eastern
time).
[GRAPHIC] NAV is calculated by:
o taking the current market value of the Fund's total assets attributable to
a class of shares (either Class A shares or Class B shares);
o subtracting the liabilities attributable to that class; and
o dividing the remainder by the total number of shares outstanding of that
class. (See page 32 and the SAI for the full details on calculating NAV.)
[GRAPHIC] Make sure your application is complete
MainStay and the Distributor each reserves the right to reject your application,
particularly if it's incomplete (for instance, if you haven't included your
certified Taxpayer I.D. Number).
Choices
If you want the ability to sell shares by telephone, or receive checks for the
dividends or capital gains you earn, you must grant authorization on the
application.
================================================================================
[GRAPHIC OF A RADIO TOWER] WIRE MONEY FROM YOUR BANK ACCOUNT
Have your Registered Representative call the Distributor for an account number
and wiring instructions. Give them to your bank, which may charge a fee for
wiring. The Distributor must receive your payment (and application, if it's your
initial investment) within the next 3 business days. If it doesn't, your order
will be cancelled, and you may be liable for losses and/or fees.
To buy shares the same day, your Registered Representative must call by noon,
Eastern time, and the wire must be received by the Shareholder Servicing Agent
before 4:00 PM Eastern time. (See page 28, "How to Purchase Shares of the
Funds--By Wire," for the wire address.) No wires are accepted on days when the
New York Stock Exchange is closed, or on Martin Luther King Day, Columbus Day or
Veterans Day, because the bank that would receive your wire is closed.
The fastest way to invest
Wiring will reduce the waiting time on selling or exchanging shares because your
money will be cleared right away. If you buy by check and quickly decide to
sell, the Fund will withold payment for up to 10 days of purchase or until the
check clears, whichever is first.
[GRAPHIC] SET UP A SYSTEMATIC INVESTMENT OR EXCHANGE PLAN
Through payroll deductions or AutoInvest, you may open an account by authorizing
your bank to automatically send money on a regular schedule to purchase shares
of the Fund or other MainStay Funds. The initial minimum is $100 per class of
share of the Fund. Subsequent minimum investments for the Fund are $50. (See
page 28, "How to Purchase Shares of the Funds--Systematic Investment Plans," for
waiving minimums and for details on AutoInvest.)
13
<PAGE>
- --------------------------------------------------------------------------------
Know How to Sell and Exchange Shares
- --------------------------------------------------------------------------------
PLACE YOUR SALES ORDER DIRECTLY OR THROUGH YOUR REGISTERED REPRESENTATIVE, IF
ALLOWED BY THE BROKER DEALER
If you place the order through your Registered Representative:
o The transfer agent must receive the order with all the information,
signatures and documentation necessary to carry out the order ("good
order").
o Your shares are then priced at the next NAV set for the Fund (either 4:00
PM Eastern time that day; or the next day, if the order is placed too late)
after receipt of your order.
OPTION 1
[GRAPHIC] USE A SYSTEMATIC WITHDRAWAL PLAN
o Requires at least $10,000 in the account at time of request
You may arrange to make monthly redemptions of $100 or more from the Fund.
Shares will be sold automatically to cover the amount plus any applicable sales
charge.
These redemptions, like any sale, may result in a gain or loss and, therefore,
may be subject to taxation. Consult your tax adviser on the consequences.
MainStay may end this plan at any time; or begin charging up to $5 per
redemption after 30 days' written notice to you.
No sales charges
There are no deferred sales charges on systematic redemptions to pay scheduled
monthly premiums on insurance policies issued by New York Life or an affiliate.
Words to the wise
We don't recommend using this plan during times when you're regularly buying
shares: you'll be paying new sales charges just to replace the shares you're
selling.
Also remember, these redemptions aren't dividends or income. If you redeem more
than the 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.
Systematic withdrawal plans established by phone are subject to the procedures
applicable to telephone redemptions.
[GRAPHIC] Your shares could be redeemed involuntarily
To reduce expenses, we have the right to redeem the shares in any account valued
at less than $250, provided that the value isn't based on fluctuations in market
prices.
We'll give you 60 days' written notice to allow you to add to your account and
avoid the redemption.
To avoid paying a reporting penalty, we may also redeem your shares if you
haven't given us a certified Taxpayer I.D. Number.
IF YOU PLACE THE ORDER DIRECTLY, YOU CAN DO IT BY A WRITTEN REQUEST OR IN ONE OF
THE FOLLOWING WAYS
When you want to use one of MainStay's alternative selling privileges, call
1-800-MAINSTAY to verify that the options you want are on record--before you
need to use them.
You may also establish a Systematic Exchange Program to have a minimum of $100
exchanged periodically from any MainStay Fund (except the Mainstay Equity Index
Fund) to another MainStay 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. Before establishing a
Systematic Exchange Program, you must obtain and read the prospectus for the
MainStay Fund you wish to exchange into. (See page 31, "Redemptions and
Exchanges--Exchange Privileges," for details.)
- --------------------------------------------------------------------------------
You have help
If permitted by the broker-dealer, your Registered Representative may sell or
exchange your shares, or set up a systematic withdrawal plan for you, by phone,
unless you notify us in writing not to allow it.
- --------------------------------------------------------------------------------
14
<PAGE>
OPTION 2
MAKE A TELEPHONE REQUEST:
1-800-MAINSTAY
You may sell or exchange shares directly over the phone.
o Minimum amount: $500 for exchanges
o You automatically have this privilege unless you notify us in writing that
you do not want it.
Whether you're buying, selling, or requesting a wire transfer or a check, the
price you receive is the next price (NAV) determined for the Fund (either at
4:00 PM Eastern time that day; or at 4:00 PM the next day, if the order is
placed too late) after receipt of your order.
Your broker-dealer must receive your order by 4:00 PM, and is responsible for
sending it in by 5:00 PM the day you place it.
o Be ready to present your Social Security Number or Taxpayer I.D. Number
over the phone.
o You can only transfer by phone between accounts with identical names,
addresses and Social Security Numbers/Taxpayer I.D. Numbers. Transfers
between different accounts are only allowed if made in writing and include
the proper information--ask your Registered Representative.
Telephone redemptions are not permitted for shares:
o represented by certificates;
o bought within the previous 10 calendar days; or
o owned by someone whose address of record has changed within the previous 30
days.
Telephone exchanges are not permitted for shares represented by certificate.
When using the MainStay Audio Response System, you bear the risk of any loss
from your errors in using the system.
[GRAPHIC] Convenient, yes...but not risk-free
Telephone redemption privileges are convenient, but you give up some security.
By signing an application to purchase shares, you agree that neither MainStay
Funds nor the Shareholder Servicing Agent will be liable for following
instructions via the phone that they reasonably believe are genuine. You bear
the risk of any loss, unless the Fund or the Shareholder Servicing Agent fails
to use established safeguards for your protection. These safeguards are among
those currently in place at MainStay Funds:
o all phone calls are tape recorded;
o written confirmation of every transaction is sent to your address of
record.
- --------------------------------------------------------------------------------
We'll send your money within the next 7 days.
MainStay will make the payment, minus any deferred sales charge, within 7 days
after receiving your redemption request in "good order." You will receive the
first NAV fixed after your request is received in "good order."
Use exchange privileges. Once you open an account, you may exchange shares of
the same class (Class A shares for Class A shares; Class B shares for Class B
shares) between MainStay Funds without a sales charge. There are two exceptions:
You will pay a sales charge if you:
o exchange shares of the Mainstay Money Market Fund for Class A shares in
another Fund, unless you've already paid the sales charge on those shares;
or,
o exchange Class B shares out of the Mainstay Money Market Fund into another
Fund and redeem within 6 years of the original purchase.
You may not exchange Class A shares for Class B shares, or vice versa. If you
sell Class B shares and then buy Class A shares, you may have to pay a deferred
sales charge on the Class B shares, as applicable, and pay an initial sales
charge on the Class A shares.
Before you exchange shares of the Fund for shares of another MainStay Fund, you
must first obtain and read the prospectus for the MainStay Fund you wish to
exchange into.
When exchanged shares are redeemed, any applicable sales charge will be charged.
What if you buy by check then quickly sell? We will withhold payment for up to
10 days of purchase or until the check clears, whichever is first.
- --------------------------------------------------------------------------------
If you're requesting a wire transfer by phone
o Minimum amount: $5,000
o Limit: One every 30 days
o Authorization: You must select this option on your application initially or
request it in writing at a later date
After receiving your sell order by phone, we will send the proceeds by bank wire
to your designated bank account the next business day. Your bank may charge you
a fee to receive the wire transfer.
If you're requesting a check by phone
o Maximum amount: $100,000
The check will be payable to you--as the name (or names) appear on the
account--and mailed to the address appearing on the account. (See page 31,
"Redemptions and Exchanges," for more details.)
Requests to redeem shares worth $100,000 or more must be made in writing and
require a signature guarantee.
You may change your mind
To cancel any telephone privilege, call 1-800-MAINSTAY between 8:00 AM and 6:00
PM Eastern time. We reserve the right to suspend or end telephone privileges at
any time without notice.
15
<PAGE>
- --------------------------------------------------------------------------------
Decide How to Receive Your Earnings
- --------------------------------------------------------------------------------
TWO KINDS OF EARNINGS
DIVIDENDS AND INTEREST
Most funds earn either dividends from stocks, interest from bonds and other
securities, or both. A mutual fund, however, always pays this income to you as
"dividends." The dividends paid by the Fund will vary based on the income from
its investments and the expenses incurred by the Fund.
When the Fund pays
The Fund will declare and distribute the first dividend on December 19, 1997.
This dividend will be for the fourth quarter only. Thereafter, the Fund will
declare and distribute any dividends quarterly.
CAPITAL GAINS
Funds earn capital gains when they sell securities in their portfolio at a
profit.
When the Fund pays
At the end of each fiscal year, the Fund matches its gains against its losses;
and, if the balance results in a gain, the Fund will distribute the gain to
shareholders.
- --------------------------------------------------------------------------------
When are you paid? On the first business day of each month after a dividend is
declared.
- --------------------------------------------------------------------------------
HOW TO TAKE YOUR EARNINGS
You may choose how to receive earnings (and change your choice as often as you
like) by notifying your Registered Representative (if permitted by the
broker-dealer) or MainStay directly. If you don't make a choice on your
application, your earnings will be automatically reinvested in the same class of
shares of the Fund. In order to reinvest dividends and/or capital gains in
another MainStay Fund, you must have an established account in that class of
shares of that Fund. Here are your choices:
REINVEST EVERYTHING IN:
o the Fund; or
o in another MainStay Fund of your choice.
TAKE THE DIVIDENDS IN CASH
Reinvest the capital gains in:
o the Fund; or
o in another MainStay Fund of your choice.
TAKE THE CAPITAL GAINS IN CASH
Reinvest the dividends in:
o the Fund; or
o in another MainStay Fund of your choice.
TAKE EVERYTHING IN CASH
16
<PAGE>
- --------------------------------------------------------------------------------
Understand the Tax Consequences
- --------------------------------------------------------------------------------
The Fund intends to be treated as a regulated investment company under
subchapter M of the Code. As a regulated investment company, the Fund is
required to distribute at least 90% of its:
o net taxable income;
o net short-term capital gains; and
o net tax-exempt income.
"Net" means the amount remaining after tax deductible expenses (expenses reduce
"gross" earnings: in other words, the amount the Fund can pay to you.)
MOST OF YOUR DIVIDENDS ARE TAXABLE
Virtually all of the dividends you receive from the Fund are taxable, whether
you take them as cash or automatically reinvest them. Some dividends will be
taxable as long-term capital gains.
MainStay keeps track of your tax status and will mail your tax report each year
by January 31. This report will tell you which dividends and redemptions should
be treated as taxable ordinary income; which, if any, as tax-exempt income; and
which, if any, as long- and short-term capital gains.
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 may be withheld by those
countries as income taxes. Under certain circumstances, the Fund may elect to
pass along tax credits or deductions to you for foreign income taxes paid,
although there are no assurances that the Fund will be able to do so, or that
the credits or deductions will result in a tax benefit to you.
[GRAPHIC] Seek assistance
Your Registered Representative is always available to help you keep your
investment goals coordinated with your tax considerations. You should, however,
rely on your tax adviser for tax counsel.
For additional information on taxation, see the SAI.
Don't overlook sales charges
The amount you pay in sales charges reduces gains and increases losses for tax
purposes.
17
<PAGE>
- --------------------------------------------------------------------------------
Know With Whom You're Investing
- --------------------------------------------------------------------------------
================================================================================
WHO RUNS THE FUND'S DAY-TO-DAY BUSINESS?
================================================================================
MainStay Management, Inc. (the "Manager"), Morris Corporate Center I, Building
A, 300 Interpace Parkway, Parsippany, NJ 07054, serves as the Fund's manager,
handling business affairs for the Fund. MainStay Management, Inc. is a
corporation organized under the laws of Delaware and is an indirect wholly owned
subsidiary of New York Life Insurance Company. The Manager provides offices and
conducts clerical, recordkeeping and bookkeeping services, and keeps most of the
financial and accounting records required for the Fund. The Manager has
delegated its portfolio management responsibilities to the Sub-Adviser.
The Manager pays the salaries and expenses of all personnel affiliated with the
Fund, and all the operational expenses that aren't the responsibility of the
Fund, including the fee paid to the Sub-Adviser. (See page 26, "Manager,
Sub-Adviser and Distributor," and the SAI for more details.)
For its services, the Fund pays the Manager a monthly fee. (See page 26,
"Manager, Sub-Adviser and Distributor".)
================================================================================
WHO MANAGES YOUR MONEY?
================================================================================
MacKay-Shields Financial Corporation ("MacKay-Shields"), 9 West 57th St., New
York, NY 10019, is the Sub-Adviser to the Fund. The firm was incorporated in
1969 as an independent investment advisory firm and was privately held until
1984 when it became a wholly owned but autonomously managed subsidiary of New
York Life Insurance Company. As of June 30, 1997, MacKay-Shields managed over
$26.9 billion in assets.
Under the supervision of the Fund's Trustees and the Manager, MacKay-Shields is
responsible for making the specific decisions about buying, selling and holding
securities; selecting brokers and brokerage firms to trade for them; maintaining
accurate records; and, if possible, negotiating favorable commissions and fees
with the brokers and brokerage firms. For these services, the Sub-Adviser is
paid a monthly fee by the Manager, not the Fund. (See "Manager, Sub-Adviser and
Distributor," page 26, for a breakdown of fees.)
[GRAPHIC] Who works to protect your interests?
A Board of Trustees oversees the Fund. The Trustees have financial or other
relevant experience and meet several times during the year to review contracts,
Fund activities and the quality of services provided to the Fund. Other than
serving as Trustees, most of the Board Members have no affiliation with The
MainStay Funds or its service providers.
18
<PAGE>
- --------------------------------------------------------------------------------
Know With Whom You're Investing
- --------------------------------------------------------------------------------
WHO DISTRIBUTES THE MAINSTAY FUNDS?
NYLIFE Distributors Inc., 260 Cherry Hill Road, Parsippany, NJ 07054, acts as
the principal underwriter and distributor of the Fund's shares. NYLIFE
Distributors Inc. (the "Distributor") is a corporation organized under New York
laws and is an indirect wholly owned subsidiary of New York Life Insurance
Company. The Distributor offers shares of the Fund. In addition, NYLIFE
Securities Inc., an indirect wholly owned subsidiary of New York Life Insurance
Company, and other broker-dealers offer shares of the Fund pursuant to dealer
agreements with the Distributor. The Distributor and other broker-dealers pay
commissions and service fees to Registered Representatives. The Distributor also
pays for printing and mailing prospectuses and sales literature; and for any
advertising for the Fund. For its services, the Distributor is paid a monthly
fee--the Rule 12b-1 fee. (See page 26, "Manager, Sub-Adviser and
Distributor--The Distributor" for more details.)
WHO KEEPS TRACK OF YOUR ACCOUNT?
MainStay Shareholder Services Inc. (MSS) is the Fund's Transfer, Dividend
Disbursing and Shareholder Servicing Agent. MSS, whose address is 260 Cherry
Hill Road, Parsippany, N.J. 07054, is an indirect wholly owned subsidiary of New
York Life Insurance Company. MSS provides customer service, is responsible for
preparing and sending statements, confirms and checks, and keeps certain
financial and accounting records. MSS has entered into an agreement with Boston
Financial Data Services (BFDS), whose address is 2 Heritage Drive, North Quincy,
MA 02171. BFDS will perform certain of the services for which MSS is
responsible. In addition, the Fund may contract with other service
organizations, including broker-dealers and other financial institutions, which
will establish a single omnibus account for their clients with the Fund. The
service organizations will provide shareholder services to the shareholders
within the omnibus accounts and receive fees for those services from the Fund.
The Bank of New York is the custodian of the investments of the Fund and has
subcustodial agreements for holding the Fund's foreign securities.
19
<PAGE>
- --------------------------------------------------------------------------------
Know Your Rights as a Shareholder
- --------------------------------------------------------------------------------
YOU HAVE THE RIGHT TO ASK ANY QUESTIONS
Any time you have a question about your account, you should:
o ask your Registered Representative;
o call 1-800-MAINSTAY (between 8:00 AM and 6:00 PM Eastern time); or
o write to The MainStay Funds, P.O. Box 8401, Boston, Massachusetts,
02266-8401.
THE RIGHT TO RECEIVE INFORMATION ABOUT YOUR INVESTMENT -- CALL 1-800-MAINSTAY
You receive quarterly statements reviewing your investment in the Fund,
including the number and value of shares, dividends declared or paid and other
information.
Confirmations
Every time you buy or sell shares of the Fund or exchange shares between the
Fund and another MainStay Fund, you'll receive a confirmation in the mail
shortly thereafter. It summarizes all the key information: what you bought and
sold, what it cost, the sales charge (if any) and other vital data.
Financial reports
You will receive an annual financial statement for the Fund, examined by the
Fund's independent accountants. You will also receive a semiannual financial
statement which is unaudited. Each financial report shows as of the end of the
reporting period:
o the investments owned by the Fund;
o the market value of each investment; and
o other financial information.
[GRAPHIC] Keep your statements.
You may need them for tax reporting purposes.
Be alert: Mistakes can happen.
Always review your confirmations and statements immediately.
The right to have one share, one vote
o Every share issued by the Fund carries equal ownership rights.
o By owning shares, you're entitled to vote on certain issues and policies
regarding the Fund and the class of shares you own. You have one vote per
share you own.
o You're entitled to vote in the election of MainStay Trustees and to ratify
independent accountants.
o You're entitled to approve the adoption of any new investment advisory
agreement or plan of distribution relating to the Fund.
o You're also entitled to approve any changes in fundamental investment
restrictions or policies of the Fund.
THE RIGHT TO ATTEND MEETINGS
Although the Fund doesn't intend to hold annual shareholder meetings, you have
the right to call a meeting of shareholders for the purpose of voting on
removing a Trustee for cause. Removing a Trustee requires the approval of
two-thirds of the outstanding shares issued for all of The MainStay Funds.
Generally, shareholder meetings are only held when the Trustees recommend an
action which requires shareholder approval.
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Tell Me The Details
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THE TRUST
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The Trust was established as a Massachusetts business trust on January 9, 1986
by a Declaration of Trust. The Fund commenced operations on October __, 1997.
Shares have non-cumulative voting rights, do not have preemptive or subscription
rights and are transferable. No contingent deferred sales charge would be
imposed on distributions during liquidation of the Fund.
The Trust is an open-end management investment company registered under the
Investment Company Act of 1940 ("1940 Act").
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OTHER INFORMATION ABOUT THE FUND
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Investment in the Fund alone does not constitute a complete investment program.
The Manager has delegated its portfolio management responsibilities to the
Sub-Adviser. Investment decisions for the Fund are made independently from those
of the other accounts and investment companies that may be managed by the
Sub-Adviser. However, if such other accounts or investment companies are
prepared to invest in, or desire to dispose of, securities in which the Fund
invests at the same time as the Fund, 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 the
Fund or the price paid or received by the Fund.
In managing the Fund, the Sub-Adviser conducts a rigorous, disciplined valuation
methodology to maximize the most appropriate investment levels among the three
asset classes. Fundamental economic analysis, risk and return estimations,
credit quality and interest rate trends are among the principal factors
considered by the Sub-Adviser in determining whether to increase or decrease the
emphasis placed on a particular type of security or bond within the Fund's
investment portfolio. In the event that the Sub-Adviser's analysis indicates
that the Fund should be fully invested in only one asset group, the Sub-Adviser
will still adhere to the limitations on the amount of assets which may be
allocated to each of the three asset groups.
In analyzing different securities to assess their relative attractiveness, the
Sub-Adviser's value investment process emphasizes such factors as low price to
earnings and price to cash flow ratios, financial strength and earnings
predictability. The Fund intends to purchase those securities which it believes
to be undervalued in the market relative to comparable securities based on the
foregoing analysis.
In assessing whether a stock is undervalued, the Sub-Adviser considers, among
other factors, a company's financial strength and earnings predictibility. The
Fund may provide some protection on the downside through its investment in
companies whose current stock prices reflect, in the Sub-Adviser's opinion,
either unwarranted pessimism or unrecognized value.
In selecting convertible securities for purchase or sale, the Sub-Adviser takes
into account a variety of investment considerations, including credit risk,
projected interest return and the premium for the convertible security relative
to the underlying common stock.
In seeking a competitive overall return, capital appreciation may be sought by
lengthening the maturities of high yield debt securities held in the Fund's
portfolio during periods when the Sub-Adviser expects interest rates to decline.
If the Sub-Adviser is incorrect in its expectations of changes in interest
rates, or in its evaluation of the normal yield relationship between two
securities, the Fund's income, NAV and potential capital gains could decrease;
or the potential loss could increase. This and other factors may affect the
income available for distribution to shareholders.
Since available yields and yield differentials vary over time, no specific level
of income or yield differential can ever be ensured.
Debt securities in which the Fund may invest include all types of debt
obligations of both domestic and foreign issuers, such as bonds, debentures,
notes, equipment lease certificates, equipment trust certificates, conditional
sales contracts, commercial paper, foreign government securities and U.S.
government securities (including obligations, such as repurchase agreements,
secured by such instruments). For purposes of the Fund's investment policies,
the Fund considers preferred stock to be a debt obligation.
The Fund's equity investments may include capital notes, which are securities
representing beneficial interest in a trust for which the controlling common
stock is owned by a bank holding company. These beneficial interests are
commonly issued as preferred stock but may also be issued as other types of
instruments. The trust owns debentures issued by the bank holding company and
issues the preferred stock to investors. In making investments in foreign
securities the Sub-Adviser will determine, using good faith and judgement, (1)
country allocation; (2) currency exposure (asset allocation across currencies);
and (3) diversified security holdings within each market. The Sub-Adviser may
consider factors such as prospects for currency exchange and interest rates, and
inflation in each country, relative economic growth,
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government policies influencing exchange rates and business conditions, and
quality of individual issuers.
To hedge the market value of securities held, proposed to be held or sold or
relating to foreign currency exchange rates, the Fund may enter into or purchase
securities or securities index options, foreign currency options, and futures
contracts and related options with respect to securities, indexes of securities,
or currencies. The Fund also may buy and sell currencies on a spot or forward
basis. Subject to compliance with applicable rules, futures contracts and
related options may be used for any legally permissible purpose, including as a
substitute for acquiring a basket of securities and to reduce transaction costs.
The Fund may also purchase and sell foreign exchange contracts for purposes of
managing portfolio risk more efficiently. The Fund may also sell short against
the box, among other reasons, to hedge against a possible market decline in the
value of the security owned or to enhance liquidity. The Fund may also use
various techniques to shorten or lengthen the dollar-weighted average maturity
of its portfolio, including transactions in futures and option on futures.
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DESCRIPTION OF INVESTMENTS AND INVESTMENT PRACTICES
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Information about the following types of investments, investment practices and
related risks appears below: Brady Bonds, Cash Equivalents, Convertible
Securities, Floaters and Inverse Floaters, Foreign Securities, Industrial
Development and Pollution Control Bonds, Lending of Portfolio Securities, Loan
Participation Interests, Mortgage-Backed and Asset-Backed Securities, Repurchase
Agreements, Risk Management Techniques, Short Sales Against the Box, Swap
Agreements, When-Issued Securities and Forward Commitments, Zero Coupon Bonds
and Risks of Investing in High Yield Securities ("Junk Bonds"). For more
information about the investments, investment practices and risks described in
this section, please see the SAI.
BRADY BONDS
The 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. (For more
information see the SAI.)
CASH EQUIVALENTS
The Fund may invest in cash or cash equivalents, which include, but are not
limited to: short-term obligations issued or guaranteed as to interest and
principal by any U.S. or foreign government or government agencies or
instrumentality thereof (including repurchase agreements collateralized by such
securities); obligations of banks (certificates of deposit, bankers' acceptances
and time deposits) which at the date of investment have capital, surplus, and
undivided profits (as of the date of their most recently published financial
statements) in excess of $100,000,000, and obligations of other banks or savings
and loan associations if such obligations are federally insured; commercial
paper which at the date of investment is rated A-1 by S&P or P-1 by Moody's or,
if not rated, is issued or guaranteed as to payment of principal and interest by
companies which at the date of investment have an outstanding debt issue rated
AA or better by S&P or Aa or better by Moody's; short-term corporate obligations
which at the date of investment are rated AA or better by S&P or Aa or better by
Moody's; and other debt instruments not specifically described if such
instruments are deemed by the Trustees to be of comparable high quality and
liquidity.
CONVERTIBLE SECURITIES
The Fund may invest in securities convertible into common stock or the cash
value of a basket or index of equity securities. Convertible securities eligible
for inclusion in the Fund's portfolio include convertible bonds, convertible
preferred stock, warrants or notes or other debt instruments that may be
exchanged for cash payable in an amount that is linked to the value of a
particular security, basket of securities, index or indices of securities or
currencies.
FLOATERS AND INVERSE FLOATERS
The Fund may invest in floating rate debt instruments ("floaters"). The interest
rate on a floater is a variable rate which is tied to another interest rate,
such as a money-market index or Treasury bill rate. The Fund may also invest in
leveraged inverse floating rate debt instruments ("inverse floaters"). The
interest rate on an inverse floater resets in the opposite direction from the
market rate of interest to which the inverse floater is indexed. The leverage
associated with inverse floaters may result in greater volatility in their
market values. Certain inverse floaters may be determined to be illiquid
securities.
FOREIGN SECURITIES
The Fund may purchase foreign securities. Foreign investments could be more
difficult to sell than U.S. investments. They also may subject the Fund to risks
different from investing in domestic securities. Investments in foreign
securities involve risks of currency controls by governments, changes in
currency rates and interest rates, difficulties in receiving or interpreting
financial and economic information, possible imposition of taxes, higher
brokerage and custodian fees, possible exchange controls
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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.
Many of the foreign securities in which the Fund invests 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 Fund's assets. The Fund may, however,
engage in foreign currency transactions to protect itself against fluctuations
in currency exchange rates in relation to the U.S. dollar. See page 24, Risk
Management Techniques.
INDUSTRIAL DEVELOPMENT AND POLLUTION CONTROL BONDS
The Fund may purchase Industrial Development and Pollution Control Bonds.
Industrial Development and Pollution Control Bonds, although nominally issued by
municipal authorities, are generally not secured by the taxing power of the
municipality but are secured by the revenues of the authority derived from
payments by the industrial user. (For more information, see the SAI.)
LENDING OF PORTFOLIO SECURITIES
The Fund may lend its investment securities to brokers, dealers and financial
institutions for the purpose of realizing additional income pursuant to
guideliness adopted by the Board of Trustees. The total market value of
securities loaned will not at any time exceed 33% of the total assets of the
Fund. The risks in lending portfolio securities, as with other extensions of
credit, consist of possible loss of rights in the collateral should the borrower
fail financially. In determining whether to lend securities, the Sub-Adviser
will consider all relevant facts and circumstances, including the
creditworthiness of the borrower. (For more information see the SAI.)
LOAN PARTICIPATION INTERESTS
The Fund may invest in participation interests in loans. Such participation
interests, which may take the form of interests in, or assignments of, loans,
are acquired from banks which have made loans or are members of lending
syndicates. The Fund's investments in loan participation interests will be
subject to its limitation on investments in illiquid securities and its
limitation on investments in securities rated below investment grade.
In a typical corporate loan syndication, a number of institutional lenders lend
a corporate borrower a specified sum pursuant to the terms and conditions of a
loan agreement. One of the co-lenders usually agrees to act as the agent bank
with respect to the loan. The loan agreement among the corporate borrower and
the co-lenders identifies the agent bank as well as sets forth the rights and
duties of the parties. The ageement often (but not always) provides for the
collateralization of the corporate borrower's obligations thereunder and
includes various types of restrictive covenants which must be met by the
borrower.
The principal credit risk associated with acquiring participation interests from
a co-lender or another participant is the credit risk associated with the
underlying corporate borrower. The Fund may incur additional credit risk,
however, when it is in the position of participant rather than a co-lender
because the Fund must assume the risk of insolvency of the co-lender from which
the participation interest was acquired and that of any person interpositioned
between the Fund and the co-lender.
MORTGAGE-BACKED AND ASSET-BACKED SECURITIES
Mortgage-backed and asset-backed securities are securities which derive their
value from underlying pools of loans that may include interests in pools of
lower-rated debt securities, consumer loans or mortgages, or complex instruments
such as collateralized mortgage obligations and stripped mortgage-backed
securities. The value of these securities may be significantly affected by
changes in interest rates, the market's perception of issuers and the
creditworthiness of the parties involved. The ability of the Fund to
successfully utilize these instruments may depend in part upon the ability of
the Sub-Adviser to forecast interest rates and other economic factors correctly.
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.
REPURCHASE AGREEMENTS
The Fund may enter into domestic repurchase agreements to earn income. A
repurchase agreement is an agreement whereby the Fund purchases a portfolio
eligible security from a bank or broker-dealer that agrees to repurchase the
security at the Fund's cost plus interest within a specified time (normally one
day).
The Fund may enter into reverse repurchase agreements. A reverse repurchase
agreement involves the sale of a security by the Fund and its agreement to
repurchase the instrument at a specified time and price. The Fund will maintain
a segregated account consisting of liquid assets to cover its obligations under
reverse repurchase agreements. The Fund will limit its
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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 NAV will
increase faster than otherwise would be the case; conversely, if the income and
gains fail to exceed the costs, earnings or NAV would decline faster than
otherwise would be the case.
The Trustees have reviewed and approved certain sellers who they believe to be
creditworthy and have authorized the Fund to enter into repurchase agreements
with such sellers. If the other party to a repurchase agreement were to become
bankrupt, the Fund could experience delays in recovering its investment or
losses.
RISK MANAGEMENT TECHNIQUES
The Fund can use various techniques to increase or decrease its 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.
The Fund can use these practices in an attempt to adjust the risk and return
characteristics of its portfolio of investments. When the Fund uses such
techniques in an attempt to reduce risk it is known as "hedging". If the Fund's
Sub-Adviser judges market conditions incorrectly or employs a strategy that does
not correlate well with the Fund's investments, these techniques could result in
a loss, regardless of whether the intent was to reduce risk or increase return.
These techniques may increase the volatility of the 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.
The Fund may each enter into contracts for the future delivery of debt
securities or an index of debt securities that are sufficiently correlated to
its portfolio. The Fund may also enter into contracts for the future delivery of
securities and stock index futures contracts to protect against changes in stock
market prices.
In addition, the Fund may enter into contracts for the future delivery of
foreign currencies to protect against changes in currency exchange rates for the
same type of hedging purposes, 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, and enter into a variety of foreign
currency transactions, including forward foreign currency exchange contracts in
order to protect or hedge against the adverse effect that changes in future
foreign currency exchange rates may have on its investment portfolio or on its
investment activities that are undertaken in foreign currencies.
The Fund may sell (write) covered put and call options and purchase put and call
options on any securities in which it may invest that are traded on U.S. and
foreign securities and options exchanges and in the over-the-counter market,
each in accordance with its respective investment objectives and policies.
The Fund may purchase put and call options on securities indexes to hedge
against risks of market-wide price fluctuations. Options on securities indexes
are similar to options on securities except that settlement is in cash.
SHORT SALES AGAINST THE BOX
A short sale is a transaction in which the 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, the Fund owns or has the right to obtain securities equivalent in
kind and amount. The Fund will only enter into short sales against the box. The
Fund may enter into a short sale against the box, among other reasons, to hedge
against a possible market decline in the value of the security owned or to defer
recognition of a gain or loss for federal income tax purposes on the security
owned by the Fund. To effect a short sale against the box, the Fund borrows from
a broker the securities which are sold in the short sale, and the broker holds
the proceeds until the borrowed securities are replaced. If the value of a
security sold short against the box increases, the Fund would suffer a loss when
it purchases or delivers to the selling broker the security sold short. If a
broker, with which the Fund has open short sales, were to become bankrupt, the
Fund could experience losses or delays in recovering gains on short sales. The
Fund will only enter into short sales against the box with brokers the
Sub-Adviser believes are creditworthy. Short sales against the box will be
limited to no more than 25% of the Fund's assets.
SWAP AGREEMENTS
The 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.
Whether the Fund's use of swap agreements will be successful in furthering its
investment objective will depend on the Sub-Adviser's ability to predict
correctly whether certain types of investments are likely to produce greater
returns than other investments. Because they are two-party contracts and because
they may have terms of greater than
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seven days, swap agreements may be considered to be illiquid. Moreover, the Fund
bears the risk of loss of the amount expected to be received under a swap
agreement in the event of the default or bankruptcy of a swap agreement
counterparty. The Sub-Adviser will cause the Fund to enter into swap agreements
only with counterparties that would be eligible for consideration as repurchase
agreement counterparties under the Fund's repurchase agreement guidelines.
Certain restrictions imposed on the Fund by the Internal Revenue Code may limit
the Fund's ability to use swap agreements. The swaps market is a relatively new
market and is largely unregulated. It is possible that developments in the swaps
market and the laws relating to swaps, including potential government
regulation, could adversely affect the Fund's ability to terminate existing swap
agreements, to realize amounts to be received under such agreements, or to enter
into swap agreements. Furthermore, swap agreements could have adverse tax
consequences. See Tax Status in the SAI for information regarding the tax
considerations relating to swap agreements.
WHEN-ISSUED SECURITIES AND FORWARD COMMITMENTS
The Fund may from time to time purchase securities on a when-issued basis. Debt
securities are often issued on this basis. The price of such securities is fixed
at the time a commitment to purchase is made, but delivery and payment for the
when-issued securities take place at a later date. During the period between
purchase and settlement, no payment is made by the Fund and no interest accrues
to the Fund. The market value of the when-issued securities on the settlement
date may be more or less than the purchase price payable at settlement date.
Similarly, the Fund may commit to purchase a security at a future date at a
price determined at the time of the commitment. The same procedures for
when-issued securities will be followed.
ZERO COUPON BONDS
The Fund may purchase zero coupon bonds, which are debt obligations issued
without any requirement for the periodic payment of interest. Zero coupon bonds
are issued at a significant discount from face value. Zero coupon bonds tend to
be more volatile than conventional debt securities.
RISKS OF INVESTING IN HIGH YIELD SECURITIES ("JUNK BONDS")
The Fund may invest in debt securities rated lower than Baa by Moody's or BBB by
S&P. Securities rated lower than Baa by Moody's or BBB by S&P, or, if not rated,
determined to be of equivalent quality by the Sub-Adviser, are sometimes
referred to as junk bonds and are considered speculative.
Investment in high yield bonds involves special risks in addition to the risks
associated with investments in higher rated debt securities. High yield bonds
may be regarded as predominantly speculative with respect to the issuer's
continuing ability to meet principal and interest payments. Moreover, such
securities may, under certain circumstances, be less liquid than higher rated
debt securities.
Analysis of the creditworthiness of issuers of high yield securities 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 bonds, be more dependent upon such creditworthiness
analysis than would be the case if the Fund were investing in higher quality
bonds.
High yield bonds may be more susceptible to real or perceived adverse economic
and competitive industry conditions than higher grade bonds. The prices of high
yield 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 bonds
defaults, the Fund may incur additional expenses to seek recovery. In the case
of high yield 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 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 bond, and could adversely affect and cause large fluctuations in the daily
NAV of the Fund's shares. Adverse publicity and investor perceptions, whether or
not based on fundamental analysis, may decrease the values and liquidity of high
yield bonds, especially in a thinly traded market.
The use of credit ratings for evaluating high yield 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 bonds. Also, credit rating
agencies may fail to change credit ratings in a timely manner to reflect
subsequent events. If a credit rating agency changes the rating of a portfolio
security held by a Fund, the Fund may retain the portfolio security if the
Sub-Adviser deems it in the best interest of the shareholders.
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INVESTMENT RESTRICTIONS
================================================================================
The following restrictions may not be changed with respect to the Fund without
the approval of the majority of outstanding voting securities of the Fund (as
defined in the 1940 Act). Investment restrictions that appear below or elsewhere
in this
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Prospectus which involve a maximum percentage of securities or assets shall not
be considered to be violated unless an excess over the percentage occurs
immediately after, and is caused by, an acquisition or encumbrance of securities
or assets of, or borrowings by or on behalf of, the Fund.
The Trust may not, on behalf of the Fund:
(1) with respect to 75% of the Fund's total assets, invest more than 5% of the
value of the total assets of the Fund in the securities of any one issuer,
except U.S. government securities or purchase the securities of any issuer
if such purchase would cause more than 10% of the voting securities of such
issuer to be held by the Fund.
(2) borrow money except from banks on a temporary basis for extraordinary or
emergency purposes, including the meeting of redemption requests or by
engaging in reverse repurchase agreements or comparable portfolio
transactions provided that the Fund maintains asset coverage of at least
300% for all such borrowings, and no purchases of securities will be made
while such borrowings exceed 5% of the value of the Fund's assets;
(3) purchase securities if such purchase would cause 25% or more in the
aggregate of the market value of the total assets of the Fund to be
invested in the securities of one or more issuers having their principal
business activities in the same industry, provided that there is no
limitation with respect to investments in U.S. government securities (for
the purposes of this restriction, telephone companies are considered to be
a separate industry from gas or electric utilities, and wholly owned
finance companies are considered to be in the industry of their parents if
their activities are primarily related to financing the activities of the
parents) except that up to 40% of the Fund's total assets, taken at market
value, may be invested in each of the electric utility and telephone
industries, but it will not invest 25% or more in either of those
industries unless yields available for four consecutive weeks in the four
highest rating categories on new issue bonds in such industry (issue size
of $50 million or more) have averaged in excess of 105% of yields of new
issue long-term industrial bonds similarly rated (issue size of $50 million
or more) and at such time that the 1940 Act is amended to permit a
registered investment company to elect to be "industry nondiversified"
(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;
(4) purchase or sell real estate (excluding securities secured by real estate
or interests therein or, issued by companies that invest in or deal in real
estate) commodities and commodity contracts. The Trust reserves the freedom
of action to hold and to sell real estate acquired for the Fund as a result
of the ownership of securities. Purchases and sales of foreign currencies
on a spot basis and forward foreign currency exchange contracts, options on
currency, currency futures contracts and options on such futures contracts
are not deemed to be an investment in a prohibited commodity or commodity
contract for the purpose of this restriction; or
(5) make loans to other persons, except loans of portfolio securities. The
purchase of debt obligations and the entry into repurchase agreements in
accordance with the Fund's investment objectives and policies are not
deemed to be loans for this purpose.
"Value" for the purposes of all investment restrictions shall mean the value
used in determining the Fund's NAV. Additional fundamental and nonfundamental
investment restrictions may be found in the SAI.
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MANAGER, SUB-ADVISER AND DISTRIBUTOR
================================================================================
THE MANAGER
The Trust, on behalf of the Fund, pays the Manager a monthly fee for services
performed at the annual rate of .75% of the average daily net assets of the
Fund.
The Fund pursuant to an Accounting Agreement with the Manager will bear an
allocable portion of the Manager's cost of performing certain bookkeeping and
pricing services. The Fund pays the Manager a monthly fee for services provided
under the Accounting Agreement at the annual rate of 1/20 of 1% for the first
$20 million of average monthly net assets, 1/30 of 1% of the next $80 million of
average monthly net assets and 1/100 of 1% of any amount in excess of $100
million of average monthly net assets. In addition, the Manager provides the
Fund with certain recordkeeping and administrative services pursuant to a
Service Agreement with the Fund.
The Manager is not responsible for records maintained by the Fund's Custodian,
Transfer, Dividend Disbursing and Shareholder Servicing Agent or Sub-Adviser.
THE SUB-ADVISER
Pursuant to the terms of the Sub-Advisory Agreement between the Manager and the
Sub-Adviser on behalf of the Fund, the Manager, not the Fund, pays the
Sub-Adviser a monthly fee for services peformed at the annual rate of .375% of
the Fund's average daily net assets.
THE DISTRIBUTOR
To compensate the Distributor for the services it provides and for the expenses
it bears in distributing shares and servicing shareholders of the Fund, the Fund
has adopted separate
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distribution plans pursuant to Rule 12b-1 under the 1940 Act for each class of
shares (the "Class A Plan," the "Class B Plan" and, collectively, the "Plans").
Pursuant to the Class A Plan, the Fund pays the Distributor a monthly fee, which
is an expense of the Class A shares of the Fund charged against its income, at
the annual rate of 0.25% of the average daily net assets of the Fund's Class A
shares for distribution or service activities, as designated by the Distributor.
Pursuant to the Class B Plan, the Fund pays the Distributor a monthly
distribution fee, which is an expense of the Class B shares of the Fund, at the
annual rate of 0.75% of the average daily net assets of the Fund's Class B
shares.
Class B shares of the Fund pay to the Distributor, in addition to the
distribution fee, a service fee at the rate of 0.25% on an annualized basis of
the average daily net asset value of the Class B shares of the Fund as
compensation for personal continuing services rendered to Class B shareholders
of the Fund and the maintenance of shareholder accounts.
The combination of the contingent deferred sales charge and the distribution fee
contributes to the Fund's ability to sell Class B shares without a sales charge
being deducted at the time of purchase. The Distributor is entitled to receive
the proceeds of contingent deferred sales charges which may be imposed at the
time of redemptions or repurchases of shares. The receipt of contingent deferred
sales charges does not reduce the distribution fee. See page 30, Alternative
Sales Arrangements--Deferred Sales Charge Class B Shares--Contingent Deferred
Sales Charge, Class B.
Under a Plan, a class of shares of the Fund pays distribution and/or service
fees to the Distributor as compensation for distribution and/or service
activities related to that class of shares and its shareholders. Each Plan
provides that the distribution and/or service fees are payable to the
Distributor regardless of the amounts actually expended by the Distributor.
Authorized distribution expenses include the Distributor's interest expense and
profit. The Distributor anticipates that its actual expenditures will
substantially exceed the distribution fee received by it during the early years
of the operation of a Plan. For example, the Distributor will advance to dealers
who sell Class B shares of the Funds an amount equal to 4% of the aggregate net
asset value of the shares sold. In addition, the Distributor will pay dealers an
ongoing annual service fee equal to 0.25% of the aggregate net asset value of
shares held by investors serviced by the dealer. In later years, its
expenditures may be less than the distribution fee, thus enabling the
Distributor to realize a profit in those years. If the Plans for the Fund are
terminated, the Fund will owe no payments to the Distributor other than any
portion of the distribution fee accrued through the effective date of
termination but then unpaid.
Plan revenues may be used to reimburse third parties which provide various
services to shareholders who are participants in various retirement plans. These
services include aggregating and processing purchase and redemption orders for
participant shareholders, processing dividend payments, forwarding shareholder
communications, and recordkeeping.
Persons selling or servicing different classes of shares of the Fund may receive
different compensation with respect to one particular class of shares as opposed
to another.
================================================================================
HOW TO PURCHASE SHARES OF THE FUND
================================================================================
GENERAL INFORMATION
The two classes of shares each represent an interest in the same portfolio of
investments of the Fund, have the same rights and are identical in all respects,
except that, to the extent applicable, each class bears its own service and
distribution expenses and may bear incremental transfer agency costs resulting
from such sales arrangement. Each class of the Fund has exclusive voting rights
with respect to provisions of the Rule 12b-1 plan for such class pursuant to
which its distribution and service fees are paid, and each class has similar
exchange privileges. The net income attributable to Class B shares and the
dividends payable on Class B shares will be reduced by the amount of the higher
Rule 12b-1 fee and incremental expenses associated with such class. Likewise,
the NAV of the Class B shares will be generally reduced by such class specific
expenses (to the extent the Fund has undistributed net income) and investment
performance of Class B shares will be less competitive than that of Class A
shares. For additional information on the features of Class A and Class B
shares, see Alternative Sales Arrangements, page 29.
BY MAIL
Initial purchases of shares of the Fund should be made by mailing the completed
application form to the investor's Registered Representative. Shares of the Fund
may be purchased at the NAV per share next determined after receipt and
acceptance of the purchase order by the Fund plus any applicable sales charge.
BY TELEPHONE
An investor may make an initial investment by having his or her Registered
Representative telephone the Distributor between 9:00 AM and 4:00 PM, Eastern
time, on any day the New York Stock Exchange is open. The purchase will be
effected at the NAV per share plus any applicable sales charge next determined
following receipt of the telephone order as described above. An application and
payment must be received and accepted by the Distributor within three business
days. All telephone calls are recorded to protect shareholders and the
Shareholder Servicing Agent. For a description of certain limitations on the
liability of the Fund and the Shareholder Servicing Agent for transactions
effected by telephone, see page 14, Know How to Sell and Exchange Shares.
27
<PAGE>
BY WIRE
An investor may open an account and invest by wire by having his or her
Registered Representative telephone the Distributor between 9:00 AM and 4:00 PM,
Eastern time, to obtain an account number and instructions. For both initial and
subsequent investments, federal funds should be wired to:
State Street Bank and Trust Company
225 Franklin Street
Boston, Massachusetts 02110
ABA No.: 011 0000 28
Attn.: Custody and Shareholder Services
For Credit: MainStay Strategic Value Fund--
Class______
Shareholder Account No.____________________________
Shareholder Registration ____________________________
An application must be received by the Distributor within three business days.
The investor's bank may charge the investor a fee for the wire.
To make a purchase effective the same day, the registered representative must
call the Distributor by 12:00 noon, Eastern time, and federal funds must be
received by the Shareholder Servicing Agent before 4:00 PM, Eastern time.
Wiring money to the Fund will reduce the time a shareholder must wait before
redeeming or exchanging shares because, when a shareholder purchases by check,
the Fund will withhold payment for up to 10 days of purchase or until the check
clears, whichever is first.
ADDITIONAL INVESTMENTS
Additional investments in the Fund may be made at any time by mailing a check
payable to the Fund directly to The MainStay Funds, P.O. Box 8401, Boston,
Massachusetts 02266-8401. The shareholder's account number and the name of the
Fund and class of shares must be included with each investment. Purchases will
be effected at the NAV per share plus any applicable sales charge as described
above.
SYSTEMATIC INVESTMENT PLANS
The Trust's officers may waive the initial and subsequent investment minimums
for certain purchases when they deem it appropriate, including, but not limited
to, purchases by certain qualified retirement plans, New York Life employee and
agent investment plans, investments resulting from distributions by other New
York Life products and NYLIFE Distributors products, and purchases by certain
individual participants.
Investors whose bank is a member of the Automated Clearing House ("ACH") may
purchase shares of the Fund through AutoInvest. AutoInvest facilitates
investments by using electronic debits, authorized by the shareholder, to a
checking or savings account, for share purchases. When the authorization is
accepted (usually within two weeks of receipt) a shareholder may purchase shares
by calling the Shareholder Servicing Agent toll free at 1-800-MAINSTAY (between
8:00 AM and 4:00 PM, Eastern time). The investment will be effected at the NAV
per share, next determined after receipt and acceptance of the order plus any
applicable sales charge, and normally will be credited to the shareholder's Fund
account within two business days thereafter. Shareholders whose bank is an ACH
member also may use AutoInvest to automatically purchase shares of the Fund on a
scheduled basis by electronic debit for an account designated by the shareholder
on an application form. The initial investment must be in accordance with the
investment amounts previously mentioned. Subsequent minimum investments are $50
monthly, $100 quarterly, $250 semiannually, or $500 annually. The investment day
may be any day from the first through the twenty-eighth of the respective month.
Redemption proceeds from Fund shares purchased by AutoInvest may not be paid for
up to 10 days after the purchase date. Fund shares may not be redeemed by
AutoInvest.
OTHER INFORMATION
Investors may, subject to the approval of the Trust, the Distributor, the
Manager and the Sub-Adviser purchase shares of the Fund with liquid securities
that are eligible for purchase by the Fund and that have a value that is readily
ascertainable. These transactions will be effected only if the Sub-Adviser
intends to retain the security in the Fund as an investment. The Trust reserves
the right to amend or terminate this practice at any time. An investor must call
MainStay at 1-800-MAINSTAY before sending any securities.
An investor in certain qualified retirement plans may open an account with a
minimum investment of a lesser amount when permitted under such qualified
retirement plan. The Trust and the Distributor reserve the right to redeem
shares of any shareholder who has failed to provide the Trust with a certified
Taxpayer I.D. Number or such other tax-related certifications as the Trust may
require. A notice of redemption, sent by first class mail to the shareholder's
address of record, will fix a date not less than 30 days after the mailing date,
and shares will be redeemed at the NAV determined as of the close of business on
that date unless a certified Taxpayer I.D. Number (or such other information as
the Trust has requested) has been provided.
28
<PAGE>
================================================================================
ALTERNATIVE SALES ARRANGEMENTS
================================================================================
INITIAL SALES CHARGE ALTERNATIVE: CLASS A SHARES
The sales charge on Class A shares of the Fund is a variable percentage of the
public offering price depending upon the amount of the sale.
The sales charge applicable to an investment in Class A shares of the Fund will
be determined according to the following table:
<TABLE>
<CAPTION>
Sales Charge as
Sales Charge as a Percentage of
a Percentage of: Offering Price:
--------------------- ---------------------------
Net Retained
Amount of Offering Amount Retained by the
Purchase Price Invested by Dealer Distributor
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Less than $50,000 5.50% 5.82% 4.75% 0.75%
$50,000 to $99,999 4.50% 4.71% 4.00% 0.50%
$100,000 to $249,999 3.50% 3.63% 3.00% 0.50%
$250,000 to $499,999 2.50% 2.56% 2.00% 0.50%
$500,000 to $999,999 2.00% 2.04% 1.75% 0.25%
$1,000,000 or more* None None See Below* None
- --------------------------------------------------------------------------------
</TABLE>
* No sales charge applies on investments of $1 million or more, but a
contingent deferred sales charge of 1% is imposed on certain redemptions of
such shares within one year of the date of purchase. See "Reduced Sales
Charges on Class A Shares--Contingent Deferred Sales Charge, Class A."
From October 22, 1997 through February 28, 1998, a 100% Dealer Reallowance will
be offered.
Although an investor will not pay an initial sales charge on investments of
$1,000,000 or more, the Distributor will pay, from its own resources, a
commission to dealers on such investments. The dealer will receive a commission
of 1.00% on the portion of a sale from $1,000,000 to $2,999,999, 0.50% of any
portion from $3,000,000 to $4,999,999 and 0.40% on any portion of $5,000,000 or
more.
The Distributor may allow the full sales charge to be retained by dealers. The
amount retained may be changed from time to time but will remain the same for
all dealers. The Distributor, at its expense, also may from time to time provide
additional promotional incentives to dealers. A selected dealer who receives a
reallowance in excess of 90% of such a sales charge may be deemed to be an
"underwriter" under the 1933 Act.
PURCHASES AT NAV
The Fund's Class A shares may be purchased at NAV, without payment of any sales
charge, by its Trustees, New York Life and its subsidiaries and their employees,
officers, directors or agents (and immediate family members). Also, any employee
or registered representative of an authorized broker-dealer may purchase the
Fund's shares at NAV without payment of any sales charge. In addition, the Trust
will treat Class A share purchases of the Fund in an amount less than $1,000,000
by defined contribution plans that are sponsored by employers with 250 or more
employees as if such purchases were equal to an amount more than $1,000,000 but
less than $2,999,999.
In addition, Class A shares of the Fund may be purchased at NAV through
broker-dealers, investment advisers and other financial institutions which have
entered into a supplemental agreement with the Distributor, which includes a
requirement that such shares be sold for the benefit of clients participating in
a "wrap account" or similar program under which clients pay a fee to the
broker-dealer, investment adviser or other financial institution.
REDUCED SALES CHARGES ON CLASS A SHARES
The sales charge varies with the size of the purchase and reduced charges apply
to the aggregate of purchases of the Fund made at one time by any "Qualified
Purchaser," which term includes (i) an individual and his/her spouse and their
children under the age of 21; and (ii) any other organized group of persons,
whether incorporated or not, which is itself a shareholder of the Fund,
including group retirement and benefit plans (other than IRAs and 403(b) plans)
whether incorporated or not, provided the organization has been in existence for
at least six months and has some purpose other than the purchase at a discount
of redeemable securities of a registered investment company. The circumstances
under which "Qualified Purchasers" and other investors in the Fund may pay
reduced sales charges are described on page 11, "Consider Reducing Your Sales
Charge."
Letter of Intent
Qualified Purchasers may obtain reduced sales charges by signing an LOI. The LOI
is a nonbinding obligation on the Qualified Purchaser to purchase the full
amount indicated in the LOI. The sales charge is based on the total amount
invested during a 24-month period. A 90-day back-dated period can be used to
include earlier purchases; the 24-month period would then begin on the date of
the first purchase during the 90-day period. For more information, see the SAI
or call your Registered Representative or MainStay at 1-800-MAINSTAY.
Transfers From Other Fund Complexes
Subject to appropriate documentation, a Qualified Purchaser or any other
investor may purchase Class A shares of the Fund at net asset value through a
dealer where the amount invested represents redemption proceeds from a
registered open-end management investment company not distributed or managed by
New York Life or its affiliates, if such redemption has occurred no more than 30
days prior to the purchase of Class A shares of the Fund and the shareholder
paid an initial sales charge.
Contingent Deferred Sales Charge, Class A
In order to recover commissions paid to dealers on qualified investments of $1
million or more, a contingent deferred sales charge of 1% will be imposed on
redemptions of such investments made within one year of the date of purchase.
29
<PAGE>
Class A shares that are redeemed will not be subject to a contingent deferred
sales charge, however, to the extent that the value of such shares represents:
(1) capital appreciation of Fund assets; (2) reinvestment of dividends or
capital gains distributions; or (3) Class A shares redeemed more than one year
after their purchase. Class A shares of the Fund that are purchased without a
front-end sales charge may be exchanged for Class A shares of another Fund
without the imposition of a contingent deferred sales charge, although, upon
redemption, contingent deferred sales charges may apply to the Class A shares
that were acquired through an exchange.
The contingent deferred sales charge will be applicable to amounts invested
pursuant to a right of accumulation or an LOI to the extent that (a) a front-end
sales charge was not paid at the time of the purchase and (b) any shares so
purchased are redeemed within one year of the date of purchase.
For federal income tax purposes, the amount of the contingent deferred sales
charge generally will reduce the gain or increase the loss, as the case may be,
recognized upon redemption.
DEFERRED SALES CHARGE CLASS B SHARES
Proceeds from the contingent deferred sales charge are paid to, and are used in
whole or in part by, the Distributor to defray its expenses related to providing
distribution related services to the Fund in connection with the sale of the
Class B shares, such as the payment of compensation to selected dealers and
agents. The combination of the contingent deferred sales charge and the
distribution fee facilitates the ability of the Fund to sell the Class B shares
without a sales charge being deducted at the time of purchase.
Contingent Deferred Sales Charge, Class B
A contingent deferred sales charge will be imposed on redemptions of Class B
shares of the Fund, in accordance with the table below, at the time of any
redemption by a shareholder which reduces the current value of the shareholder's
Class B account in the Fund to an amount which is lower than the amount of all
payments by the shareholder for the purchase of Class B shares in the Fund
during the preceding six years. However, no such charge will be imposed to the
extent that the net asset value of the Class B shares redeemed does not exceed
(a) the current aggregate net asset value of Class B shares of the Fund
purchased more than six years prior to the redemption, plus (b) the current
aggregate net asset value of Class B shares of the Fund purchased through
reinvestment of dividends or distributions, plus (c) increases in the net asset
value of the investor's Class B shares of the Fund above the total amount of
payments for the purchase of Class B shares of the Fund made during the
preceding six years. The amount of any contingent deferred sales charge will be
paid to and retained by the Distributor.
The amount of the contingent deferred sales charge, if any, will vary depending
on the number of years from the time of payment for the purchase of Class B
shares of the Fund until the time of redemption of such shares. Solely for
purposes of determining the number of years from the time of payment for the
purchase of shares, all payments during a month will be aggregated and deemed to
have been made on the last day of the month.
The following table sets forth the rates of the contingent deferred sales
charge:
<TABLE>
<CAPTION>
Contingent Deferred Sales
Charge as a Percentage
Year Since Purchase of Amount Redeemed
Payment Made Subject to the Charge
- --------------------------------------------------------------------------------
<S> <C>
First ........................................................ 5.0%
Second ....................................................... 4.0%
Third ........................................................ 3.0%
Fourth ....................................................... 2.0%
Fifth ........................................................ 2.0%
Sixth ........................................................ 1.0%
Thereafter ................................................... None
- --------------------------------------------------------------------------------
</TABLE>
In determining the rate of any applicable contingent deferred sales charge, it
will be assumed that a redemption is made of shares held by the shareholder for
the longest period of time. This will result in any such charge being imposed at
the lowest possible rate. For federal income tax purposes, the amount of the
contingent deferred sales charge generally will reduce the gain or increase the
loss, as the case may be, recognized on the redemption or repurchase of shares.
The contingent deferred sales charge will be waived in connection with the
following redemptions: (i) withdrawals from IRS qualified and nonqualified
retirement plans, individual retirement accounts, tax sheltered accounts, and
deferred compensation plans, where such withdrawals are permitted under the
terms of the plan or account (e.g., attainment of age 59 1/2, separation from
service, death, disability, loans, hardships, withdrawals of excess
contributions pursuant to applicable IRS rules, withdrawals based on life
expectancy under applicable IRS rules); (ii) withdrawals related to the
termination of a retirement plan where no successor plan has been established;
(iii) preretirement transfers or rollovers within a retirement plan where the
proceeds of the redemption are invested in proprietary products offered or
distributed by New York Life or its affiliates; (iv) required distributions by
charitable trusts under Section 664 of the Code; (v) living revocable trusts on
the death of the beneficiary; (vi) redemptions made within one year following
the death or disability of a shareholder; (vii) continuing, periodic withdrawals
under the Systematic Withdrawal Plan used to pay monthly premiums to New York
Life or an affiliate of New York Life; (viii) continuing, periodic withdrawals,
under the Systematic Withdrawal Plan, up to an annual total of 10% of the value
of a shareholder's Class B share account in the Fund; (ix) redemptions by New
York Life or an affiliate of New York Life; (x) redemptions by directors,
Trustees, officers and employees (and immediate family members) of the Trust and
of New York Life and its affiliates where no commissions have been paid;
30
<PAGE>
(xi) redemptions by employees of any dealer which has a soliciting dealer
agreement with the Distributor, and by any trust, pension, profit-sharing or
benefit plan for the benefit of such persons where no commissions have been
paid; (xii) redemptions by separate accounts or advisory accounts managed by New
York Life or an affiliated company; (xiii) redemptions by tax-exempt employee
benefit plans resulting from the adoption or promulgation of any law or
regulation; (xiv) redemptions effected by registered investment companies by
virtue of transactions with the Fund; (xv) redemptions by any state, county or
city, or any instrumentality, department, authority or agency thereof and by
trust companies and bank trust departments; (xvi) involuntary redemptions of an
account with a net asset value of $250 or less; and (xvii) transfers to (a)
other funding vehicles sponsored or distributed by New York Life or an
affiliated company, or (b) guaranteed investment contracts, regardless of the
sponsor, within a retirement plan. The contingent deferred sales charge is
waived on such sales or redemptions to promote goodwill and because the sales
effort, if any, involved in making such sales is negligible. Shareholders should
notify the Fund's Transfer Agent at the time of requesting such redemptions that
they are eligible for a waiver of the contingent deferred sales charge. Class B
shares upon which the contingent deferred sales charge may be waived may not be
resold, except to the Trust. Shareholders who are making withdrawals from
retirement plans and accounts or other tax-sheltered or tax-deferred accounts
should consult their tax advisers regarding the tax consequences of such
withdrawals.
================================================================================
REDEMPTION AND EXCHANGES
===============================================================================
Shares may be redeemed directly from the Fund or through your Registered
Representative. Shares redeemed will be valued at the NAV per share next
determined after the Transfer Agent receives the redemption request in "good
order." "Good order" with respect to a redemption request generally means that a
stock power or certificate must be endorsed by the record owner(s) exactly as
the shares are registered and the signature(s) must be guaranteed by an eligible
guarantor institution. In cases where redemption is requested by a corporation,
partnership, trust, fiduciary or any other person other than the record owner,
written evidence of authority acceptable to the Fund's Transfer Agent must be
submitted before the redemption request will be accepted. The signature
guarantee may be waived on a redemption of $100,000 or less which is payable to
the shareholder(s) of record and mailed to the address of record, or under such
other circumstances as the Trust may allow.
Upon the redemption of shares, the Fund will make payment in cash, except as
described below, of the net asset value of the shares next determined after such
redemption request was received, less any applicable contingent deferred sales
charge. 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 such Exchange is restricted or the
SEC deems an emergency to exist.
The value of the shares redeemed from the Fund may be more or less than the
shareholder's cost, depending on portfolio performance during the period the
shareholder owned the shares.
Systematic Withdrawal Plan
Dividends and capital gains distributions on shares held under the Systematic
Withdrawal Plan are reinvested in additional full and fractional shares of the
Fund at NAV. The Fund's Transfer Agent acts as agent for the shareholder in
redeeming sufficient full and fractional shares to provide the amount of the
systematic withdrawal payment and any contingent deferred sales charge, if
applicable.
Exchange Privileges
Exchanges will be based upon each Fund's NAV per share next computed following
receipt of a properly executed exchange request.
Subject to the conditions and limitations described herein, Class A and Class B
shares of the Fund may be exchanged for shares of an identical class of the
following MainStay Funds:
MainStay California Tax Free Fund
MainStay Capital Appreciation Fund
MainStay Convertible Fund
MainStay Government Fund
MainStay High Yield Corporate Bond Fund
MainStay International Bond Fund
MainStay International Equity Fund
MainStay Money Market Fund
MainStay New York Tax Free Fund
MainStay Strategic Income Fund
MainStay Tax Free Bond Fund
MainStay Total Return Fund
MainStay Value Fund
In addition, an exchange privilege between Class A shares of the Fund and
MainStay Equity Index Fund is offered. Any exchanges between the Fund and
MainStay Equity Index Fund will be subject to the conditions applicable to Class
A share exchanges described herein, as well as any applicable minimum investment
requirements. No exchange privilege between Class B shares of the Fund and
MainStay Equity Index Fund is offered.
You must first obtain the prospectus for any MainStay Fund into which you wish
to make an exchange by calling 1-800-MAINSTAY. You should read the Prospectus
carefully before you place an exchange request.
Generally, shareholders may exchange their Class A shares of the Fund for Class
A shares of another MainStay Fund, without the imposition of a sales charge. Any
such exchanges will be based upon each Fund's NAV per share next computed
following receipt of a properly executed exchange request.
31
<PAGE>
Class B shares of the Fund may be exchanged for Class B shares of another
MainStay Fund at the NAV next computed following receipt of a properly executed
exchange request, without the payment of a contingent deferred sales charge; the
sales charge will be assessed, if applicable, when the shareholder redeems his
or her shares without a corresponding purchase of shares of another MainStay
Fund. However, where a shareholder previously exchanged his or her Class B
shares into the MainStay Money Market Fund from another MainStay Fund, the
applicable contingent deferred sales charge will be assessed when the shares are
redeemed from the Money Market Fund even though the Money Market Fund does not
otherwise assess a contingent deferred sales charge on redemptions. Class B
shares of a Fund acquired as a result of subsequent investments, except
reinvested dividends and distributions, will be subject to the contingent
deferred sales charge when ultimately redeemed or repurchased without purchasing
shares of another MainStay Fund.
Exchanges may only be made with respect to Funds registered in the state of
residence of the investor or where an exemption from registration is available.
An exchange may be made by either writing to the Fund's Shareholder Servicing
Agent at the following address: The MainStay Funds, P.O. Box 8401, Boston,
Massachusetts 02266-8401, or by calling the Fund's Shareholder Servicing Agent
at 1-800-MAINSTAY (8:00 AM to 4:00 PM, Eastern time).
In times when the volume of telephone exchanges is heavy, additional phone lines
will automatically be added by the Transfer Agent. However, in times of drastic
economic or market changes, the telephone exchange privilege may be difficult to
implement. When calling the Shareholder Servicing Agent to make a telephone
exchange, shareholders should have available their account number and Social
Security or Taxpayer I.D. Numbers. Under the telephone exchange privilege,
shares may only be transferred among accounts with identical names, addresses
and Social Security or Taxpayer I.D. Numbers. Shares may be exchanged among
accounts with different names, addresses and Social Security or Taxpayer I.D.
Numbers only if the exchange request is in writing and is received in "good
order." If the dealer permits, the dealer representative of record may initiate
telephone exchanges on behalf of a shareholder, unless the shareholder notifies
the Fund in writing not to permit such exchanges. See Redemptions and Exchanges,
page 31.
It is the policy of The MainStay Funds to discourage frequent trading by
shareholders among the Funds in response to market fluctuations. Accordingly, in
order to maintain a stable asset base in each Fund and to reduce administrative
expenses borne by each Fund, five exchanges are permitted in each 12-month
period without the imposition of any transaction fee; subsequently, exchange
requests may be denied.
For purposes of determining the length of time a shareholder owned Class B
shares prior to redemption or repurchase in order to determine the applicable
contingent deferred sales charge, Class B shares will be deemed to have been
held from the date of purchase of the shares, regardless of exchanges into other
Funds. For federal income tax purposes, an exchange is treated as a sale on
which an investor may realize a gain or loss.
See page 17, Understand the Tax Consequences, for information concerning the
federal income tax treatment of a disposition of shares. All exchanges are
subject to the minimum investment requirements of the Funds involved. The
exchange privilege may be modified or withdrawn at any time without notice.
Distributions in Kind
The Trust has agreed to redeem shares of the Fund solely in cash up to the
lesser of $250,000 or 1% of the net asset value of the Fund during any 90-day
period for any one shareholder. The Trust reserves the right to pay other
redemptions, either total or partial, by a distribution in kind of securities
(instead of cash) from the Fund's portfolio. The securities distributed in such
a distribution would be valued at the same value as that assigned to them in
calculating the NAV of the shares being redeemed. If a shareholder receives a
distribution in kind, he or she should expect to incur transaction costs when he
or she converts the securities to cash.
================================================================================
TAX-DEFERRED RETIREMENT PLANS
================================================================================
Shares of the Fund may be purchased for retirement plans, providing tax-deferred
investments for individuals and institutions. Shares purchased may be used as
investments for established plans, or the Distributor may provide plan documents
for selected plans. A plan document must be adopted in order for a plan to be in
existence.
Custodial services are provided for IRA/SEP/SARSEP plans, and for 403(b)(7)
Custodial Accounts. Plan administration is also available for select qualified
retirement plans.
Contributions made to such plans to the extent provided in federal income tax
law currently in effect, and earnings thereon, will not be taxable to the plan
participant until distribution. An investor should consult with his or her tax
adviser before establishing any tax-deferred retirement plan.
The Internal Revenue Service ("IRS") has specific distribution requirements that
apply to investors who reach age 70 1/2.
================================================================================
NET ASSET VALUE
================================================================================
For purposes of determining NAV, portfolio securities of the Fund are valued at
their fair market values as determined by the methods described in the SAI with
the exception of money market instruments held by the Fund, which are valued by
the amortized cost method.
32
<PAGE>
================================================================================
PORTFOLIO TRANSACTIONS
================================================================================
The primary consideration in portfolio security transactions is best execution.
Subject to this requirement, securities may be bought from or sold to brokers or
dealers who have furnished statistical, research and other information or
services to the Adviser. Consistent with the foregoing primary consideration,
the Rules of Fair Practice of the National Association of Securities Dealers,
Inc. and such other policies as the Trustees may determine, the Sub-Adviser may
consider sales of shares of the Fund as a factor in the selection of
broker-dealers to execute the Fund's portfolio transactions. NYLIFE Securities
Inc., may act as a broker for the Trust in accordance with applicable
regulations.
Some securities considered for investment by the Fund may also be appropriate
for other clients served by the Fund's Sub-Adviser. If a purchase or sale of
securities consistent with the investment policies of a Fund and one or more of
the clients served by the Fund's Sub-Adviser is considered at or about the same
time, transactions in such securities may be executed together and will, to the
extent practicable, be allocated among the Fund and clients in a manner deemed
equitable to the Fund and the clients by the Fund's Sub-Adviser. Although there
is no specified formula for allocating such transactions, the various allocation
methods used by a Fund's Sub-Adviser, and the results of such allocations, are
subject to periodic review by the Trustees.
================================================================================
TAX INFORMATION
================================================================================
The Fund generally will not be subject to federal income tax on its net taxable
investment income and net realized capital gains to the extent such income and
gains are distributed to its shareholders in accordance with the timing
requirements of the Code.
33
<PAGE>
================================================================================
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 B in its corporate bond rating system. The modifier 1
indicates that the security 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.
Designations Applicable to Municipal Bond Ratings
In its municipal bond rating system, Moody's designates those bonds within the
Aa, A, Baa, Ba and B categories that it believes possess the strongest credit
attributes with the symbols Aa1, A1, Baa1, Ba1 and B1.
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).
Issues that are subject to a periodic reoffer and resale in the secondary market
in a "dutch auction" are assigned a long-term rating based only on Moody's
assessment of the ability and willingness of the issuer to make timely principal
and interest payments. Moody's expresses no opinion as to the ability of the
holder to sell the security in a secondary market "dutch auction." Such issues
are identified by the insertion of the words "dutch auction" into the name of
the issue.
Municipal Short-Term Loan Ratings
Issues or the features associated with MIG, VMIG or SQ ratings are identified by
date of issue, date of maturity or maturities or rating expiration date and
description to distinguish each rating from other ratings. Each rating
designation is unique with no implication as to any other similar issue of the
same obligor. MIG ratings terminate at the retirement of the obligation while
VMIG rating expiration will be a function of each issue's specific structural or
credit features.
MIG 1/VMIG 1: This designation denotes best quality. There
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<PAGE>
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.
SQ: 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. Obligations relying upon support mechanisms such as letters-of-credit
and bonds of indemnity are excluded unless explicitly rated.
Moody's employs the following three designations, all judged to be investment
grade, to indicate the relative repayment ability of rated issuers:
PRIME-1: Issuers rated Prime-1 (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-1 repayment
ability will often be evidenced by many of the following characteristics:
leading market positions in well-established industries; high rates of return on
funds employed; conservative capitalization structure with moderate reliance on
debt and ample asset protection; broad margins in earnings coverage of fixed
financial charges and high internal cash generation; and well-established access
to a range of financial markets and assured sources of alternate liquidity.
PRIME-2: Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
PRIME-3: Issuers rated Prime-3 (or supporting institutions) have an acceptable
ability for repayment of senior short-term obligations. The effect of industry
characteristics and market compositions may be more pronounced. Variability in
earnings and profitability may result in changes in the level of debt protection
measurements and may require relatively high financial leverage. Adequate
alternate liquidity is maintained.
NOT PRIME: Issuers rated Not Prime do not fall within any of the Prime rating
categories.
STANDARD & POOR'S
Corporate and Municipal Debt Ratings
Investment Grade
AAA: Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA: Debt rated AA has a very strong capacity to pay interest and repay principal
and differs from the highest rated issues only in small degree.
A: Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB: Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
Speculative Grade
Debt rated BB, B, CCC, CC, and C is regarded as having predominantly 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 are
outweighed by large uncertainties or major exposures to adverse conditions.
BB: Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB- rating.
B: Debt rated B has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The B rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied BB or BB-
rating.
CCC: Debt rated CCC has a currently identifiable vulnerability to default and is
dependent upon favorable business, financial and economic conditions to meet
timely
35
<PAGE>
payment of interest and repayment of principal. In the event of adverse
business, financial or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The CCC rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
B or B- rating.
CC: The rating CC typically is applied to debt subordinated to senior debt which
is assigned an actual or implied CCC rating.
C: The rating C typically is applied to debt subordinated to senior debt which
is assigned an actual or implied CCC- debt rating. The C rating may be used to
cover a situation where a bankruptcy petition has been filed, but debt service
payments are continued.
C1: The rating C1 is reserved for income bonds on which no interest is being
paid.
D: Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments 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 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.
Provisional ratings: The letter "p" indicates that the rating is provisional. A
provisional rating assumes the successful completion of the project being
financed by the debt being rated and indicates that payment of debt service
requirements is largely or entirely dependent upon the successful and timely
completion of the project. This rating, however, while addressing credit quality
subsequent to completion of the project, makes no comment on the likelihood of,
or the risk of default upon failure of, such completion. The investor should
exercise his own judgment with respect to such likelihood and risk.
r: The "r" is attached to highlight derivative, hybrid, and certain other
obligations that S&P believes may experience high volatility or high variability
in expected returns due to noncredit risks. Examples of such obligations are:
securities whose principal or interest return is indexed to equities,
commodities, or currencies; certain swaps and options; and interest-only and
principal-only mortgage securities.
The absence of an "r" symbol should not be taken as an indication that an
obligation will exhibit no volatility or variability in total return.
N.R.: Not rated.
Debt obligations of issuers outside the United States and its territories are
rated on the same basis as domestic corporate and municipal issues. The ratings
measure the creditworthiness of the obligor but do not take into account
currency exchange and related uncertainties.
Note Rating Definitions
SP-1: Strong capacity to pay principal and interest. Issues determined to
possess very strong characteristics are given a plus (+) designation.
SP-2: Satisfactory capacity to pay principal and interest, with some
vulnerability to adverse financial and economic changes over the term of the
notes.
SP-3: Speculative capacity to pay principal and interest.
Commercial Paper Rating Definitions
A-1: This highest category indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus sign (+) designation.
A-2: Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.
A-3: Issues carrying this designation have adequate capacity for timely payment.
They are, however, more vulnerable to the adverse effects of changes in
circumstances than obligations carrying the higher designations.
B: Issues rated B are regarded as having only speculative capacity for timely
payment.
C: This rating is assigned to short-term debt obligations with a doubtful
capacity for payment.
D: Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments 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.
A commercial paper rating is not a recommendation to purchase, sell or hold a
security inasmuch as it does not comment as to market price or suitability for a
particular investor. The ratings are based on current information furnished to
S&P by the issuer or obtained by S&P from other sources it considers reliable.
S&P does not perform an audit in connection with any rating and may, on
occasion, rely on unaudited financial information. The ratings may be changed,
suspended, or withdrawn as a result of changes in, or unavailability of, such
information.
36
<PAGE>
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 Trust or the Distributor. This Prospectus and the related Statement of
Additional Information do not constitute an offer by the Trust 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.
[GRAPHIC] MAINSTAY (R) FUNDS
NYLIFE Distributors Inc., member NASD, 300 Interpace Parkway,
Parsippany, NJ 07054, the distributor of The MainStay Funds,
http://www.mainstayfunds.com, is an indirect wholly owned subsidiary
of New York Life Insurance Company.
[LOGO] NEW YORK LIFE
10/97
[GRAPHIC]
<PAGE>
THE MAINSTAY FUNDS
STRATEGIC VALUE FUND
- --------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
OCTOBER __, 1997
- --------------------------------------------------------------------------------
This Statement of Additional Information is not a prospectus and
should be read in conjunction with the Prospectus of the Strategic Value Fund
dated October __, 1997, as amended or supplemented from time to time, a copy of
which may be obtained without charge by writing to NYLIFE Distributors Inc.,
(the "Distributor") 260 Cherry Hill Road, Parsippany, NJ 07054 or by calling 1-
800-MAINSTAY (1-800-624-6782).
The MainStay Strategic Value Fund (the "Fund") is a diversified, open-
end management investment company organized as a separate series of The MainStay
Funds (the "Trust"), a Massachusetts business trust.
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 offers contained herein, and, if given or made, such other
information or representations must not be relied upon as having been authorized
by the Funds or the Distributor. This Statement of Additional Information and
the related Prospectus do not constitute an offer by the Trust 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
Shareholder Services, Inc., P.O. Box 8401, Boston, Massachusetts 02266-8401, or
by calling 1-800-MAINSTAY. In addition, you can make inquiries through your
registered representative.
<PAGE>
TABLE OF CONTENTS
PAGE IN
STATEMENT OF
ADDITIONAL
INFORMATION
-----------
INVESTMENT PRACTICES AND INSTRUMENTS........................ 4
Repurchase Agreements.................................. 4
Lending of Portfolio Securities........................ 5
Bank Obligations....................................... 6
U.S. Government Securities............................. 6
Debt Securities........................................ 7
Convertible Securities................................. 7
Arbitrage.............................................. 8
Foreign Securities..................................... 9
Foreign Currency Transactions.......................... 10
Brady Bonds............................................ 13
Municipal Securities................................... 14
Floating and Variable Rate Securities.................. 16
Zero Coupon Bonds...................................... 16
When-Issued Securities................................. 17
Mortgage-Related and Other Asset-Backed Securities..... 17
Short Sales Against the Box............................ 26
Options on Securities.................................. 26
Options on Foreign Currencies.......................... 31
Securities Index Options............................... 34
Futures Transactions................................... 35
Swap Agreements........................................ 45
Loan Participation Interests........................... 47
Risks Associated with Debt Securities.................. 49
Risks of Investing in High Yield Securities ("Junk
Bonds")........................................... 50
ADDITIONAL FUNDAMENTAL INVESTMENT RESTRICTIONS.............. 51
ADDITIONAL NON-FUNDAMENTAL INVESTMENT RESTRICTIONS.......... 51
TRUSTEES AND OFFICERS....................................... 52
THE MANAGER, THE SUB-ADVISER AND THE DISTRIBUTOR............ 59
Management Agreement................................... 59
Sub-Advisory Agreement................................. 60
Distribution Agreement................................. 61
Other Services......................................... 63
Expenses Borne by the Trust............................ 63
PORTFOLIO TRANSACTIONS AND BROKERAGE........................ 64
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NET ASSET VALUE............................................. 67
SHAREHOLDER INVESTMENT ACCOUNT.............................. 69
SHAREHOLDER SERVICING AGENT................................. 69
PURCHASES AND REDEMPTIONS................................... 70
Letter of Intent ("LOI")............................... 70
Suspension of Redemptions.............................. 70
TAX-DEFERRED RETIREMENT PLANS............................... 71
Cash or Deferred Profit Sharing Plans Under Section
401(k) for Corporations and Self-Employed
Individuals....................................... 71
Individual Retirement Account ("IRA").................. 71
403(b)(7) Tax Sheltered Account........................ 72
General Information.................................... 72
CALCULATION OF PERFORMANCE QUOTATIONS....................... 73
TAX STATUS.................................................. 77
Taxation of the Funds.................................. 77
Character of Distributions to Shareholders -- General.. 77
Discount............................................... 79
Excise Tax............................................. 79
Taxation of Options, Futures and Similar Instruments... 80
Passive Foreign Investment Companies................... 81
Foreign Currency Gains and Losses...................... 82
Commodity Investments.................................. 83
Dispositions of Fund Shares............................ 83
Tax Reporting Requirements............................. 84
Foreign Taxes.......................................... 85
State and Local Taxes - General........................ 86
Explanation of Fund Distributions...................... 86
General Information.................................... 86
ORGANIZATION AND CAPITALIZATION............................. 87
General................................................ 87
Voting Rights.......................................... 87
Shareholder and Trustee Liability...................... 87
OTHER INFORMATION........................................... 88
Independent Accountants................................ 88
Legal Counsel.......................................... 88
Code of Ethics......................................... 88
FINANCIAL STATEMENTS........................................ 88
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<PAGE>
INVESTMENT PRACTICES AND INSTRUMENTS
The Fund may engage in the following investment practices or invest in the
following instruments to the extent permitted in the Prospectus.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements with member banks of the
Federal Reserve System or member firms of the National Association of Securities
Dealers, Inc. that meet the repurchase agreement creditworthiness guidelines
established by the Trustees.
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 a U.S. government or other high quality
short-term debt obligation (the "Obligation") and the seller agrees, at the time
of sale, to repurchase the Obligation at a specified time (usually not more than
a week in the case of the Equity Index Fund, California Tax Free Fund and New
York Tax Free Fund) and price. A repurchase agreement with foreign banks may be
available with respect to government securities of the particular foreign
jurisdiction. The custody of the Obligation will be maintained by the Fund's
Custodian. The 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.
The income on repurchase agreements may be subject to federal and state
income taxes when distributed by the Fund as a dividend to shareholders.
For purposes of the 1940 Act, a repurchase agreement is deemed to be a loan
from the Fund to the seller of the Obligation. It is not clear whether a court
would consider the Obligation purchased by the Fund subject to a repurchase
agreement as being owned by the Fund or as being collateral for a loan by the
Fund to the seller. 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.
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<PAGE>
If the court characterizes the transaction as a loan and the Fund has not
perfected a security interest in the Obligation, the Fund may be required to
return the Obligation to the seller's estate and be treated as an unsecured
creditor of the seller. As an unsecured creditor, the Fund would be at risk of
losing some or all of the principal and income involved in the transaction. As
with any unsecured debt instrument purchased for the Funds, the Advisers seek to
minimize the risk of loss from repurchase agreements by analyzing the
creditworthiness of the obligor, in this case the seller of the Obligation.
Apart from the risk of bankruptcy or insolvency proceedings, there is also the
risk that the seller may fail to repurchase the security. However, if the
market value of the Obligation subject to the repurchase agreement becomes less
than the repurchase price (including accrued interest), the Fund will direct the
seller of the Obligation to deliver additional securities so that the market
value of all securities subject to the repurchase agreement equals or exceeds
the repurchase price.
The Fund may enter into reverse repurchase agreements. The Fund will
maintain a segregated account consisting of liquid assets to cover its
obligations under reverse repurchase agreements. The Fund will limit its
investments in reverse repurchase agreements to no more than 5% of its total
assets.
LENDING OF PORTFOLIO SECURITIES
The Fund may seek to increase its income by lending portfolio securities.
Under guidelines adopted by the Fund's Board, such loans may be made to
institutions, such as broker-dealers, and are 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
Trust, 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, under the supervision and control of the Fund's Sub-
Adviser.
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<PAGE>
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 the Fund. However, the loans
would be made only to firms deemed by the Sub-Adviser to be creditworthy and
approved by the Board, and when, in the judgment of the Sub-Adviser, the
consideration which can be earned currently from securities loans of this type
justifies the attendant risk. The value of securities loaned will not exceed
33% of the value of the total assets of the lending Fund. In addition, pursuant
to guidelines adopted by the Board, the Fund is prohibited from lending more
than 5% of its assets to any one counterparty.
BANK OBLIGATIONS
Time deposits are nonnegotiable deposits maintained in a banking
institution for a specified period of time at a stated interest rate. Time
deposits which may be held by the Funds will not benefit from insurance from the
Bank Insurance Fund or the Savings Association Insurance Fund administered by
the Federal Deposit Insurance Corporation.
Certificates of deposit are certificates evidencing the obligation of a
bank to repay funds deposited with it for a specified period of time.
Bankers' acceptances are credit instruments evidencing the obligation of a
bank to pay a draft drawn on it by a customer. These instruments reflect the
obligation both of the bank and of the drawer to pay the full amount of the
instrument upon maturity.
Investments in the obligations of banks are deemed to be "cash equivalents"
if, at the date of investment, the banks have capital surplus and individual
profits (as of the date of their most recently published financials) in excess
of $100,000,000, or if, with respect to the obligations of other banks and
savings and loan associations, such obligations are federally insured.
U.S. GOVERNMENT SECURITIES
Securities issued or guaranteed by the U.S. government or its agencies or
instrumentalities include U.S. Treasury securities, which differ only in their
interest rates, maturities and times of issuance. Treasury bills have initial
maturities of one year or less; Treasury notes have initial maturities of one to
ten years; and Treasury bonds generally have initial maturities of greater than
ten years. Some obligations issued or guaranteed by U.S. government agencies
and instrumentalities, for example, Government National Mortgage Association
("GNMA") pass-
B-6
<PAGE>
through certificates, are supported by the full faith and credit of the U.S.
Treasury; others, such as those of the Federal Home Loan Banks, by the right of
the issuer to borrow from the Treasury; others, such as those issued by the
Federal National Mortgage Association ("FNMA"), by the discretionary authority
of the U.S. government to purchase certain obligations of the agency or
instrumentality; and others, such as those issued by the Student Loan Marketing
Association, only by the credit of the agency or instrumentality. While the
U.S. government provides financial support to such U.S. government-sponsored
agencies or instrumentalities, no assurance can be given that it will always do
so, and it is not so obligated by law. See "Mortgage-Related and Other Asset-
Backed Securities."
DEBT SECURITIES
Debt securities may have fixed, variable or floating (including inverse
floating) rates of interest. 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 NAV of the shares 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 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 the
Fund.
CONVERTIBLE SECURITIES
The Fund may invest in securities convertible into common stock. Such
investments may be made, for example, if the Sub-Adviser believes that a
company's convertible securities are undervalued in the market. Convertible
securities eligible for inclusion in the Fund's portfolio include convertible
bonds, convertible preferred stocks, or warrants.
Convertible securities, until converted, have the same general
characteristics as other fixed income securities insofar as they generally
provide a stable stream of income with generally higher yields than those of
equity securities of the same or similar issuers. By permitting the holder to
exchange his investment for common stock, convertible securities may also enable
the investor to benefit from increases in the market price of the underlying
common stock. Therefore, convertible
B-7
<PAGE>
securities generally offer lower interest or dividend yields than non-
convertible securities of similar quality.
As with all fixed income securities, the market value of convertible
securities tends to decline as interest rates increase and, conversely, tends to
increase as interest rates decline. The unique feature of the convertible
security is that as the market price of the underlying common stock declines, a
convertible security tends to trade increasingly on a yield basis, and so may
not experience market value declines to the same extent as the underlying common
stock. When the market price of the underlying common stock increases, the
price of a convertible security increasingly reflects the value of the
underlying common stock and may rise accordingly. While no securities
investment is without some risk, investments in convertible securities generally
entail less risk than investments in the common stock of the same issuer.
Holders of fixed income securities (including convertible securities) have
a claim on the assets of the issuer prior to the holders of common stock in case
of liquidation. However, convertible securities are typically subordinated to
similar non-convertible securities of the same issuer.
Accordingly, convertible securities have unique investment characteristics
because (i) they have relatively high yields as compared to common stocks, (ii)
they have defensive characteristics since they provide a fixed return even if
the market price of the underlying common stock declines, and (iii) they provide
the potential for capital appreciation if the market price of the underlying
common stock increases.
A convertible security may be subject to redemption at the option of the
issuer at a price established in the charter provision or indenture pursuant to
which the convertible security is issued. If a convertible security held by the
Fund is called for redemption, the Fund will be required to surrender the
security for redemption, convert it into the underlying common stock or sell it
to a third party.
ARBITRAGE
The 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 between the prices of the security in the different markets.
Although the Fund does 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
B-8
<PAGE>
dealers involved confirm their prices to the Fund at the time of the
transaction, thus eliminating any risk to the assets of the Fund.
FOREIGN SECURITIES
The 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 and equity securities and in certificates of deposit
issued by foreign banks and foreign branches of U.S. banks, to any extent deemed
appropriate by the Sub-Adviser.
Investors should carefully consider the appropriateness of foreign
investing in light of their financial objectives and goals. While foreign
markets may present unique investment opportunities, foreign investing involves
risks not associated with domestic investing. Securities markets in other
countries are not always as efficient as those in the U.S. and are sometimes
less liquid and more volatile. Other risks involved in investing in the
securities of foreign issuers include differences in accounting, auditing and
financial reporting standards; limited publicly available information; the
difficulty of assessing economic trends in foreign countries; generally higher
commission rates on foreign portfolio transactions; the possibility of
nationalization, expropriation or confiscatory taxation; adverse changes in
investment or exchange control regulations (which may include suspension of the
ability to transfer currency from a country); government interference, including
government ownership of companies in certain sectors, wage and price controls,
or imposition of trade barriers and other protectionist measures; difficulties
in invoking legal process abroad and enforcing contractual obligations;
political, social or economic instability which could affect U.S. investments in
foreign countries; and potential restrictions on the flow of international
capital. Additionally, foreign securities and dividends and interest payable on
those securities may be subject to foreign taxes, including foreign withholding
taxes, and other foreign taxes may apply with respect to securities
transactions. Additional costs associated with an investment in foreign
securities may include higher transaction, custody and foreign currency
conversion costs. In the event of litigation relating to a portfolio
investment, the Fund may encounter substantial difficulties in obtaining and
enforcing judgments against non-U.S. resident individuals and companies.
Investment in emerging market countries presents risks in greater degree than,
and in addition to, those presented by investment in foreign issuers in general.
B-9
<PAGE>
FOREIGN CURRENCY TRANSACTIONS
Many of the foreign securities in which the Fund invests 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 Fund's assets.
However, the Fund may, to the extent it invests in foreign securities, enter
into forward foreign currency transactions in order to protect against
uncertainty in the level of future foreign currency exchange rates. The Fund
may enter into contracts to purchase foreign currencies to protect against an
anticipated rise in the U.S. dollar price of securities it intends to purchase
and may enter into contracts to sell foreign currencies to protect against the
decline in value of its foreign currency-denominated portfolio securities due to
a decline in the value of the foreign currencies against the U.S. dollar. In
addition, the Fund may use one currency (or a basket of currencies) to hedge
against adverse changes in the value of another currency (or a basket of
currencies) when exchange rates between the two currencies are correlated.
Foreign currency transactions in which the Fund may engage 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. A forward foreign currency exchange contract involves an
obligation to purchase or sell a specific currency at a future date, which may
be any fixed number of days (usually less than one year) from the date of the
contract agreed upon by the parties, at a price set at the time of the contract.
These contracts are traded in the interbank market conducted directly between
traders (usually large commercial banks) and their customers. A forward
contract generally has no deposit requirement, and no commissions are charged at
any stage for trades. Although foreign exchange dealers do not charge a fee for
conversion, they do realize a profit based on the difference (the spread)
between the price at which they are buying and selling various currencies.
Normally, consideration of the prospect for currency parities will be
incorporated in a longer term investment decision made with regard to overall
diversification strategies. However, the Sub-Adviser believes that it is
important to have the flexibility to enter into such forward contracts when it
determines that the best interest of the Fund will be served by entering into
such a contract. Generally, the Sub-Adviser believes that the best interest of
the Fund will be served if the Fund is permitted to enter into forward contracts
under specified circumstances. First, when the Fund enters into, or anticipates
B-10
<PAGE>
entering into, a contract for the purchase or sale of a security denominated in
a foreign currency, it may desire to "lock in" the U.S. dollar price of the
security. By entering into a forward contract for the purchase or sale, for a
fixed amount of U.S. dollars, of the amount of foreign currency involved in the
underlying security transaction, the Fund will be able to insulate itself from a
possible loss resulting from a change in the relationship between the U.S.
dollar and the subject foreign currency during the period between the date on
which the security is purchased or sold and the date on which payment is made or
received, although the 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.
Second, when the Sub-Adviser believes that the currency of a particular
foreign country may suffer a substantial decline against the U.S. dollar, it may
enter into a forward contract to sell, for a fixed amount of dollars, the amount
of foreign currency approximating the value of some or all of the 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), the
Fund will not enter into forward contracts to sell currency or maintain a net
exposure to such contracts if the consummation of such contracts would obligate
the Fund to deliver an amount of foreign currency in excess of the value of the
Fund's portfolio securities or other assets denominated in that currency (or the
related currency, in the case of a "proxy" hedge).
Finally, the Fund may enter into forward contracts to shift its investment
exposure from one currency into another currency that is expected to perform
inversely with respect to the hedged currency relative to the U.S. dollar. This
type of strategy, sometimes known as a "cross-currency" hedge, will tend to
reduce or eliminate exposure to the currency that is sold, and increase exposure
to the currency that is purchased, much as if the Fund had sold a security
denominated in one currency and purchased an
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<PAGE>
equivalent security denominated in another. "Cross-currency" hedges protect
against losses resulting from a decline in the hedged currency, but will cause
the Fund to assume the risk of fluctuations in the value of the currency it
purchases.
At the consummation of the forward contract, the 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 the 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 the 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.
The Fund's dealing in forward contracts will be limited to the transactions
described above. Of course, the 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 the Sub-Adviser. The Fund generally will
not enter into a forward contract with a term of greater than one year.
In cases of transactions which constitute "transaction" hedges, or
"position" hedges (including "proxy" hedges) or "cross-currency" hedges that
involve purchase and sale of two different foreign currencies directly through
the same foreign currency contract, the Fund may deem its forward currency hedge
position to be covered by underlying Fund portfolio securities or may establish
a Segregated Account with its Custodian in an amount equal to the value of the
Fund's total assets committed to the consummation of the subject hedge. The
Segregated Account will consist of liquid assets. In the case of "anticipatory"
hedges and "cross-currency" hedges that involve the purchase and sale of two
different foreign currencies indirectly through separate forward currency
contracts, the Fund will establish a Segregated Account with its Custodian as
described above. In the event the 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 liquid assets placed in the separate 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.
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<PAGE>
It should be realized that this method of protecting the value of the
Fund's portfolio securities against a decline in the value of a currency does
not eliminate fluctuations in the underlying prices of the securities. It
simply establishes a rate of exchange which can be achieved at some future point
in time. It also reduces any potential gain which may have otherwise occurred
had the currency value increased above the settlement price of the contract.
The Fund cannot assure that the techniques discussed above will be successful.
Successful use of forward contracts depends on the investment manager's skill in
analyzing and predicting relative currency values. Forward contracts alter the
Fund's exposure to currency exchange rate activity and could result in losses to
the Fund if currencies do not perform as investment managers anticipate. The
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 the Fund if the value of the hedged currency
increases.
The Sub-Adviser believes 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 Fund's foreign currency transactions may be limited by the requirements
of Subchapter M of the Code for qualification as a regulated investment company.
BRADY BONDS
The 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
B-13
<PAGE>
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. 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.
MUNICIPAL SECURITIES
Municipal securities generally are understood to include debt obligations
issued by, or on behalf of, states, territories and possessions of the United
States and their political sub-divisions, agencies and instrumentalities and the
District of Columbia, to obtain funds for various public purposes, including
construction of a wide range of public facilities, refunding of outstanding
obligations, payment of general operating expenses and extensions of loans to
public institutions and facilities. The yields on municipal securities depend
upon a variety of factors, including general economic and monetary conditions,
general money market conditions, general conditions of the municipal securities
market, the financial condition of the issuer, the size of a particular
offering, the maturity of the obligations offered and the rating of the issue or
issues. Municipal securities also may be subject to the provisions of
bankruptcy, insolvency and other laws affecting the rights and remedies of
creditors, such as the Federal Bankruptcy Code, and laws, if any, which may be
enacted by Congress or state legislatures extending the time for payment of
principal or interest, or both, or imposing other constraints upon enforcement
of such obligations or upon the ability of municipalities to levy taxes. There
is also the possibility that, as a result of litigation or other conditions, the
power or ability of any one or more issuers to pay, when due, the principal of,
and interest on, its or their municipal securities may be materially and
adversely affected.
B-14
<PAGE>
Municipal Bonds, which meet longer-term capital needs and generally have
maturities of more than one year when issued, have two principal
classifications: general obligation bonds and revenue bonds. Issuers of
general obligation bonds include states, counties, cities, towns and regional
districts. The proceeds of these obligations are used to fund a wide range of
public projects, including construction or improvement of schools, highways and
roads, and water and sewer systems. The basic security behind general
obligation bonds is the issuer's pledge of its full faith, credit and taxing
power for the payment of principal and interest. The taxes that can be levied
for the payment of debt service may be limited or unlimited as to the rate or
amount of special assessments.
A revenue bond is not secured by the full faith, credit and taxing power of
an issuer. Rather, the principal security for a revenue bond is generally the
net revenue derived from a particular facility, group of facilities or, in some
cases, the proceeds of a special excise or other specific revenue source.
Revenue bonds are issued to finance a wide variety of capital projects,
including: electric, gas, water, and sewer systems; highways, bridges, and
tunnels; port and airport facilities; colleges and universities; and hospitals.
Although the principal security behind these bonds may vary, many provide
additional security in the form of a debt service reserve fund which may be used
to make principal and interest payments on the issuer's obligations. Housing
finance authorities have a wide range of security and credit enhancement
guarantees available to them, including partially or fully insured mortgages,
rent subsidized and/or collateralized mortgages, and/or the net revenues from
housing or other public projects. Some authorities are provided further
security in the form of a state's assurance (although without obligation) to
make up deficiencies in the debt service reserve fund.
An entire issue of Municipal Bonds may be purchased by one or a small
number of institutional investors such as the Fund. Thus, the issue may not be
said to be publicly offered. Unlike securities which must be registered under
the Securities Act of 1933 prior to offer and sale, unless an exemption from
such registration is available, Municipal Bonds which are not publicly offered
may nevertheless be readily marketable. A secondary market exists for Municipal
Bonds which were not publicly offered initially.
There may be other types of municipal securities that become available
which are similar to the foregoing described municipal securities in which the
Fund may invest.
B-15
<PAGE>
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 based
on an event, such as 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 deemed to be illiquid securities for purposes of the
Fund's limitations on investments in such securities.
ZERO COUPON BONDS
The Fund may purchase zero coupon bonds, which are debt obligations issued
without any requirement for the periodic payment of interest. Zero coupon bonds
are issued at a significant discount from 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 market rate at the time of
issuance. Because interest on zero coupon bonds is not distributed on a current
basis but is, in effect, compounded, 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 Funds must accrue and
distribute every year even though a Fund receives no payment on the investment
in that year. Zero coupon bonds tend to be more volatile than conventional debt
securities.
B-16
<PAGE>
WHEN-ISSUED SECURITIES
The Fund may from time to time purchase securities on a "when-issued"
basis. Debt securities, including municipal bonds, 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 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, the Fund would earn no income; however, it is the Trust's intention
that the Fund will be fully invested to the extent practicable and subject to
the policies stated herein. Although when-issued securities may be sold prior
to the settlement date, the Fund intends to purchase such securities with the
purpose of actually acquiring them unless a sale appears desirable for
investment reasons.
At the time the Trust makes the commitment on behalf of the Fund to
purchase a security on a when-issued 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 security may be more or
less than the purchase price payable at the settlement date. The Trustees 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 basis. The Fund
will establish a segregated account in which it will maintain liquid assets at
least equal in value to commitments for when-issued securities. Such segregated
securities either will mature or, if necessary, be sold on or before the
settlement date.
MORTGAGE-RELATED AND OTHER ASSET-BACKED SECURITIES
The Fund may buy mortgage-related securities. Mortgage-related securities
are interests in pools of residential or commercial mortgage loans or leases,
including mortgage loans made by savings and loan institutions, mortgage
bankers, commercial banks and others. Pools of mortgage loans are assembled as
securities for sale to investors by various governmental, government-related and
private organizations (see "Mortgage Pass-Through Securities"). The Fund may
also invest in debt securities which are secured with collateral consisting of
mortgage-related securities (see "Collateralized Mortgage Obligations"), and in
other types of mortgage-related securities. Like other fixed-income securities,
when interest rates rise, the value of a mortgage-related security generally
will decline;
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<PAGE>
however, when interest rates are declining, the value of a mortgage-related
security with prepayment features may not increase as much as other fixed-income
securities.
MORTGAGE PASS-THROUGH 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, mortgage pass-through 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 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 the Fund to a lower rate of return upon reinvestment of principal. Also,
if a security subject to prepayment has been purchased at a premium, in the
event of prepayment the value of the premium would be lost.
Payment of principal and interest on some mortgage pass-through securities
(but not the market value of the securities themselves) may be guaranteed by the
full faith and credit of the U.S. government (in the case of securities
guaranteed by GNMA); or guaranteed by agencies or instrumentalities of the U.S.
Government (in the case of securities guaranteed by FNMA or 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 ("HUD"). 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
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<PAGE>
approved by GNMA (such a savings and loan institutions, commercial banks and
mortgage bankers) and backed by pools of FHA-insured or VA-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 and 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 collection of principal, but Pcs are not backed by the full
faith and credit of the U.S. government.
If either fixed or variable rate pass-through securities issued by the U.S.
government or its agencies or instrumentalities are developed in the future, the
Funds reserve the right to invest in them.
Commercial banks, savings and loan institutions, private mortgage insurance
companies, mortgage bankers and other secondary market issuers also create pass-
through pools of conventional residential mortgage loans. Such issuers may, in
addition, be the originators and/or servicers of the underlying mortgage loans
as well as the guarantors of the mortgage-related securities. Pools created by
such non-governmental issuers generally offer a higher rate of interest than
government and government-related pools because there are no direct or indirect
government or agency guarantees of payments in the former pools. However,
timely payment of interest and principal of these pools may be supported by
various forms of insurance or guarantees,
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<PAGE>
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 mortgage-related securities without insurance or
guarantees if, through an examination of the loan experience and practices of
the originator/servicers and poolers, the Sub-Adviser determines that the
securities meet the Fund's quality standards.
PRIVATELY ISSUED MORTGAGE-RELATED SECURITIES The mortgage-related
--------------------------------------------
securities in which the Fund may invest may be: (i) privately issued securities
which are collateralized by pools of mortgages in which each mortgage is
guaranteed as to payment of principal and interest by an agency or
instrumentality of the U.S. government; (ii) privately issued securities which
are collateralized by pools of mortgages in which payment of principal and
interest is guaranteed by the issuer and such guarantee is collateralized by
U.S. government securities; and (iii) other privately issued securities in which
the proceeds of the issuance are invested in mortgage-backed securities and
payment of the principal and interest is supported by the credit of an agency or
instrumentality of the U.S. government.
Although the market for non-government mortgage pass-through 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 Sub-Adviser's opinion are illiquid
if, as a result, more than 15% of the value of the Fund's total assets will be
illiquid.
COLLATERALIZED MORTGAGE OBLIGATIONS (CMOS) A CMO is a hybrid between a
------------------------------------------
mortgage-backed bond and a mortgage pass-through security. 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 are structured into multiple classes, each
bearing a different stated maturity - actual maturing and average life will
depend upon the prepayment experience of the collateral. CMOs provide
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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.
FHLMC COLLATERALIZED MORTGAGE OBLIGATIONS FHLMC CMOs are debt obligations
-----------------------------------------
of FHLMC issued in multiple classes having different maturity dates which are
secured by the pledge of a pool of conventional mortgage loans purchased by
FHLMC. Unlike FHLMC Pcs, payments of principal and interest on the CMOs are
made semiannually, as opposed to monthly. The amount of principal payable on
each semiannual payment date is determined in accordance with FHLMC's mandatory
sinking fund schedule, which, in turn, is equal to approximately 100% of FHA
prepayment experience applied to the mortgage collateral pool. All sinking fund
payments in the CMOs are allocated to the retirement of the individual classes
of bonds in the order of their stated maturities. Payment of principal on the
mortgage loans in the collateral pool in excess of the amount of FHLMC's minimum
sinking fund obligation for any payment date are paid to the holders of the CMOs
as additional sinking fund payments. Because of the "pass-through" nature of
all principal payments received on the collateral pool in excess of FHLMC's
minimum sinking fund requirement, the rate at which principal of the CMOs is
actually repaid is likely to be such that each class of bonds will be retired in
advance of its scheduled maturity date.
If collection of principal (including prepayments) on the mortgage loans
during any semiannual payment period is not
B-21
<PAGE>
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 mortgage-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.
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
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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, accordingly, 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 the
Fund's limitations on investment in illiquid securities.
Under certain circumstances, the Fund's investment in residual interests in
"real estate mortgage investment conduits" ("REMICs") may cause shareholders of
the Fund to be deemed to have taxable income in addition to their Fund dividends
and distributions and such income may not be eligible to be reduced for tax
purposes by certain deductible amounts, including net operating loss deductions.
In addition, in some cases, the Fund may be required to pay taxes on certain
amounts deemed to be earned from a REMIC residual. Prospective investors may
wish to consult their tax advisors regarding REMIC residual investments by the
Fund.
CMOs and REMICs 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 and REMICs typically will be issued in a variety of classes or
series, which have different maturities and are retired in sequence. Privately
issued CMOs and REMICs 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 or a REMIC, there is no assurance that the
collateral securing such CMO or REMIC will be sufficient to pay principal and
interest. It is possible that there will be limited opportunities for trading
CMOs and REMICs in the over-the-counter market, the depth and liquidity of which
will vary from time to time. Under recent legislation, holders of "residual"
interests in REMICs (including the Fund) could be required to recognize
potential phantom income, as could shareholders (including unrelated business
taxable income for tax-exempt shareholders) of
B-23
<PAGE>
funds that hold such interests. The Fund will consider this legislation in
determining whether to invest in residual interests.
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
interest-only or "IO" class), while the other class will receive all of the
principal (the principal-only or "PO" class). The yield to maturity on an IO
class is extremely sensitive to the rate of principal payments (including
prepayments) on the related underlying mortgage assets, and a rapid rate of
principal payments may have a material adverse effect on a Fund's yield to
maturity from these securities. If the underlying mortgage assets experience
greater than anticipated prepayments of principal, a Fund may fail to fully
recoup its initial investment in these securities even if the security is in one
of the highest rating categories.
Although SMBS are purchased and sold by institutional investors through
several investment banking firms acting as brokers or dealers, these securities
were only recently developed. As a result, established trading markets have not
yet developed and, accordingly, these securities may be deemed "illiquid" and
subject to a Fund's limitations on investment in illiquid securities.
RISKS ASSOCIATED WITH MORTGAGE-BACKED SECURITIES The value of some
------------------------------------------------
mortgage-backed securities in which the Fund may invest may be particularly
sensitive to changes in prevailing interest rates, and, like the other
investments of the Fund, the ability of the Fund to successfully utilize these
instruments may depend in part upon the ability of the Sub-Adviser to forecast
interest rates and other economic factors correctly. If the Sub-Adviser
incorrectly forecasts such factors and has taken a position in mortgage-backed
securities that is or becomes contrary to prevailing market trends, the Fund
could be exposed to the risk of a loss.
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<PAGE>
Investment in mortgage-backed securities poses several risks, including
prepayment, market, and credit risk. Prepayment risk reflects the chance that
borrowers may prepay their mortgages faster than expected, thereby affecting the
investment's average life and perhaps its yield. Whether or not a mortgage loan
is prepaid is almost entirely controlled by the borrower. Borrowers are most
likely to exercise their prepayment options at a time when it is least
advantageous to investors, generally prepaying mortgages as interest rates fall,
and slowing payments as interest rates rise. Besides the effect of prevailing
interest rates, the rate of prepayment and refinancing of mortgages may also be
affected by home value appreciation, ease of the refinancing process and local
economic conditions.
Market risk reflects the chance that the price of the security may
fluctuate over time. The price of mortgage-backed securities may be
particularly sensitive to prevailing interest rates, the length of time the
security is expected to be outstanding, and the liquidity of the issue. In a
period of unstable interest rates, there may be decreased demand for certain
types of mortgage-backed securities, and a Fund invested in such securities and
wishing to sell them may find it difficult to find a buyer, which may in turn
decrease the price at which they may be sold.
Credit risk reflects the chance that the Fund may not receive all or part
of its principal because the issuer or credit enhancer has defaulted on its
obligations. Obligations issued by U.S. government-related entities are
guaranteed as to the payment of principal and interest, but are not backed by
the full faith and credit of the U.S. government. The performance of private
label mortgage-backed securities, issued by private institutions, is based on
the financial health of those institutions.
OTHER ASSET-BACKED SECURITIES Several types of asset-backed securities
-----------------------------
have already been offered to investors, including CARS/SM/ ("Certificates for
Automobile Receivables/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
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<PAGE>
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.
The Sub-Adviser expects that other asset-backed securities (unrelated to
mortgage loans) will be offered to investors in the future. Consistent with its
investment objectives and policies, the Fund also may invest in other types of
asset-backed securities.
SHORT SALES AGAINST THE BOX
A short sale is a transaction in which the 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. The Fund will only enter into short sales against the box. The
Fund may enter into a short sale against the box, among other reasons, to hedge
against a possible market decline in the value of the security owned or to defer
recognition of a gain or loss for federal income tax purposes on the 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, the Fund could
experience losses or delays in recovering gains on short sales. The Fund will
only enter into short sales against the box with brokers the Sub-Adviser
believes are creditworthy. Short sales against the box will be limited to no
more than 25% of the Fund's assets.
OPTIONS ON SECURITIES
WRITING CALL OPTIONS The Fund may sell ("write") covered call options on
--------------------
the portfolio securities of the Fund in an attempt to enhance investment
performance. A call option sold by the 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 imposes on 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
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<PAGE>
prior to the expiration date, regardless of the market price of the security
during the option period. A call option may be covered by, among other things,
the writer 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.
The 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. The Fund, in writing 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. 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 on the 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.
The 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
B-27
<PAGE>
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
the 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. A
closing purchase transaction for an over-the-counter option may be made only
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.
The 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 the Fund's
portfolio turnover rate, especially during periods when market prices of the
underlying securities appreciate. Subject to the limitation that all call and
put option writing transactions be covered, the Fund may, to the extent
determined appropriate by the Sub-Adviser, engage without limitation in the
writing of options on U.S. government securities.
WRITING PUT OPTIONS The Fund may also write covered put options. Put
-------------------
options written by the Fund are agreements by the Fund, for a premium received
by the Fund, to purchase specified securities at a specified price if the option
is exercised during the option period. A put option written by the Fund is
"covered" if the Fund maintains liquid assets with a value equal to the exercise
price in a segregated account with its custodian. A put option is also
"covered" if the Fund holds on a share-for-share basis a put on the same
security as the put written, where the exercise price of the put held is equal
to or greater than the exercise price of the put written, or less than the
exercise
B-28
<PAGE>
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 Fund receives 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
could be required to purchase the security at a higher price than the then-
current market price of the security. In both cases, the writer has no control
over the time when it may be required to fulfill its obligation as a writer of
the option.
The Fund 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 Fund also may effect a closing purchase transaction, in the case
of a put option, to permit the Fund 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 the 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 Fund may also write straddles (combinations of covered
puts and calls on the same underlying security). The extent to which the Fund
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 Trust's intention that the Fund qualify
as such. Subject to the limitation that all call and put option writing
transactions be covered, the Fund may, to the extent determined appropriate by
the Sub-Adviser, engage without limitation in the writing of options on U.S.
government securities.
B-29
<PAGE>
PURCHASING OPTIONS The Fund 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 Fund will engage in such
transactions only with firms the Sub-Adviser deems to be of sufficient
creditworthiness so as to minimize these risks.
The Fund 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 Fund would buy a put option in anticipation of
a decline in the market value of such securities. 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 the 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 Fund may also purchase call options on securities the Fund intends 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 Fund
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
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<PAGE>
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
---------------------------------------------------
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.
The Fund's purpose in selling covered options is to realize greater income
than would be realized on portfolio securities transactions alone. The 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 the Fund is not sold when it has
remaining value, and if the market price of the underlying security, in the case
of a put, remains equal to or greater than the exercise price, or, in the case
of a call, remains less than or equal to the exercise price, the Fund will not
be able to exercise profitably the option and will lose its entire investment in
the option. Also, the price of a put or call option purchased to hedge against
price movements in a related security may move more or less than the price of
the related security.
The Fund would ordinarily realize a gain if the value of the securities
increased during the option period above the exercise price sufficiently to
cover the premium. The Fund would have a loss if the value of the securities
remained below the sum of the premium paid and the exercise price during the
option period. The ability of the Fund to successfully utilize options may
depend in part upon the ability of the Sub-Adviser 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
The Fund may, to the extent that it invests in foreign securities, purchase
and write options on foreign currencies for hedging purposes in a manner similar
to that of the Fund's transactions in currency futures contracts or forward
contracts. For example, a decline in the dollar value of a foreign currency
B-31
<PAGE>
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,
the Fund may purchase put options on the foreign currency. If the value of the
currency does decline, the 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, the 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 the 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, the 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.
The Fund may also write options on foreign currencies for hedging purposes.
For example, if the 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 decrease 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, the 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
B-32
<PAGE>
occur, the option may be exercised and the Fund would be required to purchase or
sell the underlying currency at a loss which may not be fully offset by the
amount of the premium. As a result of writing options on foreign currencies,
the Fund also may be required to forgo 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 the Fund is "covered" if the
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 the 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 the Fund in liquid assets in a segregated account
with its custodian.
As with other kinds of options transactions, the writing of an option on
foreign currency will constitute only a partial hedge up to the amount of the
premium received and the 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 the Fund's position, the Fund may forfeit the entire amount of the
premium plus related transaction costs. Options on foreign currencies to be
written or purchased by the Fund will be traded on U.S. and foreign exchanges or
over-the-counter.
The Fund also may 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 denominated. There can be no
assurance that a liquid market will exist when the Fund seeks to close out an
option position. Furthermore, if trading restrictions or suspensions are
imposed on the options markets, the 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 the 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
B-33
<PAGE>
buyer and seller and generally do not have as much market liquidity as
exchanged-traded options. Foreign currency exchange-traded options generally
settle in cash, whereas options traded over-the-counter may settle in cash or
result in delivery of the underlying currency upon exercise of the option.
SECURITIES INDEX OPTIONS
The Fund may purchase call and put options on securities indexes for the
purpose of hedging against the risk of unfavorable price movements which may
adversely affect the value of the Fund's securities.
Unlike a securities option, which gives the holder the right to purchase or
sell specified securities at a specified price, an option on a securities index
gives the holder the right to receive a cash "exercise settlement amount" equal
to (i) the difference between the value of the underlying securities index on
the exercise date and the exercise price of the option, multiplied by (ii) a
fixed "index multiplier." In exchange for undertaking the obligation to make
such a cash payment, the writer of the securities index option receives a
premium.
A securities index fluctuates with changes in the market values of the
securities included in the index. For example, some securities index options
are based on a broad market index such as the S&P 500 Composite Price Index or
the N.Y.S.E. Composite Index, or a narrower market index such as the S&P 100
Index. Indexes may also be based on an industry or market segment such as the
AMEX Oil and Gas Index or the Computer and Business Equipment Index. Options on
stock indexes are currently traded on the following exchanges, among others:
The Chicago Board Options Exchange, New York Stock Exchange, and American Stock
Exchange.
The effectiveness of hedging through the purchase of securities index
options will depend upon the extent to which price movements in the portion of
the securities portfolio being hedged correlate with price movements in the
selected securities index. Perfect correlation is not possible because the
securities held or to be acquired by the Fund will not exactly match the
securities represented in the securities indexes on which options are based. In
addition, the purchase of securities index options involves essentially the same
risks as the purchase of options on futures contracts. The principal risk is
that the premium and transaction costs paid by the Fund in purchasing an option
will be lost as a result of unanticipated movements in prices of the securities
comprising the securities index on which the option is based. Gains or losses
on the Fund's transactions in securities index options depend on price movements
in the
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<PAGE>
securities market generally (or, for narrow market indexes, in a particular
industry or segment of the market) rather than the price movements of individual
securities held by the Fund. In this respect, purchasing a securities index put
(or call) option is analogous to the purchase of a put (or call) on a securities
index futures contract.
The Fund may sell securities index options prior to expiration in order to
close out its positions in securities index options which it has purchased. The
Fund may also allow options to expire unexercised.
FUTURES TRANSACTIONS
The Fund may purchase and sell futures contracts on debt securities and on
indexes of debt securities in order to attempt to protect against the effects of
adverse changes in interest rates, to lengthen or shorten the average maturity
or duration of the Fund's portfolio and for other appropriate risk management
purposes. For example, the Fund may purchase futures contracts as a substitute
for the purchase of longer-term debt securities to lengthen the average duration
of the Fund's portfolio of fixed-income securities. Such futures contracts
would obligate the Fund to make or take delivery of certain debt securities or
an amount of cash upon expiration of the futures contract, although most futures
positions typically are closed out through an offsetting transaction prior to
expiration. The Fund may also purchase and sell stock index futures to hedge
the equity portion of the Fund's 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 Fund may
also purchase and sell other futures when deemed appropriate, in order to hedge
the equity or non-equity portions of its portfolio. In addition, the Fund may,
to the extent it invests in foreign securities, enter into contracts for the
future delivery of foreign currencies to hedge against changes in currency
exchange rates. The Fund may also purchase and write put and call options on
futures contracts and may engage in related closing transactions. In the United
States, all such futures on debt 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 applicable CFTC rules, the Fund also may enter into
futures contracts traded on the following foreign futures exchanges: Frankfurt,
Tokyo, London and Paris, 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 the 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 for 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. 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 the Fund, the Fund
is required to deposit with its custodian (or broker, if legally permitted) a
specified amount of liquid assets ("initial margin"). 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. The Fund expects to earn interest
income on its initial margin deposits. A futures contract held by the Fund is
valued daily at the official settlement price of the exchange on which it is
traded. Each day 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 the 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, the Fund will mark-to-market its open futures
positions.
The 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
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instead liquidated through offsetting transactions which may result in a gain or
a loss. While futures positions taken by the 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--the 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 Sub-Adviser to reflect the fair value of the
contract, in which case the positions will be valued by or under the direction
of the Trustees.
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. The 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, the Fund may take a "long" position by purchasing
futures on debt securities. This would be done, for example, when the Fund
intends to purchase particular securities and it has the necessary cash, but
expects the rate of return available in the securities markets at that time to
be less favorable than rates currently available in the futures markets. If the
anticipated rise in the price of the securities should occur (with its
concomitant reduction in yield), the increased
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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. The 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 the Fund's
securities portfolio with regard to market (systematic) risk, as distinguished
from stock-specific risk. The Fund may enter into stock index futures to the
extent that it has equity securities in its portfolio. Similarly, the Fund may
enter into futures on debt securities indexes (including the municipal bond
index) to the extent it has debt securities in its portfolio. By establishing
an appropriate "short" position in securities index futures, the 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,
the 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. The
Fund may also purchase futures on debt securities or indexes as a substitute
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for the purchase of longer-term debt securities to lengthen the average duration
of the Fund's debt portfolio.
The Fund does not intend to use U.S. stock index futures to hedge positions
in securities of non-U.S. companies.
CURRENCY FUTURES A sale of a currency futures contract creates an
----------------
obligation by the 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 the Fund, as purchaser, to
take delivery of an amount of currency at a specified future time at a specified
price. The Fund may sell a currency futures contract, if the Sub-Adviser
anticipates that exchange rates for a particular currency will fall, as a hedge
against a decline in the value of the Fund's securities denominated in such
currency. If the Sub-Adviser anticipates that exchange rates will rise, the
Fund may purchase a currency futures contract to protect against an increase in
the price of securities denominated in a particular currency the Fund intends to
purchase. Although the terms of currency futures contracts specify actual
delivery or receipt, in most instances the contracts are closed out before the
settlement date without the making or taking of delivery of the currency.
Closing out of a currency futures contract is effected by entering into an
offsetting purchase or sale transaction. To offset a currency futures contract
sold by the 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 the 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 Sub-Adviser could be incorrect in its expectation as to the direction or
extent of
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various exchange rate movements or the time span within which the movements take
place.
OPTIONS ON FUTURES For bona fide hedging and other appropriate risk
------------------
management purposes, the Fund 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. It is the current policy of the
Trust that the Fund will purchase or write only options on futures contracts
that are traded on a U.S. or foreign exchange or board of trade. The Fund also
may engage in related closing transactions with respect to options on futures.
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 the 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.
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<PAGE>
The purchase of put options on futures contracts is a means of hedging the
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 the
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 the 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.
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<PAGE>
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 the Fund of the debt securities acquired by it will be reduced by the
amount of the option premium received. Of course, if market prices have
declined, the Fund's purchase price upon exercise may be greater than the price
at which the debt securities might be purchased in the securities market.
While the holder or writer of an option on a futures contract may normally
terminate its position by selling or purchasing an offsetting option of the same
series, the 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 Fund 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 In general, the Fund 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. With respect to positions in
futures and related options that do not constitute bona fide hedging positions,
the 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, the 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
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<PAGE>
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, the 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, the 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 the Fund may enter into futures, futures options
or forward contracts. See "Tax Status."
RISKS ASSOCIATED WITH FUTURES AND FUTURES OPTIONS There are several risks
-------------------------------------------------
associated with the use of futures contracts and futures options as hedging
techniques. A purchase or sale of a futures contract may result in losses in
excess of the amount invested in the futures contract. 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. In addition, there
are significant differences between the securities and futures markets that
could result in an imperfect correlation between the markets, causing a given
hedge not to achieve its objectives. The degree of imperfection of
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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 the 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.
In addition to the risks 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 Fund 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 the Fund
would have to exercise options it has purchased in order to realize any profit
and would be less able to limit is exposure to losses on options it has written.
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<PAGE>
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.
SWAP AGREEMENTS
The 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. 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 which the parties to a swap agreement have agreed to exchange.
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. The 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"). The Fund's obligations
under a swap agreement will be accrued daily (offset against any amounts owing
to the Fund) and any accrued but unpaid
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net amounts owed to a swap counterparty will be covered by the maintenance of a
segregated account consisting of liquid assets to avoid any potential leveraging
of the Fund's portfolio. 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. The
Fund will not enter into a swap agreement with any single party if the net
amount owed or to be received under existing contracts with that party would
exceed 5% of the Fund's assets.
Whether the Fund's use of swap agreements will be successful in furthering
its investment objective will depend on the Sub-Adviser's ability correctly to
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, the Fund bears the risk of loss of the
amount expected to be received under a swap agreement in the event of the
default or bankruptcy of a swap agreement counterparty. The Sub-Adviser will
cause the Fund to enter into swap agreements only with counterparties that would
be eligible for consideration as repurchase agreement counterparties under the
Fund's repurchase agreement guidelines. Certain restrictions imposed on the
Fund by the Code may limit the Fund's 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 the 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 CFTC
effective February 22, 1993. To qualify for this exemption, a swap agreement
must be entered into by "eligible participants," which include 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,
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<PAGE>
governmental entity, broker-dealer, futures commission merchant, natural person,
or regulated foreign person. To be eligible, natural persons and most other
entities must have total assets exceeding $10 million; commodity pools and
employee benefit plans must have assets exceeding $5 million. In addition, an
eligible swap transaction must meet three conditions. First, the swap agreement
may not be part of a fungible class of agreements that are standardized as to
their material economic terms. Second, the creditworthiness of parties with
actual or potential obligations under the swap agreement must be a material
consideration in entering into or determining the terms of the swap agreement,
including pricing, cost or credit enhancement terms. Third, swap agreements may
not be entered into and traded on or through a multilateral transaction
execution facility.
This exemption is not exclusive, and participants may continue to rely on
existing exclusions for swaps, such as the Policy Statement issued in July 1989
which recognized a safe harbor for swap transactions from regulation as futures
or commodity option transactions under the CEA or its regulations. The Policy
Statement applies to swap transactions settled in cash that (1) have
individually tailored terms, (2) lack exchange-style offset and the use of a
clearing organization or margin system, (3) are undertaken in conjunction with a
line of business, and (4) are not marketed to the public.
LOAN PARTICIPATION INTERESTS
The Fund's investment in loan participation interests may take the form of
participation interests in, assignments or novations of a corporate loan
("Participation Interests"). The Participation Interests may be acquired from
an agent bank, co-lenders or other holders of Participation Interests
("Participants"). In a novation, the Fund would assume all of the rights of the
lender in a corporate loan, including the right to receive payments of principal
and interest and other amounts directly from the borrower and to enforce its
rights as a lender directly against the borrower. As an alternative, the Fund
may purchase an assignment of all or a portion of a lender's interest in a
corporate loan, in which case, the Fund may be required generally to rely on the
assigning lender to demand payment and enforce its rights against the borrower,
but would otherwise be entitled to all of such lender's rights in the corporate
loan. The Fund also may purchase a Participation Interest in a portion of the
rights of a lender in a corporate loan. In such a case, the Fund will be
entitled to receive payments of principal, interest and fees, if any, but
generally will not be entitled to enforce its rights directly against the agent
bank or the borrower; rather the Fund must rely on the lending institution for
that purpose. The Fund will not act as an agent bank, a
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guarantor or sole negotiator or 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 Trust. The Fund
generally will rely on the agent bank or an intermediate Participant to collect
its portion of the payments on the corporate loan. The agent bank monitors the
value of the collateral and, if the value of the collateral declines, may take
certain action, including accelerating the corporate loan, giving the borrower
an opportunity to provide additional collateral or seeking other protection for
the benefit of the Participants in the corporate loan, depending on the terms of
the corporate loan agreement. Furthermore, unless under the terms of a
participation agreement the Fund has direct recourse against the borrower (which
is unlikely), the Fund will rely on the agent bank to use appropriate creditor
remedies against the borrower. The agent bank also is responsible for
monitoring compliance with covenants contained in the corporate loan agreement
and for notifying holders of corporate loans of any failures of compliance.
Typically, under corporate loan agreements, the agent bank is given broad
discretion in enforcing the corporate loan agreement, and is obligated to use
only the same care it would use in the management of its own property. For
these services, the borrower compensates the agent bank. Such compensation may
include special fees paid on structuring and funding the corporate loan and
other fees paid on a continuing basis.
A financial institution's employment as an agent bank may be terminated in
the event that it fails to observe the requisite standard of care or becomes
insolvent, or has a receiver, conservator, or similar official appointed for it
by the appropriate bank regulatory authority or becomes a debtor in a bankruptcy
proceeding. A successor agent bank generally will be appointed to replace the
terminated bank, and assets held by the agent bank under the corporate loan
agreement should remain available to holders of corporate loans. If, however,
assets held by the agent bank for the benefit of the Fund were determined by an
appropriate regulatory authority or court to be subject to the claims of the
agent bank's general or secured creditors, the Fund might incur certain costs
and delays in realizing payment on a corporate loan, or suffer a loss of
principal and/or interest. In situations involving intermediate Participants
similar risks may arise.
B-48
<PAGE>
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 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 loan participation interests not subject to puts to be
illiquid.
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
a Fund, and a decline in interest rates will increase the value of fixed income
securities held by a Fund.
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).
B-49
<PAGE>
When- and if-available, debt securities may be purchased at a discount from
face value. However, the Fund does not intend to hold such securities to
maturity for the purpose of achieving potential capital gains, unless current
yields on these securities remain attractive. From time to time, the Fund may
purchase securities not paying interest or dividends at the time acquired if, in
the opinion of the Sub-Adviser, such securities have the potential for future
income (or capital appreciation, if any).
Since shares of the Funds 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 the lower rated debt securities that the Fund purchases
may fluctuate more than the value of higher rated debt securities. These 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 Fund but will be reflected in the net asset
value of the Fund's shares.
RISKS OF INVESTING IN HIGH YIELD SECURITIES ("JUNK BONDS")
High yield bonds may be more susceptible to real or perceived adverse
economic and competitive industry conditions than higher grade bonds. The
prices of high yield 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. A projection of an
economic downturn or of a period of rising interest rates, for example, could
cause a decline in high yield 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 bonds,
especially in a thinly traded market.
Legislation designed to limit the use of high yield bonds in corporate
transactions may have a material adverse effect on a Fund's net asset value and
investment practices. In addition, there may be special tax considerations
associated with investing in high yield bonds structured as zero coupon or
payment-in-kind securities. The Fund records the interest on these securities
annually as income even though it receives no cash interest until
B-50
<PAGE>
the security's maturity or payment date. Also, distributions of such amounts
generally will be taxable to shareholders even if the Fund does not distribute
cash to them. Therefore, in order to pay taxes on this interest, shareholders
may have to redeem some of their shares to pay the tax or the Fund may have to
sell some of its assets to reduce the Fund's assets and may thereby increase its
expense ratio and decrease its rate of return.
ADDITIONAL FUNDAMENTAL INVESTMENT RESTRICTIONS
In addition to the fundamental investment restrictions contained in the
Prospectus, the Trustees of the Trust also have adopted the following
fundamental investment restrictions, which may not be changed with respect to
the Fund without the approval of the majority of the outstanding voting
securities of the Fund, as defined under the 1940 Act.
The Trust may not, on behalf of the Fund:
1. Act as an underwriter of securities issued by others, except to the
extent that the Fund may be considered an underwriter within the meaning of the
1933 Act, as amended, in the disposition of portfolio securities.
2. Issue senior securities, except to the extent permitted under the 1940
Act.
ADDITIONAL NON-FUNDAMENTAL INVESTMENT RESTRICTIONS
In addition to the Trust's fundamental investment restrictions, the
Trustees of the Trust have voluntarily adopted certain policies and restrictions
which are observed in the conduct of the affairs of the Fund. These represent
intentions of the Trustees 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 Trustees without
requiring prior notice to or approval of shareholders.
(a) As an operating policy, 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.
(b) As an operating policy, 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
B-51
<PAGE>
connection with futures contracts and options on futures contracts shall
not constitute the purchase of securities on margin.
(c) As an operating policy, the Fund may not invest in securities
which are not readily marketable, or the disposition of which is restricted
under federal securities laws (collectively, "illiquid securities"), other
than Rule 144A securities determined to be liquid pursuant to guidelines
adopted by the Trust's Board of Trustees if, as a result, more than 15% of
the Fund's net assets would be invested in illiquid securities. The Fund
may not invest more than 15% of its net assets in repurchase agreements
providing for settlement in more than seven days, or in other instruments
which for regulatory purposes or in the Sub-Adviser's opinion may be deemed
to be illiquid, such as a certain portion of options traded in the over-
the-counter market, and securities being used to cover options the Fund has
written.
(d) As an operating policy, the Fund may not 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.
"Value" for the purposes of all investment restrictions shall mean the
value used in determining a Fund's net asset value.
If a percentage restriction is adhered to at the time of investment, a
later change in percentage resulting from a change in values or assets will not
constitute a violation of such restriction.
TRUSTEES AND OFFICERS
Information pertaining to the Trustees and officers of the Trust is set
forth below. Trustees deemed to be "interested persons" of the Trust for
purposes of the 1940 Act are indicated by an asterisk.
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION(S)
NAME, ADDRESS AND AGE POSITION(S) WITH TRUST DURING PAST 5 YEARS
- --------------------------- ---------------------- --------------------------------------------
<S> <C> <C>
Alice T. Kane* Chairperson and Executive Vice President, New York Life
51 Madison Avenue Trustee Insurance Company, 1992 to present;
New York, NY 10010 General Counsel, 1992 to 1995;
Age: [49] Corporate Secretary, 1989 to 1994;
Senior Vice President and General
Counsel, 1986 to 1992; Director
and
</TABLE>
B-52
<PAGE>
<TABLE>
<S> <C> <C>
Chairperson, MainStay Institutional
Funds Inc., 1994 to present; Director,
New York Life Foundation, 1992 to
1995; Director, New York Life
International Investment Inc., 1988 to
present; Director, NYLIFE Inc., 1990 to
present; Director, Greystone Realty
Corporation, 1994 to present; Director,
Monitor Capital Advisors, Inc., 1994 to
present; Director, NYLCare Health
Plans, Inc. (formerly Sanus Corp. Health
Systems), 1984 to present; Director,
MacKay-Shields Financial Corporation,
1994 to present; Director, New York
Life Benefit Services Inc. (pension
consultant and third party
administrator), 1994 to present; Director,
NYLIFE Securities Inc., 1994 to present;
Director, Eagle Strategies Corp.
(registered investment adviser), 1994 to
present; Director, NYLIFE Distributors
Inc., 1994 to present; Director, NYL
Management Limited, 1995 to present;
Director, NYL Trust Company, 1995 to
present; Director, NYLINK Insurance
Agency Incorporated, 1996 to present;
Director, Japan Gamma Asset
Management Limited, 1995 to present;
Director, New York Life Worldwide
Holding, Inc., 1995 to present; Director,
New York Life and Health Insurance
Company, 1996 to present; Director,
MainStay Shareholder Services, Inc.,
1997 to present; Director, NASD
Regulation, Inc., 1996 to present; and
Member, Board of Governors of the
National Association of Securities
Dealers, Inc., 1994 to 1996.
Walter W. Ubl* Trustee Senior Vice President, New York Life
51 Madison Avenue Insurance Company, 1995 to present;
New York, NY 10010 Vice President, 1984 to 1995; Vice
Age: [55] President in charge of Mutual Funds
Department, 1989 to present; Director
and Vice President, NYLIFE
Distributors Inc., 1993 to present; and
Director and Senior Vice President
NYLIFE Securities Inc., 1996 to present.
</TABLE>
B-53
<PAGE>
<TABLE>
<CAPTION>
Principal Occupation(s)
Name Address and Age Position(s) with Trust During Past 5 Years
- -------------------- ---------------------- ----------------------
<S> <C> <C>
Stephen Roussin* President, Chief Senior Vice President, New York Life
51 Madison Avenue Executive Officer and Insurance Company, 1997 to present;
New York, NY 10010 [Trustee] Senior Vice President, Smith Barney,
Age: [34] 1994 to 1997; Division Sales Manager,
Prudential Securities, 1989 to 1994;
Retail Securities Broker, PaineWebber
Incorporated, 1988 to 1989.
Harry G. Hohn* Trustee Retired Chairman and Chief Executive
51 Madison Avenue Officer, New York Life Insurance
New York, NY 10010 Company; Chairman of the Board and
Age [65] Chief Executive Officer, New York Life
Insurance Company, 1990 to 1997; Vice
Chairman of the Board, New York Life
Insurance Company, 1986 to 1990;
Director, New York Life Insurance
Company, 1985 to 1986; Director,
Million Dollar Roundtable Foundation,
1996 to present; Director, Insurance
Marketplace Standards Association, 1996
to present; Director, Witco Corporation,
1989 to present; Member, International
Advisory Board of Credit Commercial de
France, 1995 to present; and a Life
Fellow of the American Bar Foundation.
Donald K. Ross* Trustee Retired Chairman and Chief Executive
953 Cherokee Lane Officer, New York Life Insurance
Franklin Lakes, NJ 07417 Company; Director, New York Life
Age: [71] Insurance Company, 1978 to 1996;
President, New York Life Insurance
Company, 1986 to 1990; Chairman of the
Board, New York Life Insurance
Company, 1981 to 1990; Chief Executive
Officer, New York Life Insurance
Company, 1981 to 1990; Director,
MacKay-Shields Financial Corporation,
1984 to present; and Trustee,
Consolidated Edison Company of New
York, Inc., 1976 to present.
Edward J. Hogan Trustee Independent management consultant,
Box 2321 1991 to 1995; President, Westinghouse -
Sun Valley, ID 83353 Airship Industries, Inc. and Managing
Age: [64] Director, Airship Industries U.K., Ltd.,
1987 to 1990.
</TABLE>
B-54
<PAGE>
<TABLE>
<CAPTION>
Principal Occupation(s)
Name Address and Age Position(s) with Trust During Past 5 Years
- -------------------- ---------------------- ----------------------
<S> <C> <C>
Nancy Maginnes Trustee Member, Council of Rockefeller
Kissinger University, New York, NY, 1991 to
Hendersons Road present; Trustee, Council of Rockefeller
Kent, CT 06757 University, 1995 to present; Trustee,
Age: [63] Animal Medical Center, 1993 to present;
and Trustee, The Masters School, 1994
to present.
Terry L. Lierman Trustee President, Capitol Associates, Inc., 1984
426 C Street, N.E. to present; President, Employee Health
Washington, D.C. 20002 Programs, 1990 to present; Vice
Age: [49] Chairman, TheraCom Inc., 1994 to
present; Member, UNICEF National
Board, 1993 to present; Director,
Harvard University, Pollin Institute, 1995
to present; Director, PeacePac, 1994 to
present; and Commissioner, State of
Maryland, Higher Education
Commission, 1995 to present.
John B. McGuckian Trustee Director, Ulster Television plc, 1970 to
Ardverna present; Chairman of the Board, Ulster
Cloughmills, Northern Television plc, 1990 to present;
Ireland Chairman of the Board, Tedcastle
BT4 49NL Holding Ltd. (energy), 1995 to present;
Age: 57 Director, Cooneen Textiles Ltd.
(clothing manufacturer), 1967 to present;
Director, Allied Irish Banks plc, 1977 to
present; Director, First Trust Bank, 1991
to present; Director, Unidare plc
(engineering), 1986 to present; Director,
Irish Continental Group plc (ferry
operations), 1988 to present; Director,
Harbour Group Ltd. (management
company), 1980 to present; Chairman,
Industrial Development Board, 1990 to
present; and Chairman of Senate and
Senior Pro-Chancellor, Queen's
University, 1986 to present.
Donald E. Nickelson Trustee Vice Chairman, Harbour Group
1701 Highway A-1-A Industries, Inc., 1991 to present;
Suite 101 Director, PaineWebber Group, 1980 to
Vero Beach, FL 32963 1993; President, PaineWebber Group,
Age: [63] 1988 to 1990; Chairman of the Board,
PaineWebber Properties, 1985 to 1989;
Director, Harbour Group, 1986 to
</TABLE>
B-55
<PAGE>
<TABLE>
<CAPTION>
Principal Occupation(s)
Name Address and Age Position(s) with Trust During Past 5 Years
- -------------------- ---------------------- ----------------------
<S> <C> <C>
present; Director, CPA 10 Real Estate
Inv. Trust, 1990 to present; Director,
CIP 11 Real Estate Inv. Trust, 1991 to
present; Chairman of the Board and
Director, Rapid Rock Industries, Inc.,
1986 to present; Director and Chairman
of the Board, Del Industries, 1990 to
present; Trustee, Jones Foundation (Los
Angeles), 1978 to present; Director,
Allied Healthcare Products, Inc., 1992 to
present; Director, Sugen, Inc., 1992 to
present; Director and Chairman of the
Board, Greenfield Industries, Inc., 1993
to present; Director, DT Industries, 1992
to present; Chairman of the Board,
Omniquip International, Inc., 1996 to
present; and Advisory Panel, Sedgwick
James of NY, 1996 to present.
Richard S. Trutanic Trustee Managing Director, The Somerset Group
1155 Connecticut Ave. (financial advisory firm), 1990 to present;
N.W., Suite 400 Senior Vice President, Washington
Washington, DC 20036 National Investment Corporation
Age: [44] (financial advisory firm), 1985 to 1990;
Director, Allin Communications
Corporation, 1996 to present; and
Director and Member of Executive
Committee, Southern Net, Inc., 1986 to
1990.
</TABLE>
OFFICERS (OTHER THAN TRUSTEES)
<TABLE>
<CAPTION>
<S> <C> <C>
Jefferson C. Boyce Senior Vice President Senior Vice President, MainStay
51 Madison Avenue Institutional Funds Inc., 1995 to present;
New York, NY 10010 Senior Vice President, New York Life
Age: [39] Insurance Company, 1994 to present;
Director, NYLIFE Distributors Inc.,
1993 to present; and Chief
Administrative Officer, Pension, Mutual
Funds, Structured Finance, Corporate
Quality, Human Resources and
Employees' Health Departments, New
York Life Insurance Company, 1992 to
1994.
</TABLE>
B-56
<PAGE>
<TABLE>
<CAPTION>
Principal Occupation(s)
Name Address and Age Position(s) with Trust During Past 5 Years
- -------------------- ---------------------- ----------------------
<S> <C> <C>
Anthony W. Polis Vice President and Vice President, New York Life Insurance
51 Madison Avenue Chief Financial Company, 1988 to present; Director,
New York, NY 10010 Officer Vice President and Chief Financial
Age: [53] Officer, NYLIFE Securities Inc., 1988 to
present; Vice President and Chief
Financial Officer, NYLIFE Distributors
Inc., 1993 to present; Treasurer,
MainStay Institutional Funds Inc., 1990
to present; Treasurer, MainStay VP
Series Fund, Inc., 1993 to present;
Assistant Treasurer, MainStay VP Series
Fund, Inc., 1992 to 1993; Vice President
and Treasurer, Eclipse Financial Asset
Trust, 1992 to present; Vice President
and Chief Financial Officer, Eagle
Strategies Corp. (registered investment
adviser), 1993 to present.
Richard Zuccaro Tax Vice President Vice President, New York Life Insurance
51 Madison Avenue Company, 1995 to present; Vice
New York, NY 10010 President -- Tax, New York Life
Age: [46] Insurance Company, 1986 to 1995; Tax
Vice President, NYLIFE Securities Inc.,
1987 to present; Tax Vice President,
NAFCO, Inc., 1990 to present; Tax Vice
President, NYLIFE Depositary Inc., 1990
to present; Tax Vice President, NYLIFE
Inc., 1990 to present; Tax Vice President,
NYLIFE Insurance Company of
Arizona, 1990 to present; Tax Vice
President, NYLIFE Realty Inc., 1991 to
present; Tax Vice President, NYLICO
Inc., 1991 to present; Tax Vice President,
New York Life Fund Inc., 1991 to
present; Tax Vice President, New York
Life International Investment, Inc., 1991
to present; Tax Vice President, NYLIFE
Equity Inc., 1991 to present; Tax Vice
President, NYLIFE Funding Inc., 1991
to present; Tax Vice President, NYLCO
Inc., 1991 to present; Tax Vice President,
MainStay VP Series Fund, Inc., 1991 to
present; Tax Vice President, CNP Realty,
1991 to present; Tax Vice President,
New York Life Worldwide Holding Inc.,
1992 to present; Tax Vice President,
NYLIFE Structured Asset Management
</TABLE>
B-57
<PAGE>
<TABLE>
<CAPTION>
Principal Occupation(s)
Name Address and Age Position(s) with Trust During Past 5 Years
- -------------------- ---------------------- ----------------------
<S> <C> <C>
Co. Ltd., 1992 to present; Tax Vice
President, MainStay Institutional Funds
Inc., 1992 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 present;
Vice President, NYLCARE Health
Plans, Inc., 1995 to present; Vice
President - Tax, New York Life and
Health Insurance Co., 1996 to present;
and Tax Vice President, NYL Trust
Company, 1996 to present.
A. Thomas Smith III Secretary Vice President and Associate General
51 Madison Avenue Counsel, New York Life Insurance
New York, NY 10010 Company, 1997 to present; Associate
Age: [39] General Counsel, New York Life
Insurance Company, 1996 to 1997;
Assistant General Counsel, New York
Life Insurance Company, 1994 to 1996;
Secretary, MainStay Institutional Funds
Inc., MainStay VP Series Fund, Inc.,
New York Life Fund Inc., and Eclipse
Financial Asset Trust, 1994 to present;
Secretary, Eagle Strategies Corp.
(registered investment adviser), 1996 to
present; and Assistant General Counsel,
Dreyfus Corporation, 1991 to 1993.
</TABLE>
As indicated in the above table, certain Trustees and officers also hold
positions with MainStay Management, Inc., MacKay-Shields, New York Life
Insurance Company, NYLIFE Securities Inc. and/or NYLIFE Distributors Inc.
The Independent Trustees of the Trust receive from the Trust an annual
retainer of $40,000 and a fee of $1,000 for each Board of Trustees meeting and
for each Board committee meeting attended and are reimbursed for all out-of-
pocket expenses related to attendance at such meetings. Trustees who are
affiliated with New York Life Insurance Company do not receive compensation from
the Trust.
For the fiscal year ended December 31, 1996, the Trustees received the
following compensation from the Trust and from
B-58
<PAGE>
certain other investment companies (as indicated) that have the same manager or
sub-advisers as the Trust or an investment adviser that is an affiliated person
of one of the Trust's manager:
Total Compensation
Aggregate From Registrant
Name of Compensation and Fund Complex
Trustee from the Trust Paid to Trustees
- ---------------------- -------------- ----------------
Edward J. Hogan* $0 $0
Nancy M. Kissinger $46,000 $46,000
Terry L. Lierman $45,000 $45,000
John B. McGuckian** $0 $0
Donald E. Nickelson $45,000 $45,000
Richard S. Trutanic $44,000 $44,000
Ralph A. Pfeiffer*** $33,000 $33,000
* Mr. Hogan was elected to his position as Trustee of the Trust on October
28, 1996.
** Mr. McGuckian was elected to his position as Trustee of the Trust on July
28, 1997.
*** Mr. Pfeiffer passed away on September 13, 1996.
[As of September 30, 1997, the Trustees and officers of the Trust as a
group owned less than 1% of the outstanding shares of any class of beneficial
interest of the Funds.]
THE MANAGER, THE SUB-ADVISER AND THE DISTRIBUTOR
MANAGEMENT AGREEMENT
Pursuant to the Management Agreement for the Fund dated ________________,
1997, MainStay Management, Inc. (the "Manager"), subject to the supervision of
the Trustees of the Trust and in conformity with the stated policies of the
Fund, administers the Fund's business affairs and has investment advisory
responsibilities.
On _______________, 1997, the sole initial shareholder 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
Trustees or by vote of a majority of the outstanding voting securities of the
Fund (as defined in the 1940 Act and in a rule under the Act) and, in either
case, by a majority of the Trustees
B-59
<PAGE>
who are not "interested persons" of the Trust or the Manager (as the term is
defined in the 1940 Act).
The Manager has authorized any of its directors, officers and employees who
have been elected or appointed as Trustees or officers of the Trust 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 of judgment by the Manager or for any loss sustained by
the Fund except in the case of the Manager's willful misfeasance, bad faith,
gross negligence or reckless disregard of duty. The Management Agreement also
provides that it shall terminate automatically if assigned and that it may be
terminated without penalty by either party upon no more than 60 days' nor less
than 30 days' written notice.
In connection with its administration of the business affairs of the Fund,
and except as indicated in the Prospectus under the heading "Manager, Sub-
Adviser and Distributor," the Manager bears the following expenses:
(a) the salaries and expenses of all personnel of the Trust and the
Manager, except the fees and expenses of Trustees not affiliated with the
Manager or the Sub-Adviser; and
(b) all expenses incurred by the Manager in connection with administering
the ordinary course of the Fund's business, other than those assumed by the
Trust.
SUB-ADVISORY AGREEMENT
Pursuant to a Sub-Advisory Agreement between the Manager and MacKay-Shields
Financial Corporation ("MacKay-Shields" or the "Sub-Adviser"), MacKay-Shields,
subject to the supervision of the Trustees of the Trust and the Manager and in
conformity with the stated policies of the Fund and the Trust, manages the
Fund's portfolio, including the purchase, retention, disposition and loan of
securities.
On __________, 1997, the sole initial shareholder of the Fund approved the
Sub-Advisory Agreement with MacKay-Shields. 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 Trustees or by vote of a majority of the outstanding voting
securities of the Fund (as defined in the 1940 Act and in a rule under the Act)
and, in either case, by a majority of the Trustees who are not "interested
persons" of the
B-60
<PAGE>
Trust, the Manager or MacKay-Shields (as the term is defined in the 1940 Act).
The Sub-Adviser has authorized any of its directors, officers and employees
who have been elected or appointed as Trustees or officers of the Trust to serve
in the capacities in which they have been elected or appointed. In connection
with the services it renders, the Sub-Adviser bears the salaries and expenses of
all of its personnel.
The Sub-Advisory Agreement provides that MacKay-Shields shall not be liable
for any error of judgment by MacKay-Shields or for any loss suffered by the Fund
except in the case of MacKay-Shields' willful misfeasance, bad faith, gross
negligence or reckless disregard of duty. The 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.
DISTRIBUTION AGREEMENT
NYLIFE Distributors also acts as the Principal Underwriter and Distributor
of the Fund's shares pursuant to the Distribution Agreement with the Trust dated
January 1, 1994. NYLIFE Securities Inc., an affiliated company, sells shares of
the Fund pursuant to a dealer agreement with the Distributor. The Distributor
and other broker-dealers will pay commissions to salesmen as well as the cost of
printing and mailing prospectuses to potential investors and of any advertising
incurred by them in connection with their distribution of Fund shares. In
addition, the Distributor will pay for a variety of account maintenance and
personal services to shareholders after the sale.
The Distribution Agreement for the Fund was approved by the Trustees,
including a majority of the Trustees who are not "interested persons" (as the
term is defined in the 1940 Act) of the Trust nor have any direct or indirect
financial interest in the operation of the distribution plan or in any related
agreement (the "Independent Trustees") at a meeting held on July 28, 1997.
As disclosed in the Prospectus, the Fund has adopted separate plans of
distribution pursuant to Rule 12b-1 under the 1940 Act for each class of shares
of the Fund (the "Class A Plans", the "Class B Plans" and, collectively, the
"Plans"). Under the Class A Plans, Class A shares of the Fund pay the
Distributor a monthly fee at the annual rate of 0.25% of the average daily net
assets of the Fund's Class A shares for distribution or service activities, as
designated by the Distributor. The Class A Plan for the Fund was approved by
the
B-61
<PAGE>
sole initial shareholder of the Class A of shares of the Fund on _____________,
1997.
The Trustees of the Trust, including a majority of the Trustees who are not
interested persons of the Trust and who have no direct or indirect financial
interest in the operation of such Plan (the "Independent Trustees"), by vote
cast in person at a meeting called for the purpose of voting on such Plan,
initially approved the Class A Plan on July 28, 1997.
As noted above, the Class B shares of the Fund also have adopted a 12b-1
distribution plan. The Class B Plan for the Fund was approved on _____________,
1997 by the sole initial shareholder of the Class B shares of the Fund. The
Trustees of the Trust, including a majority of the Trustees who are not
interested persons of the Trust and who have no direct or indirect financial
interest in the operation of such plan of distribution, by vote cast in person
at meetings called for the purpose of voting on such Plans, initially approved
the Class B Plan of the Fund on July 28, 1997.
Under the Class B plan, the Fund's Class B shares pay a monthly
distribution fee to the Distributor at the annual rate of 0.75% of the average
daily net assets attributable to the Fund's Class B shares. Pursuant to the
Class B Plan, the Class B shares of the Fund also pay a service fee to the
Distributor at the annual rate of 0.25% of the average daily net assets of the
Fund's Class B shares.
Once approved by a vote of a majority of the outstanding voting securities
of a class of shares of the Fund, the Plan shall continue in effect thereafter,
provided such continuance is approved annually by a vote of the Trustees in the
manner described above. No Plan may be amended to increase materially the
amount to be spent for the services described therein without approval of the
shareholders of the affected class of shares of the Fund, and all material
amendments of each Plan must also be approved by the Trustees in the manner
described above. Each Plan may be terminated at any time, without payment of
any penalty, by vote of a majority of the Trustees who are not interested
persons of the Trust and who have no direct or indirect financial interest in
the operations of the Plan, or by a vote of a majority of the outstanding voting
securities of the affected Fund (as defined in the 1940 Act) on not more than 30
days' written notice to any other party to the Plan. So long as any Plan is in
effect, the selection and nomination of Trustees who are not such interested
persons has been committed to those Trustees who are not such interested
persons. The Trustees have determined that, in their judgment, there is a
reasonable likelihood that each Plan will benefit the respective Fund and
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its shareholders. Pursuant to both the Class A and Class B Plans, the
Distributor shall provide the Trust for review by the Trustees, and the Trustees
shall review at least quarterly, a written report of the amounts expended under
each Plan and the purpose for which such expenditures were made. In the
Trustees' quarterly review of each Plan, they will consider its continued
appropriateness and the level of compensation provided therein.
Pursuant to a rule of the National Association of Securities Dealers, Inc.,
the amount which the Fund may pay for distribution expenses, excluding service
fees, is limited to 6.25% of the gross sales of the Fund's shares since
inception of the Fund's Plan, plus interest at the prime rate plus 1% per annum
(less any contingent deferred sales charges paid by shareholders to the
Distributor or distribution fee (other than service fees) paid by the Funds to
the Distributor).
OTHER SERVICES
Pursuant to an Accounting Agreement with the Trust dated January 1, 1994,
the Manager performs certain bookkeeping and pricing services for the Fund.
In addition, the Fund may reimburse NYLIFE Securities and [NYLIFE
Distributors] for the cost of certain correspondence to shareholders and
establishing shareholder accounts.
EXPENSES BORNE BY THE TRUST
Except for the expenses to be paid by the Manager as described in the
Prospectus, the Trust, on behalf of the Fund, is responsible under its
Management Agreement for the payment of expenses related to the Fund's
operations, including (i) the fees payable to the Manager, (ii) the fees and
expenses of Trustees who are not affiliated with the Manager or the Sub-Adviser,
(iii) certain fees and expenses of the Custodian and Transfer Agent, including
the cost of pricing the Fund's shares, (iv) the charges and expenses of the
Trust's legal counsel and independent accountants, (v) brokers' commissions and
any issue or transfer taxes chargeable to the Trust, on behalf of the Fund, in
connection with its securities transactions, (vi) the fees of any trade
association of which the Fund or the Trust is a member, (vii) the cost of share
certificates representing shares of the Fund, (viii) reimbursement of a portion
of the organization expenses of the Fund and the fees and expenses involved in
registering and maintaining registration of the Trust and of its shares with the
SEC and the states registering the Trust as a broker or dealer, including the
preparation and printing of the Trust's registration statements and prospectuses
for such purposes, (ix) allocable communications expenses with respect to
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investor services and all expenses of shareholders' and Trustees' meetings and
preparing, printing and mailing prospectuses and reports to shareholders, (x)
litigation and indemnification expenses and other extraordinary expenses not
incurred in the ordinary course of the Fund's business, (xi) any expenses
assumed by the Fund pursuant to its plan of distribution, and (xii) all taxes
and business fees payable by the Fund to federal, state or other governmental
agencies. Fees and expenses of legal counsel, registering shares, holding
meetings and communicating with shareholders include an allocable portion of the
cost of maintaining an internal legal and compliance department.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Purchases and sales of securities on a securities exchange are effected by
brokers, and the Fund pays a brokerage commission for this service. In
transactions on stock exchanges in the United States, these commissions are
negotiated, whereas on many foreign stock exchanges these commissions are fixed.
In the over-the-counter markets, securities (i.e., Municipal Bonds and other
debt securities) are generally traded on a "net" basis with dealers acting as
principal for their own accounts without a stated commission, although the price
of the security usually includes a profit to the dealer. Transactions in
certain over-the-counter securities also may be effected on an agency basis,
when the total price paid (including commission) is equal to or better than the
best total prices available from other sources. In underwritten offerings,
securities are purchased at a fixed price which includes an amount of
compensation to the underwriter, generally referred to as the underwriter's
concession or discount. On occasion, certain money market instruments may be
purchased directly from an issuer, in which case no commissions or discounts are
paid.
Newly issued securities normally are purchased directly from the issuer or
from an underwriter acting as principal. Other purchases and sales usually are
placed with those dealers from which it appears that the best price or execution
will be obtained; those dealers may be acting as either agents or principals.
The purchase price paid by the Fund to underwriters of newly issued securities
usually includes a concession paid by the issuer to the underwriter, and
purchases of after-market securities from dealers normally are executed at a
price between the bid and asked prices.
The primary consideration in placing portfolio security transactions with
broker-dealers for execution is to obtain and maintain the availability of
execution at the most favorable prices and in the most effective manner
possible. The Adviser attempts to achieve this result by selecting broker-
dealers to
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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 Rules of Fair Practice
of the NASD and such other policies as the Trustees may determine, the Adviser
may consider sales of shares of the Fund as a factor in the selection of broker-
dealers to execute the Fund's portfolio transactions.
NYLIFE Securities (the "Affiliated Broker") may act as broker for the
Trust. In order for the Affiliated Broker to effect any portfolio transactions
for the Trust, 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 Trust will not deal with the Affiliated Broker in any portfolio transaction
in which the Affiliated Broker acts as principal.
Under the Sub-Advisory Agreement and as permitted by Section 28(e) of the
Securities Exchange Act of 1934 (the "1934 Act"), the Sub-Adviser may cause the
Fund to pay a broker-dealer (except the Affiliated Broker) which provides
brokerage and research services to the Sub-Adviser an amount of commission for
effecting a securities transaction for the Fund in excess of the amount other
broker-dealers would have charged for the transaction if the Sub-Adviser
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 Sub-
Adviser's overall responsibilities to the Fund 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
Sub-Adviser, be reasonable in relation to the value of the brokerage services
provided, commissions exceeding
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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 Fund and the Sub-Adviser's 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 Sub-Adviser 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 Fund, a commission higher than one charged elsewhere will not be
paid to such a firm solely because it provided Research to the Sub-Adviser.
Research provided by brokers is used for the benefit of all of the Sub-Adviser's
clients and not solely or necessarily for the benefit of the Fund. The Sub-
Adviser's investment management personnel attempt to evaluate the quality of
Research provided by brokers. Results of this effort are sometimes used by the
Sub-Adviser as a consideration in the selection of brokers to execute portfolio
transactions.
In certain instances there may be securities which are suitable for the
Fund's portfolio as well as for that of another MainStay fund or one or more of
the other clients of the Sub-Adviser. Investment decisions for the Fund and for
the Sub-Adviser's 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 the Fund is concerned. The Trust believes
that over time its ability to participate in volume transactions will produce
better executions for the Fund.
The investment advisory fee that the Trust pays on behalf of the Fund to
the Sub-Adviser will not be reduced as a consequence
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of the Adviser's receipt of brokerage and research services. To the extent the
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 Sub-Adviser in serving both the Fund and other clients and,
conversely, such services obtained by the placement of brokerage business of
other clients would be useful to the Sub-Adviser in carrying out their
obligations to the Fund.
Investors may, subject to the approval of the Trust, NYLIFE Distributors
and the Sub-Adviser, purchase shares of the Fund with liquid securities that are
eligible for purchase by the Fund and that have a value that is readily
ascertainable. These transactions will be effected only if the Adviser intends
to retain the security in the Fund as an investment. The Trust reserves the
right to amend or terminate this practice at any time.
NET ASSET VALUE
The net asset value per share of the Fund is determined by the Trust daily
as of the close of regular trading on the New York Stock Exchange (currently
4:00 p.m., Eastern time) on each day when the New York Stock Exchange is open
for trading.
Portfolio securities of the Fund are valued (a) by appraising common and
preferred stocks which are traded on the New York Stock Exchange at the last
sale price on that Exchange on the day as of which assets are valued or, if no
sale occurs, at the mean between the closing bid price and asked price, (b) by
appraising other common and preferred stocks as nearly as possible in the manner
described in clause (a) if traded on any other exchange, including the National
Association of Securities Dealers National Market System and foreign securities
exchanges, (c) by appraising over-the-counter common and preferred stocks quoted
on the National Association of Securities Dealers NASDAQ system (but not listed
on the National Market System) at the closing bid price supplied through such
system, (d) by appraising over-the-counter common and preferred stocks not
quoted on the NASDAQ system and securities listed or traded on certain foreign
exchanges whose operations are similar to the U.S over-the-counter market at
prices supplied by a pricing agent selected by the Sub-Adviser if those prices
are deemed by the Sub-Adviser to be representative of market values at the first
close of business of the New York Stock Exchange, (e) by appraising debt
securities at prices supplied by a pricing agent selected by the Sub-Adviser,
which prices reflect broker-dealer-supplied valuations and electronic data
processing techniques if those prices are deemed by the Sub-Adviser to be
representative of market values
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at the first close of business 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 listed or traded on certain 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 the Sub-Adviser 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
Trustees, although the actual calculation may be done by others. Money market
instruments held by the Fund with a remaining maturity of 60 days or less will
be valued by the amortized cost method unless such method does not represent
fair value. Forward foreign currency exchange contracts held by the Fund 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 at 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 at the mean between the buying and selling rates of such
currencies against U.S. dollars last quoted by any major bank or broker-dealer.
If such quotations are not available, the rate of exchange will be determined in
accordance with policies established by the Trustees. The Fund recognizes
dividend income and other distributions on the ex-dividend date, except that
certain dividends from foreign securities are recog nized as soon as the Fund is
informed 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 generally 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 Fund's net asset value is not
calculated. Such calculation of net asset value does not take
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place contemporaneously with the determination of the prices of the majority of
the portfolio securities used in such calculation.
Events affecting the values of portfolio securities that oc cur between the
time their prices are determined and the close of the New York Stock Exchange
will not be reflected in the Fund's calculation of net asset values unless the
Adviser deems that the particular event would materially affect net asset value,
in which case an adjustment will be made.
The proceeds received by the 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 the
Fund and constitute the underlying assets of the Fund. The underlying assets of
the Fund will be segregated on the books of account, and will be charged with
the liabilities in respect to the Fund and with a share of the general
liabilities of the Trust. Expenses with respect to the Fund and another
MainStay Fund will be allocated in proportion to the net asset values of the
respective Fund except where allocations of direct expenses can otherwise be
fairly made.
To the extent that any newly organized fund or class of shares receives, on
or before December 31, any seed capital, the net asset value of such fund(s) or
class(es) will be calculated as of December 31.
SHAREHOLDER INVESTMENT ACCOUNT
A Shareholder Investment Account is established for each investor in the
Fund, under which a record of the shares of the Fund held is maintained by the
Transfer Agent. If a share certificate is desired, it must be requested in
writing for each transaction. There is no charge to the investor for issuance
of a certificate. Whenever a transaction takes place in the Fund, the
shareholder will be mailed a confirmation showing the transaction. Shareholders
will be sent a quarterly statement showing the status of the Account. In
addition, shareholders will be sent a monthly statement for each month in which
a transaction occurs.
SHAREHOLDER SERVICING AGENT
The Glass-Steagall Act prohibits national banks from engaging in the
business of underwriting, selling or distributing securities. There is
currently no precedent prohibiting banks from performing shareholder servicing
and recordkeeping functions. Changes in federal or state statutes and
regulations
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pertaining to the permissible activities of banks and their affiliates or
subsidiaries, as well as further judicial or administrative decisions or
interpretations of those provisions, could prevent a bank from continuing to
perform all or a part of such services. If a bank were prohibited from so
acting, the Trustees would consider what actions, if any, would be necessary to
continue to provide efficient and effective shareholder services. It is not
expected that shareholders would suffer any adverse financial consequences as a
result of any of these occurrences.
PURCHASES AND REDEMPTIONS
LETTER OF INTENT ("LOI")
The LOI is a non-binding obligation on the Qualified Purchaser to purchase
the full amount indicated; however, on the initial purchase, if required (or, on
subsequent purchases if necessary), 5% of the dollar amount specified in the LOI
will be held in escrow by the Transfer Agent in shares registered in the
shareholder's name in order to assure payment of the proper sales charge. If
total purchases pursuant to the LOI (less any dispositions and exclusive of any
distribution on such shares automatically reinvested) are less than the amount
specified, the investor will be requested to remit to the Distributor an amount
equal to the difference between the sales charge paid and the sales charge
applicable to the aggregate purchases actually made. If not remitted within 20
days after written request, an appropriate number of escrowed shares will be
redeemed in order to realize the difference.
SUSPENSION OF REDEMPTIONS
The Trust may suspend the right of redemption of shares of the Fund and may
postpone payment for any period: (i) during which the New York Stock Exchange
is closed other than customary weekend and holiday closings or during which
trading on the New York Stock Exchange is restricted; (ii) when the SEC
determines that a state of emergency exists which may make payment or transfer
not reasonably practicable; (iii) as the SEC may by order permit for the
protection of the security holders of the Trust; or (iv) at any other time when
the Trust may, under applicable laws and regulations, suspend payment on the
redemption or repurchase of its shares.
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TAX-DEFERRED RETIREMENT PLANS
CASH OR DEFERRED PROFIT SHARING PLANS UNDER SECTION 401(K) FOR CORPORATIONS AND
SELF-EMPLOYED INDIVIDUALS
Shares of the Fund may also be purchased as an investment under a
specimen cash or deferred profit sharing plan intended to qualify under Section
401(k) of the Code (a "401(k) Plan") adopted by a corporation, a self-employed
individual (including sole proprietors and partnerships), or other organization.
The Fund may be used as funding vehicles for qualified retirement plans
including 401(k) plans, which may be administered by third-party administrator
organizations. NYLIFE Distributors does not sponsor or administer such
qualified plans at this time.
INDIVIDUAL RETIREMENT ACCOUNT ("IRA")
Shares of the Fund may also be purchased as an
underlying investment for an IRA made available by NYLIFE Distributors.
An individual may contribute as much as $2,000 of his or her earned
income to an IRA. A married individual filing a joint return may also
contribute to an IRA for a nonworking spouse. For tax years beginning after
1996, the maximum deduction allowed for a contribution to a spousal IRA is the
lesser of (1) $2,000 or (ii) the sum of (a) the compensation includible in the
working spouse's gross income plus (b) any compensation includible in the gross
income of the nonworking spouse, reduced by the amount of the deduction taken by
the working spouse. The maximum deduction for a IRA contribution by a married
couple is $4,000.
An individual who has not attained age 70-1/2 may make an IRA
contribution which is deductible for federal income tax purposes only if (i)
neither the individual nor his or her spouse (unless filing separate returns and
living apart at all times during the taxable year) is an active participant in
an employer's retirement plan, or (ii) the individual (and his or her spouse, if
applicable) has an adjusted gross income below a certain level ($40,000 for
married individuals filing a joint return, with a phase-out of the deduction for
adjusted gross income between $40,000 and $50,000; $25,000 for a single
individual, with a phase-out for adjusted gross income between $25,000 and
$35,000). However, an individual not permitted to make a deductible
contribution to an IRA may nonetheless make nondeductible contributions up to
the maximum contribution limit for that year. The deductibility of IRA
contributions under state law varies from state to state.
Distributions from IRAs (to the extent they are not treated as a tax-
free return of nondeductible contributions) are taxable
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under federal income tax laws as ordinary income. There are special rules for
determining how withdrawals are to be taxed if an IRA contains both deductible
and nondeductible amounts. In general, all IRAs are aggregated and treated as
one IRA, all withdrawals are treated as one withdrawal, and then a proportionate
amount of the withdrawal will be deemed to be made from nondeductible
contributions; amounts treated as a return of nondeductible contributions will
not be taxable. Certain early withdrawals are subject to an additional excise
tax. There are also special rules governing when IRA distributions must begin
and the minimum amount of such distributions; failure to comply with these rules
can result in the imposition of an excise tax.
All income and capital gains deriving from IRA investments in the Fund
are reinvested and compound tax-deferred until distributed from the IRA. The
combination of annual contributions which may be deductible and tax-deferred
compounding can lead to substantial retirement savings.
403(b)(7) TAX SHELTERED ACCOUNT
Shares of the Fund may also be purchased as the underlying investment
for tax sheltered custodial accounts made available by NYLIFE Distributors. In
general, employees of tax-exempt organizations described in Section 501(c)(3) of
the Code (such as hospitals, churches, religious, scientific, or literary
organizations and educational institutions) or a public school system are
eligible to participate in a 403(b) plan.
GENERAL INFORMATION
Shares of the Fund may also be a permitted investment under profit
sharing, pension, and other retirement plans, IRAs, and tax-deferred annuities
other than those offered by the Fund depending on the provisions of the relevant
plan. Third-party administrative services, available for some corporate plans,
may limit or delay the processing of transactions.
The custodial agreements and forms provided by the Fund's Custodian
and Transfer Agent designate State Street Bank and Trust Company as custodian
for IRAs and 403(b) plans (unless another trustee or custodian is designated by
the individual or group establishing the plan) and contain specific information
about the plans. Each plan provides that dividends and distributions will be
reinvested automatically. For further details with respect to any plan,
including fees charged by State Street Bank and Trust Company, tax consequences
and redemption information, see the specific documents for that plan.
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The federal tax laws applicable to retirement plans, IRAs and 403(b)
plans are extremely complex and change from time to time. Therefore, an
investor should consult with his or her own professional tax adviser before
establishing any of the tax-deferred retirement plans described above.
CALCULATION OF PERFORMANCE QUOTATIONS
From time to time the Fund may publish its yield and/or average annual
total return in advertisements and communications to shareholders. Total return
and yield are computed separately for Class A and Class B shares. The average
annual total return of the Fund is determined for a particular period by
calculating the actual dollar amount of the investment return on a $1,000
investment in the Fund made at the maximum public offering price at the
beginning of the period, and then calculating the annual compounded rate of
return which would produce that amount. Total return for a period of one year
is equal to the actual return of the Fund during that period. This calculation
assumes a complete redemption of the investment and the deduction of the maximum
contingent deferred sales charge at the end of the period in the case of Class B
shares. In the case of Class A shares, the calculation assumes the maximum
sales charge is deducted from the initial $1,000 purchase order. It also
assumes that all dividends and distributions are reinvested at net asset value
on the reinvestment dates during the period.
In considering any average annual total return quotation, investors
should remember that the maximum initial sales charge reflected in each
quotation for Class A shares is a one-time fee which will have its greatest
impact during the early stages of an investor's investment in the Fund. The
actual performance of your investment will be affected less by this charge the
longer you retain your investment in the Fund.
Quotations of the Fund's average annual total
return will be calculated according to the following SEC formula:
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P(1+T)to the nth power= ERV
where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment made at the
beginning of the 1, 5 or 10-year periods at the end of the 1, 5, or
10-year periods (or fractional portion thereof)
The Fund may quote total rates of return in addition to its average annual
total return. Such quotations are computed in the same manner as the average
annual compounded rate, except that such quotations will be based on the Fund's
actual return for a specified period as opposed to its average return over 1, 5,
and 10-year periods. In considering any total rate of return quotation,
investors should remember that the maximum initial sales charge reflected in
each quotation for Class A shares is a one-time fee which will have its greatest
impact during the early stages of an investor's investment in the Fund. The
actual performance of your investment will be affected less by this charge the
longer you retain your investment in the Fund.
The performance data that may be quoted represents historical performance
and the investment return and principal value of an investment will fluctuate so
that an investor's shares, when redeemed, may be worth more or less than their
original cost.
The yield of the Fund is computed by dividing its net investment income
(determined in accordance with the following SEC formula) earned during a
recent 30-day period by the product of the average daily number of shares
outstanding and entitled to receive dividends during the period and the maximum
offering price per share on the last day of the period. The results are
compounded on a bond equivalent (semiannual) basis and then they are annualized.
Yield will be calculated using the following SEC formula:
Yield = 2[(a-b +1)to the 6th power -1]
---
cd
where:
a = interest earned during the period
b = expenses accrued for the period (net of reimbursements)
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c = the average daily number of shares outstanding during the period that
were entitled to receive dividends
d = the maximum offering price per share on the last day of the period
This yield figure does not reflect the deduction of any contingent deferred
sales charges which are imposed upon certain redemptions at the rates set forth
under "Redemptions and Repurchases" in the Prospectus.
The Fund may also include its current dividend rate in its prospectus, in
supplemental sales literature, or in communications to shareholders. The
current dividend rate of the Fund for a particular period is calculated by
annualizing total distributions per share from net investment income (including
equalization credits, excluding realized short-term capital gains and premiums
from writing options) during this period and dividing this amount by the maximum
offering price per share on the last day of the period. The current dividend
rate does not reflect all components of the Fund's performance including (i)
realized and unrealized capital gains and losses, which are reflected in
calculations of the Fund's total return, or (ii) the amortized discount and
premium on debt obligations in income using the current market value of the
obligations, as is currently required for yield calculations. In addition, the
current dividend rate does not take into account the imposition of any
contingent deferred sales charge on the redemption of Fund shares. Any
performance figure which does not take into account the contingent deferred
sales charge would be reduced to the extent such charge is imposed upon a
redemption.
Investors should note that the investment results of the Fund will
fluctuate over time, and any presentation of the Fund's yield, current dividend
rate, total return or tax-equivalent yield of any prior period should not be
considered as a representation of what an investment may earn or what an
investor's yield, current dividend rate, total return or tax-equivalent yield
may be in any future period.
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
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to the approximate number of then-current Fund shareholders, shareholder
accounts and Fund assets.
From time to time, advertising and sales literature for the Fund may
discuss the investment philosophy, personnel and assets under management of the
Fund's investment adviser, and other pertinent facts relating to the management
of the Fund by the adviser.
From time to time the Fund may publish an indication of its past
performance as measured by independent sources such as Lipper Analytical
Services, Incorporated, Weisenberger Investment Companies Service, Donoghue's
Money Fund Report, Spot Market Prices, Barron's, BusinessWeek, Kiplinger's
-------- ------------ -----------
Personal Finance, Financial World, Forbes, Money, Morningstar, Personal
- ---------------- --------------- ------ ----- ----------- --------
Investor, Sylvia Porter's Personal Finance, and The Wall Street Journal.
- -------- -------------------------------- -----------------------
In addition, performance information for the Fund may be compared, in
advertisements, sales literature, and reports to shareholders, to: (i)
unmanaged indexes, such as the Standard & Poor's 500 Composite Stock Price
Index, the Salomon Brothers Broad Investment Grade Bond Index, the Morgan
Stanley Capital International indexes; the Dow Jones Industrial Average,
Donoghue Money Market Institutional Averages, the Merrill Lynch 1 to 3 Year
Treasury Index, the Salomon Brothers World Government Benchmark Bond Index, the
Salomon Brothers non-U.S. Dollar World Government Bond Index, the Lehman
Brothers Municipal Bond Index and the Lehman Brothers Government Corporate
Index; (ii) other groups of mutual funds tracked by Morningstar Inc. or Lipper
Analytical Services, widely used independent research firms which rank mutual
funds by overall performance, investment objectives and assets, or tracked by
other services, companies, publications or persons who rank mutual funds on
overall performance or other criteria; and (iii) the Consumer Price Index
(measure for inflation) and other measures of the performance of the economy to
assess the real rate of return from an investment in the Fund. Unmanaged
indexes may assume the reinvestment of dividends but generally do not reflect
deductions for administrative and management costs and expenses.
From time to time, advertisements for the Fund may include general
information about the services and products offered by The MainStay Funds,
MainStay Institutional Funds Inc. 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
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statements about this information by the entities' officers, directors and
employees.
TAX STATUS
TAXATION OF THE FUNDS
The Fund intends to be treated as a regulated investment company ("RIC")
under Subchapter M of the Code. Such qualification does not involve supervision
of management or investment practices or policies by any governmental agency or
bureau.
As a regulated investment company required under Subchapter M of the Code
to distribute at least 90% of its taxable net investment income and net short-
term capital gain in excess of net long-term capital losses (and at least 90%
of net tax-exempt interest income), the Fund generally will not be subject to
federal income or excise tax on any of its net investment income or net realized
capital gains which are timely distributed to shareholders. Provided that the
Fund qualifies as a regulated investment company, it generally will not be
subject to any excise or income taxes in Massachusetts. The Fund's investments,
if any, in REMIC residual interests (as explained previously in this SAI) or in
Passive Foreign Investment Companies, as explained below, may cause the Fund to
become liable for certain taxes. Investors that are tax-exempt organizations
should carefully consider whether distributions of the Fund's earnings will be
subject to tax in their hands.
CHARACTER OF DISTRIBUTIONS TO SHAREHOLDERS -- GENERAL
Assuming the Fund qualifies as a RIC, distributions of taxable net
investment income and net short-term capital gains in excess of net long-term
capital losses will be treated as ordinary income in the hands of shareholders.
If a Fund's investment income is derived exclusively from interest rather than
dividends, no portion of such distributions will be eligible for the dividends-
received deduction available to corporations. 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 eliminated
if such shares are deemed to have been held for less than 46 days. 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, the
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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.
Distributions of the excess of net long-term capital gain over net short-
term capital loss are taxable to shareholders as long-term capital gain, if such
distributions are designated as capital gain dividends, regardless of the length
of time the shares of the Fund have been held by such shareholders. Such
distributions are not eligible for the corporate dividends-received deduction.
Any loss realized upon the redemption of shares within six months from the date
of their purchase will be treated as a long-term capital loss to the extent of
any capital gain dividends received with respect to such shares during that six-
month period. A loss realized upon a redemption of shares of the Fund within 30
days before or after a purchase of shares of the Fund (whether by reinvestment
of distributions or otherwise) may be disallowed in whole or in part.
If any net long-term capital gains in excess of net short-term capital
losses are retained by the Fund for reinvestment, requiring federal income taxes
to be paid thereon by the Fund, the Fund intends to elect to treat such capital
gains as having been distributed to shareholders. As a result, such amounts
will be taxable as long-term capital gains in the hands of the shareholders.
Shareholders will be able to claim their proportionate share of the federal
income taxes paid by the Fund on such gains as a credit against their own
federal income tax liabilities and will be entitled to increase the adjusted tax
basis of Fund shares by the difference between their pro-rata share of such
gains and their tax credit.
Distributions by the Fund result in a reduction in 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 (except to the extent the distribution is an exempt interest
dividend as described below) as ordinary income or capital gain as described
above, even though, from an investment standpoint, it may constitute a partial
return of investment. In particular, investors should be careful to consider
the tax implications of buying shares just prior to a distribution. The price
of shares purchased at that time includes the amount of the forthcoming
distribution. Those investors purchasing shares just prior to a distribution
will then receive a partial return of their investment upon such distribution,
which may nevertheless be taxable to them.
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Distributions of taxable net investment income and net realized capital
gains will be taxable as described above, whether received in shares or in cash.
Any distributions that are not from the Fund's net investment income or net
capital gain may be characterized as a return of capital to shareholders or, in
some cases, as capital gain. Shareholders electing to receive distributions in
the form of additional shares will have a cost basis for federal income tax
purposes in each share so received equal to the net asset value of such share on
the reinvestment date.
DISCOUNT
Certain of the bonds purchased by the Fund, such as zero coupon bonds, may
be treated as bonds that were originally issued at a discount. Original issue
discount represents interest for federal income tax purposes and can generally
be defined as the difference between the price at which a security was issued
and its stated redemption price at maturity. Original issue discount, although
no cash is actually received by the Fund until the maturity of the bond, is
treated for federal income tax purposes as income earned by the Fund over the
term of the bond, and therefore is subject to the distribution requirements of
the Code. The annual amount of income earned on such a bond by the Fund
generally is determined on the basis of a constant yield to maturity which takes
into account the semiannual compounding of accrued interest.
In addition, some of the bonds may be purchased by the Fund at a discount
which exceeds the original issue discount on such bonds, if any. This
additional discount represents market discount for federal income tax purposes.
The gain realized on the disposition of any bond having market discount,
generally will be treated as taxable ordinary income to the extent it does not
exceed the accrued market discount on such bond (unless the Fund elects to
include market discount in income in tax years to which it is attributable).
Realized accrued market discount on obligations that pay tax-exempt interest is
nonetheless taxable. Generally, market discount accrues on a daily basis for
each day the bond is held by the Fund at a constant rate over the time remaining
to the bond's maturity. In the case of any debt security having a fixed
maturity date of not more than one year from date of issue, the gain realized on
disposition will be treated as short-term capital gain.
EXCISE TAX
The Fund is potentially subject to a 4% nondeductible excise tax on amounts
required to be but not distributed under a prescribed formula. The formula
generally requires payment to
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shareholders during a calendar year of distributions representing at least 98%
of the Fund's ordinary income for the calendar year and at least 98% of the
excess of its capital gains over capital losses realized during the one-year
period ending October 31 during such year. The Fund will adjust its
distribution policies to minimize any adverse impact from this tax or eliminate
its application.
TAXATION OF OPTIONS, FUTURES AND SIMILAR INSTRUMENTS
Many of the options, futures contracts and forward contracts entered into
by the Fund will be classified as "Section 1256 contracts." Generally, gains or
losses on Section 1256 contracts are considered 60% long-term and 40% short-term
capital gains or losses ("60/40"). Also, certain Section 1256 contracts held by
a Fund are "marked-to-market" at the times required pursuant to the Code 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, except for foreign currency gain or loss on such contracts, which
generally is ordinary in character.
Gains from hedging transactions generally are taxable so distributions of
such gains generally will be taxable to shareholders. Generally, the hedging
transactions and certain other transactions in options, futures and forward
contracts undertaken by the Fund may result in "straddles" for federal income
tax purposes. The straddle rules may affect the character of gains (or losses)
realized by the Fund. In addition, losses realized by the Fund on positions
that are part of a straddle may be deferred under the straddle rules rather than
being taken into account in the taxable year in which such losses are realized.
Because only a few regulations implementing the straddle rules have been
promulgated, the tax consequences of transactions in options, futures and
forward contracts to the Fund are not entirely clear. The hedging transactions
in which the Fund engages may increase the amount of short-term capital gain
realized by the Fund which is taxed as ordinary income when distributed to
shareholders.
The Fund may make one or more of the elections available under the Code
which are applicable to straddles. If the 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
operate to accelerate the recognition of gains or losses from the affected
straddle positions.
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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 hedging transactions.
[The 30% limit on gains from the disposition of certain assets held less
than three months and] the diversification requirements applicable to the Fund's
status as a regulated investment company may limit the extent to which the Fund
will be able to engage in transactions in options, futures contracts or forward
contracts.
Rules governing the tax aspects of swap agreements are in a developing
stage and are not entirely clear in certain respects. Accordingly, while the
Fund intends to account for such transactions in a manner they deem to be
appropriate, the IRS might not accept such treatment. If it did not, the status
of the Fund as a regulated investment company might be affected. The Fund
intends to monitor developments in this area. Certain requirements that must be
met under the Code in order for the Fund to qualify as a regulated investment
company may limit the extent to which the Fund will be able to engage in swap
agreements.
PASSIVE FOREIGN INVESTMENT COMPANIES
The Fund may invest in shares of foreign corporations which may be
classified under the Code as passive foreign investment companies ("PFICs"). In
general, a foreign corporation is classified as a PFIC 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 the 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 the Fund held the PFIC shares. The Fund itself will be
subject to tax on the portion, if any, of an excess distribution that is so
allocated to prior Fund taxable years and an interest factor will be added to
the tax, as if the tax had been payable in such prior taxable years. Certain
distributions from a PFIC as well as gain from the sale of PFIC shares are
treated as excess distributions. Excess distributions are characterized as
ordinary income even
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though, absent application of the PFIC rules, certain excess distributions might
have been classified as capital gain.
The Fund may be eligible to elect alternative tax treatment with respect to
PFIC shares. Under an election that currently is available in some
circumstances, the 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. In addition, another election may be
available that would involve marking-to-market the Fund's PFIC shares at the end
of each taxable year (and on certain other dates prescribed in the Code), with
the result that unrealized gains are treated as though they were realized. If
this election were made, tax at the fund level under the PFIC rules would
generally be eliminated, but the Fund could, in limited circumstances, incur
nondeductible interest charges. Other elections may become available that would
affect the tax treatment of PFIC shares held by the Fund. The Fund's intention
to qualify annually as a regulated investment company may limit its elections
with respect to PFIC shares.
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 the 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 the Fund that did not invest in PFIC shares.
FOREIGN CURRENCY GAINS AND LOSSES
Under the Code, gains or losses attributable to fluctuations in exchange
rates which occur between the time the Fund accrues income or other receivables
or accrues expenses or other liabilities denominated in a foreign currency and
the time the Fund actually collects such receivables or pays such liabilities
generally are treated as ordinary income or ordinary loss. Similarly, on the
disposition of debt securities denominated in a foreign currency and on the
disposition of certain options, futures, forward and other contracts, gain or
loss 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 or losses, referred to under
the Code as "Section 988" gains or losses, may increase or decrease the amount
of the Fund's net investment income to be distributed to its
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shareholders. If Section 988 losses exceed other 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)
during the taxable year, the Fund would not be able to make any ordinary
dividend distributions, and distributions made before the losses were realized
would be recharacterized as a return of capital to shareholders or, in some
cases, as capital gain, rather than as an ordinary dividend.
COMMODITY INVESTMENTS
A regulated investment company is required under the Code to derive at
least 90% of its gross income from certain qualifying sources and to have, at
the close of each quarter of the taxable year, at least 50% of the market value
of its assets represented by cash, 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. In addition, not more than
25% of the value of the Fund's total assets may be invested in the securities of
any one issuer (other than U.S. government securities or the securities of other
regulated investment companies). Qualifying income includes, inter alia,
----------
interest, dividends, and gain from the sale of stock or securities, but it does
not include gain from the sale of commodities such as gold and other precious
metals.
DISPOSITIONS OF FUND SHARES
Upon redemption, sale or exchange of shares of the Fund, a shareholder will
realize a taxable gain or loss, depending on whether the gross proceeds are more
or less than the shareholder's tax basis for the shares. Such gain or loss
generally will be a capital gain or loss if the shares of the Fund were capital
assets in the hands of the shareholder, and generally will be long- or short-
term, depending on the length of time the shares of the Fund were held. A loss
realized by a shareholder on the redemption, sale or exchange 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 at the time
of their disposition. Furthermore, a loss realized by a shareholder on the
redemption, sale or exchange of shares of the Fund with respect to which exempt-
interest dividends have been paid will, to the extent of such exempt-interest
dividends, be disallowed if such shares have been held by the shareholder for
six months or
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less at the time of their disposition. A loss realized on a redemption, sale or
exchange also will be disallowed to the extent the shares disposed of are
replaced (whether through 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 should be aware that redeeming shares of the Fund after tax-
exempt interest has been accrued by the Fund but before that income has been
declared as a dividend may be disadvantageous. This is because the gain, if
any, on the redemption will be taxable, even though such gains may be
attributable in part to the accrued tax-exempt interest which, if distributed to
the shareholder as a dividend rather than as redemption proceeds, might have
qualified as an exempt-interest dividend.
Under certain circumstances, the sales charge incurred in acquiring shares
of the Fund may not be taken into account in determining the gain or loss on the
disposition of those shares. This rule applies where shares of the Fund are
exchanged within 90 days after the date they were purchased and new shares are
acquired without a sales charge or at a reduced sales charge. In that case, the
gain or loss recognized on the exchange will be determined by excluding from the
tax basis of the shares exchanged all or a portion of the sales charge incurred
in acquiring those shares. This exclusion applies to the extent that the
otherwise applicable sales charge with respect to the newly acquired shares is
reduced as a result of having incurred a sales charge initially. The portion of
the sales charge affected by this rule will be treated as a sales charge paid
for the new shares.
TAX REPORTING REQUIREMENTS
All distributions, whether received in shares or cash, must be reported by
each shareholder on his or her federal income tax return. Shareholders are also
required to report tax-exempt interest. Dividends declared and payable to
shareholders of record on a specified date in October, November or December, if
any, will be deemed to have been received by shareholders on December 31 if paid
during January of the following year. Redemptions of shares, including
exchanges for shares of another Fund, may result in tax consequences (gain or
loss) to the shareholder and generally are also subject to these reporting
requirements. Each shareholder should consult his or her own tax adviser to
determine the tax status of Fund distributions in his or her own state and
locality.
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Under the federal income tax law, the Fund will be required to report to
the IRS all distributions of income (other than exempt-interest dividends) and
capital gains as well as gross proceeds from the redemption or exchange of Fund
shares, except in the case of certain exempt shareholders. Under the backup
withholding provisions of Section 3406 of the Code, all such taxable
distributions and proceeds from the redemption or exchange of a Fund's shares
may be subject to withholding of federal income tax at the rate of 31% in the
case of nonexempt shareholders who fail to furnish the Fund with their taxpayer
identification number and with required certifications regarding their status
under the federal income tax law or if the IRS or a broker notifies the Fund
that the number furnished by the shareholder is incorrect. In addition, both
the Fund and the shareholder are potentially subject to a $50 penalty imposed by
the IRS if a correct, certified taxpayer identification number is not furnished
and used on required information returns. If the withholding provisions are
applicable, any such distributions and proceeds, whether taken in cash or
reinvested in shares, will be reduced by the amounts required to be withheld.
Backup withholding is not an additional tax and any amounts withheld are
creditable against the shareholder's U.S. Federal tax liability. Investors may
wish to consult their tax advisers about the applicability of the backup
withholding provisions.
FOREIGN TAXES
Investment income and gains received by the Fund from sources outside the
United States may be subject to foreign taxes which were withheld at the
source. If the percentage of the Fund's total assets invested in foreign stocks
and securities at the close of a taxable year is less than [or equal to] 50%,
any foreign tax credits or deductions associated with such foreign taxes will
not be available for use by its shareholders. The effective rate of foreign
taxes to which the Fund will be subject depends on the specific countries in
which the Fund's assets will be invested and the extent of the assets invested
in each such country and, therefore, cannot be determined in advance.
If the percentage of the Fund's total assets invested in foreign stock and
securities is greater than 50% at the close of a taxable year, the Fund may
qualify for and make the election permitted under Section 853 of the Code so
that shareholders will be able to claim a credit or deduction on their federal
income tax returns for, and will be required to treat as part of the amounts
distributed to them, their pro rata portion of qualified taxes paid by the Fund
to foreign countries (which taxes relate primarily to investment income). The
U.S. shareholders of the Fund may claim a foreign tax credit or deduction by
reason of the Fund's election under Section 853 of the Code, provided that more
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than 50% of the value of the total assets of the Fund at the close of the
taxable year consists of securities of foreign corporations. The foreign tax
credit and deduction available to shareholders is subject to certain limitations
imposed by the Code. Also, under Section 63 of the Code, no deduction for
foreign taxes may be claimed by shareholders who do not itemize deductions on
their federal income tax returns, although any such shareholder may claim a
credit for foreign taxes and in any event will be treated as having taxable
income in respect to the shareholder's pro rata share of foreign taxes paid by
the Fund. It should also be noted that a tax-exempt shareholder, like other
shareholders, will be required to treat as part of the amounts distributed its
pro rata portion of the income taxes paid by the Fund to foreign countries.
However, that income will generally be exempt from taxation by virtue of such
shareholder's tax-exempt status, and such a shareholder will not be entitled to
either a tax credit or a deduction with respect to such income. The foreign tax
credit generally may offset only up to 90% of the alternative minimum tax in any
given year. Foreign taxes generally are not deductible in computing alternative
minimum taxable income.
STATE AND LOCAL TAXES - GENERAL
The state and local tax treatment of distributions received from the Fund
and any special tax considerations associated with foreign investments of the
Fund should be examined by shareholders with regard to their own tax situations.
EXPLANATION OF FUND DISTRIBUTIONS
Each distribution is accompanied by a brief explanation of the form and
character of the distribution. In January of each year, the Fund will issue to
each shareholder a statement of the federal income tax status of all
distributions.
GENERAL INFORMATION
The foregoing discussion generally relates to U.S. 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). Each shareholder who
is not a U.S. person should consult his or her tax adviser regarding the U.S.
and non-U.S. tax consequences of ownership of shares of the Fund, including the
possibility that such a shareholder may be subject to a U.S. withholding tax at
a rate of 30% (or at a lower rate under an applicable U.S. income tax treaty) on
amounts constituting ordinary income to him or her.
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This discussion of the federal income tax treatment of each Fund and its
shareholders is based on the federal income tax law in effect as of the date of
this SAI.
ORGANIZATION AND CAPITALIZATION
GENERAL
The Fund is a separate series of an open-end investment company, The
MainStay Funds (the "Trust"), established under the laws of The Commonwealth of
Massachusetts by a Declaration of Trust dated January 9, 1986, as amended. The
Fund commenced operations on October __, 1997. The organizational expenses of
the Fund will be amortized and deferred over a period not to exceed 60 months.
The Declaration of Trust and By-Laws authorize the Trustees to establish
additional series or "Funds" as well as additional classes of shares.
VOTING RIGHTS
Shares entitle their holders to one vote per share; however, separate votes
will be taken by the Fund or class on matters affecting the Fund or a particular
class of shares issued by the Fund. Shares have noncumulative voting rights,
which means that holders of more than 50% of the shares voting for the election
of Trustees can elect all Trustees and, in such event, the holders of the
remaining shares voting for the election of Trustees will not be able to elect
any person or persons as Trustees. Shares have no preemptive or subscription
rights and are transferable.
SHAREHOLDER AND TRUSTEE LIABILITY
The Trust is an entity of the type commonly known as a "Massachusetts
business trust." Under Massachusetts law, shareholders of such a trust may,
under certain circumstances, be held personally liable as partners for the
obligations of the trust. The Declaration of Trust contains an express
disclaimer of shareholder liability for acts or obligations of the Trust.
Notice of such disclaimer will normally be given in each agreement, obligation
or instrument entered into or executed by the Trust or the Trustees. The
Declaration of Trust provides for indemnification by the relevant Fund for any
loss suffered by a shareholder as a result of an obligation of the Fund. The
Declaration of Trust also provides that the Trust shall, upon request, assume
the defense of any claim made against any shareholder for any act or obligation
of the Trust and satisfy any judgment thereon. Thus, the risk of a shareholder
incurring financial loss on account of shareholder liability is limited to
circumstances in which a Fund would be unable to meet its
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obligations. The Trustees believe that, in view of the above, the risk of
personal liability of shareholders is remote.
The Declaration of Trust further provides that the Trustees will not be
liable for errors of judgment or mistakes of fact or law, but nothing in the
Declaration of Trust protects a Trustee against any liability to which he or she
would otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of his or
her office.
OTHER INFORMATION
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP, 1177 Avenue of the Americas, New York, New York,
10036, has been selected as independent public accountants of the Trust.
LEGAL COUNSEL
Dechert Price & Rhoads, 1500 K Street, N.W., Washington, D.C. 20005, passes
upon certain legal matters in connection with the shares offered by the Trust,
and also acts as counsel to the Trust.
CODE OF ETHICS
The Trust has adopted a Code of Ethics governing personal trading
activities of all Trustees, officers of the Trust 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 Trust or obtain information pertaining to such
purchase or sale or who have the power to influence the management or policies
of the Trust or an Investment Adviser unless such power is the result of their
position with the Trust or Investment Adviser. Such persons are generally
required to preclear all security transactions with the Trust's Compliance
Officer or his designee and to report all transactions on a regular basis. The
Trust has developed procedures for administration of the Code.
FINANCIAL STATEMENTS
Unaudited financial statements relating to the Fund will be prepared semi-
annually and distributed to shareholders. Audited financial statements will be
prepared annually and distributed to shareholders.
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THE MAINSTAY FUNDS
PART C. OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
a. Financial Statements for MainStay Strategic Value Fund:
Not Applicable
b. Exhibits:
1. (a) Amended and Restated Declaration of Trust dated August 30,
1991 -- Previously filed as Exhibit 1(a) to Post-Effective
Amendment No. 13*
(b) Fifth Amended and Restated Establishment and Designation of
Series of Shares of Beneficial Interest, Par Value $.01 Per Share
dated October 26, 1992 -- Previously filed as Exhibit 1(b) to
Post-Effective Amendment No. 16*
(c) Establishment and Designation of Additional Series of Shares of
Beneficial Interest, Par Value $.01 Per Share -- Previously filed
as Exhibit 1(b) to Post-Effective Amendment No. 11*
(d) Form of Establishment and Designation of Additional Series of
Shares of Beneficial Interest, Par Value $.01 Per Share --
Previously filed as Exhibit 1(b) to Post-Effective Amendment No.
23*
(e) Form of Declaration of Trust as Amended and Restated December 31,
1994 -- Previously filed as Exhibit 1(e) to Post-Effective
Amendment No. 27*
(f) Form of Establishment and Designation of Additional Series of
Shares of Beneficial Interest, Par Value $.01 Per Share --
Previously filed as Exhibit 1(e) to Post-Effective Amendment No.
28*
(g) Form of Establishment and Designation of an Additional Series of
Shares of Beneficial Interest, Par Value $.01 Per Share --
Previously filed as Exhibit 1(g) to Post-Effective Amendment No.
35*
(h) Establishment and Designation of an Additional Series of
Shares of Beneficial Interest, Par Value $.01 Per Share
____________________
* Previously filed as part of this Registration Statement and incorporated
herein by reference.
<PAGE>
2. (a) Amended and Restated By-laws dated August 30, 1991
-- Previously filed as Exhibit 2 to Post-Effective Amendment
No. 13*
(b) Amended and Restated By-Laws dated December 31, 1994 --
Previously filed as Exhibit 2(b) to Post-Effective Amendment No.
32*
3. Inapplicable
4. Specimen Share Certificate -- Previously filed as Exhibit 4 to
Pre-Effective Amendment No. 2*
5. (a) (1) Revised Form of Investment Advisory Agreement --
Capital Appreciation Fund -- Previously filed as Exhibit
5(a)(1) to Pre-Effective Amendment No. 2*
(2) Revised Form of Investment Advisory Agreement -- Value Fund
-- Previously filed as Exhibit 5(a)(2) to Pre-Effective
Amendment No. 2*
(3) Revised Form of Investment Advisory Agreement -- Convertible
Fund -- Previously filed as Exhibit 5(a)(3) to Pre-Effective
Amendment No. 2*
(4) Revised Form of Investment Advisory Agreement -- High Yield
Corporate Bond Fund --Previously filed as Exhibit 5(a)(4) to
Pre-Effective Amendment No. 2*
(5) Revised Form of Investment Advisory Agreement -- Government
Fund -- Previously filed as Exhibit 5(a)(5) to Pre-Effective
Amendment No. 2*
(6) Revised Form of Investment Advisory Agreement -- Money
Market Fund -- Previously filed as Exhibit 5(a)(6) to Pre-
Effective Amendment No. 2*
(7) Form of Investment Advisory Agreement -- Tax Free Bond Fund
-- Previously filed as Exhibit 5(a)(7) to Post-Effective
Amendment No. 2*
(8) Revised Form of Investment Advisory Agreement -- Total
Return Fund -- Previously filed as Exhibit 5(a)(9) to Post-
Effective Amendment No. 4*
(9) Form of Investment Advisory Agreement --Equity Index Fund --
Previously filed as Exhibit 5(a) to Post-Effective Amendment
No. 7*
____________________
* Previously filed as part of this Registration Statement and incorporated
herein by reference.
C-2
<PAGE>
(10) Form of Investment Advisory Agreement --California Tax Free
Fund and New York Tax Free Fund -- Previously filed as
Exhibit 5(a) to Post-Effective Amendment No. 11*
(11) Form of Investment Advisory Agreement --International Equity
Fund and International Bond Fund -- Previously filed as
Exhibit 5 to Post-Effective Amendment No. 23*
(12) Form of Investment Advisory Agreement--Strategic Income Fund
-- Previously filed as Exhibit 5(a)(12) to Post-Effective
Amendment No. 35*
(13) Form of Management Agreement -- Strategic Value Fund
(b)(1) Form of Sub-Advisory Agreement -- Strategic Value Fund
6.(a)(1) Form of Distribution Agreement -- Previously filed as Exhibit
6(a) to Post-Effective Amendment No. 22*
(b) Form of Soliciting Dealer Agreement -- Previously filed as
Exhibit 6(b) to Pre-Effective Amendment No. 1*
7. Inapplicable
8.(a) Custodian Contract with State Street Bank and Trust Company --
Previously filed as Exhibit 8(a) to Pre-Effective Amendment No.
1*
(b) Fee schedule for Exhibit 8(a) -- Previously filed as Exhibit 8(b)
to Pre-Effective Amendment No. 2*
(c) Custodian Contract with The Bank of New York --Previously filed
as Exhibit 8(a) to Post-Effective Amendment No. 7*
9.(a)(1) Form of Transfer Agency Agreement -- Previously filed as Exhibit
9(a)(1) to Post-Effective Amendment No. 37*
(2) Form of Subtransfer Agency Agreement -- Previously filed as
Exhibit 9(a)(2) to Post-Effective Amendment No. 37*
____________________
* Previously filed as part of this Registration Statement and
incorporated herein by reference.
C-3
<PAGE>
(b)(1) Form of Administration Agreement -- Equity Index Fund --
Previously filed as Exhibit 9(b) to Post Effective Amendment No.
20*
(2) Form of Administration Agreement -- California Tax Free Fund and
New York Tax Free Fund -- Previously filed as Exhibit 9(b) to
Post-Effective Amendment No. 21*
(3) Form of Composite Administration Agreement --Capital Appreciation
Fund, Value Fund, Convertible Fund, Total Return Fund, High Yield
Corporate Bond Fund, Government Fund and Tax Free Bond Fund --
Previously filed as Exhibit 9(b) to Post-Effective Amendment No.
22*
(4) Form of Administration Agreement -- International Equity Fund and
International Bond Fund --Previously filed as Exhibit 9(b) to
Post-Effective Amendment No. 23*
(5) Form of Administration Agreement -- Strategic Income Fund --
Previously filed as Exhibit 9(b)(5) to Post-Effective Amendment
No. 35*
(c) Form of Fund Accounting Service Agreement --Previously filed as
Exhibit 9(11) to Post-Effective Amendment No. 6*
(d) Form of Guaranty Agreement -- Equity Index Fund --Previously
filed as Exhibit 9(c) to Post-Effective Amendment No. 7*
(e) Form of Services Agreement between The MainStay Funds and NYLIFE
Distributors Inc. -- Previously filed as Exhibit 9(b) to Post-
Effective Amendment No. 25*
(f) Form of Service Agreement -- Previously filed as Exhibit 9(g) to
Post-Effective Amendment No. 33*
(g) Form of Service Agreement with New York Life Benefit Services,
Inc. -- Previously filed as Exhibit 9(g) to Post-Effective
Amendment No. 37*
10. Opinion and consent of counsel**
11. Consent of independent accountants***
12. Inapplicable
____________________
* Previously filed as part of this Registration Statement and incorporated
herein by reference.
** Previously filed with Rule 24f-2 Notice on February 25, 1997 and
incorporated herein by reference.
*** To be filed by amendment.
C-4
<PAGE>
13. Investment representation letter relating to initial capital --
Previously filed as Exhibit 13 to Pre-Effective Amendment No. 1*
14.(a)(1) Revised Form of 403(b) Account Application --Previously filed as
Exhibit 14(a)(1) to Post-Effective Amendment No. 3*
(2) Revised Form of 403(b) Custodial Agreement --Previously filed as
Exhibit 14(a)(2) to Post-Effective Amendment No. 3*
(b)(1) Form of 401(k) Adoption Agreement -- Previously filed as Exhibit
14(b)(1) to Pre-Effective Amendment No. 2*
(2) Form of 401(k) Plan and Trust -- Previously filed as Exhibit
14(b)(2) to Pre-Effective Amendment No. 2*
(c)(1) Form of IRS Form 5305-A -- Previously filed as Exhibit 14(c)(1)
to Pre-Effective Amendment No. 2*
(2) Revised Form of IRS Adoption Agreement and Custodian Disclosure
Statement*
(3) Form of MainStay Funds Individual Retirement Account Application
and Transfer Request*
15.(a)(1) Form of Composite Plan of Distribution pursuant to Rule 12b-1
(Class A shares) as approved October 30, 1995 -- Capital
Appreciation Fund, Value Fund, Convertible Fund, Total Return
Fund, High Yield Corporate Bond Fund, Government Fund and Tax
Free Bond Fund -- Previously filed as Exhibit 15(a)(1) to Post-
Effective Amendment No. 32*
(2) Form of Composite Plan of Distribution pursuant to Rule 12b-1
(Class B Shares) as approved October 30, 1995 -- Capital
Appreciation Fund, Value Fund, Convertible Fund, Global Fund,
Total Return Fund, Natural Resources/Gold Fund, High Yield
Corporate Bond Fund, Government Fund and Tax Free Bond Fund --
Previously filed as Exhibit 15(a)(2) to Post-Effective Amendment
No. 32*
(3) Form of Plan of Distribution pursuant to Rule 12b-1 (Class A
Shares) as approved October 30, 1995 -- International Equity Fund
and International Bond Fund -- Previously filed as Exhibit
15(a)(3) to Post-Effective Amendment No. 33*
(4) Form of Plan of Distribution pursuant to Rule 12b-1 (Class B
Shares) as approved October 30, 1995 -- International Equity Fund
and International Bond Fund -- Previously filed as Exhibit
15(a)(4) to Post-Effective Amendment No. 33*
C-5
<PAGE>
(5) Form of Plan of Distribution pursuant to Rule 12b-1 (Class A
Shares) as approved October 30, 1995 -- California Tax Free Fund,
New York Tax Free Fund and Equity Index Fund -- Previously filed
as Exhibit 15(a)(5) to Post-Effective Amendment No. 33*
(6) Form of Plan of Distribution pursuant to Rule 12b-1 (Class B
Shares) as approved October 30, 1995 -- California Tax Free Fund
and New York Tax Free Fund -- Previously filed as Exhibit
15(a)(6) to Post-Effective Amendment No. 33*
(7) Form of Plan of Distribution pursuant to Rule 12b-1 (Class A
Shares) -- MainStay Strategic Income Fund -- Previously filed as
Exhibit 15(a)(7) to Post-Effective Amendment No. 34*
(8) Form of Plan of Distribution pursuant to Rule 12b-1 (Class B
Shares) -- MainStay Strategic Income Fund -- Previously filed as
Exhibit 15(a)(8) to Post-Effective Amendment No. 34*
(9) Form of Plan of Distribution pursuant to Rule 12b-1 (Class A
shares) -- MainStay Strategic Value Fund
(10) Form of Plan of Distribution pursuant to Rule 12b-1 (Class B
shares) -- MainStay Strategic Value Fund
16. Inapplicable
17. Inapplicable
18. Form of Multiple Class Plan Pursuant to Rule 18f-3 -- Previously
filed as Exhibit 18 to Post-Effective Amendment No. 30*
____________________
* Previously filed as part of this Registration Statement and
incorporated herein by reference.
C-6
<PAGE>
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
The following chart indicates the persons controlled by New York Life:
<TABLE>
<CAPTION>
Jurisdiction of Percent of Voting
Name+ Organization Securities Owned
- -------------------------------------------------- ----------------- -----------------
<S> <C> <C>
Eagle Strategies Corporation Arizona 100%
Greystone Realty Corporation which owns 100% Delaware 100%
of the shares of:
Greystone Realty Management, Inc. Delaware
NYLIFE Administration Corp. Texas 100%
(doing business as NYLACOR)
MacKay-Shields Financial Corporation Delaware 100%
MSC Holding, Inc. (formerly Magnus Software Georgia 85.43%
Corporation, Inc.)
MainStay Institutional Funds Inc. Maryland ***
Monitor Capital Advisors, Inc. Delaware 100%
NYLIFE SFD Holding, Inc. Delaware 100%
which owns 83.33% of NYLIFE
Structured Asset Management Company Ltd. Texas
New York Life Capital Corporation Delaware 100%
New York Life Fund, Inc. New York *
New York Life Insurance and Annuity Delaware 100%
Corporation
New York Life International Investment Inc. Delaware 100%
which owns 100% of the shares of:
Monetary Research Ltd. Bermuda
and 100% of the shares of:
NYL Management Limited which owns United Kingdom
33.345% of the shares of:
Japan Gamma Asset Management Limited Japan
MainStay VP Series Fund, Inc. Maryland *
New York Life Worldwide Holding, Inc., which Delaware 100%
owns 100% of the shares of:
New York Life Worldwide Capital, Inc. Delaware
</TABLE>
C-7
<PAGE>
<TABLE>
Jurisdiction of Percent of Voting
Name+ Organization Securities Owned
- -------------------------------------------------- ----------------- -----------------
<S> <C> <C>
New York Life Worldwide Development, Delaware
Inc.
New York Life Worldwide (Bermuda) Ltd. Bermuda
New York Life Insurance Worldwide Ltd. Bermuda
and owns 99.97% of the shares of
New York Life (U.K.) Ltd., which owns United Kingdom
100% of the shares of:
Windsor Construction Company Limited England
and owns 51% of the shares of:
KOHAP New York Life Insurance Ltd. South Korea
and owns 50.2% of the shares of:
P.T. Asuransi Jiwa Sewu-New York Life Indonesia
and owns 49% of the shares of:
GEO New York Life, S.A. and owns Mexico
31.25% of the shares of:
Life Assurance Holding Corporation United Kingdom
Limited, which owns 100% of the shares
of:
Windsor Life Assurance Company England
Limited
Gresham Life Assurance Society England
Limited
NYLCO, Inc. New York 100%
NYLIFE Depositary Corporation which owns Delaware 100%
16.67% of NYLIFE Structured Asset Texas
Management Company Ltd.
New York Life Benefit Services, Inc. which owns Massachusetts 100%
100% of ADQ Insurance Agency Inc. Massachusetts
New York Life Trust Company New York 100%
NYLICO, Inc. New York 100%
(formerly New York Life Capital Corp.)
NYLIFE Distributors Inc. Delaware 100%
NYLIFE Equity Inc. Delaware 100%
NYLIFE Funding Inc. Delaware 100%
</TABLE>
C-8
<PAGE>
<TABLE>
Jurisdiction of Percent of Voting
Name+ Organization Securities Owned
- -------------------------------------------------- ----------------- -----------------
<S> <C> <C>
NYLIFE Healthcare Management Inc., which Delaware
owns 46.3% of total combined stock and
89.6% of the voting rights of:
Express Scripts, Inc., which owns 100% of Delaware
the shares of:
Great Plains Reinsurance Company Canada
Practice Patterns Science, Inc.
ESI Canada Holdings, Inc., which owns Canada
100% of the shares of:
ESI Canada, Inc. Canada
IVTx of Houston, Inc. Texas
IVTx of Dallas, Inc. Texas
PhyNet, Inc. Delaware
Express Scripts Vision Corporation Delaware
NYLCare Health Plans, Inc. Delaware
(formerly Sanus Corp. Health Systems),
which owns 100% of the shares of:
New York Life and Health Insurance Company Delaware
Avanti Corporate Health Systems Inc. Delaware
Avanti Health Systems, Inc., which owns Texas
100% of the shares of:
Avanti of the District, Inc. Maryland
Avanti of Illinois, Inc. Illinois
Avanti of New York, Inc. New York
Avanti of New Jersey, Inc. New Jersey
and owns 80% of the shares of:
NYLCare Health Plans of the Mid- Maryland
Atlantic, Inc., which owns 100% of the
shares of:
Physicians Health Services Maryland
Foundation, Inc.
Lonestar Holding Co., which owns 90% Delaware
of the shares of:
Lone Star Health Plan, Inc., which New York
owns 100% of the shares of:
NYLCare Health Plans of the Texas
Gulf Coast, Inc.
Prime Provider Corp., which owns 100% New York
of the shares of:
Prime Provider Corp. of Texas Texas
NYLCare of Connecticut, Inc. Connecticut
Sanus Dental Plan of New Jersey, Inc. New Jersey
NYLCare Dental Plans of the
Southwest, Inc. Texas
NYLCare Health Plans of New York, New York
Inc.
</TABLE>
C-9
<PAGE>
<TABLE>
Jurisdiction of Percent of Voting
Name+ Organization Securities Owned
- -------------------------------------------------- ----------------- -----------------
<S> <C> <C>
NYLCare Health Plans of Connecticut, Connecticut
Inc.
NYLCare Health Plans of the Midwest, Illinois
Inc.
NYLCare Health Plans of New Jersey, New Jersey
Inc.
NYLCare of Texas, Inc., which owns Texas
100% of the shares of:
NYLCare Passport PPO of the Texas
Southwest, Inc.
Sanus Preferred Providers West, Inc. California
Sanus Preferred Services, Inc. Maryland
Sanus Preferred Services of Illinois Illinois
Inc.
NYLCare Health Plans of the Texas
Southwest, Inc.
WellPath of Arizona Reinsurance Arizona
Company
NYLCare Health Plans of Louisiana, Louisiana
Inc.
NYLCare of New England, Inc. Delaware
Sanus - Northeast, Inc. Delaware
NYLCare Health Plans of Maine, Inc. Maine
NYLCare NC Holdings, Inc. Delaware
WellPath Community Health Plan North Carolina
Holdings, L.L.C.
which owns 100% of WPCHP Holdings, Delaware
Inc. and 99% of:
WellPath Preferred Services, North Carolina
L.L.C.
and North Carolina
WellPath Select Holdings,
L.L.C.
WellPath of Carolina, Inc. North Carolina
WellPath Select, Inc. North Carolina
Sanus of New York and New Jersey,
Inc. New York
NYLCare Health Plans of Pennsylvania
Pennsylvania, Inc.
Docservo, Inc. New York
The ETHIX Corporation, which owns Delaware
100% of the shares of:
ETHIX Great Lakes, Inc. Michigan
ETHIX Mid-Atlantic, Inc., which owns Pennsylvania
100% of the shares of:
PriMed, Inc. New Jersey
ETHIX Midlands, Inc. Delaware
ETHIX Mid-Rivers, Inc. Missouri
ETHIX Northwest Public Services,
Inc. Washington
ETHIX Northwest, Inc.,
Washington
</TABLE>
C-10
<PAGE>
<TABLE>
Jurisdiction of Percent of Voting
Name+ Organization Securities Owned
- -------------------------------------------------- ----------------- -----------------
<S> <C> <C>
which owns 100% of:
NYLCare Health Plans Northwest, Inc. Washington
ETHIX Pacific, Inc. Oregon
ETHIX Risk Management, Inc. Oregon
ETHIX Southeast, Inc. North Carolina
ETHIX Southwest, Inc. Texas
Benefit Panel Services which owns 100% of the California
shares of VivaHealth, Incorporated California
One Liberty Plaza Holdings, Inc. Delaware
NYLIFE Inc. New York 100%
NYLIFE Insurance Company of Arizona Arizona 100%
NYLIFE Realty Inc. which owns 100% of the Delaware 100%
shares of: CNP Realty Investments, Inc. Delaware
NYLIFE Refinery, Inc. Delaware 100%
NYLIFE Resources Inc. Delaware 100%
NYLIFE Securities Inc. New York 100%
NYLINK Insurance Agency Incorporated Delaware 100%
which owns 100% of the shares of:
NYLINK Insurance Agency of Alabama Alabama
NYLINK Insurance Agency of New Mexico New Mexico
NYLTEMPS Inc. Delaware 100%
</TABLE>
_____________________
+ By including the indicated corporations 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.
* New York Life serves as investment adviser to these entities, the shares of
which are held of record by separate accounts of New York Life (for the New
York Life Fund, Inc.) and NYLIAC (for the MainStay VP Series Fund, Inc.).
New York Life disclaims any beneficial ownership and control of these
entities.
** New York Life Foundation does not issue voting securities.
*** MacKay-Shields Financial Corporation and Monitor Capital Advisors, Inc.
serve as investment advisers to this entity.
C-11
<PAGE>
Item 26. Number of Holders of Securities (as of June 30, 1997)
(2)
(1) NUMBER OF
TITLE OF CLASS RECORD HOLDERS
- ---------------------------------- --------------
Shares of Common Stock: Class A Class B
------- ---------
Shares of beneficial interest,
Capital Appreciation Fund 15,015 129,107
Shares of beneficial interest,
Value Fund 6,773 89,956
Shares of beneficial interest,
Convertible Fund 3,750 46,968
Shares of beneficial interest,
High Yield Corporate Bond Fund 5,798 101,204
Shares of beneficial interest,
Government Fund 652 43,528
Shares of beneficial interest,
Tax Free Bond Fund 407 16,401
Shares of beneficial interest,
Money Market Fund 3,998 39,195
Shares of beneficial interest,
Total Return Fund 4,419 47,887
Shares of beneficial interest,
Equity Index Fund 15,086 --
Shares of beneficial interest,
California Tax Free Fund 533 212
Shares of beneficial interest,
New York Tax Free Fund 431 171
Shares of beneficial interest,
International Equity Fund 1,421 4,911
Shares of beneficial interest,
International Bond Fund 311 1,507
Shares of beneficial interest,
Strategic Income Fund 241 682
Shares of beneficial interest,
Strategic Value Fund ______ _______
ITEM 27. INDEMNIFICATION
New York Life Insurance Company maintains Directors & Officers Liability
insurance coverage totaling $100 million. The coverage limit applies each year
and has been extended to cover Directors, Trustees and Officers of the Trust,
and subsidiaries and certain affiliates of New York Life. Subject to the
policies' terms, conditions, deductible and retentions, Directors, Officers and
Trustees are covered for claims,
C-12
<PAGE>
including related expenses, made against them while acting in their capacities
as such. The primary policy in the amount of $25 million is issued by National
Union Fire Insurance Company of Pittsburgh, PA, and the excess policies in the
amount at $75 million are issued by various insurance companies. The issuing
insurance companies may be changed from time to time and there is no assurance
that any or all of the current coverage will be maintained by New York Life.
Article IV of Registrant's Declaration of Trust states as follows:
Section 4.3. Mandatory Indemnification.
(a) Subject to the exceptions and limitations contained in paragraph (b)
below:
(i) every person who is, or has been, a Trustee or officer of the Trust
shall be indemnified by the Trust, or by one or more Series thereof if the
claim arises from his or her conduct with respect to only such Series to
the fullest extent permitted by law against all liability and against all
expenses reasonably incurred or paid by him in connection with any claim,
action, suit or proceeding in which he becomes involved as a party or
otherwise by virtue of his being or having been a Trustee or officer and
against amounts paid or incurred by him in the settlement thereof;
(ii) the words "claim," "action," "suit," or "proceeding" shall apply
to all claims, actions, suits or proceedings (civil, criminal, or other,
including appeals), actual or threatened; and the words "liability" and
"expenses" shall include, without limitation, attorneys' fees, costs,
judgments, amounts paid in settlement, fines, penalties and other
liabilities.
(b) No indemnification shall be provided hereunder to a Trustee or
officer:
(i) against any liability to the Trust or a Series thereof or the
Shareholders by reason of a final adjudication by a court or other body
before which a proceeding was brought that he engaged in willful
misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of his office;
(ii) with respect to any matter as to which he shall have been finally
adjudicated not to have acted in good
C-13
<PAGE>
faith in the reasonable belief that his action was in the best interest of
the Trust or a Series thereof;
(iii) in the event of a settlement or other disposition not involving a
final adjudication as provided in paragraph (b)(i) or (b)(ii) resulting in
a payment by a Trustee or officer, unless there has been a determination
that such Trustee or officer did not engage in willful misfeasance, bad
faith, gross negligence or reckless disregard of the duties involved in the
conduct of his office;
(A) by the court or other body approving the settlement or other
disposition; or
(B) based upon a review of readily available facts (as opposed to
a full trial-type inquiry) by (x) vote of a majority of the
Disinterested Trustees acting on the matter (provided that a majority of
the Disinterested Trustees then in office act on the matter) or (y)
written opinion of independent legal counsel.
(c) The rights of indemnification herein provided may be insured against
by policies maintained by the Trust, shall be severable, shall not affect any
rights to which any Trustee or officer may now or hereafter be entitled, shall
continue as to a person who has ceased to be such Trustee or officer and shall
inure to the benefit of the heirs, executors, administrators and assigns of such
a person. Nothing contained herein shall affect any rights to indemnification
to which personnel of the Trust other than Trustees and officers may be entitled
by contract or otherwise under law.
(d) Expenses of preparation and presentation of a defense to any claim,
action, suit, or proceedings of the character described in paragraph (a) of this
Section 4.3 shall be advanced by the Trust or a Series thereof to final
disposition thereof upon receipt of an undertaking by or on behalf of the
recipient, to repay such amount if it is ultimately determined that he is not
entitled to indemnification under this Section 4.3, provided that either:
(i) such undertaking is secured by surety bond or some other
appropriate security provided by the recipient, or the Trust or a Series
thereof shall be insured against losses arising out of any such advances;
or
(ii) a majority of the Non-interested Trustees acting on the matter
(provided that a majority of the Disinterested Trustees acts on the matter)
or an
C-14
<PAGE>
independent legal counsel in a written opinion shall determine, based upon
a review of readily available facts (as opposed to a full trial-type
inquiry), that there is reason to believe that the recipient ultimately
will be found entitled to indemnification.
As used in this Section 4.3, a "Non-interested Trustee" is one who is not
(i) an "Interested Person" of the Trust (including anyone who has been exempted
from being an "Interested Person" by any rule, regulation or order of the
Commission), or (ii) involved in the claim, action, suit or proceeding.
ITEM 28. BUSINESS OR OTHER CONNECTIONS OF INVESTMENT ADVISER
The business of MainStay Management, Inc., MacKay-Shields Financial
Corporation and Monitor Capital Advisors, Inc. is summarized under "Know with
Whom You're Investing" in the Prospectus constituting Part A of this
Registration Statement, which summary is incorporated herein by reference.
The business or other connections of each director and officer of MainStay
Management, Inc. is currently listed in the investment adviser registration on
Form ADV for MainStay Management, Inc. (File No. ___________) and is hereby
incorporated herein by reference.
The business or other connections of each director and officer of MacKay-
Shields Financial Corporation is currently listed in the investment adviser
registration on Form ADV for MacKay-Shields Financial Corporation (File No. 801-
5594) and is hereby incorporated herein by reference.
The business or other connections of each director and officer of Monitor
Capital Advisors, Inc. is currently listed in the investment adviser
registration on Form ADV for Monitor Capital Advisors, Inc. (File No. 801-34412)
and is hereby incorporated herein by reference.
C-15
<PAGE>
ITEM 29. PRINCIPAL UNDERWRITERS
(a) None.
(b)
<TABLE>
<CAPTION>
(3)
(1) (2) Positions and
Name and Principal Position and Office with Offices with
Business Address NYLIFE Distributors Inc. Registrant
- ----------------------------- ----------------------------------------- -----------------------
<S> <C> <C>
Mistero, Frank Director, President and Chief None
260 Cherry Hill Road Executive Officer
Parsippany, NJ 07054
Boyce, Jefferson C. Director Senior Vice President
51 Madison Avenue
New York, NY 10010
Brady, Robert E. Director and Vice President None
260 Cherry Hill Road
Parsippany, NJ 07054
Kane, Alice T. Director Chairperson
51 Madison Avenue
New York, NY 10010
Boccio, Frank M. Director None
51 Madison Avenue
New York, NY 10010
Rock, Robert D. Director None
51 Madison Avenue
New York, NY 10010
Gallo, Michael G. Director None
51 Madison Avenue
New York, NY 10010
Hildebrand, Phillip J. Director None
51 Madison Avenue
New York, NY 10010
Roussin, Stephen Director President and Chief
Morris Corporate Center I Executive Officer
Building A
300 Interpace Parkway
Parsippany, NJ 07054
Polis, Anthony W. Vice President and Chief Chief Financial Officer
Morris Corporate Center I Financial Officer
Building A
300 Interpace Parkway
Parsippany, NJ 07054
Calhoun, Jay S. Vice President and Treasurer None
51 Madison Avenue
New York, NY 10010
</TABLE>
C-16
<PAGE>
<TABLE>
<CAPTION>
(3)
(1) (2) Positions and
Name and Principal Position and Office with Offices with
Business Address NYLIFE Distributors Inc. Registrant
- ----------------------------- ----------------------------------------- -----------------------
<S> <C> <C>
Ubl, Walter W. Director and Senior Vice President None
260 Cherry Hill Road
Parsippany, NJ 07054
Warga, Thomas J. Senior Vice President and General Auditor None
51 Madison Avenue
New York, NY 10010
Livornese, Linda M. Vice President None
51 Madison Avenue
New York, NY 10010
Murray, Thomas J. Corporate Vice President None
51 Madison Avenue
New York, NY 10010
Zuccaro, Richard W. Tax Vice President Tax Vice
51 Madison Avenue President
New York, NY 10010
Krystel, David J. Vice President None
51 Madison Avenue
New York, NY 10010
Zwarick, Phyllis Corporate Vice President None
51 Madison Avenue
New York, NY 10010
O'Byrne, John H. Vice President and Chief None
51 Madison Avenue Compliance Officer
New York, NY 10010
Adasse, Louis H. Corporate Vice President None
51 Madison Avenue,
New York, NY 10010
Daoust, George R. Assistant Vice President None
Morris Corporate Center I
Building A
300 Interpace Parkway
Parsippany, NJ 07054
Arizmendi, Arphiela Assistant Vice President Assistant Treasurer
Morris Corporate Center I
Building A
300 Interpace Parkway
Parsippany, NJ 07054
Cirillo, Antoinette B. Assistant Vice President Assistant Treasurer
Morris Corporate Center I
Building A
300 Interpace Parkway
Parsippany, NJ 07054
</TABLE>
C-17
<PAGE>
<TABLE>
<CAPTION>
(3)
(1) (2) Positions and
Name and Principal Position and Office with Offices with
Business Address NYLIFE Distributors Inc. Registrant
- ----------------------------- ----------------------------------------- -----------------------
<S> <C> <C>
Lorito, Geraldine Assistant Vice President Assistant Treasurer
Morris Corporate Center I
Building A
300 Interpace Parkway
Parsippany, NJ 07054
Gomez, Mark A. Assistant Secretary None
51 Madison Avenue
New York, NY 10010
Brenner, Nancy Secretary None
51 Madison Avenue
New York, NY 10010
</TABLE>
(c) Inapplicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS.
Certain accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940 and the Rules promulgated
thereunder are maintained at the offices of the Registrant, the Manager and
NYLIFE Distributors Inc., Morris Corporate Center I, Building A, 300 Interpace
Parkway, Parsippany, NJ 07054, at MacKay-Shields Financial Corporation, 9 West
57th Street, New York, NY 10019; Monitor Capital Advisors, Inc., 504 Carnegie
Center, Princeton, New Jersey 08540. Records relating to the Registrant's
transfer agent are maintained by MainStay Shareholder Services Inc., 200 Cherry
Hill Road, Parsippany, NJ 07054. Records relating to the duties of the
Registrant's custodian for the Capital Appreciation Fund, Convertible Fund, High
Yield Corporate Bond Fund, Government Fund, Money Market Fund, Tax Free Fund,
Total Return Fund and Value Fund are maintained by State Street Bank and Trust
Company, 1776 Heritage Drive, Quincy, MA 02171; and records relating to
Registrant's custodian for the California Tax Free Fund, New York Tax Free Fund,
International Equity Fund, International Bond Fund, Equity Index Fund, Strategic
Income Fund and Strategic Value Fund are maintained by The Bank of New York, 110
Washington Street, New York, NY 10286.
ITEM 31. MANAGEMENT SERVICES.
Inapplicable.
C-18
<PAGE>
ITEM 32. UNDERTAKINGS.
b. The Registrant hereby undertakes to file a post-effective amendment,
including financial statements relating to the MainStay Strategic Value
Fund, which need not be certified, within four to six months from the
effective date of Post-Effective Amendment No. 38 to the Registration
Statement under the Securities Act of 1933.
c. The Registrant hereby undertakes to furnish each person to whom a
prospectus is delivered a copy of the Registrant's latest annual report to
shareholders upon request and without charge.
Other. 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.
C-19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this Post-
Effective Amendment No. 38 to its Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of New York
and the State of New York, on the 8th day of August, 1997.
THE MAINSTAY FUNDS
By: /s/Stephen Roussin
--------------------------
STEPHEN ROUSSIN, President
Pursuant to the requirements of the Securities Act of 1933, this Post-
Effective Amendment No. 38 to the Registration Statement has been signed below
by the following persons in the capacities and on the dates indicated.
Signatures Title Date
---------- ----- ----
***** Chairperson and August 8, 1997
- ----------------------- Trustee
ALICE T. KANE
**** Trustee August 8, 1997
- -----------------------
WALTER W. UBL
** Chief Financial August 8, 1997
- ----------------------- Officer (Principal
ANTHONY W. POLIS Financial and
Accounting Officer)
******* Trustee August 8, 1997
- -----------------------
HARRY G. HOHN
****** Trustee August 8, 1997
- -----------------------
DONALD E. NICKELSON
* Trustee August 8, 1997
- -----------------------
NANCY M. KISSINGER
*** Trustee August 8, 1997
- -----------------------
TERRY L. LIERMAN
****** Trustee August 8, 1997
- -----------------------
RICHARD S. TRUTANIC
<PAGE>
*** Trustee August 8, 1997
- -----------------------
DONALD K. ROSS
******* Trustee August 8, 1997
- -----------------------
EDWARD J. HOGAN
Trustee August 8, 1997
- -----------------------
JOHN B. McGUCKIAN
/s/Jeffrey L. Steele
- --------------------
JEFFREY L. STEELE
* Executed by Jeffrey L. Steele pursuant to a power of attorney filed
with Post-Effective Amendment No. 6 to the Registration Statement on
December 22, 1989.
** Executed by Jeffrey L. Steele pursuant to a power of attorney filed
with Post-Effective Amendment No. 8 to the Registration Statement on
November 2, 1990.
*** Executed by Jeffrey L. Steele pursuant to a power of attorney filed
with Post-Effective Amendment No. 13 to the Registration Statement on
December 23, 1991.
**** Executed by Jeffrey L. Steele pursuant to a power of attorney filed
with Post-Effective Amendment No. 19 to the Registration Statement on
November 1, 1993.
***** Executed by Jeffrey L. Steele pursuant to a power of attorney filed
with Post-Effective Amendment No. 24 to the Registration Statement on
October 20, 1994.
****** Executed by Jeffrey L. Steele pursuant to a power of attorney filed
with Post-Effective Amendment No. 29 to the Registration Statement on
April 27, 1995.
******* Executed by Jeffrey L. Steele pursuant to a power of attorney filed
with Post-Effective Amendment No. 35 on February 26, 1997.
-2-
<PAGE>
EXHIBIT INDEX
EXHIBIT ITEM
------- ----
Establishment and Designation 1(h)
of an Additional Series of Shares of
Beneficial Interest
Form of Management Agreement -- 5(a)(13)
Strategic Value Fund
Form of Sub-Advisory Agreement -- 5(b)(1)
Strategic Value Fund
Form of Plan of Distribution pursuant 15(a)(9)
to Rule 12b-1 (Class A shares) --
Strategic Value Fund
Form of Plan of Distribution pursuant 15(a)(10)
to Rule 12b-1 (Class B shares) --
Strategic Value Fund
<PAGE>
THE MAINSTAY FUNDS
Establishment and Designation
of Additional Series of Shares of Beneficial
Interest, Par Value $0.01 Per Share
July 28, 1997
RESOLVED, that the undersigned, being a majority of the Trustees of The
MainStay Funds, a Massachusetts business trust (the "Trust"), acting pursuant to
Section 5.11 of the Declaration of Trust dated January 9, 1986, as amended and
restated December 31, 1994 (the "Declaration of Trust"), hereby authorize the
establishment of one new series of the Trust, by dividing the shares of
beneficial interest of the Trust into one additional series (the "Series"):
RESOLVED FURTHER, that the new Series shall have the following special
and relative rights:
1. The Series shall be designated "MainStay Strategic Value Fund" (the
"Fund").
2. The Fund shall be authorized to invest in cash, securities,
instruments and other property as from time to time described in the Fund's
then currently effective prospectus and registration statement under the
Securities Act of 1933. Each share of beneficial interest of the Fund
("Share") shall be redeemable, shall be entitled to one vote (or fraction
thereof in respect of a fractional Share) on matters on which Shares of the
Fund shall be entitled to vote, shall represent a pro rata beneficial interest
in the assets allocated to the Fund, and shall be entitled to receive its pro
rata share of net assets of the Fund upon liquidation of the Fund, all as
provided in the Declaration of Trust. The proceeds of sales of Shares of the
Fund, together with any income and gain thereon, less any diminution or
expenses thereof, shall irrevocably belong to the Fund, unless otherwise
required by law.
3. Shareholders of all series of the Trust, including the Fund, shall
vote as a class on any matter, except to the extent otherwise required by the
Investment Company Act of 1940 or when the Trustees have determined that the
matter affects only the interests of Shareholders of any series, including the
Fund, in which case only the Shareholders of such series shall be entitled to
vote thereon. Any matter shall be deemed to have been effectively acted upon
with respect to the Fund if acted upon as provided in Rule 18f-2 under such
Act or any successor rule and in the Declaration of Trust.
4. The assets and liabilities of the Trust shall be allocated among
the series of the Trust, including the Fund, as set forth in Section 5.11 of
the Declaration of Trust, except as described below.
(a) Costs incurred by the Trust on behalf of the Fund in connection
with the
<PAGE>
organization and initial registration and public offering of Shares of the
Fund shall be amortized for the Fund over the lesser of the life of the Fund
or the five year period beginning with the month that the Fund commences
operations.
(b) The liabilities, expenses, costs, charges or reserves of the
Trust (other than the investment advisory fee, the administration fee, the
distribution fee, or the organizational expenses paid by the Trust) which are
not readily identifiable as belonging to any particular series shall be
allocated among the series of the Trust, including the Fund, on the basis of
their relative average daily net assets except where allocations of direct
expenses can otherwise fairly be made.
(c) The Trustees may from time to time in particular cases make
specific allocations of assets or liabilities among the series of the Trust.
5. The Trustees (including any successor Trustees) shall have the
right as to any time and from time to time to reallocate assets and expenses
or to change the designation of any series now or hereafter created, or to
otherwise change the special and relative rights of any such series, provided
that such change shall not adversely affect the rights of the Shareholders of
such series.
/s/ Alice T. Kane /s/ Nancy Maginnes Kissinger
- ------------------------------ ----------------------------
Alice T. Kane Nancy Maginnes Kissinger
/s/ Walter W. Ubl /s/ Donald K. Ross
- ------------------------------ ----------------------------
Walter W. Ubl Donald K. Ross
/s/ Terry L. Lierman /s/ Harry G. Hohn
- ------------------------------ ----------------------------
Terry L. Lierman Harry G. Hohn
/s/ Edward J. Hogan /s/ Donald E. Nickelson
- ------------------------------ ----------------------------
Edward J. Hogan Donald E. Nickelson
/s/ Richard S. Trutanic
-----------------------
Richard S. Trutanic
<PAGE>
EXHIBIT 99.2
THE MAINSTAY FUNDS
MAINSTAY STRATEGIC VALUE FUND
MANAGEMENT AGREEMENT
Agreement, made as of the ___ day of ____________, 1997 between THE
MAINSTAY FUNDS, a Massachusetts business trust (the "Trust"), on behalf of the
MAINSTAY STRATEGIC VALUE FUND (the "Fund"), a separate series of the Trust, and
MainStay Management, Inc., a Delaware corporation (the "Manager").
W I T N E S S E T H :
---------------------
WHEREAS, the Trust is an open-end management investment company registered
under the investment Company Act of 1940, as amended (the "1940 Act");
WHEREAS, the shares of beneficial interest of the Trust (the "Shares") are
divided into separate series, each of which is established pursuant to a written
instrument executed by the Trustees of the Trust, and the Trustees may from time
to time terminate such series or establish and terminate additional series; and
WHEREAS, the Fund desires to retain the Manager to render investment
advisory and related administrative services to the Fund, and the Manager is
willing to render such services on the terms and conditions hereinafter set
forth;
NOW, THEREFORE, the parties agree as follows:
1. Appointment. The Fund hereby appoints MainStay Management, Inc. to act as
-----------
manager to the Fund for the period and on the terms set forth in this Agreement.
The Manager accepts such appointment and agrees to render the services herein
described, for the compensation herein provided.
2. Duties as Manager. Subject to the supervision of the Trustees of the
-----------------
Trust, the Manager shall administer the Fund's business affairs and manage the
investment operations of the Fund and the composition of the portfolio of the
Fund, including the purchase, retention and disposition thereof, in accordance
with the investment objectives, policies and restrictions of the Fund, as stated
in the Prospectus (as hereinafter defined) and subject to the following
understandings:
(a) The Manager shall (i) furnish the Fund with office facilities; (ii)
be responsible for the financial and accounting records required to be
maintained by the Fund (excluding those being maintained by the Fund's Custodian
and Transfer Agent except as to which the Manager has supervisory functions) and
[other than those being maintained by the Fund's sub-
<PAGE>
adviser, if any]; and (iii) furnish the Fund with ordinary clerical, bookkeeping
and recordkeeping services at such office facilities.
(b) The Manager shall provide supervision of the Fund's investments and
determine from time to time what investments or securities will be purchased,
retained, sold or lent by the Fund, and what portion of the Fund's assets will
be invested or held uninvested as cash.
(c) The Manager shall use its best judgment in the performance of its
duties under this Agreement.
(d) The Manager, in the performance of its duties and obligations under
this Agreement, shall act in conformity with the Declaration of Trust, By-Laws
and Prospectus (each as hereinafter defined) of the Trust and with the
instructions and directions of the Trustees of the Trust and will conform
to and comply with the requirements of the 1940 Act and all other
applicable federal and state laws and regulations.
(e) The Manager, and any sub-adviser to whom such authority has been
delegated, shall determine the securities to be purchased or sold by the Fund
and will place orders pursuant to its determination with or through such
persons, brokers or dealers (including NYLIFE Securities Inc.) in conformity
with the policy with respect to brokerage as set forth in the Trust's
Registration Statement and Prospectus (each as hereinafter defined) or as the
Trustees may direct from time to time. It is recognized that, in providing the
Fund with investment supervision or the placing of orders for portfolio
transactions, the Manager or any sub-adviser will give primary consideration to
securing the most favorable price and efficient execution. Consistent with this
policy, the Manager or any sub-adviser may consider the financial
responsibility, research and investment information and other services provided
by brokers or dealers who may effect or be a party to any such transaction or
other transactions to which other clients of the Manager or any sub-adviser may
be a party. It is understood that neither the Fund, the Trust nor the Manager or
sub-adviser has adopted a formula for allocation of the Fund's investment
transaction business. It is also understood that it is desirable for the Fund
that the Manager or any sub-adviser have access to supplemental investment and
market research and security and economic analyses provided by certain brokers
who may execute brokerage transactions at a higher cost to the Fund than may
result when allocating brokerage to other brokers on the basis of seeking the
most favorable price and efficient execution. Therefore, the Manager or any sub-
adviser is authorized to place orders for the purchase and sale of securities
for the Fund with such certain brokers, subject to review by the Trust's
Trustees from time to time with respect to the extent and continuation of this
practice. It is understood that the services provided by such brokers may be
useful to the Manager or any sub-adviser in connection with its services to
other clients.
On occasions when the Manager or any sub-adviser deems the purchase or sale
of a security to be in the best interest of the Fund as well as other clients,
the Manager or any sub-adviser, to the extent permitted by applicable laws and
regulations, may, but shall be under no obligation to, aggregate the securities
to be so sold or purchased in order to obtain the most favorable price or lower
brokerage commissions and efficient execution. In such event, allocation of the
securities so purchased or sold, as well as expenses incurred in the
transaction, will be made
-2-
<PAGE>
by the Manager or any sub-adviser in the manner it considers to be the most
equitable and consistent with its fiduciary obligations to the Fund and to such
other clients.
(f) The Manager shall maintain all books and records with respect to the
Fund's securities transactions required by [sub-paragraphs (b)(5), (6), (9) and
(10) and paragraph (f) of] Rule 31a-1 under the 1940 Act [and any other books
and records required to be maintained by it under the 1940 Act and the Rules
thereunder] and shall render to the Trust's Trustees such periodic and special
reports as the Trustees may reasonably request.
(g) The Manager shall provide the Trust's Custodian on each business day
with information relating to the execution of all portfolio transactions
pursuant to standing instructions.
(h) With respect to any or all Series of the Trust, including the Fund,
the Manager may enter into one or more contracts ("Sub-Advisory or Sub-
Administration Contract") with a sub-adviser or sub-administrator in which
the Manager delegates to such sub-adviser or sub-administrator any or all
its duties specified in this Agreement, provided that each Sub-Advisory or
Sub-Administration Contract meets all requirements of the 1940 Act and
rules thereunder.
3. Manager Personnel. The Manager shall authorize and permit any of its
-----------------
directors, officers and employees who may be elected or appointed as Trustees or
officers of the Trust to serve in the capacities in which they are elected or
appointed. Services to be furnished by the Manager under this Agreement may be
furnished through the medium of any of such directors, officers, or employees.
4. Books and Records. The Manager shall keep the Fund's books and records
-----------------
required to be maintained by it, pursuant to paragraph 2 hereof. The Manager
agrees that all records which it maintains for the Fund are the property of the
Fund, and it will surrender promptly to the Fund any of such records upon the
Fund's request. The Manager further agrees to preserve for the periods
prescribed by Rule 31a-2 as promulgated by the Commission under the 1940 Act any
such records as are required to be maintained by the Manager pursuant to
paragraph 2 hereof.
5. Services Not Exclusive. The services furnished by the Manager hereunder
----------------------
are not to be deemed exclusive and the Manager shall be free to furnish similar
services to others so long as its services under this Agreement are not impaired
thereby.
6. Documents. The Trust has delivered to the Manager copies of each of the
---------
following documents and will deliver to it all future amendments and
supplements, if any:
(a) Declaration of Trust of the Trust, filed with the Secretary of the
Commonwealth of Massachusetts (such Declaration of Trust, as in effect on
the date hereof and as amended from time to time, is herein called the
"Declaration of Trust");
-3-
<PAGE>
(b) By-Laws of the Trust (such By-Laws, as in effect on the date hereof
and as amended from time to time, are herein called the "By-Laws");
(c) Certified Resolutions of the Trustees of the Trust authorizing the
appointment of the Manager and approving the form of this Agreement;
(d) Written Instrument to Establish and Designate Separate Series of
Shares;
(e) Registration Statement under the 1940 Act and the Securities Act of
1933, as amended, on Form N-lA (the "Registration Statement"), as filed with the
Securities and Exchange Commission (the "Commission") relating to the Fund and
the Fund's Shares and all amendments thereto;
(f) Notification of Registration of the Trust under the 1940 Act on Form
N-8A as filed with the Commission and all amendments thereto; and
(g) Prospectus and Statement of Additional Information of the Fund (such
Prospectus and Statement of Additional Information, as currently in effect
and as amended or supplemented from time to time, being herein called the
"Prospectus").
7. Expenses. (a) In connection with the services rendered by the Manager
--------
under this Agreement, the Manager will bear all of the following expenses:
(i) the salaries and expenses of all personnel of the Trust and the
Manager, except the fees and expenses of Trustees who are not interested
persons of the Manager or of the Trust; and
(ii) all expenses incurred by the Manager in connection with managing
the investment operations of the Fund and administering the ordinary course of
the Fund's business, other than those assumed by the Fund herein;
(b) The Fund assumes and will pay its expenses, including but not
limited to those described below (where any such category applies to more than
one series of the Trust, the Fund shall be liable only for its allocable
portion of the expenses):
(i) the fees and expenses of Trustees who are not interested persons
of the Manager or of the Trust;
(ii) the fees and expenses of the Fund's custodian which relate to
(A) the custodial function and the recordkeeping connected therewith, (B) the
maintenance of the required accounting records of the Fund not being
maintained by the Manager, (C) the pricing of the Fund's Shares, including
the cost of any pricing service or services which may be retained pursuant
to the authorization of the Trustees of the Trust, and (D) for both mail
and wire orders, the cashiering function in connection with the issuance
and redemption of the Fund's Shares;
-4-
<PAGE>
(iii) the fees and expenses of the Trust's transfer and dividend
disbursing agent, which may be the custodian, which relate to the maintenance
of each shareholder account;
(iv) the charges and expenses of legal counsel and independent
accountants for the Trust;
(v) brokers' commissions and any issue or transfer taxes chargeable
to the Trust in connection with its securities transactions on behalf of the
Fund;
(vi) all taxes and business fees payable by the Fund to federal,
state or other governmental agencies;
(vii) the fees of any trade association of which the Trust may be a
member;
(viii) the cost of share certificates representing the Fund's Shares;
(ix) the fees and expenses involved in registering and maintaining
registrations of the Trust and of its Shares with the Securities and Exchange
Commission, registering the Trust as a broker or dealer and qualifying its
Shares under state securities laws, including the preparation and printing of
the Trust's registration statements and prospectuses for filing under federal
and state securities laws for such purposes;
(x) allocable communications expenses with respect to investor
services and all expenses of shareholders' and Trustees' meetings and of
preparing, printing and mailing reports to shareholders in the amount
necessary for distribution to the shareholders; and
(xi) litigation and indemnification expenses and other extraordinary
expenses not incurred in the ordinary course of the Fund's business.
8. Organization Expenses. The Fund hereby agrees to reimburse the Manager
---------------------
for the organization expenses of, and the expenses incurred in connection with,
the initial offering of Shares of the Fund.
9. Compensation. For the services provided and the facilities furnished
------------
pursuant to this Agreement, the Trust will pay to the Manager as full
compensation therefor a fee at an annual rate of 0.75% of the average daily net
assets of the Fund.
This fee will be computed daily and will be paid to the Manager monthly.
This fee will be chargeable only to the Fund, and no other series of the Trust
shall be liable for the fee due and payable hereunder. The Fund shall not be
liable for any expense of any other series of the Trust.
-5-
<PAGE>
10. Standard of Care. The Manager shall not be liable for any error of
----------------
judgment or for any loss suffered by the Fund in connection with the matters
to which this Agreement relates, except a loss resulting from willful
misfeasance, bad faith or gross negligence on its part in the performance of its
duties or from reckless disregard by it of its obligations and duties under this
Agreement.
11. Duration and Termination. This Agreement shall continue in effect with
------------------------
respect to the Fund for a period of more than two years from the date hereof
only so long as such continuance is specifically approved at least annually with
respect to the Fund in conformity with the requirements of the 1940 Act and the
Rules thereunder; provided, however, that this Agreement may be terminated with
respect to the Fund at any time, without the payment of any penalty, by the
Trustees of the Trust or by vote of a majority of the outstanding voting
securities (as defined in the 1940 Act) of the Fund, or by the Manager at any
time, without the payment of any penalty, on not more than 60 days' nor less
than 30 days' written notice to the other party. This Agreement shall terminate
automatically in the event of its assignment (as defined in the 1940 Act).
12. Other Business. Nothing in this Agreement shall limit or restrict the
--------------
right of any of the Manager's directors, officers, or employees who may also be
a Trustee, officer, or employee of the Trust to engage in any other business or
to devote his time and attention in part to the management or other aspects of
any business, whether of a similar or dissimilar nature, nor limit or restrict
the Manager's right to engage in any other business or to render services of any
kind to any other corporation, trust, firm, individual or association.
13. Independent Contractor. Except as otherwise provided herein or
----------------------
authorized by the Trustees of the Trust from time to time, the Manager shall for
all purposes herein be deemed to be an independent contractor and shall have no
authority to act for or represent the Fund or the Trust in any way or otherwise
be deemed an agent of the Fund or the Trust.
14. Trust Materials. During the term of this Agreement, the Trust agrees to
---------------
furnish the Manager at its principal office all Prospectuses, proxy statements,
reports to shareholders, sales literature or other material prepared for
distribution to shareholders of the Fund or to the public, which refer to the
Manager in any way, prior to use thereof and not to use such material if the
Manager reasonably objects in writing within five business days (or such other
time as may be mutually agreed) after receipt thereof. In the event of
termination of this Agreement, the Trust will continue to furnish to the Manager
copies of any of the above-mentioned materials which refer in any way to the
Manager. The Trust shall furnish or otherwise make available to the Manager
such other information relating to the business affairs of the Fund as the
Manager at any time, or from time to time, reasonably requests in order to
discharge its obligations hereunder.
15. Amendment. This Agreement may be amended in writing by mutual consent,
---------
but consent of the Fund, if required, must be obtained in conformity with the
requirements of the 1940 Act and the Rules thereunder.
-6-
<PAGE>
16. Notice. Any notice or other communication required to be given pursuant
------
to this Agreement shall be deemed duly given if delivered or mailed by
registered mail, postage prepaid, (1) to the Manager at Morris Corporate Center
I, Building A, 300 Interpace Parkway, Parsippany, New Jersey 07054; or (2) to
the Trust at 51 Madison Avenue, New York, NY 10010.
17. Governing Law. This Agreement shall be governed by and construed in
-------------
accordance with the laws of the State of New York.
18. Limitation of Liability of the Trust and the Shareholders. It is
---------------------------------------------------------
understoodand expressly stipulated that none of the Trustees, officers, agents
or shareholders of the Trust shall be personally liable hereunder. The name "The
MainStay Funds" is the designation of the Trust for the time being under the
Declaration of Trust and all persons dealing with the Trust must look solely to
the property of the Trust for the enforcement of any claims against the Trust,
as neither the Trustees, officers, agents or shareholders assume any personal
liability for obligations entered into on behalf of the Trust. No series of the
Trust shall be liable for any claims against any other series of the Trust.
19. Use of Name. The Fund may use any name including the word "MainStay"
-----------
only for so long as this Agreement or any other Investment Advisory Agreement
between the Manager or any other affiliate of New York Life Insurance Company
and the Trust or any extension, renewal or amendment thereof remains in effect,
including any similar agreement with any organization which shall have succeeded
to the Manager's business as investment adviser. At such time as such an
agreement shall no longer be in effect, the Fund will (to the extent that it
lawfully can) cease to use such name or any other name indicating that it is
advised by or otherwise connected with the Manager or any organization which
shall have so succeeded to its business.
20. Miscellaneous. The captions in this Agreement are included for
-------------
convenience of reference only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect. If any
provision of this Agreement shall be held or made invalid by a court decision,
statute, rule or otherwise, the remainder of this Agreement shall not be
affected thereby. As used in this Agreement, terms shall have the same meaning
as such terms have in the 1940 Act. Where the effect of a requirement of the
federal securities laws reflected in any provision of this Agreement is made
less restrictive by a rule, regulation or order of the Commission, whether of
special or general application, such provision shall be deemed to incorporate
the effect of such rule, regulation or order. This Agreement may be signed in
counterpart.
-7-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
executed by their officers designated below as of the day and year first above
written.
THE MAINSTAY FUNDS, on behalf of
MAINSTAY STRATEGIC VALUE FUND,
a series
By: ________________________________
Name:
Title:
MAINSTAY MANAGEMENT, INC.
By: ________________________________
Name:
Title:
-8-
<PAGE>
EXHIBIT 99.3
SUB-ADVISORY AGREEMENT
Agreement made as of ______________, 1997 (the "Agreement") between
MainStay Management, Inc., a Delaware corporation (the "Manager"), and MacKay-
Shields Financial Corporation, a Delaware corporation (the "Sub-Adviser") (the
"Agreement").
WHEREAS, the Manager has entered into a Management Agreement, dated
_____________, 1997 (the "Management Agreement"), with the MainStay Funds (the
"Trust"), an open-end management investment company registered under the
Investment Company Act of 1940, as amended (the "1940 Act"), on behalf of the
MainStay Strategic Value Fund (the "Fund"), a series of the Trust;
WHEREAS, under the Management Agreement, the Manager has agreed to provide
certain investment advisory and related administrative services to the Fund;
WHEREAS, the Management Agreement permits the Manager to delegate certain
of its investment advisory duties under the Management Agreement to a sub-
adviser; and
WHEREAS, the Manager desires to retain the Sub-Adviser to furnish certain
investment advisory services with respect to the Fund and the Sub-Adviser is
willing to furnish such services;
NOW, THEREFORE, the parties agree as follows:
1. Appointment. The Manager hereby appoints the Sub-Adviser as an investment
-----------
sub-adviser with respect to the Fund for the period and on the terms set forth
in this Agreement. The Sub-Adviser accepts that appointment and agrees to
render the services herein set forth, for the compensation herein provided.
2. Duties as Sub-Adviser. Subject to the supervision of the Trustees of the
---------------------
Trust and the Manager, the Sub-Adviser shall manage the investment operations of
the Fund and the composition of the portfolio of the Fund, including the
purchase, retention and disposition thereof, in accordance with the investment
objectives, policies and restrictions of the Fund, as stated in the Prospectus
(as hereinafter defined) and subject to the following understandings:
(a) The Sub-Adviser shall provide supervision of the Fund's investments
and determine from time to time what investments or securities will be
purchased, retained, sold or lent by the Fund, and what portion of the Fund's
assets will be invested or held uninvested as cash.
(b) The Sub-Adviser shall use its best judgment in the performance of its
duties under this Agreement.
(c) The Sub-Adviser, in the performance of its duties and obligations
under this Agreement, shall act in conformity with the Declaration of Trust, By-
Laws and Prospectus
<PAGE>
(each as hereinafter defined) of the Trust and with the instructions and
directions of the Trustees of the Trust and the Manager and will conform to and
comply with the requirements of the 1940 Act and all other applicable federal
and state laws and regulations.
(d) The Sub-Adviser shall determine the securities to be purchased or
sold by the Fund and will place orders pursuant to its determination with or
through such persons, brokers or dealers (including NYLIFE Securities Inc.) in
conformity with the policy with respect to brokerage as set forth in the Trust's
Registration Statement and Prospectus (each as hereinafter defined)or as the
Trustees may direct from time to time. It is recognized that, in providing the
Fund with investment supervision or the placing of orders for portfolio
transactions, the Sub-Adviser will give primary consideration to securing the
most favorable price and efficient execution. Consistent with this policy, the
Sub-Adviser may consider the financial responsibility, research and investment
information and other services provided by brokers or dealers who may effect or
be a party to any such transaction or other transactions to which other clients
of the Sub-Adviser may be a party. It is understood that none of the Fund, the
Trust, the Manager nor the Sub-Adviser has adopted a formula for allocation of
the Fund's investment transaction business. It is also understood that it is
desirable for the Fund that the Sub-Adviser have access to supplemental
investment and market research and security and economic analyses provided by
certain brokers who may execute brokerage transactions at a higher cost to the
Fund than may result when allocating brokerage to other brokers on the basis of
seeking the most favorable price and efficient execution. Therefore, the Sub-
Adviser is authorized to place orders for the purchase and sale of securities
for the Fund with such certain brokers, subject to review by the Trust's
Trustees from time to time with respect to the extent and continuation of this
practice. It is understood that the services provided by such brokers may be
useful to the Sub-Adviser in connection with its services to other clients.
On occasions when the Sub-Adviser deems the purchase or sale of a security
to be in the best interest of the Fund as well as other clients, the Sub-
Adviser, to the extent permitted by applicable laws and regulations, may, but
shall be under no obligation to, aggregate the securities to be so sold or
purchased in order to obtain the most favorable price or lower brokerage
commissions and efficient execution. In such event, allocation of the
securities so purchased or sold, as well as expenses incurred in the
transaction, will be made by the Sub-Adviser in the manner it considers to be
the most equitable and consistent with its fiduciary obligations to the Fund and
to such other clients.
(e) The Sub-Adviser shall maintain all books and records with respect to
the Fund's securities transactions required by [sub-paragraphs (b)(5), (6), (9)
and (10) and paragraph (f) of] Rule 31a-1 under the 1940 Act [and any other
books and records required to be maintained by it under the 1940 Act and the
Rules thereunder] and shall render to the Manager and to the Trust's Trustees
such periodic and special reports as the Manager or the Trustees may reasonably
request.
(f) The Sub-Adviser shall provide the Fund's Custodian on each business
day with information relating to the execution of all portfolio transactions
pursuant to standing instructions.
-2-
<PAGE>
3. Sub-Adviser Personnel. The Sub-Adviser shall authorize and permit any
---------------------
of its directors, officers and employees who may be elected or appointed as
Trustees or officers of the Trust to serve in the capacities in which they are
elected or appointed. Services to be furnished by the Sub-Adviser under this
Agreement may be furnished through the medium of any of such directors,
officers, or employees.
4. Books and Records. The Sub-Adviser shall keep the Fund's books and
-----------------
records required to be maintained by it, pursuant to paragraph 2 hereof. The
Sub-Adviser agrees that all records which it maintains for the Fund are the
property of the Fund, and it will surrender promptly to the Fund any of such
records upon the Fund's request. The Sub-Adviser further agrees to preserve for
the periods prescribed by Rule 31a-2 as promulgated by the Commission under the
1940 Act any such records as are required to be maintained by the Sub-Adviser
pursuant to paragraph 2 hereof.
5. Services Not Exclusive. The services furnished by the Sub-Adviser
----------------------
hereunder are not to be deemed exclusive and the Sub-Adviser shall be free to
furnish similar or different services to others so long as its services under
this Agreement are not impaired thereby.
6. Documents. The Manager has delivered to the Sub-Adviser copies of each
---------
of the following documents and will deliver to it all future amendments and
supplements, if any:
(a) Declaration of Trust of the Trust, filed with the Secretary of the
Commonwealth of Massachusetts (such Declaration of Trust, as in effect on the
date hereof and as amended from time to time, is herein called the "Declaration
of Trust");
(b) By-Laws of the Trust (such By-Laws, as in effect on the date hereof
and as amended from time to time, are herein called the "By-Laws");
(c) Certified Resolutions of the Trustees of the Trust authorizing the
appointment of the Sub-Adviser and approving the form of this Agreement;
(d) Written Instrument to Establish and Designate Separate Series of
Shares;
(e) Registration Statement under the 1940 Act and the Securities Act of
1933, as amended, on Form N-lA (the "Registration Statement"), as filed with the
Securities and Exchange Commission (the "Commission") relating to the Fund and
the Fund's Shares and all amendments thereto;
(f) Notification of Registration of the Trust under the 1940 Act on Form
N-8A as filed with the Commission and all amendments thereto; and
(g) Prospectus and Statement of Additional Information of the Fund (such
Prospectus and Statement of Additional Information, as currently in effect and
as amended or supplemented from time to time, being herein called the
"Prospectus").
-3-
<PAGE>
7. Expenses. During the term of this Agreement, the Sub-Adviser will bear
--------
all expenses incurred by it in connection with its services under this
Agreement. The Sub-Adviser shall not be responsible for any expenses incurred by
the Trust, the Fund or the Manager.
8. Compensation. For the services provided and the expenses assumed by the
------------
Sub-Adviser pursuant to this Agreement, the Manager, not the Trust or the Fund,
will pay to the Sub-Adviser a fee, computed daily and payable monthly, at an
annual rate of 0.375% of the Fund's average daily net assets.
9. Standard of Care. The Sub-Adviser shall not be liable for any error of
----------------
judgment or for any loss suffered by the Fund in connection with the matters to
which this Agreement relates, except a loss resulting from willful misfeasance,
bad faith or gross negligence on its part in the performance of its duties or
from reckless disregard by it of its obligations and duties under this
Agreement.
10. Duration and Termination. This Agreement shall continue in effect for a
------------------------
period of more than two years from the date hereof only so long as such
continuance is specifically approved at least annually with respect to the Fund
in conformity with the requirements of the 1940 Act and the Rules thereunder.
Notwithstanding the foregoing, this Agreement may be terminated: (a) at any
time without penalty by the Fund upon the vote of a majority of the Trustees or
by vote of the majority of the Fund's outstanding voting securities, upon sixty
(60) days' written notice to the Sub-adviser, (b) by the Manager at any time
without penalty upon sixty (60) days' written notice to the Sub-Adviser or
immediately upon material breach by the Sub-Adviser or immediately if, in the
reasonable judgment of the Manager, the Sub-Adviser becomes unable to discharge
its duties and obligations under this Agreement, or (c) by the Sub-Adviser at
any time without penalty, upon sixty (60) days' written notice to the Fund.
This Subadvisory Agreement will also terminate automatically in the event of its
assignment (as defined in the 1940 Act) or the assignment or termination of the
Management Agreement.
11. Other Business. Nothing in this Agreement shall limit or restrict the
--------------
right of any of the Sub-Adviser's directors, officers, or employees who may also
be a Trustee, officer, or employee of the Trust to engage in any other business
or to devote his or her time and attention in part to the management or other
aspects of any business, whether of a similar or dissimilar nature, nor limit or
restrict the Sub-Adviser's right to engage in any other business or to render
services of any kind to any other corporation, trust, firm, individual or
association.
12. Amendment. No provision of this Agreement may be changed, waived,
---------
discharged or terminated orally, but only by an instrument in writing signed by
the party against which enforcement of the change, waiver, discharge or
termination is sought. No amendment of this Agreement shall be effective until
approved (i) by a vote of a majority of those Trustees who are not parties to
this Agreement or interested persons of any such party, and (ii) by a vote of a
majority of the Fund's outstanding voting securities (unless in the case of
(ii), the Trust receives an SEC order or no-action letter permitting it to
modify the Agreement without such vote).
-4-
<PAGE>
13. Governing Law. This Agreement shall be governed by and construed in
-------------
accordance with the laws of the State of New York.
14. Notice. Any notice or other communication required to be given pursuant
------
to this Agreement shall be deemed duly given if delivered or mailed by
registered mail, postage prepaid, (1) to the Manager at Morris Corporate Center
I, Building A, 300 Interpace Parkway, Parsippany, New Jersey 07054; or (2) to
the Sub-Adviser at 9 West 57th Street, New York, NY 10019.
15. Miscellaneous. The captions in this Agreement are included for
-------------
convenience of reference only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect. If any
provision of this Agreement shall be held or made invalid by a court decision,
statute, rule or otherwise, the remainder of this Agreement shall not be
affected thereby. As used in this Agreement, the terms "majority of the
outstanding voting securities," "affiliated person," "interested person,"
"assignment," "broker," "investment adviser," "net assets," "sale," "sell" and
"security" shall have the same meaning as such terms have in the 1940 Act. Where
the effect of a requirement of the federal securities laws reflected in any
provision of this Agreement is made less restrictive by a rule, regulation or
order of the Commission, whether of special or general application, such
provision shall be deemed to incorporate the effect of such rule, regulation or
order. This Agreement may be signed in counterpart.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
executed by their officers designated below as of the day and year first above
written.
MAINSTAY MANAGEMENT, INC.
By: ____________________________________
Name:
Title:
MACKAY-SHIELDS FINANCIAL CORPORATION
By: ____________________________________
Name:
Title:
-5-
<PAGE>
EXHIBIT 99.4
PLAN OF DISTRIBUTION PURSUANT TO RULE 12b-1
FOR CLASS A SHARES
OF THE MAINSTAY FUNDS
STRATEGIC VALUE FUND
WHEREAS, the MainStay Funds (the "Trust") engages in business as an
open-end management investment company and is registered as such under the
Investment Company Act of 1940, as amended (the "Act");
WHEREAS, shares of beneficial interest of the Trust are currently
divided into a number of separate series, including the Strategic Value Fund
(the "Fund");
WHEREAS, the trustees of the Trust have determined that there is a
reasonable likelihood that adoption of the Plan of Distribution will benefit the
Trust, the Fund and its shareholders;
WHEREAS, the Trust employs NYLife Distributors Inc. ("NYLIFE
Distributors") as distributor of the securities of which it is the issuer,
including Class A shares of the Fund; and
WHEREAS, the Trust and NYLIFE Distributors have entered into a
Distribution Agreement, pursuant to which the Trust employs NYLIFE Distributors
in such capacity during the continuous offering of both Class A and Class B
shares of the trust.
NOW, THEREFORE, the Trust hereby adopts on behalf of the Fund, and
NYLIFE Distributors hereby agrees to the terms of, the Plan, in accordance with
Rule 12b-1 under the Act on the following terms and conditions:
1. The Fund shall pay to NYLIFE Distributors, as the distributor of
securities of which the Fund is the issuer, a fee for distribution of Class A
shares, and services to shareholders of the Class A shares of the Fund at the
annual rate of 0.25% of the Fund's average daily net assets of the Fund's Class
A shares. Such fee shall be calculated and accrued daily and paid monthly or at
such other intervals as the Trustees shall determine, subject to any applicable
restriction imposed by rules of the National Association of Securities Dealers,
Inc. If this Plan is terminated, the Fund will owe no payments to NYLIFE
Distributors other than any portion of the distribution fee accrued through the
effective date of termination but then unpaid.
2. The amount set forth in paragraph 1 of this Plan shall be paid for
NYLIFE Distributors' services as distributor of the Class A shares of the Fund
in connection with any activities or expenses primarily intended to result in
the sale of Class A shares of the Fund, including, but not limited to,
compensation to registered representatives or other employees of NYLIFE
Distributors and to other broker-dealers that have entered into a Soliciting
Dealer Agreement with NYLIFE Distributors, compensation to and expenses of
employees of NYLIFE Distributors who engage in or support distribution of the
Fund's Class A shares; telephone expenses; interest expense; printing of
prospectuses and reports for other than existing shareholders; preparation,
printing and distribution of sales literature and advertising materials;
administrative services and expenses; and profit on the foregoing; provided,
however, that such
<PAGE>
amount to be paid to NYLIFE Distributors may be paid to it as
compensation for "service activities" (as defined below) rendered to Class A
shareholders of the Fund. Such fee shall be calculated daily and paid monthly or
at such other intervals as the Board shall determine.
For purposes of the Plan, "service activities" shall mean activities in
connection with the provision of personal, continuing services to investors in
the Fund, excluding transfer agent and subtransfer agent services for beneficial
owners of Fund Class A shares, aggregating and processing purchase and
redemption orders, providing beneficial owners with share account statements,
processing dividend payments, providing subaccounting services for Class A
shares held beneficially, forwarding shareholder communications to beneficial
owners and receiving, tabulating and transmitting proxies executed by beneficial
owners; provided, however, that if the National Association of Securities
Dealers Inc. ("NASD") adopts a definition of "service fee" for purposes of
Section 26(d) of the Rules of Fair Practice of the NASD that differs from the
definition of "service activities" hereunder, or if the NASD adopts a related
definition intended to define the same concept, the definition of "service
activities" in this Paragraph shall be automatically amended, without further
action of the parties, to conform to such NASD definition. Overhead and other
expenses of NYLIFE Distributors related to its "service activities," including
telephone and other communications expenses, may be included in the information
regarding amounts expended for such activities.
3. This Plan shall not take effect until it, together with any related
agreements, has been approved by votes of a majority of both (a) the Trustees of
the Trust and (b) those Trustees of the Trust who are not "interested persons"
of the Trust (as defined in the Act) and who have no direct or indirect
financial interest in the operation of this Plan or any agreements related to it
(the "Rule 12b-l Trustees"), cast in person at a meeting (or meetings) called
for the purpose of voting on this Plan and such related agreements.
4. The Plan of Distribution shall continue in full force and effect as
to the Fund for so long as such continuance is specifically approved at least
annually in the manner provided for approval of this Plan in paragraph 4.
5. NYLIFE Distributors shall provide to the Trustees of the Trust and
the Trustees shall review, at least quarterly, a written report of the amounts
so expended and the purposes for which such expenditures were made.
6. This Plan may be terminated as to the Fund at any time, without
payment of any penalty, by vote of a majority of the Rule 12b-l Trustees, or by
a vote of a majority of the outstanding voting securities of the Fund on not
more than 30 days' written notice to any other party to the Plan.
7. This Plan may not be amended to increase materially the amount of the
compensation provided for in paragraph 1 hereof unless such amendment is
approved in the manner provided for initial approval in paragraph 3 hereof, and
no material amendment to the
-2-
<PAGE>
Plan shall be made unless approved in the manner provided for approval and
annual renewal in paragraph 4 hereof.
8. While this Plan is in effect, the selection and nomination of
Trustees who are not interested persons (as defined in the Act) of the Trust
shall be committed to the discretion of the Trustees who are not such interested
persons.
9. The Trust shall preserve copies of this Plan and any related
agreements and all reports made pursuant to paragraph 6 hereof, for a period of
not less than six years from the date of this Plan, any such agreement or any
such report, as the case may be, the first two years in an easily accessible
place.
10. The Trustees of the Trust and the shareholders of the Fund shall not
be liable for any obligations of the Trust or the Fund under this Plan, and
NYLIFE Distributors or any other person, in asserting any rights or claims under
this Plan, shall look only to the assets and property of the Trust or the Fund
in settlement of such right or claim, and not to such Trustees or shareholders.
IN WITNESS WHEREOF, the Trust, on behalf of the Fund, and NYLIFE
Distributors have executed this amended and restated Plan of Distribution as of
the ____ day of ______________, 1997, to be effective ______________, 1997.
THE MAINSTAY FUNDS
By: __________________________
Title:
NYLIFE DISTRIBUTORS INC.
By: __________________________
Title:
-3-
<PAGE>
PLAN OF DISTRIBUTION PURSUANT TO RULE 12b-1
FOR CLASS B SHARES
OF THE MAINSTAY FUNDS
STRATEGIC VALUE FUND
WHEREAS, the MainStay Funds (the "Trust") engages in business as an open-
end management investment company and is registered as such under the Investment
Company Act of 1940, as amended (the "Act");
WHEREAS, shares of beneficial interest of the Trust are currently divided
into a number of separate series including the STRATEGIC VALUE FUND (the
"Fund");
WHEREAS, the Trustees of the Trust have determined that there is a
reasonable likelihood that adoption of the Plan of Distribution will benefit the
Trust, the Fund and its respective shareholders;
WHEREAS, the Trust employs NYLIFE Distributors Inc. ("NYLIFE Distributors")
as distributor of the securities of which it is the issuer, including Class B
shares of the Fund; and
WHEREAS, the Trust and NYLIFE Distributors have entered into a Distribution
Agreement, pursuant to which the Trust employs NYLIFE Distributors in such
capacity during the continuous offering of Class A and Class B shares of the
Trust.
NOW, THEREFORE, the Trust hereby adopts on behalf of the Fund, and NYLIFE
Distributors hereby agrees to the terms of, the Plan in accordance with Rule
12b-1 under the Act on the following terms and conditions:
1. The Fund shall pay to NYLIFE Distributors, as the distributor of
securities of which the Fund is the issuer, a fee for distribution of the Class
B shares, and services to shareholders of the Class B shares of the Fund at the
annual rate of 0.75% of the Fund's average daily net assets attributable to the
Fund's Class B shares. Such fee shall be calculated and accrued daily and paid
monthly or at such other intervals as the Trustees shall determine, subject to
any applicable restriction imposed by rules of the National Association of
Securities Dealers, Inc. If this Plan is terminated, the Fund will owe no
payments to NYLIFE Distributors other than any portion of the distribution fee
accrued through the effective date of termination but then unpaid.
2. The amount set forth in paragraph 1 of this Plan shall be paid for
NYLIFE Distributors' services as distributor of the Class B shares of the Fund
in connection with any activities or expenses primarily intended to result in
the sale of Class B shares of the Fund, including, but not limited to,
compensation to registered representatives or other employees of NYLIFE
Distributors and to other broker-dealers that have entered into a Soliciting
Dealer Agreement with NYLIFE Distributors, compensation to and expenses of
employees of NYLIFE Distributors who engage in or support distribution of the
Fund's Class B shares; telephone expenses; interest expense; printing of
prospectuses and reports for other than existing shareholders; preparation,
printing and distribution of sales literature and advertising materials;
administrative services and expenses; and profit on the foregoing.
<PAGE>
3. The Fund will pay to NYLIFE Distributors, in addition to the
distribution fee, a service fee at the rate of 0.25% on an annualized basis of
the average daily net asset value of the Fund (the "Service Fee") as
compensation for "service activities" (as defined below) rendered to
shareholders of the Fund. Such Service Fee shall be calculated daily and paid
monthly or at such other intervals as the Board shall determine.
For purposes of the Plan, "service activities" shall mean activities in
connection with the provision of personal, continuing services to investors in
the Fund, excluding transfer agent and subtransfer agent services for beneficial
owners of Fund Class B shares, aggregating and processing purchase and
redemption orders, providing beneficial owners with share account statements,
processing dividend payments, providing subaccounting services for Class B
shares held beneficially, forwarding shareholder communications to beneficial
owners and receiving, tabulating and transmitting proxies executed by beneficial
owners; provided, however, that if the National Association of Securities
Dealers Inc. ("NASD") adopts a definition of "service fee" for purposes of
Section 26(d) of the Rules of Fair Practice of the NASD that differs from the
definition of "service activities" hereunder, or if the NASD adopts a related
definition intended to define the same concept, the definition of "service
activities" in this Paragraph shall be automatically amended, without further
action of the parties, to conform to such NASD definition. Overhead and other
expenses of NYLIFE Distributors related to its "service activities," including
telephone and other communications expenses, may be included in the information
regarding amounts expended for such activities.
4. This Plan shall not take effect until it, together with any related
agreements, has been approved by votes of a majority of both (a) the Trustees of
the Trust and (b) those Trustees of the Trust who are not "interested persons"
of the Trust (as defined in the Act) and who have no direct or indirect
financial interest in the operation of this Plan or any agreements related to it
(the "Rule 12b-l Trustees"), cast in person at a meeting (or meetings) called
for the purpose of voting on this Plan and such related agreements.
5. The Plan of Distribution shall continue in full force and effect as to
the Fund for so long as such continuance is specifically approved at least
annually in the manner provided for approval of this Plan in paragraph 5.
6. NYLIFE Distributors shall provide to the Trustees of the Trust and the
Trustees shall review, at least quarterly, a written report of the amounts so
expended and the purposes for which such expenditures were made.
7. This Plan may be terminated as to the Fund at any time, without payment
of any penalty, by vote of a majority of the Rule 12b-l Trustees, or by a vote
of a majority of the outstanding voting securities of the Fund on not more than
30 days' written notice to any other party to the Plan.
8. This Plan may not be amended to increase materially the amount of
distribution fee (including any Service Fee) provided for in paragraph 1 hereof
unless such amendment is
-2-
<PAGE>
approved in the manner provided for initial approval in paragraph 4 hereof, and
no material amendment to the Plan shall be made unless approved in the manner
provided for approval and annual renewal in paragraph 5 hereof.
9. While this Plan is in effect, the selection and nomination of Trustees
who are not interested persons (as defined in the Act) of the Trust shall be
committed to the discretion of the Trustees who are not such interested persons.
10. The Trust shall preserve copies of this Plan and any related
agreements and all reports made pursuant to paragraph 7 hereof, for a period of
not less than six years from the date of this Plan, any such agreement or any
such report, as the case may be, the first two years in an easily accessible
place.
11. The Trustees of the Trust and the shareholders of the Fund shall not
be liable for any obligations of the Trust or the Fund under this Plan, and
NYLIFE Distributors or any other person, in asserting any rights or claims under
this Plan, shall look only to the assets and property of the Trust or the Fund
in settlement of such right or claim, and not to such Trustees or shareholders.
IN WITNESS WHEREOF, the Trust, on behalf of the Fund, and NYLIFE
Distributors have executed this Plan of Distribution as of the ____ day of
_________, 1997, to be effective ____________, 1997.
THE MAINSTAY FUNDS
By: _________________________
Title:
NYLIFE DISTRIBUTORS INC.
By: _________________________
Title:
-3-
