<PAGE>
As filed with the Securities and Exchange Commission on February 28, 1997
File No. 33-2610
File No. 811-4550
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933 [X]
Post-Effective Amendment No. 36 [X]
and
REGISTRATION STATEMENT
UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 38 [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)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
[ ] Immediately upon filing pursuant to [ ] on ( ) pursuant to paragraph
paragraph (b), or (b), or
[ ] 60 days after filing pursuant to [X] on May 1, 1997 pursuant to paragraph
paragraph (a)(1), or (a)(1), or
[ ] 75 days after filing pursuant to [ ] on ( ) pursuant to paragraph
paragraph (a)(2), or (a)(2), of Rule 485.
</TABLE>
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.
- --------------------------------------------------------------------------------
<PAGE>
PROSPECTUS AND STATEMENT OF
ADDITIONAL INFORMATION RELATING TO
THE MAINSTAY FUNDS
CROSS REFERENCE SHEET
REQUIRED BY RULE 404
UNDER THE SECURITIES ACT OF 1933
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 Financial Highlights; Tell Me the Details -
Performance and Yield Information
4 Tell Me the Key Facts -Descriptions of Each Fund;
General Investment Considerations; Tell Me the
Details - The Trust; Other Information About the
Funds; Description of Investments and Investment
Practices; Investment Restrictions
5 Tell Me the Key Facts -Descriptions of Each Fund;
Know With Whom You're Investing; Tell Me the
Details - The Trust; Investment Advisers,
Administrator and Distributor
5A See Annual Reports
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
<PAGE>
Item Number in Part A Prospectus Caption
- --------------------- ------------------
7 Tell Me the Key Facts - Decide whether to pay a
sales charge now, later or maybe never; Consider
Reducing Your Sales Charge; Open an Account and
Buy Shares; Know with Whom You're Investing; Tell
Me the Details - Investment Advisers,
Administrator and Distributor; How to Purchase
Shares of the Funds; 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 Additional Investment Policies of the Money Market
Fund; Investment Practices Common to Multiple
Funds; Additional Fundamental Investment
Restrictions; Additional Non-Fundamental
Investment Restrictions
14 Trustees and Officers
15 Trustees and Officers; Other Information
16 The Advisers, the Administrator and the
Distributor
17 Portfolio Transactions and Brokerage
18 Organization and Capitalization
- 2 -
<PAGE>
Item Number in Part B Statement of Additional Information Caption
- --------------------- -------------------------------------------
19 Shareholder Investment Account; Redemption and
Repurchase; Net Asset Value
20 Tax Status
21 The Advisers, the Administrator and the
Distributor
22 Calculation of Performance; Quotations; Tax Status
23 Financial Statements
- 3 -
<PAGE>
- --------------------------------------------------------------------------------
The MainStay Funds Prospectus May 1, 1997
- --------------------------------------------------------------------------------
================================================================================
Read This!
================================================================================
These Funds aren't federally insured or guaranteed by the U.S. government--even
if you're investing through a bank. Shares of these Funds 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 Funds are subject to investment risks, including possible
loss of principal.
No guarantees. There are no guarantees that a Fund will meet its objectives. All
mutual funds involve risk, including the potential to lose some or all of your
original investment. Except for money market funds, the price of a mutual fund
share will fluctuate and, when sold, may be higher or lower than your original
purchase price. Furthermore, although the Money Market Fund attempts to maintain
a stable net asset value of $1 per share, there can be no assurance that it will
succeed in doing so.
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.
- --------------------------------------------------------------------------------
Please read this prospectus carefully before you invest, and keep it for future
reference. 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.
This prospectus includes information you should know before investing. For even
more details, write to NYLIFE Distributors Inc., 260 Cherry Hill Road,
Parsippany, N.J. 07054, call 1-800-MAINSTAY or visit our website at
www.mainstayfunds.com for a free copy of the Statement of Additional Information
(SAI), dated May 1, 1997 (as amended from time to time). The SAI is incorporated
by reference into this prospectus and also has been filed with the Securities
and Exchange Commission (SEC). The SEC maintains a website (http://www.sec.gov)
that contains the SAI, material incorporated by reference and other information
regarding registrants that file electronically with the SEC.
- --------------------------------------------------------------------------------
MainStay offers 13 mutual funds.
Growth
Capital Appreciation Fund .......................................... page 23
Equity Index Fund .................................................. page 24
International Equity Fund .......................................... page 25
Growth & Income
Convertible-Equity Income Fund ..................................... page 26
Total Return Fund .................................................. page 27
Value Fund ......................................................... page 28
Income
Government Fund .................................................... page 29
High Yield Corporate Bond Fund ..................................... page 30
International Bond Fund ............................................ page 31
Money Market Fund .................................................. page 32
Tax Free
California Tax Free Fund ........................................... page 33
New York Tax Free Fund ............................................. page 34
Tax Free Bond Fund ................................................. page 35
[LOGO] MAINSTAY(R) FUNDS
<PAGE>
This page intentionally left blank
2
<PAGE>
- --------------------------------------------------------------------------------
What's Inside?
- --------------------------------------------------------------------------------
Tell Me Quickly page
The Funds ................................................................. 1
A quick overview...understanding MainStay Funds ........................... 4
Tell Me the Key Facts
Analyze the costs of investing: two kinds of fees ......................... 6
If you invest $1,000, you might pay... .................................... 6
Financial highlights ...................................................... 12
Descriptions of each Fund ................................................. 23
General investment considerations ......................................... 36
Decide whether to pay a sales charge now, later...or maybe never .......... 38
Consider reducing your sales charges ...................................... 39
Open an account and buy shares ............................................ 40
Know how to sell and exchange shares ...................................... 42
Decide how to receive your earnings ....................................... 44
Understand the tax consequences ........................................... 45
Know with whom you're investing ........................................... 46
Know your rights as a shareholder ......................................... 48
Tell Me the Details
The Trust ................................................................. 49
Other information about the Funds ......................................... 49
Description of investments and investment practices ....................... 54
Investment restrictions ................................................... 61
Investment Advisers, Administrator and Distributor ........................ 63
How to purchase shares of the Funds ....................................... 65
Alternative sales arrangements ............................................ 66
Redemptions and exchanges ................................................. 68
Tax-deferred retirement plans ............................................. 70
Net asset value ........................................................... 71
Portfolio transactions .................................................... 71
Tax information ........................................................... 71
Performance and yield information ......................................... 72
Appendix A: description of securities ratings ............................. 73
Appendix B: taxable equivalent yield table ................................ 76
3
<PAGE>
- --------------------------------------------------------------------------------
Tell Me Quickly
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
A Quick Overview...
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
2
================================================================================
Study the Funds' objectives policies and risks
================================================================================
Focus on the Funds that seem to be seeking your objectives. Read about the
people who manage each Fund. Understand the types of securities in which each
Fund invests and the risks associated with those investments.
Talk with your registered representative.
For key facts about and risks of the Funds, see pages 23-35. For more detailed
information, see "Tell Me the Details" in this prospectus and see the Statement
of Additional Information (SAI).
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
3
================================================================================
Evaluate each Fund's track record, fees and expenses
================================================================================
Turn to pages 12-22 for Financial Highlights. Read down the columns (by year)
and find, in particular, the beginning and ending share prices, the amount of
income produced, and the "total investment return" figures to see how each Fund
has done in the past.
Don't just look at recent performance, which may or may not be repeated. Read
the "total investment return" for each year to look for a performance pattern.
Remember, though, no fund can ever guarantee it will continue to perform at the
same levels.
Understand one-time and ongoing fees.
See the tables beginning on page 7 for your Fund's one-time and ongoing fees and
the impact of those costs on a $1,000 investment.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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
40-41.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
8
================================================================================
See how many shares your money will buy
================================================================================
You can calculate the number of shares of a 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.
Each 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 (except for the Money Market Fund, which is calculated at noon).
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 41 and 71.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
9
================================================================================
Ongoing fees
================================================================================
Every mutual fund pays fees for services. These may include administration,
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 pages 6-11.
- --------------------------------------------------------------------------------
4
<PAGE>
- --------------------------------------------------------------------------------
...Understanding MainStay Funds
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
4
================================================================================
Decide how much to invest in each Fund
================================================================================
You may split your investment among as many MainStay Funds as you desire. The
initial investment, however, must be at least $500 in each Fund ($1,000 for the
Money Market Fund and Equity Index Fund); then $50 thereafter (except for the
Equity Index Fund, which requires $1,000).
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 38.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
6
================================================================================
Consider reducing 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 39 for details.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
10
================================================================================
Earn dividends and capital gains
================================================================================
Your Fund may earn money through interest payments, dividend payments, or
through capital appreciation of the securities it owns. The Fund periodically
distributes these earnings to you, based on the number of shares you own.
You should check how often a Fund makes distributions, especially if current
income is important to you.
You may elect to have earnings sent to you or have them automatically reinvested
in more shares (with no sales charge).
To learn more, see page 44.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
11
================================================================================
Exchange shares/ Redeem shares
================================================================================
You generally may redeem your shares on any business day. The Fund will redeem
shares at the current net asset value and send you a check. If you wish, you may
exchange shares of one 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 Ashares and redeem them within a year of
the purchase, you may pay a sales charge.
To learn more, see pages 42-43.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 even a tax-free fund may earn taxable income for you. Also be
aware that your 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 45.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 monthly statement for the Money
Market Fund), a confirmation of each transaction and annual and semiannual
reports on your Fund's status and investments.
To learn more, see page 48.
- --------------------------------------------------------------------------------
5
<PAGE>
- --------------------------------------------------------------------------------
Tell Me The Key Facts
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Analyze the Costs of Investing: Two Kinds of Fees
- --------------------------------------------------------------------------------
To help you understand the costs of investing in a MainStay Fund, we've provided
expense information based on the expenses paid by each Fund for the most recent
fiscal year. Because some expenses are based on the value of the Fund's assets,
which fluctuates daily, you should only use these figures as 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 38 and 66-68 for more details.
Ongoing fees. Each Fund pays ongoing operating fees to the investment adviser,
administrator, custodians 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 47 and 63-64 for more details.
The Rule 12b-1 fees shown on pages 7-11 pay, for example, commissions and
marketing/promotional expenses. Management fees go to the investment advisers
who invest your money and to others for their administrative duties such as
keeping records and providing you with statements and reports. "Other" includes
legal, auditing, custodian and other fees. See pages 63-64 for more details on
fees.
- --------------------------------------------------------------------------------
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. But, there may be a charge of 1% on
redemptions (sales of shares) made within a year of the purchase date.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
If you invest $1,000, you might pay...
- --------------------------------------------------------------------------------
The "Examples" on the following pages are provided to help you understand the
various costs and expenses that an investor in each Fund will bear directly or
indirectly.
The examples on pages 7-11 are based on a hypothetical 5% annual return on an
investment of $1,000 and redemption at the end of each period; and the annual
fund operating expenses reflected in each 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 charts, therefore, do not represent how your investment will perform,
nor do they show how the Funds have actually performed in the past. They are
strictly hypothetical examples.
- --------------------------------------------------------------------------------
[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); but, even 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. Notice the examples on the following pages: you
pay higher 12b-1 fees (which are ongoing fees) if you defer the sales charge.
- --------------------------------------------------------------------------------
6
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Sales Charges and Operating Expenses Examples
- ------------------------------------------------------------------------------------------------------------------------------------
====================================================================================================================================
CAPITAL APPRECIATION FUND CLASS A CLASS B CLASS A CLASS B
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Assuming
Redemption
Assuming No at the End
Shareholder Transaction Expenses Redemption of Each Period
---------- --------------
Maximum Sales Charge Imposed on Purchase of
Shares (as a percentage of offering price) 5.50% None Expenses after 1 year $ 66 $ 17 $ 67
Expenses after 3 years $ 90 $ 54 $ 84
Expenses after 5 years $115 $ 92 $112
Expenses after 10 years $188 $201 $201
Deferred Sales Charge
(as a percentage of redemption proceeds)(1) None 5.00%
[THE FOLLOWING TABLES WILL BE PRESENTED AS BOTH PIE CHARTS
Annual Fund Operating Expenses AND TABLES IN THE PRINTED PROSPECTUS]
(as a percentage of average net assets) $ 55 up-front sales charge $ 20 deferred sales charge
33 management fees 34 management fees
Management Fees(2) 0.63% 0.63% 13 12b-1 fees 43 12b-1 fees
12b-1 Fees(3) 0.25% 0.79% 14 other expenses 15 other expenses
Other Expenses 0.27% 0.27% -------------------------- --------------------------
---- ---- $115 total sales charges $112 total sales charges
Total Fund Operating Expenses 1.15% 1.69% and expenses and expenses
==== ====
<CAPTION>
====================================================================================================================================
EQUITY INDEX FUND CLASS A CLASS A
====================================================================================================================================
<S> <C> <C> <C> <C> <C>
Shareholder Transaction Expenses
Maximum Sales Charge Imposed on Purchase of
Shares (as a percentage of offering price) 3.00% N/A Expenses after 1 year $ 41 N/A
Expenses after 3 years $ 65
Expenses after 5 years $ 91
Expenses after 10 years $164
Deferred Sales Charge
(as a percentage of redemption proceeds)(1) None
[THE FOLLOWING TABLE WILL
BE PRESENTED AS BOTH A PIE
CHART AND A TABLE IN THE
Annual Fund Operating Expenses PRINTED PROSPECTUS]
(as a percentage of average net assets) $ 30 up-front sales charge
27 management fees
Management Fees(2) 0.50% 13 12b-1 fees
12b-1 Fees(3) 0.25% 21 other expenses
Other Expenses 0.38% --------------------------
---- $ 91 total sales charges
Total Fund Operating Expenses 1.13% and expenses
====
<CAPTION>
====================================================================================================================================
INTERNATIONAL EQUITY FUND CLASS A CLASS B CLASS A CLASS B
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Assuming
Redemption
Assuming No at the End
Shareholder Transaction Expenses Redemption of Each Period
---------- --------------
Maximum Sales Charge Imposed on Purchase of
Shares (as a percentage of offering price) 5.50% None Expenses after 1 year $ 76 $ 30 $ 80
Expenses after 3 years $121 $ 93 $123
Expenses after 5 years $168 $157 $177
Expenses after 10 years $296 $331 $331
Deferred Sales Charge
(as a percentage of redemption proceeds)(1) None 5.00%
[THE FOLLOWING TABLES WILL BE PRESENTED AS BOTH PIE CHARTS
Annual Fund Operating Expenses AND TABLES IN THE PRINTED PROSPECTUS]
(as a percentage of average net assets) $ 55 up-front sales charge $ 20 deferred sales charge
51 management fees 53 management fees
Management Fees(2) 1.00% 1.00% 13 12b-1 fees 53 12b-1 fees
12b-1 Fees(3) 0.25% 1.00% 49 other expenses 51 other expenses
Other Expenses 0.95% 0.95% -------------------------- --------------------------
---- ---- $168 total sales charges $177 total sales charges
Total Fund Operating Expenses 2.20% 2.95% and expenses and expenses
==== ====
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Sales Charges and Operating Expenses Examples
- ------------------------------------------------------------------------------------------------------------------------------------
====================================================================================================================================
CONVERTIBLE-EQUITY INCOME FUND CLASS A CLASS B CLASS A CLASS B
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Assuming
Redemption
Assuming No at the End
Shareholder Transaction Expenses Redemption of Each Period
---------- --------------
Maximum Sales Charge Imposed on Purchase of
Shares (as a percentage of offering price) 5.50% None Expenses after 1 year $ 69 $ 22 $ 72
Expenses after 3 years $ 99 $ 66 $ 96
Expenses after 5 years $131 $114 $134
Expenses after 10 years $222 $245 $245
Deferred Sales Charge
(as a percentage of redemption proceeds)(1) None 5.00%
[THE FOLLOWING TABLES WILL BE PRESENTED AS BOTH PIE CHARTS
Annual Fund Operating Expenses AND TABLES IN THE PRINTED PROSPECTUS]
(as a percentage of average net assets) $ 55 up-front sales charge $ 20 deferred sales charge
37 management fees 39 management fees
Management Fees(2) 0.72% 0.72% 13 12b-1 fees 48 12b-1 fees
12b-1 Fees(3) 0.25% 0.88% 26 other expenses 27 other expenses
Other Expenses 0.50% 0.50% -------------------------- --------------------------
---- ---- $131 total sales charges $134 total sales charges
Total Fund Operating Expenses 1.47% 2.10% and expenses and expenses
==== ====
<CAPTION>
====================================================================================================================================
TOTAL RETURN FUND CLASS A CLASS B CLASS A CLASS B
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Assuming
Redemption
Assuming No at the End
Shareholder Transaction Expenses Redemption of Each Period
---------- --------------
Maximum Sales Charge Imposed on Purchase of
Shares (as a percentage of offering price) 5.50% None Expenses after 1 year $ 66 $ 17 $ 67
Expenses after 3 years $ 89 $ 53 $ 83
Expenses after 5 years $114 $ 92 $112
Expenses after 10 years $184 $200 $200
Deferred Sales Charge
(as a percentage of redemption proceeds)(1) None 5.00%
[THE FOLLOWING TABLES WILL BE PRESENTED AS BOTH PIE CHARTS
Annual Fund Operating Expenses AND TABLES IN THE PRINTED PROSPECTUS]
(as a percentage of average net assets) $ 55 up-front sales charge $ 20 deferred sales charge
33 management fees 35 management fees
Management Fees(2) 0.63% 0.63% 13 12b-1 fees 44 12b-1 fees
12b-1 Fees(3) 0.25% 0.81% 13 other expenses 13 other expenses
Other Expenses 0.24% 0.24% -------------------------- --------------------------
---- ---- $114 total sales charges $112 total sales charges
Total Fund Operating Expenses 1.12% 1.68% and expenses and expenses
==== ====
<CAPTION>
====================================================================================================================================
VALUE FUND CLASS A CLASS B CLASS A CLASS B
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Assuming
Redemption
Assuming No at the End
Shareholder Transaction Expenses Redemption of Each Period
---------- --------------
Maximum Sales Charge Imposed on Purchase of
Shares (as a percentage of offering price) 5.50% None Expenses after 1 year $ 66 $ 18 $ 68
Expenses after 3 years $ 90 $ 56 $ 86
Expenses after 5 years $116 $ 96 $116
Expenses after 10 years $189 $209 $209
Deferred Sales Charge
(as a percentage of redemption proceeds)(1) None 5.00%
[THE FOLLOWING TABLES WILL BE PRESENTED AS BOTH PIE CHARTS
Annual Fund Operating Expenses AND TABLES IN THE PRINTED PROSPECTUS]
(as a percentage of average net assets) $ 55 up-front sales charge $ 20 deferred sales charge
34 management fees 36 management fees
Management Fees(2) 0.65% 0.65% 13 12b-1 fees 46 12b-1 fees
12b-1 Fees(3) 0.25% 0.85% 14 other expenses 14 other expenses
Other Expenses 0.26% 0.26% -------------------------- --------------------------
---- ---- $116 total sales charges $116 total sales charges
Total Fund Operating Expenses 1.16% 1.76% and expenses and expenses
==== ====
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Sales Charges and Operating Expenses Examples
- ------------------------------------------------------------------------------------------------------------------------------------
====================================================================================================================================
GOVERNMENT FUND CLASS A CLASS B CLASS A CLASS B
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Assuming
Redemption
Assuming No at the End
Shareholder Transaction Expenses Redemption of Each Period
---------- --------------
Maximum Sales Charge Imposed on Purchase of
Shares (as a percentage of offering price) 4.50% None Expenses after 1 year $ 55 $ 17 $ 67
Expenses after 3 years $ 76 $ 53 $ 83
Expenses after 5 years $100 $ 91 $111
Expenses after 10 years $166 $198 $198
Deferred Sales Charge
(as a percentage of redemption proceeds)(1) None 5.00%
[THE FOLLOWING TABLES WILL BE PRESENTED AS BOTH PIE CHARTS
Annual Fund Operating Expenses AND TABLES IN THE PRINTED PROSPECTUS]
(as a percentage of average net assets) $ 45 up-front sales charge $ 20 deferred sales charge
32 management fees 33 management fees
Management Fees(2) 0.60% 0.60% 13 12b-1 fees 48 12b-1 fees
12b-1 Fees(3) 0.25% 0.88% 10 other expenses 10 other expenses
Other Expenses 0.18% 0.18% -------------------------- --------------------------
---- ---- $100 total sales charges $111 total sales charges
Total Fund Operating Expenses 1.03% 1.66% and expenses and expenses
==== ====
<CAPTION>
====================================================================================================================================
HIGH YIELD CORPORATE BOND FUND CLASS A CLASS B CLASS A CLASS B
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Assuming
Redemption
Assuming No at the End
Shareholder Transaction Expenses Redemption of Each Period
---------- --------------
Maximum Sales Charge Imposed on Purchase of
Shares (as a percentage of offering price) 4.50% None Expenses after 1 year $ 55 $ 17 $ 67
Expenses after 3 years $ 76 $ 51 $ 81
Expenses after 5 years $ 99 $ 88 $108
Expenses after 10 years $165 $192 $192
Deferred Sales Charge
(as a percentage of redemption proceeds)(1) None 5.00%
[THE FOLLOWING TABLES WILL BE PRESENTED AS BOTH PIE CHARTS
AND TABLES IN THE PRINTED PROSPECTUS]
Annual Fund Operating Expenses
(as a percentage of average net assets) $ 45 up-front sales charge $ 20 deferred sales charge
30 management fees 31 management fees
Management Fees(2) 0.57% 0.57% 13 12b-1 fees 46 12b-1 fees
12b-1 Fees(3) 0.25% 0.84% 11 other expenses 11 other expenses
Other Expenses 0.20% 0.20% -------------------------- --------------------------
---- ---- $ 99 total sales charges $108 total sales charges
Total Fund Operating Expenses 1.02% 1.61% and expenses and expenses
==== ====
<CAPTION>
====================================================================================================================================
INTERNATIONAL BOND FUND CLASS A CLASS B CLASS A CLASS B
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Assuming
Redemption
Assuming No at the End
Shareholder Transaction Expenses Redemption of Each Period
---------- --------------
Maximum Sales Charge Imposed on Purchase of
Shares (as a percentage of offering price) 4.50% None Expenses after 1 year $ 60 $ 23 $ 73
Expenses after 3 years $ 91 $ 70 $100
Expenses after 5 years $125 $120 $140
Expenses after 10 years $219 $258 $258
Deferred Sales Charge
(as a percentage of redemption proceeds)(1) None 5.00%
[THE FOLLOWING TABLES WILL BE PRESENTED AS BOTH PIE CHARTS
AND TABLES IN THE PRINTED PROSPECTUS]
Annual Fund Operating Expenses
(as a percentage of average net assets) $ 45 up-front sales charge $ 20 deferred sales charge
21 management fees 22 management fees
Management Fees(2, 4) 0.40% 0.40% 13 12b-1 fees 51 12b-1 fees
12b-1 Fees(3) 0.25% 0.95% 46 other expenses 47 other expenses
Other Expenses 0.87% 0.87% -------------------------- --------------------------
---- ---- $125 total sales charges $140 total sales charges
Total Fund Operating Expenses 1.52% 2.22% and expenses and expenses
==== ====
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Sales Charges and Operating Expenses Examples
- ------------------------------------------------------------------------------------------------------------------------------------
====================================================================================================================================
MONEY MARKET FUND CLASS A CLASS B CLASS A CLASS B
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Assuming
Redemption
Assuming No at the End
Shareholder Transaction Expenses Redemption of Each Period
---------- --------------
Maximum Sales Charge Imposed on Purchase of
Shares (as a percentage of offering price) None None Expenses after 1 year $ 7 $ 7 $ 7
Expenses after 3 years $ 22 $ 22 $ 22
Expenses after 5 years $ 39 $ 39 $ 39
Expenses after 10 years $ 87 $ 87 $ 87
Deferred Sales Charge
(as a percentage of redemption proceeds)(1) None None
[THE FOLLOWING TABLES WILL BE PRESENTED AS BOTH PIE CHARTS
Annual Fund Operating Expenses AND TABLES IN THE PRINTED PROSPECTUS]
(as a percentage of average net assets) $ 0 up-front sales charge $ 0 deferred sales charge
16 management fees 16 management fees
Management Fees(2, 5) 0.29% 0.29% 0 12b-1 fees 0 12b-1 fees
12b-1 Fees(3) None None 23 other expenses 23 other expenses
Other Expenses 0.41% 0.41% -------------------------- --------------------------
---- ---- $ 39 total sales charges $ 39 total sales charges
Total Fund Operating Expenses(5) 0.70% 0.70% and expenses and expenses
==== ====
<CAPTION>
====================================================================================================================================
CALIFORNIA TAX FREE FUND CLASS A CLASS B CLASS A CLASS B
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Assuming
Redemption
Assuming No at the End
Shareholder Transaction Expenses Redemption of Each Period
---------- --------------
Maximum Sales Charge Imposed on Purchase of
Shares (as a percentage of offering price) 4.50% None Expenses after 1 year $ 57 $ 15 $ 65
Expenses after 3 years $ 83 $ 47 $ 77
Expenses after 5 years $110 $ 82 $102
Expenses after 10 years $189 $179 $179
Deferred Sales Charge
(as a percentage of redemption proceeds)(1) None 5.00%
[THE FOLLOWING TABLES WILL BE PRESENTED AS BOTH PIE CHARTS
Annual Fund Operating Expenses AND TABLES IN THE PRINTED PROSPECTUS]
(as a percentage of average net assets) $ 45 up-front sales charge $ 20 deferred sales charge
26 management fees 28 management fees
Management Fees(2, 6) 0.50% 0.50% 13 12b-1 fees 27 12b-1 fees
12b-1 Fees(3) 0.25% 0.50% 26 other expenses 27 other expenses
Other Expenses 0.49% 0.49% -------------------------- --------------------------
---- ---- $110 total sales charges $102 total sales charges
Total Fund Operating Expenses(6) 1.24% 1.49% and expenses and expenses
==== ====
<CAPTION>
====================================================================================================================================
NEW YORK TAX FREE FUND CLASS A CLASS B CLASS A CLASS B
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Assuming
Redemption
Assuming No at the End
Shareholder Transaction Expenses Redemption of Each Period
---------- --------------
Maximum Sales Charge Imposed on Purchase of
Shares (as a percentage of offering price) 4.50% None Expenses after 1 year $ 57 $ 15 $ 65
Expenses after 3 years $ 83 $ 47 $ 77
Expenses after 5 years $110 $ 82 $102
Expenses after 10 years $189 $179 $179
Deferred Sales Charge
(as a percentage of redemption proceeds)(1) None 5.00%
[THE FOLLOWING TABLES WILL BE PRESENTED AS BOTH PIE CHARTS
Annual Fund Operating Expenses AND TABLES IN THE PRINTED PROSPECTUS]
(as a percentage of average net assets) $ 45 up-front sales charge $ 20 deferred sales charge
26 management fees 28 management fees
Management Fees(2, 6) 0.50% 0.50% 13 12b-1 fees 27 12b-1 fees
12b-1 Fees(3) 0.25% 0.50% 26 other expenses 27 other expenses
Other Expenses 0.49% 0.49% -------------------------- --------------------------
---- ---- $110 total sales charges $102 total sales charges
Total Fund Operating Expenses(6) 1.24% 1.49% and expenses and expenses
==== ====
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Sales Charges and Operating Expenses Examples
- ------------------------------------------------------------------------------------------------------------------------------------
====================================================================================================================================
TAX FREE BOND FUND CLASS A CLASS B CLASS A CLASS B
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Assuming
Redemption
Assuming No at the End
Shareholder Transaction Expenses Redemption of Each Period
---------- --------------
Maximum Sales Charge Imposed on Purchase of
Shares (as a percentage of offering price) 4.50% None Expenses after 1 year $ 55 $ 13 $ 63
Expenses after 3 years $ 76 $ 39 $ 69
Expenses after 5 years $ 98 $ 67 $ 87
Expenses after 10 years $162 $148 $148
Deferred Sales Charge
(as a percentage of redemption proceeds)(1) None 5.00%
[THE FOLLOWING TABLES WILL BE PRESENTED AS BOTH PIE CHARTS
Annual Fund Operating Expenses AND TABLES IN THE PRINTED PROSPECTUS]
(as a percentage of average net assets) $ 45 up-front sales charge $ 20 deferred sales charge
32 management fees 33 management fees
Management Fees(2) 0.60% 0.60% 13 12b-1 fees 26 12b-1 fees
12b-1 Fees(3) 0.25% 0.47% 8 other expenses 8 other expenses
Other Expenses 0.15% 0.15% -------------------------- --------------------------
---- ---- $ 98 total sales charges $ 87 total sales charges
Total Fund Operating Expenses 1.00% 1.22% and expenses and expenses
==== ====
</TABLE>
(1) Generally, Class A shares of the Funds 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) Management Fees include both Investment Advisory and Administration fees.
(3) 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 a 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 Funds, see "The Distributor."
(4) The Adviser and Administrator each agreed that a portion of its fees would
not be imposed, pursuant to the applicable contracts, until such time as
the International Bond Fund reaches $50 million in net assets. Had the
reduction in fees not been reflected in the above table, the management fee
would have been 0.70%, and the annualized total fund operating expenses
would have been 1.82% and 2.52% for Class A and Class B, respectively.
(5) The Adviser and Administrator each agreed that a portion of its fees would
not be imposed, pursuant to the applicable contracts, during the fiscal
year ended December 31, 1995. In addition, the Adviser and the
Administrator agreed to limit certain expenses at various times during the
fiscal year ended December 31, 1995 to the extent the expenses of the Fund
exceeded on an annualized basis defined voluntary expense limitations,
expressed as a percentage of net assets of the Fund. Had the reduction of
certain fees otherwise payable and voluntary expense limitations not been
reflected in the above table, the annualized operating expenses would have
been 0.91% and management fees would have been 0.50%.
(6) Based on a voluntary expense limitation imposed by the Adviser and the
Administrator; they reserve the right to terminate or revise this
limitation when the assets of a Fund reach $25 million. Without the expense
limitation, total expenses for the California Tax Free Fund would be 1.42%
and 1.67% for the Class A and Class B shares, respectively, total expenses
for the New York Tax Free Fund would be 1.39% and 1.64% for the Class A and
Class B shares, respectively.
11
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
Here are the financial histories for each of the 13 MainStay Funds. The
information for each of the ten years up to December 31, 1996 (including the
short year ended December 31, 1994) has been audited by Price Waterhouse LLP,
independent accountants. You should read the related financial information and
notes and the independent accountants' unqualified reports on each Fund
incorporated by reference in the Statement of Additional Information. These
materials with respect to the Equity Index Fund are included in the Statement of
Additional Information.
Additional performance information is included in each Fund's annual report to
shareholders.
For a free copy of the Statement of Additional Information (SAI) or the annual
reports, ask your registered representative; call MainStay at 1-800-624-6782; or
write to NYLIFE Distributors Inc., 260 Cherry Hill Road, Parsippany, N.J. 07054.
MAINSTAY CAPITAL APPRECIATION FUND
Selected data for a share outstanding throughout the years ended December 31,
1996 and December 31, 1995, the period September 1, 1994 through December 31,
1994 and the years ended August 31, 1994, August 31, 1993, August 31, 1992,
August 31, 1991, August 31, 1990, August 31, 1989, August 31, 1988, August 31,
1987 and August 31, 1986.
<TABLE>
<CAPTION>
Class B
--------------------------------------------------------
Class A Class B
------- -------- September 1
Year Ended through
December 31, December 31,
1995 1994(a) 1994 1993 1992
----------------------- ------------ -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Net asset value at
beginning of
period ............... $ 19.11 $ 19.11 $ 19.93 $ 19.47 $ 14.14 $ 15.96
------- -------- -------- -------- -------- --------
Net investment
income (loss) ........ 0.03 (0.08) (0.03)* (0.12)* (0.12)* (0.19)*
Net realized and
unrealized gain (loss)
on investments ....... 6.81 6.79 (0.65) 1.13 5.64 1.30
------- -------- -------- -------- -------- --------
Total from investment
operations ........... 6.84 6.71 (0.68) 1.01 5.52 1.11
------- -------- -------- -------- -------- --------
Less dividends and
distributions:
Dividends from net
investment income .... -- -- -- -- -- --
Distributions from
net realized gain .... (0.05) (0.05) (0.14) (0.55) (0.19) (2.93)
------- -------- -------- -------- -------- --------
Total dividends and
distributions ........ (0.05) (0.05) (0.14) (0.55) (0.19) (2.93)
------- -------- -------- -------- -------- --------
Net asset value at
end of period ....... $ 25.90 $ 25.77 $ 19.11 $ 19.93 $ 19.47 $ 14.14
======= ======== ======== ======== ======== ========
Total investment
return(c) ............ 35.79% 35.11% (3.40%) 5.36% 39.25% 6.77%
Ratios (to average
net assets)/
Supplemental Data:
Net investment
income (loss) ........ 0.2% (0.4%) (0.5%)+ (0.6%) (0.7%) (1.2%)
Net expenses ......... 1.1% 1.7% 1.8%+ 1.8% 1.8% 2.0%
Expenses (before
waiver and
reimbursement) ....... 1.1% 1.7% 1.8%+ 1.8% 1.8% 2.0%
Portfolio turnover rate 29% 29% 11% 31% 73% 157%
Net assets at end of
period (in 000's) .... $44,434 $856,221 $499,133 $472,497 $279,300 $128,710
<CAPTION>
1991 1990 1989 1988 1987 1986(b)
------- ------- ------- ------- ------- -------
Net asset value at
beginning of
period ............... $ 11.35 $ 12.44 $ 9.37 $ 13.14 $ 10.05 $ 10.00
------- ------- ------- ------- ------- -------
Net investment
income (loss) ........ (0.13)* (0.02) (0.11) (0.12) (0.12) (0.02)*
Net realized and
unrealized gain (loss)
on investments ....... 5.16 (0.36) 3.18 (3.65) 3.21 0.09
------- ------- ------- ------- ------- -------
Total from investment
operations ........... 5.03 (0.38) 3.07 (3.77) 3.09 0.07
------- ------- ------- ------- ------- -------
Less dividends and
distributions:
Dividends from net
investment income .... -- (0.02) -- -- -- (0.02)
Distributions from
net realized gain .... (0.42) (0.69) -- -- -- --
------- ------- ------- ------- ------- -------
Total dividends and
distributions ........ (0.42) (0.71) -- -- -- (0.02)
------- ------- ------- ------- ------- -------
Net asset value at
end of period ....... $ 15.96 $ 11.35 $ 12.44 $ 9.37 $ 13.14 $ 10.05
======= ======= ======= ======= ======= =======
Total investment
return(c) ............ 45.89% (3.14%) 32.76% (28.69%) 30.75% 0.65%
Ratios (to average
net assets)/
Supplemental Data:
Net investment
income (loss) ........ (1.0%) (0.2%) (0.8%) (1.3%) (1.5%) (0.1%)+
Net expenses ......... 2.5% 2.5% 2.8% 2.7% 2.9% 2.9%+
Expenses (before
waiver and
reimbursement) ....... 2.5% 2.5% 2.8% 2.7% 2.9% 3.9%+
Portfolio turnover rate 327% 259% 256% 60% 16% 10%
Net assets at end of
period (in 000's) .... $65,659 $36,062 $34,685 $28,845 $36,954 $12,306
</TABLE>
- ----------
* Per share data based on average shares outstanding during the period.
+ Annualized.
(a) The Fund changed its fiscal year end from August 31 to December 31.
(b) Commenced operations May 1, 1986.
(c) Total return is calculated exclusive of sales charges and is not
annualized.
12
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
MAINSTAY EQUITY INDEX FUND
Selected data for a share outstanding throughout the years ended December 31,
1996 and December 31, 1995, the period September 1, 1994 through December 31,
1994, the years ended August 31, 1993 and August 31, 1992 and the period
December 20, 1990 (commencement of operations) through August 31, 1991.
<TABLE>
<CAPTION>
Dec. 20,
September 1 Year Ended 1990(a)
Year Ended through August 31, through
December 31, December 31, ------------------------------ August 31,
1995 1994* 1994 1993 1992 1991
-------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Net asset value at beginning of period .................. $ 14.09 $ 14.48 $ 13.84 $ 12.15 $ 11.41 $ 9.45
-------- ------- ------- ------- ------- -------
Net investment income ................................... 0.24 0.09 0.27 0.22 0.18 0.11
Net realized and unrealized gain (loss) on investments... 4.82 (0.48) 0.37 1.47 0.56 1.85
-------- ------- ------- ------- ------- -------
Total from investment operations ........................ 5.06 (0.39) 0.64 1.69 0.74 1.96
-------- ------- ------- ------- ------- -------
Less dividends and distributions:
Dividends from net investment income .................... (0.27) -- (0.25) (0.18) (0.17) --
Distributions from net realized gain .................... (0.27) -- (0.18) (0.02) (0.04) --
-------- ------- ------- ------- ------- -------
Total dividends and distributions ....................... (0.54) -- (0.43) (0.20) (0.21) --
-------- ------- ------- ------- ------- -------
Reverse share split ..................................... 0.54 -- 0.43 0.20 0.21 --
-------- ------- ------- ------- ------- -------
Net asset value at end of period ........................ $ 19.15 $ 14.09 $ 14.48 $ 13.84 $ 12.15 $ 11.41
======== ======= ======= ======= ======= =======
Total investment return(b) .............................. 35.91% (2.68%) 4.59% 13.91% 6.49% 20.74%
Ratios (to average net assets)/Supplemental Data:
Net investment income ................................. 1.7% 2.0%+ 1.9% 1.9% 1.8% 1.9%+
Expenses .............................................. 1.1% 0.9%+ 0.9% 0.9% 1.2% 1.4%+
Portfolio turnover rate ................................. 4% 2% 12% 4% 3% 1%
Net assets at end of period (in 000's) .................. $109,308 $61,561 $62,828 $62,921 $41,742 $23,534
</TABLE>
- ----------
* The Fund changed its fiscal year end from August 31 to December 31.
+ Annualized.
(a) Commencement of operations.
(b) Total return is calculated exclusive of sales charges and is not
annualized.
MAINSTAY INTERNATIONAL EQUITY FUND
Selected data for a share outstanding throughout the years ended December 31,
1996 and December 31, 1995 and the period September 13, 1994 through December
31, 1994.
<TABLE>
<CAPTION>
Class B
---------------
Class A Class B September 13(a)
------- ------- through
Year Ended December 31,
December 31, 1995 1994
--------------------- ---------------
<S> <C> <C> <C>
Net asset value at beginning of period ................................................... $ 9.77 $ 9.77 $ 10.00
------- ------- -------
Net investment income (loss) ............................................................. 0.27 0.26 (0.04)
Net realized and unrealized gain (loss) on investments ................................... 0.10 0.07 (0.16)
Net realized and unrealized gain (loss) on foreign currency transactions ................. 0.14 0.09 (0.03)
------- ------- -------
Total from investment operations ......................................................... 0.51 0.42 (0.23)
------- ------- -------
Less dividends and distributions:
From net investment income ............................................................... (0.15) (0.15) --
In excess of net realized gain on investments and foreign currency transactions .......... (0.08) (0.07) --
------- ------- -------
Total dividends and distributions to shareholders ........................................ (0.23) (0.22) --
------- ------- -------
Net asset value at end of period ......................................................... $ 10.05 $ 9.97 $ 9.77
======= ======= =======
Total investment return(b) ............................................................... 5.25% 4.27% (2.30%)
Ratios (to average net assets)/Supplemental Data:
Net investment loss ..................................................................... (0.2%) (1.0%) (1.6%)+
Expenses ................................................................................ 2.2% 3.0% 3.9%+
Portfolio turnover rate .................................................................. 25% 25% 9%
Net assets at end of period (in 000's) ................................................... $12,856 $25,341 $20,549
</TABLE>
- ----------
+ Annualized.
(a) Commencement of operations.
(b) Total return is calculated exclusive of sales charges and is not
annualized.
13
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
MAINSTAY CONVERTIBLE-EQUITY INCOME FUND
Selected data for a share outstanding throughout the years ended December 31,
1996 and December 31, 1995, the period September 1, 1994 through December 31,
1994 and the years ended August 31, 1994, August 31, 1993, August 31, 1992,
August 31, 1991, August 31, 1990, August 31, 1989, August 31, 1988, August 31,
1987 and August 31, 1986.
<TABLE>
<CAPTION>
Class B
Class A Class B -------------------------------------------------------------
------- ------- September 1
Year Ended through
December 31, December 31,
1995 1994(a) 1994 1993 1992
---------------------------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Net asset value at
beginning of
period ............... $ 11.67 $ 11.67 $ 12.83 $ 13.92 $ 11.46 $ 10.10
------- -------- -------- -------- ------- -------
Net investment
income ............... 0.59 0.51 0.19 0.50 0.92 0.32
Net realized and
unrealized gain (loss)
on investments ....... 2.14 2.14 (0.71) 0.70 2.45 1.32
Net realized and
unrealized loss
on foreign currency
transactions ......... (0.00)(d) (0.00)(d) -- (0.01) -- --
------- -------- -------- -------- ------- -------
Total from investment
operations ........... 2.73 2.65 (0.52) 1.19 3.37 1.64
------- -------- -------- -------- ------- -------
Less dividends and
distributions:
Dividends from net
investment income .... (0.55) (0.47) (0.21) (0.49) (0.42) (0.28)
Distributions from
net realized gain ... (0.40) (0.40) (0.43) (1.79) (0.49)
------- -------- -------- -------- ------- -------
Total dividends and
distributions ........ (0.95) (0.87) (0.64) (2.28) (0.91) (0.28)
------- -------- -------- -------- ------- -------
Net asset value at
end of period ........ $ 13.45 $ 13.45 $ 11.67 $ 12.83 $ 13.92 $ 11.46
======= ======== ======== ======== ======= =======
Total investment
return(c) ............ 23.72% 23.02% (4.09%) 8.95% 30.80% 16.43%
Ratios (to average
net assets)/
Supplemental Data:
Net investment
income ............... 4.9% 4.3% 4.8%+ 3.5% 3.4% 2.9%
Net Expenses ......... 1.5% 2.1% 1.9%+ 1.9% 1.9% 2.3%
Expenses (before
waiver and
reimbursement ...... 1.5% 2.1% 1.9%+ 1.9% 1.9% 2.3%
Portfolio turnover rate 243% 243% 77% 269% 370% 291%
Net assets at end of
period (in 000's) .... $26,836 $427,461 $180,304 $160,407 $58,943 $28,899
<CAPTION>
1991 1990 1989 1988 1987 1986(b)
------- ------- ------- ------- ------- -------
Net asset value at
beginning of
period ............... $ 8.02 $ 9.16 $ 8.91 $ 10.22 $ 9.88 $ 10.00
------- ------- ------- ------- ------- -------
Net investment
income ............... 0.24 0.40 0.52 0.40 0.42 0.13
Net realized and
unrealized gain (loss)
on investments ....... 2.08 (1.06) 0.41 (1.21) 0.33 (0.23)
Net realized and
unrealized loss
on foreign currency
transactions ......... -- -- -- -- -- --
------- ------- ------- ------- ------- -------
Total from investment
operations ........... 2.32 (0.66) 0.93 (0.81) 0.75 (0.10)
------- ------- ------- ------- ------- -------
Less dividends and
distributions:
Dividends from net
investment income .... (0.24) (0.48) (0.46) (0.42) (0.41) (0.02)
Distributions from
net realized gain ... -- -- -- (0.22) (0.08)
------- ------- ------- ------- ------- -------
Total dividends and
distributions ........ (0.24) (0.48) (0.68) (0.50) (0.41) (0.02)
------- ------- ------- ------- ------- -------
Net asset value at
end of period ........ $ 10.10 $ 8.02 $ 9.16 $ 8.91 $ 10.22 $ 9.88
======= ======= ======= ======= ======= =======
Total investment
return(c) ............ 29.58% (7.25%) 10.73% (7.83%) 7.76% (1.00%)
Ratios (to average
net assets)/
Supplemental Data:
Net investment
income ............... 2.8% 4.7% 5.6% 4.4% 4.1% 3.7%+
Net Expenses ......... 2.7% 2.5% 2.6% 2.6% 2.7% 2.8%+
Expenses (before
waiver and
reimbursement ...... 2.7% 2.5% 2.6% 2.6% 2.7% 3.9%+
Portfolio turnover rate 283% 204% 308% 182% 147% 19%
Net assets at end of
period (in 000's) .... $20,029 $17,791 $25,651 $29,189 $36,627 $13,179
</TABLE>
- ----------
+ Annualized.
(a) The Fund changed its fiscal year end from August 31 to December 31.
(b) Commenced operations May 1, 1986.
(c) Total return is calculated exclusive of sales charges and is not
annualized.
(d) Less than one cent per share.
14
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
MAINSTAY TOTAL RETURN FUND
Selected data for a share outstanding throughout the years ended December 31,
1996 and December 31, 1995, the period September 1, 1994 through December 31,
1994 and the years ended August 31, 1994, August 31, 1993, August 31, 1992,
August 31, 1991, August 31, 1990, August 31, 1989 and the period ending August
31, 1988.
<TABLE>
<CAPTION>
Class B
------------------------------------------
Class A Class B September 1
------- -------- through
Year Ended December 31,
December 31, 1995 1994(a) 1994 1993
---------------------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value at
beginning of period ............ $ 14.76 $ 14.76 $ 15.28 $ 15.42 $ 13.37
------- -------- -------- -------- --------
Net investment income ........... 0.42 0.33 0.11 0.38 0.33
Net realized and unrealized gain
(loss) on investments .......... 3.77 3.77 (0.52) (0.02) 2.31
------- -------- -------- -------- --------
Total from investment operations 4.19 4.10 (0.41) 0.36 2.64
------- -------- -------- -------- --------
Less dividends and distributions:
Dividends from net investment
income ......................... (0.42) (0.33) (0.11) (0.37) (0.36)
Distributions from net realized
gain ........................... -- -- -- (0.13) (0.23)
Total dividends and distributions (0.42) (0.33) (0.11) (0.50) (0.59)
------- -------- -------- -------- --------
Net asset value at end of period $ 18.53 $ 18.53 $ 14.76 $ 15.28 $ 15.42
======= ======== ======== ======== ========
Total investment return(c) ...... 28.66% 27.96% (2.65%) 2.41% 20.09%
Ratios (to average net assets)/
Supplemental Data:
Net investment income .......... 2.5% 2.0% 2.5%+ 2.5% 2.4%
Expenses ....................... 1.1% 1.7% 1.7%+ 1.7% 1.8%
Portfolio turnover rate ......... 228% 228% 74% 273% 340%
Net assets at end of period
(in 000's) ..................... $19,206 $860,881 $648,725 $639,619 $486,959
<CAPTION>
1992 1991 1990 1989 1988(b)
-------- -------- ------- ------- ------
Net asset value at
beginning of period ............ $ 13.89 $ 11.07 $ 11.82 $ 10.24 $10.00
-------- -------- ------- ------- ------
Net investment income ........... 0.22 0.26 0.32 0.38 0.18
Net realized and unrealized gain
(loss) on investments .......... 0.32 2.83 (0.29) 1.67 0.16
-------- -------- ------- ------- ------
Total from investment operations 0.54 3.09 0.03 2.05 0.34
-------- -------- ------- ------- ------
Less dividends and distributions:
Dividends from net investment
income ......................... (0.23) (0.27) (0.33) (0.38) (0.10)
Distributions from net realized
gain ........................... (0.83) -- (0.45) (0.09) --
Total dividends and distributions (1.06) (0.27) (0.78) (0.47) (0.10)
-------- -------- ------- ------- ------
Net asset value at end of period $ 13.37 $ 13.89 $ 11.07 $ 11.82 $10.24
-------- -------- ------- ------- ------
Total investment return(c) ...... 3.96% 28.42% 0.19% 20.69% 3.39%
Ratios (to average net assets)/
Supplemental Data:
Net investment income .......... 1.7% 2.1% 2.8% 3.6% 3.0%+
Expenses ....................... 2.0% 2.4% 2.4% 2.8% 3.4%+
Portfolio turnover rate ......... 316% 213% 171% 271% 197%
Net assets at end of period
(in 000's) ..................... $292,002 $116,072 $47,008 $21,383 $9,936
</TABLE>
- ----------
+ Annualized.
(a) The Fund changed its fiscal year end from August 31 to December 31.
(b) Commenced operations December 29, 1987.
(c) Total return is calculated exclusive of sales charges and is not
annualized.
15
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
MAINSTAY VALUE FUND
Selected data for a share outstanding throughout the years ended December 31,
1996 and December 31, 1995, the period September 1, 1994 through December 31,
1994 and the years ended August 31, 1994, August 31, 1993, August 31, 1992,
August 31, 1991, August 31, 1990, August 31, 1989, August 31, 1988, August 31,
1987 and August 31, 1986.
<TABLE>
<CAPTION>
Class B
--------------------------------------------------------
Class A Class B
------- ------- September 1
Year Ended through
December 31, December 31,
1995 1994(a) 1994 1993 1992
---------------------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Net asset value at
beginning of
period ............... $ 14.66 $ 14.66 $ 16.30 $ 15.90 $ 13.82 $ 13.27
------- -------- -------- -------- -------- -------
Net investment
income (loss) ........ 0.29 0.19 0.04 0.06 0.07 0.12
Net realized and
unrealized gain (loss)
on investments ....... 3.91 3.91 (1.03) 1.04 3.40 1.64
------- -------- -------- -------- -------- -------
Total from investment
operations ........... 4.20 4.10 (0.99) 1.10 3.47 1.76
------- -------- -------- -------- -------- -------
Less dividends and
distributions:
Dividends from net
investment income .... (0.29) (0.19) (0.03) (0.06) (0.10) (0.09)
Distributions from net
realized gain ........ (0.32) (0.32) (0.62) (0.64) (1.29) (1.12)
------- -------- -------- -------- -------- -------
Total dividends and
distributions ........ (0.61) (0.51) (0.65) (0.70) (1.39) (1.21)
------- -------- -------- -------- -------- -------
Net asset value at
end of period ........ $ 18.25 $ 18.25 $ 14.66 $ 16.30 $ 15.90 $ 13.82
======= ======== ======== ======== ======== =======
Total investment
return(c) ............ 28.74% 28.01% (6.03%) 7.26% 26.58% 14.82%
Ratios (to average
net assets)/
Supplemental Data:
Net investment
income (loss) ........ 1.5% 0.9% 0.8%+ 0.5% 0.5% 0.8%
Net Expenses ......... 1.2% 1.8% 1.8%+ 1.9% 1.9% 1.9%
Expenses (before
waiver and
reimbursement) ..... 1.2% 1.8% 1.8%+ 1.9% 1.9% 1.9%
Portfolio turnover rate 48% 48% 11% 53% 77% 145%
Net assets at end of
period (in 000's) .... $25,258 $708,840 $472,365 $449,789 $226,524 $77,877
------- -------- -------- -------- -------- -------
<CAPTION>
1991 1990 1989 1988 1987 1986(b)
------- ------- ------- ------- ------- ------
Net asset value at
beginning of
period ............... $ 10.42 $ 12.55 $ 9.51 $ 11.62 $ 10.37 $10.00
------- ------- ------- ------- ------- ------
Net investment
income (loss) ........ 0.14 0.25 0.19 0.09 (0.08) 0.00*
Net realized and
unrealized gain (loss)
on investments ....... 3.07 (1.47) 2.98 (2.09) 1.33 0.39
------- ------- ------- ------- ------- ------
Total from investment
operations ........... 3.21 (1.22) 3.17 (2.00) 1.25 0.39
------- ------- ------- ------- ------- ------
Less dividends and
distributions:
Dividends from net
investment income .... (0.20) (0.18) (0.13) (0.06) -- (0.02)
Distributions from net
realized gain ........ (0.16) (0.73) -- (0.05) -- --
------- ------- ------- ------- ------- ------
Total dividends and
distributions ........ (0.36) (0.91) (0.13) (0.11) -- (0.02)
------- ------- ------- ------- ------- ------
Net asset value at
end of period ........ $ 13.27 $ 10.42 $ 12.55 $ 9.51 $ 11.62 $10.37
------- ------- ------- ------- ------- ------
Total investment
return(c) ............ 31.79% (10.23%) 33.66% (17.22%) 12.05% 3.92%
Ratios (to average
net assets)/
Supplemental Data:
Net investment
income (loss) ........ 1.2% 2.2% 1.7% 0.9% (1.1%) 0.1%+
Net Expenses ......... 2.4% 2.6% 2.8% 2.9% 3.3% 2.9%+
Expenses (before
waiver and
reimbursement) ..... 2.4% 2.6% 2.8% 2.9% 3.3% 3.9%+
Portfolio turnover rate 150% 117% 107% 88% 41% 0%
Net assets at end of
period (in 000's) .... $44,548 $30,827 $26,218 $17,252 $20,647 $9,867
</TABLE>
- ----------
* Per share data based on average shares outstanding during the period.
+ Annualized.
(a) The Fund changed its fiscal year end from August 31 to December 31.
(b) Commenced operations May 1, 1986.
(c) Total return is calculated exclusive of sales charges and is not
annualized.
16
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
MAINSTAY GOVERNMENT FUND (d)
Selected data for a share outstanding throughout the years ended December 31,
1996 and December 31, 1995, the period September 1, 1994 through December 31,
1994 and the years ended August 31, 1994, August 31, 1993, August 31, 1992,
August 31, 1991, August 31, 1990, August 31, 1989, August 31, 1988, August 31,
1987 and August 31, 1986.
<TABLE>
<CAPTION>
Class B
----------------------------------------------------------------
Class A Class B
------- ------- September 1
Year Ended through
December 31, December 31,
1995 1994(a) 1994 1993 1992
-------------------------- ---------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Net asset value at
beginning of
period ............... $ 7.76 $ 7.76 $ 8.04 $ 8.77 $ 8.88 $ 8.82
------- -------- ---------- ---------- ---------- --------
Net investment
income ............... 0.58 0.54 0.19 0.57 0.68 0.73
Net realized and
unrealized gain (loss)
on investments ....... 0.65 0.65 (0.29) (0.71) (0.09) 0.07
------- -------- ---------- ---------- ---------- --------
Total from investment
operations ........... 1.23 1.19 (0.10) (0.14) 0.59 0.80
------- -------- ---------- ---------- ---------- --------
Less dividends and
distributions:
Dividends from net
investment income .... (0.58) (0.54) (0.18) (0.57) (0.70) (0.74)
Distributions in excess
of net investment
income ............... (0.00)(e) (0.00)(e) -- (0.01) -- --
Return of capital ..... -- -- -- (0.01) -- --
------- -------- ---------- ---------- ---------- --------
Total dividends and
distributions ........ (0.58) (0.54) (0.18) (0.59) (0.70) (0.74)
------- -------- ---------- ---------- ---------- --------
Net asset value at
end of period ........ $ 8.41 $ 8.41 $ 7.76 $ 8.04 $ 8.77 $ 8.88
======= ======== ========== ========== ========== ========
Total investment
return(c) ............ 16.38% 15.69% (1.24%) (1.63%) 6.92% 9.46%
Ratios (to average
net assets)/
Supplemental Data:
Net investment
income ............... 7.3% 6.7% 7.1%+ 7.1% 7.8% 8.3%
Net expenses ......... 1.0% 1.7% 1.7%+ 1.7% 1.7% 1.8%
Expenses (before
waiver and
reimbursement) ..... 1.0% 1.7% 1.7%+ 1.7% 1.7% 1.8%
Portfolio turnover rate 540% 540% 143% 491% 629% 613%
Net assets at end of
period (in 000's) .... $12,784 $990,184 $1,024,492 $1,119,586 $1,210,998 $957,010
<CAPTION>
1991 1990 1989 1988 1987 1986(b)
-------- -------- -------- -------- -------- -------
Net asset value at
beginning of
period ............... $ 8.48 $ 9.01 $ 8.96 $ 9.40 $ 10.00 $ 10.00
-------- -------- -------- -------- -------- -------
Net investment
income ............... 0.81 0.83 0.99 0.95 0.95 0.34
Net realized and
unrealized gain (loss)
on investments ....... 0.35 (0.52) (0.04) (0.44) (0.51) (0.09)
-------- -------- -------- -------- -------- -------
Total from investment
operations ........... 1.16 0.31 0.95 0.51 0.44 0.25
-------- -------- -------- -------- -------- -------
Less dividends and
distributions:
Dividends from net
investment income .... (0.82) (0.84) (0.90) (0.95) (1.04) (0.25)
Distributions in excess
of net investment
income ............... -- -- -- -- -- --
Return of capital ..... -- -- -- -- -- --
-------- -------- -------- -------- -------- -------
Total dividends and
distributions ........ (0.82) (0.84) (0.90) (0.95) (1.04) (0.25)
-------- -------- -------- -------- -------- -------
Net asset value at
end of period ........ $ 8.82 $ 8.48 $ 9.01 $ 8.96 $ 9.40 $ 10.00
======== ======== ======== ======== ======== =======
Total investment
return(c) ............ 14.33% 3.53% 11.18% 5.53% 4.62% 2.58%
Ratios (to average
net assets)/
Supplemental Data:
Net investment
income ............... 9.5% 9.4% 10.2% 10.3% 9.7% 10.3%+
Net expenses ......... 1.8% 2.0% 2.0% 2.0% 1.9% 1.0%+
Expenses (before
waiver and
reimbursement) ..... 1.8% 2.0% 2.0% 2.0% 1.9% 2.6%+
Portfolio turnover rate 318% 228% 383% 476% 594% 78%
Net assets at end of
period (in 000's) .... $622,550 $463,010 $512,669 $436,836 $349,817 $42,693
</TABLE>
- ----------
+ Annualized.
(a) The Fund changed its fiscal year end from August 31 to December 31.
(b) Commenced operations May 1, 1986.
(c) Total return is calculated exclusive of sales charges and is not
annualized.
(d) Formerly Government Plus Fund.
(e) Less than one cent per share.
17
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
MAINSTAY HIGH YIELD CORPORATE BOND FUND
Selected data for a share outstanding throughout the years ended December 31,
1996 and December 31, 1995, the period September 1, 1994 through December 31,
1994 and the years ended August 31, 1994, August 31, 1993, August 31, 1992,
August 31, 1991, August 31, 1990, August 31, 1989, August 31, 1988, August 31,
1987 and August 31, 1986.
<TABLE>
<CAPTION>
Class B
--------------------------------------------------------------
Class A Class B
------- ---------- September 1
Year Ended through
December 31, December 31,
1995 1994(a) 1994 1993 1992
-------------------------- ---------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Net asset value at
beginning of
period ............... $ 7.44 $ 7.44 $ 7.70 $ 7.93 $ 7.41 $ 6.66
------- ---------- ---------- ---------- -------- --------
Net investment
income ............... 0.84 0.81 0.23 0.69 0.70 0.79
Net realized and
unrealized gain (loss)
on investments ....... 0.61 0.61 (0.27) (0.08) 0.54 0.75
Net realized and
unrealized gain (loss)
on foreign currency
transactions ......... (0.00)(d) (0.00)(d) -- -- -- --
------- ---------- ---------- ---------- -------- --------
Total from investment
operations ........... 1.45 1.42 (0.04) 0.61 1.24 1.54
------- ---------- ---------- ---------- -------- --------
Less dividends and
distributions:
From net investment
income ............... (0.84) (0.81) (0.22) (0.67) (0.72) (0.79)
In excess of net
investment income .... (0.01) (0.01) -- -- -- --
From net realized
gain on
investments .......... (0.10) (0.10) -- (0.17) -- --
In excess of net
realized gain on
investments .......... (0.02) (0.02) -- -- -- --
------- ---------- ---------- ---------- -------- --------
Total dividends and
distributions ........ (0.97) (0.94) (0.22) (0.84) (0.72) (0.79)
------- ---------- ---------- ---------- -------- --------
Net asset value at
end of period ........ $ 7.92 $ 7.92 $ 7.44 $ 7.70 $ 7.93 $ 7.41
======= ========== ========== ========== ======== ========
Total investment
return(c) ............ 20.28% 19.71% (0.48%) 7.95% 18.58% 24.55%
Ratios (to average
net assets)/
Supplemental Data:
Net investment
income ............... 10.2% 9.5% 9.1%+ 8.7% 9.9% 11.0%
Net expenses ......... 1.0% 1.6% 1.6%+ 1.6% 1.7% 1.9%
Expenses (before
waiver and
reimbursement) ..... 1.0% 1.6% 1.6%+ 1.6% 1.7% 1.9%
Portfolio turnover rate 137% 137% 45% 190% 207% 226%
Net assets at end of
period (in 000's) .... $42,850 $1,601,238 $1,128,913 $1,090,261 $808,538 $447,819
<CAPTION>
1991 1990 1989 1988 1987 1986(b)
-------- -------- -------- -------- ------- -------
Net asset value at
beginning of
period ............... $ 6.54 $ 8.34 $ 9.10 $ 9.37 $ 9.95 $ 10.00
-------- -------- -------- -------- ------- -------
Net investment
income ............... 0.89 1.01 1.41 1.08 0.99 0.41
Net realized and
unrealized gain (loss)
on investments ....... 0.15 (1.77) (0.85) (0.30) (0.48) (0.15)
Net realized and
unrealized gain (loss)
on foreign currency
transactions ......... -- -- -- -- -- --
-------- -------- -------- -------- ------- -------
Total from investment
operations ........... 1.04 (0.76) 0.56 0.78 0.51 0.26
-------- -------- -------- -------- ------- -------
Less dividends and
distributions:
From net investment
income ............... (0.92) (1.04) (1.32) (1.05) (1.09) (0.31)
In excess of net
investment income .... -- -- -- -- -- --
From net realized
gain on
investments .......... -- -- -- -- -- --
In excess of net
realized gain on
investments .......... -- -- -- -- -- --
-------- -------- -------- -------- ------- -------
Total dividends and
distributions ........ (0.92) (1.04) (1.32) (1.05) (1.09) (0.31)
-------- -------- -------- -------- ------- -------
Net asset value at
end of period ........ $ 6.66 $ 6.54 $ 8.34 $ 9.10 $ 9.37 $ 9.95
======== ======== ======== ======== ======= =======
Total investment
return(c) ............ 18.25% (9.51%) 6.71% 8.98% 5.45% 2.67%
Ratios (to average
net assets)/
Supplemental Data:
Net investment
income ............... 14.4% 14.3% 15.3% 12.1% 11.2% 12.0%+
Net expenses ......... 2.1% 2.1% 2.1% 2.2% 2.1% 1.0%+
Expenses (before
waiver and
reimbursement) ..... 2.1% 2.1% 2.1% 2.2% 2.2% 2.8%+
Portfolio turnover rate 214% 305% 403% 437% 48% 45%
Net assets at end of
period (in 000's) .... $262,103 $201,052 $181,496 $109,569 $85,786 $18,803
</TABLE>
- ----------
+ Annualized.
(a) The Fund changed its fiscal year end from August 31 to December 31.
(b) Commenced operations May 1, 1986.
(c) Total return is calculated exclusive of sales charges and is not
annualized.
(d) Less than one cent per share.
18
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
MAINSTAY INTERNATIONAL BOND FUND
Selected data for a share outstanding throughout the years ended December 31,
1996 and December 31, 1995 and the period September 13, 1994 through December
31, 1994.
<TABLE>
<CAPTION>
Class B
---------------
Class A Class B September 13(a)
------- ------- through
Year Ended December 31,
December 31, 1995 1994
---------------------- ------
<S> <C> <C> <C>
Net asset value at beginning of period ............................................ $ 9.90 $ 9.90 $10.00
------ ------ ------
Net investment income ............................................................. 1.15 1.06 0.12
Net realized and unrealized gain (loss) on investments ............................ 0.59 0.61 (0.08)
Net realized and unrealized gain (loss) on foreign currency transactions .......... 0.07 0.07 (0.02)
------ ------ ------
Total from investment operations .................................................. 1.81 1.74 0.02
------ ------ ------
Less dividends and distributions:
From net investment income ........................................................ (0.61) (0.56) (0.12)
From net realized gain on investments and foreign currency transactions ........... (0.28) (0.28) --
In excess of net realized gain on investments and foreign currency transactions ... (0.39) (0.35) --
------ ------ ------
Total dividends and distributions ................................................. (1.28) (1.19) (0.12)
------ ------ ------
Net asset value at end of period .................................................. $10.43 $10.45 $ 9.90
------ ------ ------
Total investment return(b) ........................................................ 18.68% 17.96% 0.20%
===== ===== ====
Ratios (to average net assets)/Supplemental Data:
Net investment income ............................................................ 5.6% 4.9% 4.8%+
Net Expenses ..................................................................... 1.5% 2.2% 2.8%+
Expenses (before reimbursement) .................................................. 1.8% 2.5% 3.1%+
Portfolio turnover rate ........................................................... 103% 103% 4%
Net assets at end of period (in 000's) ............................................ $11,494 $13,212 $17,155
</TABLE>
- ----------
+ Annualized.
(a) Commencement of operations.
(b) Total return is calculated exclusive of sales charges and is not
annualized.
19
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
MAINSTAY MONEY MARKET FUND
Selected data for a share outstanding throughout the years ended December 31,
1996 and December 31, 1995, the period September 1, 1994 through December 31,
1994, and the years ended August 31, 1994, August 31, 1993, August 31, 1992,
August 31, 1991, August 31, 1990, August 31, 1989, August 31, 1988, August 31,
1987 and August 31, 1986.
<TABLE>
<CAPTION>
Class B
Class A Class B --------------------------------------------------------------
------- ------- September 1
Year Ended through
December 31, December 31,
1995 1994(a) 1994 1993 1992
------------------------ -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Net asset value at
beginning of
period ............ $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------ ------ ------ ------ ------ ------
Net investment
income ............ 0.05 0.05 0.02 0.03 0.03 0.04
------ ------ ------ ------ ------ ------
Less dividends from
net investment
income ............ (0.05) (0.05) (0.02) (0.03) (0.03) (0.04)
------ ------ ------ ------ ------ ------
Net asset value at
end of period ..... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
====== ====== ====== ====== ====== ======
Total investment
return(c) ......... 5.51% 5.51% 1.54% 3.08% 2.71% 3.80%
Ratios (to average
net assets)/
Supplemental Data:
Net investment
income .......... 5.4% 5.4% 4.6%+ 3.1% 2.7% 4.0%
Net expenses ...... 0.7% 0.7% 0.7%+ 0.7% 0.7% 0.7%
Expenses (before
waiver and
reimbursement) .. 0.9% 0.9% 0.9%+ 1.0% 0.9% 1.0%
Net assets at end of
period (in 000's) . $34,880 $279,843 $221,912 $192,477 $149,907 $182,567
</TABLE>
<TABLE>
<CAPTION>
Class B
--------------------------------------------------------------------------------------------
1991 1990 1989 1988 1987 1986(b)
-------- -------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Net asset value at
beginning of
period ............ $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------ ------ ------ ------ ------ ------
Net investment
income ............ 0.06 0.08 0.08 0.06 0.05 0.02
------ ------ ------ ------ ------ ------
Less dividends from
net investment
income ............ (0.06) (0.08) (0.08) (0.06) (0.05) (0.02)
------ ------ ------ ------ ------ ------
Net asset value at
end of period ..... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
====== ====== ====== ====== ====== ======
Total investment
return(c) ......... 6.63% 8.36% 8.75% 6.76% 5.11% 2.25%
Ratios (to average
net assets)/
Supplemental Data:
Net investment
income .......... 6.5% 7.7% 8.6% 6.5% 5.1% 6.5%+
Net expenses ...... 0.7% 0.7% 0.7% 0.8% 1.3% 0.2%+
Expenses (before
waiver and
reimbursement) .. 0.9% 0.9% 1.0% 1.0% 1.6% 2.0%+
Net assets at end of
period (in 000's) . $246,954 $256,489 $171,088 $59,572 $24,646 $12,937
</TABLE>
- ----------
+ Annualized.
(a) The Fund changed its fiscal year end from August 31 to December 31.
(b) Commenced operations May 1, 1986.
(c) Total return is not annualized.
20
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
MAINSTAY CALIFORNIA TAX FREE FUND
Selected data for a share outstanding throughout the years ended December 31,
1996 and December 31, 1995, the period September 1, 1994 through December 31,
1994, the years ended August 31, 1994 and August 31, 1993 and the period October
1, 1991 (commencement of operations) to August 31, 1992.
<TABLE>
<CAPTION>
Class A
-------------------------------------------------------
October 1,
Class A Class B September 1 Year Year 1991(a)
------- ------- through Ended Ended through
Year Ended December 31, August 31, August 31, August 31,
December 31, 1995 1994* 1994 1993 1992
--------------------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Net asset value at beginning of period ........ $ 9.10 $ 9.10 $ 9.57 $10.38 $ 9.90 $ 9.55
------ ------ ------ ------ ------ ------
Net investment income ......................... 0.50 0.52 0.17 0.53 0.55 0.45
Net realized and unrealized gain
(loss) on investments ....................... 0.85 0.81 (0.47) (0.51) 0.64 0.30
------ ------ ------ ------ ------ ------
Total from investment operations .............. 1.35 1.33 (0.30) 0.02 1.19 0.75
------ ------ ------ ------ ------ ------
Less dividends and distributions:
Dividends from net investment income .......... (0.50) (0.52) (0.17) (0.52) (0.59) (0.40)
Distributions from net realized gain .......... -- -- -- (0.31) (0.12) --
------ ------ ------ ------ ------ ------
Total dividends and distributions ............. (0.50) (0.52) (0.17) (0.83) (0.71) (0.40)
------ ------ ------ ------ ------ ------
Net asset value at end of period .............. $ 9.95 $ 9.91 $ 9.10 $ 9.57 $10.38 $ 9.90
====== ====== ====== ====== ====== ======
Total investment return(b) .................... 15.18% 14.91% (3.11%) 0.12% 12.58% 8.02%
Ratios (to average net assets)
/Supplemental Data:
Net investment income ........................ 5.3% 5.1% 5.5%+ 5.4% 5.6% 5.6%+
Net expenses ................................. 1.24% 1.49% 0.99%+ 0.99% 0.99% 0.99%+
Expenses (before reimbursement) .............. 1.4% 1.7% 1.2%+ 1.1% 1.2% 1.6%+
Portfolio turnover rate ....................... 107% 107% 24% 96% 154% 87%
Net assets at end of period (in 000's) ........ $19,825 $1,963 $16,667 $17,356 $14,603 $10,085
</TABLE>
- ----------
* The Fund changed its fiscal year end from August 31 to December 31.
+ Annualized.
(a) Commencement of operations.
(b) Total return is calculated exclusive of sales charges and is not
annualized.
MAINSTAY NEW YORK TAX FREE FUND
Selected data for a share outstanding throughout the years ended December 31,
1996 and December 31, 1995, the period September 1, 1994 through December 31,
1994, the years ended August 31, 1994 and August 31, 1993 and the period October
1, 1991 (commencement of operations) to August 31, 1992.
<TABLE>
<CAPTION>
Class A
---------------------------------------------------------
October 1,
Class A Class B September 1 Year Year 1991(a)
------- ------- through Ended Ended through
Year Ended December 31, August 31, August 31, August 31,
December 31, 1995 1994* 1994 1993 1992
--------------------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Net asset value at beginning of period ...... $ 9.20 $ 9.20 $ 9.58 $10.43 $ 9.95 $ 9.55
------ ------ ------ ------ ------ ------
Net investment income ....................... 0.52 0.59 0.19 0.56 0.60 0.49
Net realized and unrealized gain
(loss) on investments ..................... 0.91 0.82 (0.39) (0.59) 0.54 0.34
------ ------ ------ ------ ------ ------
Total from investment operations ............ 1.43 1.41 (0.20) (0.03) 1.14 0.83
------ ------ ------ ------ ------ ------
Less dividends and distributions:
Dividends from net investment income ........ (0.51) (0.59) (0.18) (0.57) (0.65) (0.43)
Distributions from net realized gain ........ -- -- -- (0.25) (0.01) --
------ ------ ------ ------ ------ ------
Total dividends and distributions ........... (0.51) (0.59) (0.18) (0.82) (0.66) (0.43)
------ ------ ------ ------ ------ ------
Net asset value at end of period ............ $10.12 $10.02 $ 9.20 $ 9.58 $10.43 $ 9.95
====== ====== ====== ====== ====== ======
Total investment return(b) .................. 15.97% 15.67% (2.11%) (0.35%) 11.88% 8.95%
Ratios (to average net assets)
/Supplemental Data:
Net investment income ...................... 5.4% 5.1% 6.1%+ 5.7% 6.0% 5.9%+
Net expenses ............................... 1.24% 1.49% 0.99%+ 0.99% 0.98% 0.99%+
Expenses (before reimbursement) ............ 1.4% 1.6% 1.2%+ 1.1% 1.2% 1.5%+
Portfolio turnover rate ..................... 114% 114% 39% 169% 131% 23%
Net assets at end of period (in 000's) ...... $18,248 $1,588 $17,106 $17,862 $15,665 $10,605
</TABLE>
- ----------
* The Fund changed its fiscal year end from August 31 to December 31.
+ Annualized.
(a) Commencement of operations.
(b) Total return is calculated exclusive of sales charges and is not
annualized.
21
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
MAINSTAY TAX FREE BOND FUND
Selected data for a share outstanding throughout the years ended December 31,
1996 and December 31, 1995, the period September 1, 1994 through December 31,
1994 and the years ended August 31, 1994, August 31, 1993, August 31, 1992,
August 31, 1991, August 31, 1990, August 31, 1989, August 31, 1988, August 31,
1987 and August 31, 1986.
<TABLE>
<CAPTION>
Class B
Class A Class B -------------------------------------------------------
-------- ------- September 1
Year Ended through
December 31, December 31,
1995 1994(a) 1994 1993 1992
-------------------- ----- ------ ------ -----
<S> <C> <C> <C> <C> <C> <C>
Net asset value at
beginning of
period ............... $ 9.20 $ 9.20 $ 9.71 $10.39 $10.21 $ 9.82
------ ------ ------ ------ ------ ------
Net investment
income ............... 0.52 0.51 0.17 0.54 0.57 0.59
Net realized and
unrealized gain (loss)
on investments ....... 0.83 0.83 (0.51) (0.61) 0.47 0.40
------ ------ ------ ------ ------ ------
Total from investment
operations ........... 1.35 1.34 (0.34) (0.07) 1.04 0.99
------ ------ ------ ------ ------ ------
Less dividends and
distributions:
Dividends from net
investment income .... (0.53) (0.51) (0.17) (0.53) (0.60) (0.60)
Distributions from net
realized gain ........ -- -- -- (0.08) (0.26) --
------ ------ ------ ------ ------ ------
Total dividends and
distributions ........ (0.53) (0.51) (0.17) (0.61) (0.86) (0.60)
------ ------ ------ ------ ------ ------
Net asset value at
end of period ........ $10.02 $10.03 $ 9.20 $ 9.71 $10.39 $10.21
====== ====== ====== ====== ====== ======
Total investment
return(c) ............ 15.00% 14.86% (3.53%) (0.69%) 10.81% 10.42%
Ratios (to average
net assets)/
Supplemental Data:
Net investment
income ............... 5.5% 5.2% 5.6%+ 5.4% 5.6% 5.9%
Net expenses ......... 1.0% 1.2% 1.2%+ 1.2% 1.2% 1.3%
Expenses (before
waiver and
reimbursement ...... 1.0% 1.2% 1.2%+ 1.2% 1.2% 1.3%
Portfolio turnover rate 110% 110% 37% 92% 138% 97%
Net assets at end of
period (in 000's) .... $9,752 $543,314 $513,781 $552,156 $476,761 $292,936
</TABLE>
<TABLE>
<CAPTION>
Class B
---------------------------------------------------------------------------------
1991 1990 1989 1988 1987 1986(b)
----- ----- ----- ----- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Net asset value at
beginning of
period ............... $ 9.40 $ 9.74 $ 9.60 $ 9.73 $10.02 $10.00
------ ------ ------ ------ ------ ------
Net investment
income ............... 0.59 0.61 0.70 0.65 0.67 0.23
Net realized and
unrealized gain (loss)
on investments ....... 0.43 (0.33) 0.08 (0.13) (0.29) 0.02
------ ------ ------ ------ ------ ------
Total from investment
operations ........... 1.02 0.28 0.78 0.52 0.38 0.25
------ ------ ------ ------ ------ ------
Less dividends and
distributions:
Dividends from net
investment income .... (0.60) (0.62) (0.64) (0.65) (0.67) (0.23)
Distributions from net
realized gain ........ -- -- -- -- -- --
------ ------ ------ ------ ------ ------
Total dividends and
distributions ........ (0.60) (0.62) (0.64) (0.65) (0.67) (0.23)
------ ------ ------ ------ ------ ------
Net asset value at
end of period ........ $ 9.82 $ 9.40 $ 9.74 $ 9.60 $ 9.73 $10.02
====== ====== ====== ====== ====== ======
Total investment
return(c) ............ 11.21% 2.88% 8.34% 5.60% 3.30% 2.56%
Ratios (to average
net assets)/
Supplemental Data:
Net investment
income ............... 6.1% 6.4% 6.8% 6.8% 7.0% 7.2%+
Net expenses ......... 1.4% 1.4% 1.6% 1.5% 1.5% 1.0%+
Expenses (before
waiver and
reimbursement ...... 1.4% 1.4% 1.6% 1.6% 2.3% 3.7%+
Portfolio turnover rate 52% 44% 186% 215% 153% 70%
Net assets at end of
period (in 000's) .... $174,625 $131,342 $111,787 $82,042 $67,559 $21,097
</TABLE>
- ----------
+ Annualized.
(a) The Fund changed its fiscal year end from August 31 to December 31.
(b) Commenced operations May 1, 1986.
(c) Total return is calculated exclusive of sales charges and is not
annualized.
22
<PAGE>
================================================================================
Capital Appreciation Fund
The Fund's objective is:
================================================================================
to seek long-term growth of capital. Dividend income, if any, is an incidental
consideration.
Who should invest? Investors who seek growth and are willing to accept a higher
level of risk for higher return potential.
- --------------------------------------------------------------------------------
================================================================================
The Fund invests in:
================================================================================
The Fund may invest in a variety of companies and securities including common
stocks, preferred stocks, warrants and other equity securities. The Adviser
selects investments according to the economic environment and the attractiveness
of particular markets. Generally, though, the Fund does not invest its assets
for short-term profits.
Under normal market conditions...
...securities of companies with these characteristics:
o participation in expanding product or service markets;
o increasing unit sales volume;
o revenue growth and earnings per share superior to the average of common
stock indexes comprising indices such as the S&P 500 Index; or
o an increasing return on investment.
...any other securities that are deemed by MacKay-Shields to be ready for a rise
in price, or expected to have accelerated growth in earnings due to special
factors like new management, new products, changes in consumer demand or changes
in the economy.
...other investments suitable for most or all MainStay Funds. (See pages 36-37,
"General Investment Considerations" and pages 54-61, "Description of Investments
and Investment Practices," for details.)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Risks? Opportunities for greater gain often come with greater risk of loss. Some
of the securities, therefore, may carry above-average risk, compared to common
stock indexes such as the Dow Jones Industrial Average and the S&P 500 Index.
- --------------------------------------------------------------------------------
WHO'S MANAGING
YOUR MONEY?
EDMUND SPELMAN AND
RUDY CARRYL OF
MACKAY-SHIELDS
FINANCIAL CORPORATION.
Mr. Spelman is a Director at MacKay-Shields who specializes in equities. He
joined the firm in 1991 after working as an analyst at Oppenheimer & Co. since
1983. Mr. Spelman has acted as a portfolio manager of the Capital Appreciation
and Total Return Funds since 1991. Mr. Carryl joined MacKay-Shields Financial
Corporation as a Director--and the manager of this Fund--in 1992. He has fifteen
years of investment management and research experience. Mr. Carryl was research
director and senior portfolio manager at Value Line, Inc. from 1978-1992. Mr.
Carryl has also acted as a portfolio manager of the Total Return Fund since
1992.
23
<PAGE>
================================================================================
Equity Index Fund
The Fund's objective is:
================================================================================
to provide investment results that correspond to the total return performance
(and reflect reinvestment of dividends) of publicly traded common stocks
represented by the Standard & Poor's 500 Composite Stock Price Index (the "S&P
500 Index" or the "Index").
Who should invest? Investors who seek a conservative way to participate in the
growth potential of stocks with the protection of a principal guarantee.
See page 50 for more details about the Fund.
- --------------------------------------------------------------------------------
Guarantee. This Fund comes with an unconditional guarantee from NYLIFE, Inc.
that, exactly 10 years from your date of purchase, the value of your shares will
equal not less than the price you paid, provided all dividends and distributions
are reinvested and are not subject to tax withholding. If you redeem shares
before or after the guarantee date, you will forfeit the benefit of the
guarantee. For details, see page 50 under "Other Information About the
Funds--Equity Index Fund."
- --------------------------------------------------------------------------------
================================================================================
The Fund invests in:
================================================================================
Under normal market conditions...
...at least 80% of net assets in stocks listed in the Index. The Fund will
attempt to be fully invested at all times, and will invest in stocks in the same
proportions as they are invested in the Index.
The Fund may invest in securities of foreign issuers included in the Index.
...other investments suitable for most or all MainStay Funds. (See pages 36-37,
"General Investment Considerations" and pages 54-61, "Description of Investments
and Investment Practices," for details.)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Risks? An investment in this Fund involves risks similar to those of investing
directly in common stocks. The Fund uses the Index because it represents about
two-thirds of the total market value of all common stocks and is well-known to
investors. The Index also represents total return performance including
reinvested dividends of the stocks in the Index. If the value of the Index
declines, the NAV of shares of the Fund will also decline.
- --------------------------------------------------------------------------------
WHO'S MANAGING YOUR
MONEY?
JAMES MEHLING OF
MONITOR CAPITAL
ADVISORS, INC.
Mr. Mehling joined Monitor Capital Advisors in 1991 after working as director of
risk management in the investment department of New York Life Insurance Company.
Mr. Mehling is currently Chief Investment Officer for Monitor. He began his
career in financial services with Merrill Lynch in 1976 and was with County
NatWest Government Securities from 1987-1989. Mr. Mehling has served as
portfolio manager to the Fund since 1991.
The Index is a broad measurement of stock market performance composed of 500
common stocks selected by Standard & Poor's ("S&P").
The Fund is neither sponsored by nor affiliated with S&P.
By including a stock in the Index, neither S&P nor the Fund's Adviser takes any
stance on the stock's investment value.
24
<PAGE>
================================================================================
International Equity Fund
The Fund's objective is:
================================================================================
to provide long-term growth of capital commensurate with an acceptable level of
risk by investing in a portfolio consisting primarily of non-U.S. equity
securities. Current income is a secondary objective.
Who should invest? Investors who prefer the higher return potential of
international equities or want to add diversification to their domestic
investments.
See page 52 for more details about the Fund.
- --------------------------------------------------------------------------------
================================================================================
The Fund invests in:
================================================================================
Under normal market conditions...
...at least 65% of total assets in a diversified portfolio of equity securities,
which may include common stocks, preferred stocks, warrants, and other equity
securities of issuers, wherever organized, who do business mainly outside the
U.S. Eligible investments include any equity or equity-related investments,
domestic or foreign, whether denominated in foreign currencies or U.S. dollars.
...a variety of countries, with a minimum of 5 countries other than the U.S.
This includes countries with established economies as well as emerging market
countries, including those in Latin America, and other newly industrialized
countries such as South Korea and Taiwan, that the Adviser believes present
favorable opportunities.
...no more than 25% of total assets in any one industry group or in any one
government, not including the U.S.
The Fund may buy and sell currency on a spot basis and enter into forward
foreign currency contracts for hedging purposes. The Fund may also buy foreign
currency options, securities and securities index options, and enter into
futures contracts and related options. (For more details, see page 52, "Other
Information About the Funds--International Equity Fund.")
...other investments suitable for most or all MainStay Funds. (See pages 36-37,
"General Investment Considerations" and pages 54-61, "Description of Investments
and Investment Practices," for details.)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
This Fund is for long-term investors who seek growth over current income. It is
not designed as a way to speculate on short-term stock market swings. Investors
should be able to tolerate sudden, sometimes substantial fluctuations in value.
Risks? Alone, this Fund is not a balanced investment plan. It is appropriate for
investors wanting investments in markets outside the U.S. while seeking to avoid
undue volatility. The orientation is in avoiding excessive risk, although there
are risks associated with any investment. Due to this philosophy, the Fund may
not attain as high a return as more aggressively managed international
funds--although the Fund is expected to outperform some funds in down markets.
There is no guarantee that the Fund will succeed in achieving its objective.
Investments in foreign securities could be more volatile and more difficult to
sell than U.S. investments, and involve additional risks. (For more on risks of
investing in foreign securities, see page 55, "Description of Investments and
Investment Practices--Foreign Securities.")
- --------------------------------------------------------------------------------
WHO'S MANAGING
YOUR MONEY?
SHIGEMI TAKAGI OF
MACKAY-SHIELDS
FINANCIAL CORPORATION.
Mr. Takagi is a Director at MacKay-Shields, specializing in international
equities. He joined the firm in 1989 after working at First Boston Corp. as an
international equity analyst. He has served as a portfolio manager since the
Fund was started in 1994.
Securities of issuers in one country may be denominated in the currency of
another country.
25
<PAGE>
================================================================================
Convertible-Equity Income Fund
The Fund's objective is:
================================================================================
to seek capital appreciation together with current income. Certain of the Fund's
investments have speculative characteristics.
Who should invest? Investors who want income from securities that may offer
growth potential if converted into common stock.
See page 49 for more details about the Fund.
- --------------------------------------------------------------------------------
================================================================================
The Fund invests in:
================================================================================
Under normal market conditions...
...at least 30% of total assets in convertible securities (such as preferred
stock, bonds, debentures, corporate notes and others which can be converted into
common stock).
...at least 65% of total assets in dividend and interest paying equity
securities including common stocks, preferred stocks, and convertible
securities.
The Fund takes a flexible approach, investing in a broad range of securities of
a variety of companies and industries.
...not more than 5% of total assets in securities that are:
o rated less than B by Moody's Investors Service, Inc. ("Moody's") or S&P; or
o unrated but judged by the Adviser to be of comparable quality.
The Fund may invest without restriction in securities rated Ba or B by Moody's
or BB or B by S&P.
...up to 35% of total assets in nonconvertible debt, equity securities that do
not pay regular dividends, U.S. government securities, cash or cash
equivalents.
...other investments suitable for most or all MainStay Funds. (See pages 36-37,
"General Investment Considerations" and pages 54-61, "Description of Investments
and Investment Practices," for details.)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Risks? Generally, when interest rates fall, the NAV rises; and when interest
rates rise, the NAV declines.
A convertible security's total return partly depends on the performance of the
common stock into which it can be converted. The Fund doesn't generally restrict
investments by rating category.
The Fund invests in common stocks or convertible securities which can be
converted into common stocks and therefore is exposed to the risks of investing
in those securities, including fluctuations in value.
Securities rated Ba (Moody's), BB (S&P) or lower (sometimes called "junk bonds")
aren't considered "investment grade" and run greater risks of price
fluctuations, loss of principal and interest, default or bankruptcy by the
issuer, and other risks which is why these securities are considered
speculative. (See page 60, "Risks of Investing in High Yield Securities ('Junk
Bonds')" for more details; and Appendix A for a description of ratings.)
- --------------------------------------------------------------------------------
WHO'S MANAGING
YOUR MONEY?
DENIS LAPLAIGE AND
NEIL FEINBERG OF
MACKAY-SHIELDS
FINANCIAL CORPORATION.
Mr. Laplaige is President and Managing Director of MacKay-Shields. He joined the
firm in 1982, became a director in 1988, managing director in 1991 and a member
of the Board of Directors in 1993. He has managed this Fund since 1991 and is
also a manager of the Value Fund and the High Yield Corporate Bond Fund. Mr.
Feinberg is a Director of MacKay-Shields and has been a portfolio manager for
the Convertible Equity-Income Fund 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.
26
<PAGE>
================================================================================
Total Return Fund
The Fund's objective is:
================================================================================
to realize current income consistent with reasonable opportunity for future
growth of capital and income.
The Fund takes a flexible approach by investing in a broad range of securities
which may be spread among different companies, industries and types of
securities. Securities may include common stocks, convertible securities,
warrants, bonds, preferred stocks and other debt obligations, including money
market instruments.
Who should invest? Investors who seek a combination of income and growth
potential and want to manage risk through diversification.
See page __ for more details about the Fund.
- --------------------------------------------------------------------------------
================================================================================
The Fund invests in:
================================================================================
Under normal market conditions...
...at least 30% of net assets in equities. Usually, a majority of stocks of
companies with revenue growth and earnings per share better than the average of
the stocks that comprise the S&P 500 Index. The Fund also invests in stocks and
other equities which the Adviser believes are "undervalued;"
...at least 30% of net assets in debt securities, including U.S. government
securities, corporate debt securities, asset-backed securities, mortgage-backed
securities and commercial paper. The long-term investments are expected mainly
to be rated A or better by S&P or Moody's; or, unrated but judged by the Adviser
to be of comparable quality;
...up to 20% of the debt securities may be rated below A but must be rated at
least Ba (Moody's) or BB (S&P); or, if unrated, judged by the Adviser to be of
comparable creditworthiness;
...but no more than 5% of the Fund's net assets may be below investment grade.
...other investments suitable for most or all MainStay Funds. (See pages __-__,
"General Investment Considerations" and pages __-__, "Description of Investments
and Investment Practices," for details.)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Risks? The Fund may allocate its assets among equity and debt securities and,
therefore, has some exposure to the risks of both common stocks and bonds. Debt
securities rated Ba (Moody's) or BB (S&P) run greater risks of price
fluctuations, default by the issuer, and other risks. Securities rated Ba
(Moody's), BB (S&P) or lower are considered speculative and are sometimes called
"junk bonds." (See page __ for more details; and Appendix A for ratings
descriptions.)
- --------------------------------------------------------------------------------
WHO'S MANAGING
YOUR MONEY?
RAVI AKHOURY, EDMUND
SPELMAN AND RUDY
CARRYL OF MACKAY-
SHIELDS FINANCIAL
CORPORATION.
Mr. Akhoury joined MacKay-Shields as a director in 1984, became managing
director in 1988, president and member, Board of Directors in 1989, and Chairman
and CEO in 1992. Previously, he'd served four years as fixed income manager for
Fischer Francis Trees and Watts and seven years for the Equitable Life Assurance
Society. He has been a portfolio manager of the Total Return Fund since 1987,
and also manages the Government and Tax Free Bond Funds. Biographies for Mr.
Spelman and Mr. Carryl appear on page __.
27
<PAGE>
================================================================================
Value Fund
The Fund's objective is:
================================================================================
to realize maximum long-term total return from a combination of capital growth
and income. It is not designed or managed primarily to produce current income.
Who should invest? Investors who seek to maximize total return from securities
which may have more potential than the market currently sees.
- --------------------------------------------------------------------------------
================================================================================
The Fund invests in:
================================================================================
The Fund takes a flexible approach, emphasizing investments in common stocks
with the characteristics listed below.
Under normal market conditions...
...at least 65% of net assets in common stocks which:
o the 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; and
o are listed on a national securities exchange or are traded in the
Over-the-Counter (OTC) market.
...other investments suitable for most or all MainStay Funds. (See pages 36-37,
"General Investment Considerations" and pages 54-61, "Description of Investments
and Investment Practices," for details.)
Usually, stocks deemed to be at full value will be replaced with new,
"undervalued" stocks.
In assessing whether a stock is undervalued, the Adviser considers many factors
and will compare the market price to the company's "book" value, estimated value
of the company's assets (liquidating value) and cash flow. To a lesser extent,
the Adviser will also look at trends and forecasts such as growth rates and
future earnings.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Risks? The Fund invests primarily in common stocks and therefore is exposed to
the risks of investing in those securities, including fluctuations in value.
- --------------------------------------------------------------------------------
WHO'S MANAGING
YOUR MONEY?
DENIS LAPLAIGE AND
JEFFREY A. SIMON OF
MACKAY-SHIELDS
FINANCIAL CORPORATION.
Mr. Laplaige, President and Managing Director of MacKay-Shields, has served as a
portfolio manager of the Value Fund since 1986. His biography is on page 26. Mr.
Simon joined MacKay-Shields in 1993. Mr. Simon is a Director of MacKay-Shields
and specializes in equity securities. Previously, Mr. Simon was a senior equity
research analyst and portfolio manager at National Securities and Research
Corporation (from 1991-1992) and Neuberger & Berman (from 1987-1991).
28
<PAGE>
================================================================================
Government Fund
The Fund's objective is:
================================================================================
to seek a high level of current income, consistent with safety of principal.
Who should invest? Investors who seek to combine high current income and safety
of principal.
See page __ for more details about the Fund.
- --------------------------------------------------------------------------------
================================================================================
The Fund invests in:
================================================================================
Under normal market conditions...
...at least 65% of net assets in U.S. government securities including:
o U.S. Treasury bills (maturing in one year or less), notes (1-10 years), and
bonds (generally 10+ years);
o debt securities issued or guaranteed by the U.S. government or its agencies
or instrumentalities; and
o Government National Mortgage Association ("GNMA") mortgage-backed
certificates and other U.S. government securities representing ownership
interests in mortgage pools, such as securities issued by the Federal
National Mortgage Association ("FNMA") and by the Federal Home Loan
Mortgage Corporation ("FHLMC").
...up to 35% of net assets in mortgage-backed and asset-backed securities that
are not U.S. government securities including interests in mortgage pools
sponsored by private entities.
...enter into agreements to purchase securities on a when-issued or forward
commitment basis.
...other investments suitable for most or all MainStay Funds. (See pages __-__,
"General Investment Considerations" and pages 54-61, "Description of Investments
and Investment Practices," for details.)
Risks? Although some of the instruments the Fund purchases are backed by the
U.S. government and its agencies, shares of the Fund are not guaranteed and the
Fund's NAV will fluctuate. Generally, when interest rates fall, the NAV rises;
and when interest rates rise, the NAV declines.
Mortgage-backed securities may be prepaid prior to maturity. Prepayment rates
may be affected by changes in mortgage rates. During periods of falling rates,
prepayments tend to increase; during periods of rising rates, they tend to
decrease. Prepayments usually are reinvested at different rates than the
original investment. As a result, these securities can increase in value less
than "non-callable" bonds during falling rate periods, yet involve comparable
risks during rising rate periods.
- --------------------------------------------------------------------------------
WHO'S MANAGING YOUR
MONEY?
RAVI AKHOURY AND
EDWARD MUNSHOWER OF
MACKAY-SHIELDS
FINANCIAL CORPORATION.
Mr. Akhoury, Chairman and CEO of MacKay-Shields, has served as portfolio manager
of the Government Fund since 1986. His biography appears on page __. Mr.
Munshower is a Director of MacKay-Shields and has been a portfolio manager for
the Government Fund since 1986. He joined MacKay-Shields as a fixed income
investment specialist in 1985 after having been an investment analyst for New
York Life Insurance Company. Mr. Munshower has over 14 years of experience in
investment management and research.
29
<PAGE>
================================================================================
High Yield Corporate Bond Fund
The Fund's primary objective is:
================================================================================
maximum current income through investment in a diversified portfolio of high
yield debt securities. Capital appreciation is a secondary objective. The
potential for high yield is accompanied by higher risk. Certain of the Fund's
investments are speculative.
Who should invest? Investors who want to maximize current income and can accept
the higher risk of securities with high yield potential.
See page 51 for more details about the Fund.
- --------------------------------------------------------------------------------
================================================================================
The Fund invests in:
================================================================================
Under normal market conditions...
...at least 65% of total 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). These securities tend to offer yields
above those that are rated higher and are not considered speculative.
...without restriction in securities rated at least Ba or B by Moody's, BB or B
by S&P, or unrated securities considered by the Adviser to be of comparable
quality.
...not more than 15% of net assets in securities rated lower than B by Moody's
or S&P.
...up to 25% of total assets in equity securities, including common stocks,
preferred stocks, warrants and rights.
...other investments suitable for most or all MainStay Funds. (See pages 36-37,
"General Investment Considerations" and pages 54-61, "Description of Investments
and Investment Practices," for details.)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Risks? Generally, when interest rates fall, the NAV rises; and when interest
rates rise, the NAV declines.
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. (For a more complete
discussion of those risks, see page 60, "Risks of Investing in High Yield
Securities (`Junk Bonds')"). Seeking to reduce risk, the Fund's Adviser
diversifies investments and also pays close attention to issuer creditworthiness
and trends across industries and in the economy. (See Appendix A for a
description of ratings.)
If the 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.
- --------------------------------------------------------------------------------
WHO'S MANAGING YOUR
MONEY?
DENIS LAPLAIGE AND
STEVEN TANANBAUM OF
MACKAY-SHIELDS
FINANCIAL CORPORATION.
Mr. Laplaige, President and Managing Director of MacKay-Shields, has served as
portfolio manager of the High Yield Corporate Bond Fund since 1991. His
biography is on page 26. Mr. Tananbaum has been a portfolio manager for the Fund
since he joined MacKay-Shields in 1989. He is also a Director at MacKay-Shields.
Previously, he worked as a high yield and merger associate intern in the
corporate finance department at Kidder Peabody.
30
<PAGE>
================================================================================
International Bond Fund
The Fund's objective is:
================================================================================
to seek to provide competitive overall return commensurate with an acceptable
level of risk by investing primarily in a portfolio consisting of non-U.S.
(primarily government) debt securities.
Who should invest? Investors who prefer the higher return potential of
international bonds or want to add diversification to their domestic
investments.
See page 51 for more details about the Fund.
- --------------------------------------------------------------------------------
================================================================================
The Fund invests in:
================================================================================
Under normal market conditions...
...any debt or debt-related investment, domestic or foreign, denominated in
foreign or U.S. currency.
...at least 65% of total assets in debt securities of foreign governments,
agencies and supranational organizations denominated in foreign currencies.
These could have fixed, variable, floating or inverse floating rates of
interest. The Fund may also purchase debt securities of corporate issuers. Some
of these securities may be privately issued and/or convertible into common
stock; or they may be traded together with warrants for the purchase of common
stock.
...a variety of countries, with a minimum of 5 countries other than the U.S.
This includes countries with established economies as well as emerging market
countries, including those in Latin America, and other newly industrialized
countries, such as South Korea and Taiwan, that the Adviser believes present
favorable opportunities.
...not more than 25% of net assets in debt securities rated below BBB by S&P or
Baa by Moody's; or, if unrated, deemed by the Adviser to be of equal quality.
(See Appendix A for a description of ratings.)
The Fund may buy and sell currency on a spot basis and enter into forward
foreign currency contracts for hedging purposes. The Fund may also buy forward
foreign currency options, securities and securities index options, and enter
into futures contracts and related options. (For more details, see page 51,
"Other Information About the Funds-- International Bond Fund")
...other investments suitable for most or all MainStay Funds. (See pages 36-37,
"General Investment Considerations" and pages 54-61, "Description of Investments
and Investment Practices," for details.)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Risks? Alone, this Fund is not a balanced investment plan. It may be appropriate
for investors wanting investments in markets outside the U.S. while seeking to
avoid higher volatility. The orientation is in avoiding excessive risk, although
there are risks associated with any investment. Due to this philosophy, the Fund
may not attain as high a return as more aggressively managed international
funds--although the Fund is expected to outperform some funds in down markets.
There is no guarantee that the Fund will succeed in achieving its objective.
Generally, when interest rates fall, the NAV rises; and when interest rates
rise, the NAV declines.
Securities rated below BBB or Baa (sometimes called "junk bonds") are not
considered "investment grade" and run greater risks of price fluctuations, loss
of principal and interest, default or bankruptcy by the issuer, and other risks,
which is why these securities are considered speculative. (See page 60, "Risks
of Investing in High Yield Securities (`Junk Bonds')," for details and Appendix
A for a description of ratings.)
Investments in foreign securities could be more volatile and more difficult to
sell than U.S. investments, and involve additional risks. (For more on risks of
investing in foreign securities, see page 55, "Description of Investments and
Investment Practices--Foreign Securities.")
There are certain risks associated with investment in securities with floating
or inverse floating rates of interest. (See page 55, "Description of Investments
and Investment Practices--Floaters and Inverse Floaters.")
- --------------------------------------------------------------------------------
WHO'S MANAGING YOUR
MONEY?
JOSEPH PORTERA OF
MACKAY-SHIELDS FINANCIAL
CORPORATION.
Mr. Portera is a Director of MacKay-Shields specializing in international bonds.
He returned to MacKay-Shields in December 1996 after working at Fiduciary Trust
Company International as a portfolio manager in international bonds. Mr. Portera
joined MacKay-Shields in 1991 and was portfolio manager of the International
Bond Fund from its inception in September 1994 to August 1995. Previously, Mr.
Portera was a portfolio manager specializing in international debt securities at
ABN-AMRO Bank, N.V.(from 1988-1991).
Securities of issuers in one country may be denominated in the currency of
another country.
31
<PAGE>
================================================================================
Money Market Fund
The Fund's objective is:
================================================================================
to seek as high a level of current income as is considered consistent with the
preservation of capital and liquidity. Investments in the Fund are neither
insured nor guaranteed by the U.S. government. Although the Fund attempts to
maintain a stable net asset value (NAV) of $1 per share, there can be no
assurance that it will succeed in doing so.
Who should invest? Investors who are averse to risk or want to earn competitive
yields on cash they're planning to spend or invest in the near future.
- --------------------------------------------------------------------------------
================================================================================
The Fund invests in:
================================================================================
...short-term securities of the U.S. government (those that mature within 13
months).
...bank and bank holding company obligations (including CDs and bankers'
acceptances). The banks must have capital, surplus and undivided profits of over
$100 million (as of their most recent financial statement); up to 10% of the
Fund's securities may not meet these criteria as long as they're federally
insured. The Fund will invest more than 25% of its total assets in bank and bank
holding company obligations.
...commercial paper (short-term, unsecured loans to corporations), including
variable rate master demand notes; and other short-term corporate loans (one
year or less).
...dollar-denominated loans to U.S. and foreign issuers and securities of
foreign branches of U.S. banks (such as negotiable CDs, also known as
Eurodollars) including variable rate master demand notes and floating rate
notes.
...up to 5% of total assets in securities of one issuer, (this doesn't apply to
U.S. government securities and related repurchase agreements) except, more than
5% of total assets may be invested in securities from one issuer for up to 3
days if they're rated in the highest category by at least two major rating
agencies ("First Tier"); or, if unrated, deemed to be of comparable quality by
the Adviser. (Only one of these investments at a time.)
...up to 5% of total assets in securities that were rated in the top two
categories by at least two nationally recognized rating agencies, but not rated
in the highest category by two or more major rating agencies ("Second Tier");
or, if unrated, deemed to be of comparable quality by the Adviser when acquired.
...up to 1% of total assets (or $1 million, whichever is greater at the time of
the purchase) in securities of any one issuer which is Second Tier).
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Risks? Any investment the Fund makes must present minimal credit risk in the
opinion of the Adviser. If rated, a security must be rated within the two
highest rating categories for short-term debt securities by at least two major
rating agencies (or by one major agency, if only that agency has rated the
security).
Unrated securities and one-agency-rated securities may only be bought with
Trustee approval or ratification. (See Appendix A for a description of ratings.)
- --------------------------------------------------------------------------------
This Fund generally can't invest in securities with remaining maturities longer
than 397 days (13 months). In addition, the weighted average portfolio maturity
may not exceed 90 days. (See the SAI for a more detailed explanation.)
32
<PAGE>
================================================================================
California Tax Free Fund
The Fund's objective is:
================================================================================
to seek to provide a high level of current income exempt from regular Federal
income tax and California personal income tax, consistent with preservation of
capital. The Fund invests primarily in municipal securities issued by the State
of California and its political subdivisions, agencies and instrumentalities.
Who should invest? California residents who want to keep more of what they earn
by investing for income that's double tax-free.
- --------------------------------------------------------------------------------
================================================================================
The Fund invests in:
================================================================================
Under normal market conditions...
...at least 80% of total assets in California tax-exempt securities. These could
have fixed, variable or floating rates of interest. They may also be zero coupon
municipal bonds, with no coupon rate.
The tax-exempt securities must be:
o rated, at purchase, in one of the top four categories by Moody's or S&P;
o short-term tax-exempt securities which, at purchase, are rated in one of
the top three categories by Moody's or S&P;
o municipal commercial paper which, at purchase, is rated P-1 by Moody's or
A-1 by S&P;
o unrated securities deemed by the Adviser to be of comparable quality.
The two main types of municipal bonds are "General Obligation" and "Revenue"
bonds. (See page __, "Descriptions of Investments and Investment Practices--
Municipal Securities and Municipal Lease Obligations," for details.)
The Fund may also purchase Industrial Development and Pollution Control Bonds,
which are generally not secured by the taxing power of the municipality but are
secured by revenues paid by the industrial user.
...generally not more than 25% of total assets in securities of any one
governmental unit.
...not more than 20% of total assets in tax-exempt securities subject to the
federal alternative minimum tax (AMT) for individual shareholders.
...tax-exempt debt obligations issued by political subdivisions and authorities
of the Commonwealth of Puerto Rico.
...other investments suitable for most or all MainStay Funds. (See pages __-__,
"General Investment Considerations" and pages __-__, "Description of Investments
and Investment Practices," for details.)
The Fund may also buy and sell call and put options; invest in futures contracts
on debt securities or securities indexes; and invest in options on futures
contracts.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Risks? The value of these securities--and, therefore, the Fund's NAV--may rise
or fall due to various factors, mainly changes in interest rates, and the
ability of the issuers to make their interest and principal payments on these
securities. Generally, when interest rates fall, the NAV rises; and when rates
rise, the NAV declines.
Changes in credit ratings may cause the Fund to hold bonds rated below
"investment grade." The Fund isn't obligated to sell a security that has been
downgraded below investment grade; but the Fund will sell the security as soon
as reasonably practicable, depending on market conditions, if more than 5% of
the total assets would be invested in securities rated below investment grade.
Securities rated BBB (S&P) or Baa (Moody's) run greater risks of price
fluctuations, default by the issuer, and other risks that may be considered
speculative. Municipal bonds rated below investment grade may not currently pay
interest and may have extremely poor prospects of ever attaining any real
investment standing. (See Appendix A for a description of ratings.)
Issuers of municipal lease securities aren't obligated to continue payments
unless money is appropriated periodically by the legislative body. This could
make collecting difficult in the case of a default.
Since the Fund concentrates its investments in California securities, the NAV of
the Fund's shares can be adversely affected by political developments or
economic events in California, including a default of a municipal issuer or a
financial crisis. Investments in futures contracts and options carry certain
risks. (See page __, "Description of Investments and Investment
Practices--Options on Securities and Indexes" and page __, "Futures Contracts
and Options on Futures Contracts.")
- --------------------------------------------------------------------------------
WHO'S MANAGING YOUR MONEY?
RAVI AKHOURY AND JAMES FLOOD OF
MACKAY-SHIELDS FINANCIAL
CORPORATION.
Mr. Akhoury, Chairman and CEO of MacKay-Shields, has served as portfolio manager
since the Fund started in 1991. His biography appears on page __. Mr. Flood, a
Director of MacKay-Shields, has been a portfolio manager for the Fund since
1992. His biography appears on page __.
To help you decide whether taxable or non-taxable yields are better for you, see
page __ for a comparative yield table.
33
<PAGE>
================================================================================
New York Tax Free Fund
The Fund's objective is:
================================================================================
to seek to provide a high level of current income exempt from regular Federal
income tax and personal income tax of New York State and its political
subdivisions, including New York City, consistent with preservation of capital.
The Fund invests primarily in municipal securities issued by the State of New
York and its political subdivisions, agencies and instrumentalities.
Who should invest? New York State or New York City residents who want to keep
more of what they earn with income that's double or triple tax-free.
- --------------------------------------------------------------------------------
================================================================================
The Fund invests in:
================================================================================
Under normal market conditions...
...at least 80% of total assets in New York tax-exempt securities. These could
have fixed, variable or floating rates of interest. They may also be zero coupon
municipal bonds, with no coupon rate.
The tax-exempt securities must be:
o rated, at purchase, in one of the top four categories by Moody's or S&P;
o short-term tax-exempt securities which, at purchase, are rated in one of
the top three categories by Moody's or S&P;
o municipal commercial paper which, at purchase, is rated P-1 by Moody's or
A-1 by S&P;
o unrated securities deemed by the Adviser to be of comparable quality.
The two main types of municipal bonds are "General Obligation" and "Revenue"
bonds. (See page __, "Descriptions of Investments and Investment Practices--
Municipal Securities and Municipal Lease Obligations," for details.)
The Fund may also purchase Industrial Development and Pollution Control Bonds,
which are generally not secured by the taxing power of the municipality but are
secured by revenues paid by the industrial user.
...generally not more than 25% of total assets in securities of any one
governmental unit.
...not more than 20% of total assets in tax-exempt securities subject to the
federal alternative minimum tax (AMT) for individual shareholders.
...tax-exempt debt obligations issued by political subdivisions and authorities
of the Commonwealth of Puerto Rico.
...other investments suitable for most or all MainStay Funds. (See pages __-__,
"General Investment Considerations" and pages __-__, "Description of Investments
and Investment Practices," for details.)
The Fund may also buy and sell call and put options; invest in futures contracts
on debt securities or securities indexes; and invest in options on futures
contracts.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Risks? The value of these securities--and, therefore, the Fund's NAV--may rise
or fall due to various factors, mainly changes in interest rates, and the
ability of the issuers to make their interest and principal payments on these
securities. Generally, when interest rates fall, the NAV rises; and when rates
rise, the NAV declines.
Changes in credit ratings may cause the Fund to hold bonds rated below
"investment grade." The Fund isn't obligated to sell a security that has been
downgraded below investment grade; but the Fund will sell the security as soon
as reasonably practicable, depending on market conditions, if more than 5% of
the total assets would be invested in securities rated below investment grade.
Securities rated BBB (S&P) or Baa (Moody's) run greater risks of price
fluctuations, default by the issuer, and other risks that may be considered
speculative. Municipal bonds rated below investment grade may not currently pay
interest and may have extremely poor prospects of ever attaining any real
investment standing. (See Appendix A for a description of ratings.)
Issuers of municipal lease securities aren't obligated to continue payments
unless money is appropriated periodically by the legislative body. This could
make collecting difficult in the case of a default.
Since the Fund concentrates its investments in New York securities, the NAV of
the Fund's shares can be adversely affected by political developments or
economic events in New York State, including a default of a municipal issuer or
a financial crisis.
Investments in futures contracts and options carry certain risks. (See page __,
"Description of Investments and Investment Practices--Options on Securities and
Indexes" and page __, "Futures Contracts and Options on Futures Contracts.")
- --------------------------------------------------------------------------------
WHO'S MANAGING YOUR MONEY?
RAVI AKHOURY AND JAMES FLOOD
OF MACKAY-SHIELDS FINANCIAL
CORPORATION.
Mr. Akhoury, Chairman and CEO of MacKay-Shields, has served as portfolio manager
since the Fund started in 1991. His biography appears on page __. Mr. Flood, a
Director of MacKay-Shields, has been a portfolio manager for the Fund since
1992. His biography appears on page __.
To help you decide whether taxable or non-taxable yields are better for you, see
page 76 for a comparative yield table.
34
<PAGE>
================================================================================
Tax Free Bond Fund
The Fund's objective is:
================================================================================
to provide a high level of current income free from regular federal income tax,
consistent with the preservation of capital. There may be some earnings,
however, subject to federal tax; and most may be subject to state and local
taxes.
Who should invest? Investors in a high federal income tax bracket or investors
who want to pay less of their investment earnings to the IRS.
See page 52 for more details about the Fund.
- --------------------------------------------------------------------------------
================================================================================
The Fund invests in:
================================================================================
Under normal market conditions...
...tax-exempt securities which are, at the time of purchase, rated in one of the
top four categories (or short-term tax-exempt securities rated in one of the top
three categories) by Moody's or S&P, or if unrated, deemed by the Adviser to be
of comparable quality. The Fund may also buy futures, options on futures and
cash equivalents.
...at least 80% of net assets in "municipal bonds" issued by, or on behalf of,
the states, the District of Columbia, territories and possessions of the United
States and their political subdivisions; and their agencies, authorities and
instrumentalities.
The two main types of municipal bonds are "General Obligation" and "Revenue"
bonds. (See page 57, "Descriptions of Investments and Investment
Practices--Municipal Securities and Municipal Lease Obligations," for details.)
...more than 25% of total assets may be invested in Industrial Development
Bonds, which are generally not secured by the taxing power of the municipality
but are secured by revenues paid by the industrial user.
...not more than 20% of net assets in unrated tax-exempt securities deemed by
the Adviser to be of comparable quality to securities rated within the four
highest grades by S&P and Moody's.
...not more than 10% of assets in illiquid municipal lease obligations and other
securities that are "illiquid" (can't be easily sold). (See page 57 for more
details.)
...other investments suitable for most or all MainStay Funds. (See pages 36-37,
"General Investment Considerations" and pages 54-61, "Description of Investments
and Investment Practices," for details.)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Risks? Generally, when interest rates fall, expect the NAV to rise; and when
rates rise, expect the NAV to decline.
The Fund may not invest in a tax-exempt security rated below "medium grade."
Securities rated BBB (S&P) or Baa (Moody's) run greater risks of price
fluctuations, default by the issuer, and other risks that may be considered
speculative. (See Appendix A for a description of ratings.)
Issuers of municipal lease securities aren't obligated to continue payments
unless money is appropriated periodically by the legislative body. This could
make collecting difficult in the case of a default. (For more details, see
"California Tax Free Fund, New York Tax Free and Tax Free Bond Fund" in the
SAI.)
- --------------------------------------------------------------------------------
WHO'S MANAGING YOUR
MONEY?
RAVI AKHOURY AND JAMES
FLOOD OF MACKAY-
SHIELDS FINANCIAL
CORPORATION.
Mr. Akhoury, Chairman and CEO of MacKay-Shields, has served as portfolio manager
since the Fund started in 1991. His biography appears on page 27. Mr. Flood is a
Director of MacKay-Shields and has acted as portfolio manager for this Fund
since 1992, when he joined the firm. Previously, he worked for over 8 years as
portfolio manager for Value Line, Inc.
Laws may change, and issuers may fail to follow tax laws, causing a tax-exempt
item to become a taxable one.
To help you decide whether taxable or non-taxable yields are better for you, see
page 76 for a comparative yield table.
35
<PAGE>
- --------------------------------------------------------------------------------
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 a Fund and the share price (NAV) of that Fund
(other than the Money Market 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. (The Equity Index Fund comes with
a limited guarantee. MainStay also recommends that you discuss its parameters
fully with your registered representative before investing.) (See page 50,
"Other Information About the Funds--Equity Index Fund--The Guarantee," for
details.)
Fundamental investment objectives
The investment objective of each 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.
FUND DIVERSIFICATION
Each of the Funds, except the Equity Index Fund, International Bond Fund,
California Tax Free Fund and New York Tax Free Fund, is "diversified" for the
purposes of the Investment Company Act of 1940, as amended ("1940 Act"). The
Equity Index Fund, International Bond Fund, California Tax Free Fund and New
York Tax Free Fund are each "nondiversified" for the purposes of the 1940 Act,
meaning that each may invest a greater percentage of its assets in the
securities of one issuer than a diversified Fund. As a "nondiversified" fund, a
Fund may be more susceptible to risks associated with a single economic,
political, or regulatory occurrence than a diversified portfolio might be.
However, each Fund intends to qualify as a "regulated investment company" under
provisions of the Internal Revenue Code of 1986, as amended (the "Code"), and
therefore will be subject to diversification limits requiring that, as of the
close of each fiscal quarter:
o no more than 25% of its total assets may be invested in the securities of a
single issuer (except for U.S. government securities); and
o with respect to 50% of its total assets, no more than 5% of such assets may be
invested in the securities of a single issuer (except for U.S. government
securities) or invested in more than 10% of the outstanding voting securities of
a single issuer.
TEMPORARY DEFENSIVE MEASURES
In times of unusual or adverse market conditions, for temporary defensive
purposes, each Fund, except the Equity Index Fund, may invest without limit in
cash and cash equivalents (as defined on page 54 under "Description of
Investments and Investment Practices--Cash Equivalents"). In addition, under
such circumstances:
...High Yield Corporate Bond Fund may invest without limit in securities rated A
or higher by Moody's or S&P, and may invest more than 25% of its net assets in
U.S. government securities;
...International Equity Fund may invest up to 5% of its assets in debt
instruments rated below investment grade;
36
<PAGE>
- --------------------------------------------------------------------------------
General Investment Considerations
- --------------------------------------------------------------------------------
...The California Tax Free Fund and New York Tax Free Fund may, for defensive
purposes, each invest more than 25% of its total assets in Industrial
Development and Pollution Control Bonds whether or not the users of facilities
financed by such bonds are located in the same geographic region or whether the
proceeds are used to finance similar types of projects. In cases where users are
in the same locale, or where proceeds are used for similar projects, there may
be additional risk. In an economic downturn in the area, or if a business or
political development affects the area or type of project, there could generally
be less need for the facilities or use of those facilities.
In addition, in adverse market conditions such as an uncertain interest rate
environment or when, in the opinion of the Adviser, no suitable tax-exempt
securities are available, each of the California Tax Free Fund and New York Tax
Free Fund may temporarily invest more than 20% of its total assets in taxable
money market instruments, tax-exempt securities of another state (not exempt
from taxes of the Fund's target state) or in tax-exempt securities subject to
the alternative minimum tax. Only those tax-exempt securities of another state
which satisfy the applicable credit and quality standards for California or New
York tax-exempt securities may be purchased by a Fund.
INVESTMENTS IN ILLIQUID AND RESTRICTED SECURITIES
Each Fund has a nonfundamental policy (except it is fundamental for California
Tax Free Fund and New York Tax Free Fund) that it will not invest more than 10%
of its net assets (15% for the International Bond and International Equity
Funds) in "illiquid" securities. These are securities subject to legal or
contractual restrictions on resale (other than restricted securities eligible
for resale pursuant to Rule 144A 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 applicable
Adviser are deemed illiquid. The Equity Index Fund is subject to the 10% limit
on investments in illiquid securities but is not permitted to purchase
securities subject to restrictions on disposition under the Securities Act of
1933. 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 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.
Funds with high turnover rates (extensive trading activity) 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).
You can find the turnover rate for any fund, in any prospectus, as a line item
in the "Financial Highlights" table for that fund. MainStay recommends, however,
that you consider all the facts when you compare the turnover rates of different
funds. 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.
- --------------------------------------------------------------------------------
{GRAPHIC] Take note:
The High Yield Corporate Bond Fund, the International Bond Fund and the Tax Free
Bond Fund normally must each invest at least 65% of its total assets in "bonds."
For this purpose, each Fund considers the various types of debt or fixed income
securities in which it invests, as specifically described elsewhere in this
prospectus, to be "bonds" as referenced in the Fund's name. The use of this name
is not meant to restrict each Fund's investment to a narrow category of debt
securities that are formally denominated as "bonds." For additional investment
restrictions, see the Fund descriptions on pages 30 and 51, 31 and 51, and 35
and 52.
37
<PAGE>
- --------------------------------------------------------------------------------
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.
NOT FOR THE MONEY MARKET FUND
The Money Market Fund generally doesn't impose a sales charge and has no Rule
12b-1 fees. There are two classes of the Money Market Fund only to track
exchanges from other Funds.
[GRAPHIC] Take note: The Equity Index Fund only offers
Class A shares.
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 39, "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.
[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 67, "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 a Fund's shares, the sales charge will be based on the lower of
the current NAV of Fund shares less dividends and distributions 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.
- --------------------------------------------------------------------------------
38
<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've paid a sales
charge when you redeem (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
Money Market Fund shares). This is helpful because the more you invest with
MainStay, the smaller the sales charge. (See "Alternative Sales Arrangements,"
page 66.)
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 or Class A shares if
you purchased $1 million or more) 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 66. For more
information on LOIs, call your registered representative or MainStay Client
Services at 1-800-462-6782.
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 67, "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 or withdrawals from qualified
pension, profit sharing and retirement plans.) 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 other situations, including purchases by certain retirement plans,
which entitle you to a waiver of the sales charge. (For purchases at NAV, see
page 67 for the full listing.)
39
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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, 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
To open an account:
o $1,000 for Money Market Fund and Equity Index Fund;
o $500 for all other Funds;
o Each time after that: $50 for all Funds except the Equity Index Fund (which
has a $1,000 minimum).
Except for the Equity Index Fund, 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 MainStay Fund(s) you want to invest in;
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 PLACED INTO AN ENVELOPE] SEND A CHECK TO YOUR
REGISTERED REPRESENTATIVE WITH THE 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, Fund name 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; except $1,000 for
the Equity Index Fund) directly to: MainStay Funds, PO Box 8401, Boston, MA
02266-8401. Please include your account number and class of shares with all
checks.
[GRAPHIC OF A TELEPHONE] HAVE YOUR REGISTERED REPRESENTATIVE ORDER BY
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 NYLIFE Distributors. Purchase orders effected by
telephone are subject to a purchase minimum of $5,000 per Fund. You may not
purchase shares of the Money Market Fund by telephone. The Distributor must
receive your money (and the application, if it's your initial investment) within
the next 3 business days. All calls are recorded.
40
<PAGE>
- --------------------------------------------------------------------------------
...Buy Shares
- --------------------------------------------------------------------------------
MAKE SURE YOU ARE USING THE PROPER FORMS
Your order to buy is only accepted when received by BFDS (the transfer 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. For each Fund, other than the
Money Market Fund, NAV is calculated at the close of business of the New York
Stock Exchange (normally at 4:00 PM Eastern time). For the Money Market Fund,
NAV is determined at noon.
[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) or, in the case
of the Money Market Fund, using the amortized cost method of valuation;
o subtracting the liabilities; and
o dividing the remainder by the total number of shares owned of that class.
(See page 71 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 money (and application, if it's your
initial investment) within the next 3 business days.
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 65, "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 reject your redemption requests until we're sure your check
has cleared (which can take up to 10 calendar days).
[GRAPHIC OF A CLOCK] 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 one or more MainStay Funds. The initial minimum is $100 per Fund per class of
share, except $1,000 for the Money Market Fund and the Equity Index Fund.
Subsequent minimum investments for all Funds are $50, except $1,000 for the
Equity Index Fund. (See page 65, "How to Purchase Shares of the
Funds--Systematic Investment Plans," for waiving minimums and for details on
AutoInvest.)
You may also establish a Systematic Exchange Program to have a minimum of $100
exchanged periodically from any MainStay Fund (except the 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. (See page 69, "Redemptions and
Exchanges--Exchange Privileges," for details.)
41
<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.
IF YOU PLACE THE ORDER DIRECTLY, YOU CAN DO IT THROUGH A WRITTEN REQUEST OR IN
ONE OF THE FOLLOWING THREE 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.
OPTION 1
WRITE A CHECK (IF YOU OWN SHARES OF THE MONEY MARKET FUND) [GRAPHIC OF A
CHECK]
o Minimum amount: $100
o Authorization: The Fund must receive a completed signature card and
authorization form
You may open a special account with State Street Bank and Trust Company for
writing checks against the money in your Money Market Fund account. (This is not
available for qualified retirement plans or IRAs.) You'll be sent a supply of
checks. When you write a check, the Fund will sell enough shares to cover the
amount and any applicable deferred sales charge. If you write a check for more
than the value of your shares--plus any deferred sales charge--the Fund will
return the check and may assess an extra charge. You're entitled to the
dividends declared on shares you redeem up to the time the check is processed.
You may not close your account by writing a check.
[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 ($500 for the Money Market Fund), provided that the value
isn't based on fluctuations in market prices.
We'll give you 60 days' written notice to give you time 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.
OR, OPTION 2
USE A SYSTEMATIC WITHDRAWAL PLAN [GRAPHIC OF A CALENDAR]
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 any Fund other
than the Equity Index 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 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 your Fund is earning for you, eventually, your account will be
worth less than your original investment and, ultimately, you will redeem all of
your shares. Systematic withdrawal plans established by phone are subject to the
procedures applicable to telephone redemptions.
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
42
<PAGE>
OR, OPTION 3
MAKE A TELEPHONE REQUEST: [GRAPHIC]
1-800-MAINSTAY
You may sell or exchange shares directly over the phone. [GRAPHIC]
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 exchange by phone between accounts with identical names,
addresses and Social Security Numbers/Taxpayer I.D. Numbers. Exchanges
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.
[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 order 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 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 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. When exchanged shares are redeemed, any applicable
sales charge will be charged.
What if you buy by check then quickly sell? We will reject your redemption
requests until we're sure that your check clears; usually within 10 days of
receiving the check.
- --------------------------------------------------------------------------------
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
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 68,
"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 (or have your registered representative
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.
43
<PAGE>
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Decide How to Receive Your Earnings
- --------------------------------------------------------------------------------
TWO KINDS OF EARNINGS
DIVIDENDS AND INTEREST
Most Funds earn either dividends from stocks, interest from bonds and other
securities, or both. A mutual fund, however, always pays this income to you as
"dividends." The dividends paid by each Fund will vary based on the income from
its investments and the expenses incurred by the Fund.
When the Funds pay
The Money Market Fund declares dividends daily; you're paid monthly. The High
Yield Corporate Bond Fund, Government Fund, Tax Free Bond Fund, International
Bond Fund, California Tax Free Fund and New York Tax Free Fund all declare and
distribute any dividends monthly. The other Funds, except the Equity Index Fund,
declare and distribute any dividends quarterly. The Equity Index Fund
distributes dividends at least annually.
In the Money Market Fund, you begin earning dividends the business day after the
transfer agent receives your investment and is open for business.
CAPITAL GAINS
Funds earn capital gains when they sell securities in their portfolio at a
profit.
When the Funds pay
At the end of each fiscal year, each MainStay 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 same Fund. In order to reinvest dividends and/or capital gains in
another Fund, you must have an established account in that class of shares of
that Fund. Here are your choices:
REINVEST EVERYTHING IN:
o the same Fund; or
o in another Fund of your choice.
TAKE THE DIVIDENDS IN CASH
Reinvest the capital gains in:
o the same Fund; or
o in another Fund of your choice.
TAKE THE CAPITAL GAINS IN CASH
Reinvest the dividends in:
o the same Fund; or
o in another Fund of your choice.
TAKE EVERYTHING IN CASH
44
<PAGE>
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Understand the Tax Consequences
- --------------------------------------------------------------------------------
Each Fund intends to be treated as a regulated investment company under
subchapter M of the Code. As a regulated investment company, each MainStay 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 MainStay Funds (except the
California Tax Free Fund, and New York Tax Free Fund and the Tax Free Bond Fund)
are taxable, whether you take them as cash or automatically reinvest them. Some
dividends will be taxable as long-term capital gains.
Tax-free dividends are different
Dividends earned from tax-exempt securities will usually be free from federal
tax. Your MainStay year-end statement will provide full tax information.
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
(Mainly from the International Bond Fund and International Equity Fund.) 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.
See page 71 for the tax consequences of the Equity Index Fund guarantee.
[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.
All income affects your benefits
The government includes tax-exempt income when computing the amount of social
security or other benefits that are subject to tax.
[GRAPHIC] "Tax Free" rarely means "totally tax-free"
o The California Tax Free Fund, New York Tax Free Fund and Tax Free Bond Fund
(or any tax-free fund) may earn taxable income--in other words, you may have
taxable income even from a generally tax-free fund.
o Tax-exempt dividends may still be subject to state and local taxes.
o Any time you sell shares--even shares of a tax-free fund--you will be subject
to tax on any gain (the rise in the share price).
o If you sell shares in a tax-free fund before you become entitled to receive
tax-exempt interest as a dividend, a portion of sales proceeds may be taxable
when paid to you. This is because it will be considered to be money from the
sale instead of a dividend.
45
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Know with Whom You're Investing
- --------------------------------------------------------------------------------
WHO MANAGES YOUR MONEY?
Under the supervision of the Funds' Trustees, the investment advisers (each an
"Adviser" and collectively the "Advisers") are responsible for making the
specific decisions about buying, selling and holding securities; selecting
brokers and brokerage firms to trade for them; maintaining accurate records;
and, if possible, negotiating favorable commissions and fees with the brokers
and brokerage firms. For these services, the investment advisers are paid
monthly fees by each Fund. (See "Investment Advisers, Administrator and
Distributor--The Advisers," page 63, for a breakdown of their fees.)
================================================================================
MacKay-Shields Financial Corporation
9 West 57th St.
New York, N.Y. 10019
================================================================================
MacKay-Shields manages all the Funds in this prospectus, except the Equity Index
Fund. The firm was incorporated in 1969 as an independent investment advisory
firm and was privately held until 1984 when it became a wholly owned but
autonomously managed subsidiary of New York Life Insurance Company. As of
December 31, 1996, MacKay-Shields managed over $23.7 billion in assets.
- --------------------------------------------------------------------------------
================================================================================
Monitor Capital Advisors, Inc.
504 Carnegie Center
Princeton, N.J. 08540
================================================================================
Monitor serves as investment adviser to the Equity Index Fund. Monitor is a
wholly owned subsidiary of NYLIFE Inc. and an indirect wholly owned subsidiary
of New York Life Insurance Company. Monitor, a registered investment adviser
incorporated in 1988, specializes in quantitative investment techniques such as
enhanced indexing and asset allocation. As of December 31, 1996, Monitor managed
assets totaling approximately $1.2 billion, mainly of index funds.
- --------------------------------------------------------------------------------
[GRAPHIC] Who works to protect your interests?
A Board of Trustees oversees the Funds. 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 Funds. Other than
serving as Trustees, most of the Board Members have no affiliation with MainStay
Funds or its service providers.
46
<PAGE>
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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 Funds' 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 each Fund. In addition, NYLIFE
Securities Inc. and other broker-dealers offer shares of some or all of the
Funds 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 MainStay Funds. For its
services, the Distributor is paid a monthly fee--the Rule 12b-1 fee. (See page
64, "The Investment Advisers, Administrator and Distributor--The Distributor"
for more details.)
WHO KEEPS TRACK OF YOUR ACCOUNT?
Boston Financial Data Services (BFDS) is the Funds' Transfer, Dividend
Disbursing and Shareholder Servicing Agent. BFDS provides customer service, is
responsible for preparing and sending statements, confirms and checks, and keeps
certain financial and accounting records. BFDS is at 2 Heritage Drive, North
Quincy, MA 02171. The Funds may also contract with other service organizations,
including broker-dealers and other financial institutions, which will establish
a single omnibus account for their clients with the Funds. The service
organizations will provide shareholder services to the shareholders within the
omnibus accounts and receive fees for those services from the Funds.
The Bank of New York is the custodian of the investments of the Equity Index
Fund, International Bond Fund, International Equity Fund, California Tax Free
Fund and New York Tax Free Fund and has subcustodial agreements for holding the
Funds' foreign securities.
State Street Bank and Trust Company is the Custodian of the investments of the
Capital Appreciation Fund, Convertible-Equity Income Fund, Government Fund, High
Yield Corporate Bond Fund, Money Market Fund, Tax Free Bond Fund, Total Return
Fund and Value Fund, and has subcustodial agreements for holding the Funds'
foreign securities.
WHO RUNS MAINSTAY'S DAY-TO-DAY BUSINESS?
NYLIFE Distributors Inc. (the "Administrator") also serves as the administrator,
handling business affairs for The MainStay Funds. The Administrator provides
offices and conducts clerical, recordkeeping and bookkeeping services, and keeps
most of the financial and accounting records required for each Fund.
The Administrator pays the salaries and expenses of all personnel affiliated
with the Trust, and all the operational expenses that aren't the responsibility
of the Funds. (See page 63, "Investment Advisers, Administrator and
Distributor," and the SAI for full details.)
For its services, the Trust pays the Administrator a monthly fee. (See the
breakdown on page 63, "The Investment Advisers, Administrator and
Distributor--The Administrator".)
47
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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 (monthly statements for the Money Market Fund)
covering the Funds you own, including the number and value of shares, dividends
declared or paid and other information.
Confirmations
Every time you buy, sell or exchange shares between Funds, you'll receive a
confirmation in the mail shortly thereafter. It summarizes all the key
information: what you bought and sold, what it cost, the sales charge (if any)
and other vital data. The Money Market Fund mails confirmations once a month
detailing dividend and account activity.
Financial reports
You will receive an annual financial statement for your Fund, examined by the
Fund's independent accountants. You will also receive semiannual financial
statements which are unaudited.
Each financial report shows:
o the investments owned by the Fund;
o the market value of each investment; and
o other financial information.
[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 a Fund carries equal ownership rights.
o By owning shares, you're entitled to vote on certain issues and policies
regarding the Fund or class of shares you own. You have one vote per share
you own.
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 MainStay 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.
48
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Tell Me The Details
- --------------------------------------------------------------------------------
================================================================================
THE TRUST
================================================================================
The Trust was established as a Massachusetts business trust on January 9, 1986
by a Declaration of Trust. The Tax Free Bond Fund was originally formed as the
MacKay-Shields MainStay Tax Free Bond Fund pursuant to a Declaration of Trust on
January 9, 1986 and became a series of the Trust pursuant to a reorganization
which occurred on May 29, 1987. The Total Return Fund commenced operations on
December 29, 1987, the Equity Index Fund commenced operations on December 20,
1990, the California Tax Free Fund and New York Tax Free Fund each commenced
operations on October 1, 1991 and the International Bond Fund and International
Equity Fund each commenced operations on September 13, 1994. The
responsibilities of the Board of Trustees of the Trust are derived from the laws
of the Commonwealth of Massachusetts and the Investment Company Act of 1940, as
amended (the "1940 Act"). The Declaration of Trust and By-laws authorize the
Trustees to establish additional series or "Funds" as well as additional classes
of shares.
Under Massachusetts law, shareholders could, under certain circumstances, be
held liable for the obligations of the Trust. However, the Declaration of Trust
disclaims any shareholder liability in connection with Trust property or the
acts, obligations or affairs of the Trust. The Declaration of Trust provides
that the Trust shall indemnify and hold each shareholder harmless from and
against all claims and liabilities, to which such shareholder may become subject
by reason of his being or having been a shareholder, and shall reimburse such
shareholder out of the Trust's property for all legal and other expenses
reasonably incurred by him in connection with any such claim or liability. The
risk of a shareholder incurring financial loss on account of shareholder
liability is limited to circumstances in which the Trust itself would be unable
to meet its obligations and, thus, should be considered remote.
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 a Fund. [As of April 1, 1997,
NYLIFE Distributors Inc. owned a controlling interest (as that term is defined
under the 1940 Act) of the International Bond Fund and New York Tax Free Fund.]
As of December 31, 1996, the Trust had aggregate net assets of $____________,
and ________ shareholders.
The Trust is an open-end management investment company registered under the 1940
Act. Each Fund has a separate investment objective or objectives which it
pursues through separate investment policies, as described in "Tell Me the Key
Facts" on pages 23 through 35 and in the SAI. The differences in objectives and
policies among the Funds can be expected to affect the degree of market and
financial risk to which each Fund is subject and the investment return of each
Fund.
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OTHER INFORMATION ABOUT THE FUNDS
================================================================================
None of the Funds alone constitutes a complete investment program.
Investment decisions for each Fund are made independently from those of the
other accounts and investment companies that may be managed by the Advisers.
However, if such other accounts or investment companies are prepared to invest
in, or desire to dispose of, securities in which one Fund invests at the same
time as another Fund, available investments or opportunities for sales will be
allocated equitably to each. In some cases, this procedure may adversely affect
the size of the position obtained for or disposed of by a Fund or the price paid
or received by a Fund.
CONVERTIBLE-EQUITY INCOME FUND
In selecting convertible securities for purchase or sale, the 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.
During the fiscal year ended December 31, 1996, based upon the dollar-weighted
average ratings of the Fund's portfolio holdings at the end of each month in the
Fund's fiscal year, the Fund had the following percentages of its net assets
invested in securities rated in the categories indicated (all ratings are by
S&P):
--% in securities rated AAA
--% in securities rated AA
--% in securities rated A
--% in securities rated BBB
--% in securities rated BB
--% in securities rated B
--% in securities rated CCC
--% in unrated securities
--% in cash and cash equivalents
--% in equity securities
These figures are intended solely to provide disclosure about the Fund's asset
composition during its fiscal year ended December 31, 1996. The asset
composition after this time may or may not be the same as represented by such
figures. In addition, the categories reflect ratings by S&P, and ratings
assigned by Moody's may not be consistent with ratings assigned by S&P or other
credit rating services, and the Adviser may not necessarily agree with a rating
assigned by any credit rating agency.
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EQUITY INDEX FUND
When the Fund has cash reserves, the Fund may invest in cash equivalents, U.S.
government securities and repurchase agreements with respect thereto. The Fund
may also invest up to 25% of its total assets in securities of issuers in one
industry (unless the Index exceeds that concentration) and lend up to 30% of its
total assets to financial institutions.
The Guarantee
NYLIFE Inc. ("NYLIFE"), a New York corporation and a wholly owned subsidiary of
New York Life Insurance Company ("New York Life"), will guarantee
unconditionally and irrevocably pursuant to a Guaranty Agreement between NYLIFE
and the Fund (the "Guarantee") that if, exactly 10 years from the date of
purchase (the "Guarantee Date"), the net asset value of a unit equal to the net
asset value of a Fund share when purchased, plus the value of all dividends and
distributions paid, including cumulative reinvested dividends and distributions
attributable to such share paid during that 10-year period ("Guaranteed Share"),
is less than the public offering price initially paid for the share ("Guaranteed
Amount"), NYLIFE will pay for disbursement to shareholders an amount equal to
the difference between the Guaranteed Amount for each such share and the net
asset value of each such Guaranteed Share outstanding and held by shareholders
as of the close of business on the Guarantee Date. There is no charge to the
Fund or its Shareholders for the Guarantee.
If the Fund pays a dividend or distribution in cash to all Fund shareholders,
the amount of the distribution will reduce the Guaranteed Amount with respect to
each Guaranteed Share in the amount of such cash distribution. Fund shares may
be redeemed or exchanged by shareholders prior to their Guarantee Date. However,
any such redeemed or exchanged shares will lose the benefit of the
Guarantee.
Following the Guarantee Date, the shares of the Equity Index Fund will be
subject to those risks normally associated with an investment in shares of a
mutual fund that invests in securities represented in the Index.
NYLIFE is a New York holding company incorporated on January 26, 1984. Audited
financial statements for NYLIFE for its most recent fiscal year ended December
31, 1995, appear in the SAI.
New York Life is a mutual life insurance company. Payment obligations under the
Guarantee will be solely the obligations of NYLIFE. None of the Fund, New York
Life, Monitor, NYLIFE Distributors Inc., NYLIFE Securities Inc., any of their
affiliates nor any other party is undertaking any obligation to the Fund or its
shareholders with respect to the Guarantee. New York Life is not obligated to
pay any claim under the Guarantee or to make additional capital contributions to
NYLIFE.
For more information on the Guarantee, see the SAI.
How the indexing works
The weightings of stocks in the Index are based on each stock's relative total
market capitalization (the stock's market price per share times the number of
shares outstanding). The Adviser seeks to provide investment results which
mirror the performance of the Index. The Adviser attempts to achieve this
objective by investing in all stocks in the Index in the same proportion as
their representation in the Index.
The Fund is managed using mathematical algorithms to determine which stocks are
to be purchased or sold to replicate the Index to the extent feasible. From time
to time, adjustments may be made in the Fund's portfolio because of changes in
the composition of the Index, but such changes should be infrequent. No attempt
is made to manage the portfolio in the traditional sense using economic,
financial and market analysis.
The Adviser believes that the indexing approach described above is an effective
method of simulating percentage changes in the Index. It is a reasonable
expectation that there will be a close correlation between the Fund's
performance and that of the Index in both rising and falling markets. The
correlation between the performance of the Fund and the Index is expected to be
at least 0.9975%. A correlation of 1.00 would indicate perfect correlation,
which would be achieved when the Fund's NAV, including the value of its dividend
and capital gains distributions, increases or decreases in exact proportion to
changes in the Index. The Fund's correlation, however, may be affected by, among
other things, transaction costs, changes in either the composition of the Index
or number of shares outstanding for the components of the Index, and the timing
and amount of shareholder redemptions, if any.
GOVERNMENT FUND
This Fund seeks to achieve its investment objective by investing primarily in
U.S. government securities, which include obligations issued or guaranteed by
the U.S. government or its agencies or instrumentalities which are supported by:
(i) the full faith and credit of the U.S. government e.g., GNMA certificates;
(ii) the right of the issuer to borrow an amount limited to a specific line of
credit from the U.S. government; (iii) the credit of the instrumentality (e.g.,
bonds issued by the FNMA); or (iv) the discretionary authority of the U.S.
government to purchase certain obligations of U.S. government agencies or
instrumentalities.
The agencies and instrumentalities that issue U.S. government securities
include, among others specifically mentioned in this prospectus: Federal Land
Banks, Farmers Home Administration, Central Bank for Cooperatives, Federal
Intermediate Credit Banks, Federal Farm Credit Bank, Student Loan Marketing
Association and U.S. Maritime Administration.
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The Fund anticipates that a significant portion of its portfolio may consist of
Treasury bonds, GNMA mortgage-backed certificates and other U.S. government
securities representing ownership interests in mortgage pools, such as
securities issued by FNMA and FHLMC.
Although the mortgage loans in the pool underlying a GNMA certificate will have
maturities of up to 30 years, the actual average life of a GNMA certificate
typically will be substantially less because the mortgages will be subject to
normal principal amortization and may be prepaid prior to maturity.
The duration of the Fund's portfolio will be managed in light of current and
projected economic and market conditions and other factors considered relevant
by the Adviser.
HIGH YIELD CORPORATE BOND FUND
This Fund seeks to maximize current income through investment in a diversified
portfolio of high yield debt securities. Capital appreciation is a secondary
objective; and will be sought only when consistent with the Fund's primary
objective. For example, capital appreciation will be sought by lengthening the
maturities of high yield debt securities held in the Fund's portfolio during
periods when the Adviser expects interest rates to decline.
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 and U.S. government securities (including
obligations, such as repurchase agreements, secured by such instruments).
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, to the
extent applicable, its limitation on investments in securities rated below
investment grade.
The Fund may invest up to 40% of the value of its total assets in each of the
electric utility and telephone industries, but will not invest more than 25% 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).
The Adviser seeks to reduce risk through diversification, credit analysis and
attention to current developments and trends in both the economy and financial
markets. In addition, investments in foreign securities may serve to provide
further diversification. For a further discussion of the special risks of
investing in lower-rated and foreign securities, see "Risks of Investing in High
Yield Securities (`Junk Bonds')" and "Foreign Securities" in this prospectus.
During the fiscal year ended December 31, 1996, based upon the dollar-weighted
average ratings of the Fund's portfolio holdings at the end of each month in the
Fund's fiscal year, the Fund had the following percentages of its net assets
invested in securities rated in the categories indicated (all ratings are by
S&P):
--% in securities rated AAA
--% in securities rated BB
--% in securities rated B
--% in securities rated CCC
--% in securities rated D
--% in unrated securities
--% in cash and cash equivalents
--% in equity securities
These figures are intended solely to provide disclosure about the Fund's asset
composition during its fiscal year ended December 31, 1996. The asset
composition after this time may or may not be the same as represented by such
figures. In addition, the categories reflect ratings by S&P, and ratings
assigned by Moody's may not be consistent with ratings assigned by S&P or other
credit ratings services, and the Adviser may not necessarily agree with a rating
assigned by any credit rating agency.
INTERNATIONAL BOND FUND
The International Bond Fund is intended for investors who are seeking
competitive overall return commensurate with an acceptable level of risk from an
international portfolio of debt securities, but who also understand that
international fixed income investments involve more risk than comparable
domestic securities, due, in part, to fluctuating currency values.
In making investments for the Fund, the Adviser considers factors such as
prospects for currency exchange and interest rates, and inflation in each
country, relative economic growth, government policies influencing exchange
rates and business conditions, and quality of individual issuers. The Adviser
will also determine, using good faith and judgement, (1) country allocation; (2)
currency exposure (asset allocation across currencies); and (3) diversified
security holdings within each market.
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To hedge the market value of securities held, proposed to be held or sold or
relating to foreign currency exchange rates, the Fund may enter into or purchase
securities or securities index options, foreign currency options, and futures
contracts and related options with respect to securities, indexes of securities,
or currencies. The Fund also may buy and sell currencies on a spot or forward
basis. Subject to compliance with applicable rules, futures 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
seeking to enhance portfolio returns and manage portfolio risk more efficiently.
Generally, the Fund's average maturity will be shorter when interest rates
worldwide or in a particular country are expected to rise, and longer when
interest rates are expected to fall. The Fund may use various techniques to
shorten or lengthen the dollar-weighted average maturity of its portfolio,
including transactions in futures and options on futures, interest rate swaps,
caps, floors and short sales against the box.
The duration of the Fund's portfolio will be managed in light of current and
projected economic and market conditions and other factors considered relevant
by the Adviser.
INTERNATIONAL EQUITY FUND
In making investments for the Fund, the Adviser considers factors such as
prospects for currency exchange and interest rates, and inflation in each
country, relative economic growth, government policies influencing exchange
rates and business conditions, and quality of individual issuers. The Adviser
will also determine, using good faith judgement, (1) country allocation; (2)
currency exposure (asset allocation across currencies); and (3) diversified
security holdings within each market. To hedge the market value of securities
held, proposed to be held or sold, or relating to foreign currency exchange
rates, the Fund may enter into or purchase securities or securities index
options, foreign currency options, and future 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 also may purchase
securities on a when-issued or forward commitment basis and engage in portfolio
securities lending. The Fund may use all of these techniques (1) in an effort to
manage cash flow and remain fully invested in the stock and currency markets,
instead of or in addition to buying and selling stocks and currencies, or (2) in
an effort to hedge against a decline in the value of securities or currencies
owned by it or an increase in the price of securities which it plans to
purchase. The Fund may also purchase and sell foreign exchange contracts for
purposes of seeking to enhance portfolio returns and manage portfolio risk more
efficiently. See pages 54-61, "Description of Investments and Investment
Practices," for additional information on the Fund's permitted investments.
The International Equity Fund may invest in American Depositary Receipts
("ADRs") European Depositary Receipts ("EDRs"), Global Depositary Receipts
("GDRs"), International Depositary Receipts ("IDRs") or other similar securities
convertible into securities of foreign issuers. An ADR is a receipt typically
issued by a U.S. bank or trust company showing that you own a foreign security.
An EDR is a receipt typically issued by a European bank or trust company showing
that you own a foreign security. GDRs and IDRs are receipts typically issued by
global or international depositories showing that you own a foreign security.
TAX FREE BOND FUND
This Fund invests in obligations of states and their political subdivisions and
agencies, the interest from which is, in the opinion of the issuer's bond
counsel, exempt from regular federal income tax ("Municipal Bonds" or
"tax-exempt securities"). None of the Fund, the Adviser nor counsel to the Fund
reviews such opinions or otherwise determines independently that the interest on
a security will be classified as tax-exempt interest. Municipal Bonds are issued
to obtain funds for various public purposes. The interest on these obligations
is generally exempt from regular federal income tax in the hands of most
investors.
Because the Fund may hold high-grade Municipal Bonds, the income earned on
shares of the Fund may tend to be less than it might be on a portfolio
emphasizing lower quality securities. Conversely, to the extent that the Fund
holds lower quality securities, the risk of default in the payment of principal
or interest by the issuer of a portfolio security is greater than if the Fund
held only higher quality securities. Although higher quality tax-exempt
securities may produce lower yields, they are generally more marketable. To
protect the Fund's capital under adverse market conditions, the Fund may from
time to time purchase higher quality securities or taxable short-term
investments with a resultant decrease in yield or increase in the proportion of
taxable income.
The Fund may sell a security at any time in order to improve the yield on the
Fund's portfolio. In buying and selling portfolio securities, the Fund seeks to
take advantage of market developments, yield disparities and variations in the
creditworthiness of issuers. The Fund will not engage in arbitrage transactions.
The Fund may invest in Industrial Development and Pollution Control Bonds and
municipal lease obligations. For more information on these types of investments
see page 57, "Description of Investments and Investment Practices--Industrial
Development and Pollution Control Bonds" and
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page 57, "Description of Investments and Investment Practices--Municipal
Securities and Municipal Lease Obligations."
From time to time, the Fund may invest 25% or more of the value of its total
assets in Municipal Bonds that are related in such a way that an economic,
business, or political development or change affecting one such security could
also affect the other securities (for example, securities whose issuers are
located in the same state). The Fund may also invest 25% or more of the value of
its total assets in Industrial Development Bonds. Further, the Fund may acquire
all or part of privately negotiated loans made to tax-exempt borrowers. To the
extent that these private placements are not readily marketable, the Fund will
limit its investment in such securities (along with all other illiquid
securities) to no more than 10% of the value of its total assets. Because an
active trading market may not exist for such securities, the price that the Fund
may pay for these securities or receive on their resale may be lower than that
for similar securities with a more liquid market.
The duration of the Fund's portfolio will be managed in light of current and
projected economic and market conditions and other factors considered relevant
by the Adviser.
The enactment of the Tax Reform Act of 1986 ("TRA") has limited the types and
volume of Municipal Bonds qualifying for the federal income tax exemption for
interest, and results in the treatment of tax-exempt interest on certain
Municipal Bonds as a tax preference item included in the alternative minimum tax
base for corporate and noncorporate shareholders. In addition, all tax-exempt
interest may result in or increase a corporation's liability under the corporate
alternative minimum tax, because a portion of the difference between corporate
"adjusted current earnings" and alternative minimum taxable income is treated as
a tax preference item. Further, an issuer's failure to comply with the more
detailed and more numerous requirements imposed by the TRA after bonds have been
issued may increase the likelihood of retroactive revocation of the tax-exempt
status of certain Municipal Bonds after their issuance. It is not possible to
predict the precise effect of such enactment on the availability of Municipal
Bonds for investment or the value of the Fund's portfolio. The Fund intends to
monitor developments in the municipal bond market to determine whether any
defensive action should be taken.
TOTAL RETURN FUND
The Fund may invest in common stocks, convertible securities, warrants and
fixed-income securities, such as bonds, preferred stocks and other debt
obligations, including money market instruments. The Fund will also invest in
stocks and other equity securities which it believes to be undervalued based
upon factors such as ratios of market price to book value, estimated liquidating
value and projected cash flow.
Although the Fund does not intend to seek short-term profits, securities in its
portfolio will be sold whenever the Adviser believes it is appropriate to do so
without regard to the length of time the particular security may have been held,
subject to certain tax requirements for qualification as a regulated investment
company under the Code. A high turnover rate involves greater expenses to the
Fund and may increase the possibility of shareholders realizing taxable capital
gains. The Fund engages in portfolio trading if it believes a transaction, net
of costs (including custodian charges), will help in achieving its investment
objective.
The duration of the Fund's portfolio will be managed in light of current and
projected economic and market conditions and other factors considered relevant
by the Adviser.
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DESCRIPTION OF INVESTMENTS AND
INVESTMENT PRACTICES
================================================================================
Information about the following types of investments, investment practices and
related risks appears below: Arbitrage, Brady Bonds, Cash Equivalents,
Convertible Securities, Debt Securities, Floaters and Inverse Floaters, Foreign
Currency Transactions, Foreign Index-Linked Instruments, Foreign Securities,
Futures Contracts and Options on Futures Contracts, Industrial Development and
Pollution Control Bonds, Lending of Portfolio Securities, Mortgage-Related and
Other Asset-Backed Securities, Municipal Securities and Municipal Lease
Obligations, Options on Foreign Currencies, Options on Securities and Indexes,
Repurchase Agreements, Short Sales Against the Box, Swap Agreements, When-Issued
Securities and Forward Commitments, Zero Coupon Bonds, Risks of Investing in
High Yield Securities ("Junk Bonds") and Special Risk Considerations for
California Tax Free Fund and NewYork Tax Free Fund. For more information about
the investments, investment practices and risks described in this section,
please see the SAI.
ARBITRAGE
Each Fund, except the California Tax Free Fund, Equity Index Fund, International
Bond Fund, International Equity Fund, New York Tax Free Fund, and Tax Free Bond
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 Funds do not actively engage in arbitrage, such transactions may be
entered into only with respect to debt securities and will occur only in a
dealer's market where the buying and selling dealers involved confirm their
prices to the Fund at the time of the transaction, thus eliminating any risk to
the assets of a Fund.
BRADY BONDS
The Convertible-Equity Income Fund, High Yield Corporate Bond Fund,
International Bond Fund and Total Return Fund may each 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 dollar).
Brady Bonds are not considered U.S. government securities. In light of various
factors, including the history of defaults with respect to commercial bank loans
by public and private entities of countries issuing Brady Bonds, investments in
Brady Bonds are viewed as speculative.
There can be no assurance that Brady Bonds acquired by a Fund 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.
For further information see "Brady Bonds" in the SAI.
CASH EQUIVALENTS
Each of the Funds 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 Capital Appreciation Fund, Convertible-Equity Income Fund, High Yield
Corporate Bond Fund, International Bond Fund, International Equity Fund, Total
Return Fund and Value Fund may invest in securities convertible into common
stock. These securities include, but are not limited to, convertible bonds,
convertible preferred stocks, and warrants.
DEBT SECURITIES
Debt securities may have fixed, variable or floating (including inverse
floating) rates of interest. To the extent that a Fund invests in debt
securities, it will be subject to certain risks. The value of the debt
securities held by a Fund, and thus the NAV of the shares of a 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 a Fund's investments,
changes in relative values of the currencies in which a Fund's investments are
denominated relative to the U.S. dollar, and the extent to which a Fund hedges
its interest rate, credit and currency exchange rate risks. Generally, a rise
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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.
FLOATERS AND INVERSE FLOATERS
Each Fund, other than the Capital Appreciation Fund and the Equity Index Fund,
may, to the extent permitted by law, 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
interest rate on a floater resets periodically, typically every six months.
While, because of the interest rate reset feature, floaters provide a Fund with
a certain degree of protection against rises in interest rates, a Fund will
participate in any declines in interest rates as well.
The California Tax Free Fund, Convertible-Equity Income Fund, High Yield
Corporate Bond Fund, International Bond Fund, International Equity Fund, New
York Tax Free Fund, Tax Free Bond Fund and Total Return Fund, may, to the extent
permitted by law, invest in leveraged inverse floating rate debt instruments
("inverse floaters"). The interest rate on an inverse floater resets in the
opposite direction from the market rate of interest to which the inverse floater
is indexed. An inverse floater may be considered to be leveraged to the extent
that its interest rate varies by a magnitude that exceeds the magnitude of the
change in the index rate of interest. The higher degree of leverage inherent in
inverse floaters is associated with greater volatility in their market values.
Accordingly, the duration of an inverse floater may exceed its stated final
maturity. Certain inverse floaters may be deemed to be illiquid securities for
purposes of a Fund's limitation on investments in such securities.
FOREIGN CURRENCY TRANSACTIONS
Each Fund, except the California Tax Free Fund, Equity Index Fund, Government
Fund, Money Market Fund, New York Tax Free Fund and Tax Free Bond Fund, may
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 Funds cannot assure that these techniques will always be successful.
Successful use of forward contracts depends on the investment manager's skill in
analyzing and predicting relative currency values. Forward contracts alter a
Fund's exposure to currency exchange rate activity and could result in losses to
the Fund if currencies do not perform as investment managers anticipate. A Fund
may also incur significant costs when converting assets from one currency to
another. Contracts to sell foreign currency would limit any potential gain which
might be realized by a Fund if the value of the hedged currency increases.
The 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.
FOREIGN INDEX-LINKED INSTRUMENTS
As part of its investment program, and to maintain greater flexibility, the
International Bond Fund and the International Equity Fund may invest in
instruments which have the investment characteristics of particular securities,
securities indexes, futures contracts or currencies. Such instruments may take a
variety of forms, such as debt instruments with interest or principal payments
determined by reference to the value of a currency or commodity at a future
point in time.
A foreign index may be based upon the exchange rate of a particular currency or
currencies or the differential between two currencies, or the level of interest
rates in a particular country or countries, or the differential in interest
rates between particular countries. The risks of such investments would reflect
the risks of investing in the index or other instrument, the performance of
which determines the return for the instrument. Tax considerations may limit the
Funds' ability to invest in foreign index-linked instruments.
FOREIGN SECURITIES
Each Fund, except the California Tax Free Fund, Government Fund, New York Tax
Free Fund, and Tax Free Bond Fund, may purchase foreign securities. The Money
Market Fund may only purchase dollar-denominated 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 or other government restrictions, including possible seizure or
nationalization of foreign deposits or assets. In addition, foreign securities
may be less liquid and more volatile than U.S. securities. There may also be
difficulty in invoking legal protections across borders.
Investment in emerging market countries presents risks in greater degree than,
and in addition to, those presented by investment in foreign issuers in general.
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Many of the foreign securities in which the Funds invest will be denominated in
foreign currencies. Changes in foreign exchange rates will affect the value of
securities denominated or quoted in foreign currencies. Exchange rate movements
can be large and can endure for extended periods of time, affecting either
favorably or unfavorably the value of the Funds' assets. A Fund may, however,
engage in foreign currency transactions to protect itself against fluctuations
in currency exchange rates in relation to the U.S. dollar. See page 55,
"Description of Investments and Investment Practices--Foreign Currency
Transactions." Although the Advisers will attempt to manage the risk associated
with currency exchange rates through foreign currency hedging, there is no
guarantee the hedging will be effective and currency risk cannot be eliminated
entirely.
FUTURES CONTRACTS AND
OPTIONS ON FUTURES CONTRACTS
The California Tax Free Fund, Convertible-Equity Income Fund, Government Fund,
High Yield Corporate Bond Fund, International Bond Fund, International Equity
Fund, New York Tax Free Fund, Tax Free Bond Fund and Total Return 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, 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 a Fund's portfolio and
for other appropriate risk management purposes. The Government Fund may enter
into futures contracts and purchase and write options on futures, which are not
U.S. government securities, in order to attempt to hedge against changes in
interest rates and to seek current income. 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.
In the case of a futures contract on an index, the amount of cash is equal to a
specific dollar amount times the difference between the price at which the
agreement is made and the value of an index at the close of the last trading day
of the contract. No physical delivery of the underlying securities in the index
is made.
Similarly, the Capital Appreciation Fund, Convertible-Equity Income Fund, Equity
Index Fund, International Equity Fund, Total Return Fund and Value Fund may
enter into contracts for the future delivery of securities and stock index
futures contracts to protect against changes in stock market prices. In
addition, each Fund, except the California Tax Free Fund, Equity Index Fund,
Government Fund, Money Market Fund, New York Tax Free Fund and Tax Free Bond
Fund, may, to the extent it invests in foreign securities, 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.
The Funds may purchase put and call options on futures contracts, which give a
Fund the right to sell or purchase the underlying futures contract for a
specified price upon exercise at any time during the option period. The Funds
also may write put and call options on futures contracts. It is the current
policy of the Trust that the Funds will purchase or write only options on
futures contracts that are traded on a U.S. or foreign exchange or board of
trade.
The Funds will use financial futures contracts and related options for "bona
fide hedging" purposes, as such term is defined in applicable regulations of the
Commodity Futures Trading Commission or, with respect to positions in financial
futures and related options that do not qualify as "bona fide hedging"
positions, will enter into such nonhedging positions only to the extent that
aggregate initial margin deposits plus premiums paid by it for open futures
options positions, less the amount by which any such positions are
"in-the-money," would not exceed 5% of a Fund's total assets. The Funds will
not, however, use futures contracts on securities, securities indexes or
currencies for speculation. A Fund may lose the expected benefit of the
transactions if interest rates, currency exchange rates or securities prices
change in an unanticipated manner. Such unanticipated changes in interest rates,
currency exchange rates or securities prices may also result in poorer overall
performance of a Fund than if the Fund had not entered into any futures
transactions.
Because the only future contracts currently available to hedge the Tax Free Bond
Fund's portfolio are futures on various U.S. government securities and futures
on a municipal securities index, perfect correlation between that Fund's futures
positions and portfolio positions may be difficult to achieve. The Tax Free Bond
Fund will only purchase or sell such related futures or related options (such as
U.S. Treasury or municipal securities index futures and related options) when,
in the opinion of the Adviser, price movements in such futures and related
options will closely correlate with price movements in the tax-exempt municipal
securities which are subject to the hedge.
There are several risks associated with the use of futures and options on
futures as hedging and risk management techniques. There may be an imperfect
correlation between changes in the prices of futures and changes in the prices
of securities or currencies which are the subject of the hedge. If the price of
a futures contract changes less than the price of the securities or currencies
which are the subject of the hedge, the hedge will not be fully effective.
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It is also possible that, when a Fund has sold stock index futures to hedge its
portfolio against a decline in the market, the market may advance while the
value of the particular securities held in the Fund's portfolio may decline. If
this occurred, the Fund would incur a loss on the futures contracts and also
experience a decline in the value of its portfolio securities. The Funds do not
intend to use U.S. stock index futures to hedge positions in securities of
non-U.S. companies.
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 Funds generally will purchase only
those options and futures contracts for which there appears to be an active
market, there is no assurance that a liquid market on an exchange will exist for
any particular option or futures contract at any particular time. In the event
no such market exists for particular options, it might not be possible to effect
closing transactions in such options with the result that a Fund would have to
exercise options it has purchased in order to realize any profit and would be
less able to limit its exposure to losses on options it has written.
INDUSTRIAL DEVELOPMENT AND POLLUTION
CONTROL BONDS
The California Tax Free Fund, High Yield Corporate Bond Fund, New York Tax Free
Fund, Tax Free Bond Fund and Total Return 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.
Industrial Development Bonds issued after the effective date of the TRA, as well
as certain other bonds, are now classified as "private activity bonds." Some,
but not all, private activity bonds issued after that date qualify to pay
tax-exempt interest.
LENDING OF PORTFOLIO SECURITIES
Each Fund, except the Money Market Fund and the Tax Free Bond Fund, may also
seek to increase its income by lending portfolio securities. If an Adviser
determines to make securities loans, it is intended that the value of the
securities loaned would not exceed 33% of the value of the total assets of the
lending Fund. (For more information, see the SAI.)
MORTGAGE-RELATED AND OTHER
ASSET-BACKED SECURITIES
Each Fund may buy mortgage-related securities. The value of some
mortgage-related or asset-backed securities in which the Funds invest may be
particularly sensitive to changes in prevailing interest rates, and, like the
other investments of the Funds the ability of the Funds to successfully utilize
these instruments may depend in part upon the ability of the Adviser to forecast
interest rates and other economic factors correctly. When people prepay their
mortgage loans, a Fund's return from mortgage-related securities may be reduced.
The rate of prepayments on underlying mortgages will affect the price and
volatility of a mortgage-related security, and may have the effect of shortening
or extending the effective maturity of the security beyond what was anticipated
at the time of purchase. To the extent that unanticipated rates of prepayment on
underlying mortgages increase the effective maturity of a mortgage-related
security, the volatility of such security can be expected to increase. While
principal and interest payments on some mortgage-related securities may be
guaranteed by the U.S. government, government agencies or other guarantors, the
market value of such securities is not guaranteed.
MORTGAGE PASS-THROUGH SECURITIES
Mortgage pass-through securities are securities representing interest in "pools"
of mortgages in which payments of both interest and principal on the securities
are made monthly, in effect "passing through" monthly payments made by the
individual borrowers on the residential mortgage loans which underlie the
securities (net of fees paid to the issuer or guarantor of the securities).
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOs")
CMOs are hybrid instruments with characteristics of both mortgage-backed bonds
and mortgage pass-through securities. Similar to a bond, interest and pre-paid
principal on a CMO are 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 Government National
Mortgage Association ("GNMA"), Federal Home Loan Mortgage Corporation ("FHLMC")
or Federal National Mortgage Association ("FNMA"). CMOs are structured into
multiple classes, with each class bearing a different stated maturity. Monthly
payments of principal, including prepayments, are 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.
OTHER MORTGAGE-RELATED SECURITIES
The Funds' Advisers expect that governmental, government-related or private
entities may create mortgage loan pools and other mortgage-related securities
offering mortgage pass-through and mortgage-collateralized investments in
addition to those described above. As new types of mortgage-related securities
are developed and offered to investors, the Funds' Adviser will, consistent with
the Funds' investment objective, policies and quality standards, consider making
investments in such new types of mortgage-related securities.
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OTHER ASSET-BACKED SECURITIES
Other asset-backed securities (unrelated to mortgage loans) have been offered to
investors, such as "CARssm" ("Certificates for Automobile Receivablessm").
CARssm represent undivided fractional interests in a trust whose assets consist
of a pool of motor vehicle retail installment sales contracts and security
interests in the vehicles securing the contracts. Payments of principal and
interest on CARSsm are "guaranteed up to certain amounts and passed-through"
monthly to certificate holders, and are for a certain time period by a letter of
credit issued by a financial institution unaffiliated with the trustee or
originator of the trust. Underlying sales contracts are subject to prepayment,
which may reduce the overall return to certificate holders. If the letter of
credit is exhausted, certificate holders may also experience delays in payment
or losses on CARssm, if the full amounts due on underlying sales contracts are
not realized by the trust because of unanticipated legal or administrative costs
of enforcing the contracts, or because of depreciation, damage or loss of the
vehicles securing the contracts, or other factors. The Fund may invest in CARssm
and in other asset-backed securities that may be developed in the future.
The Fund will invest only in mortgage-related (or other asset-backed)
securities either (i) issued by U.S. government-sponsored corporations
(currently GNMA, FHLMC and FNMA or (ii) privately issued securities rated Baa or
better by Moody's or BBB by S&P. In addition, if any such security is determined
to be illiquid, a Fund will limit its investments these and other illiquid
instruments to not more than 10% of its net assets (15% for the International
Bond and International Equity Funds).
MUNICIPAL SECURITIES AND
MUNICIPAL LEASE OBLIGATIONS
The two main types of municipal bonds are "general obligation" and "revenue"
bonds. "General obligation" bonds are secured by the issuer's pledge of its full
faith, credit and taxing power to repay the principal and interest. "Revenue"
bonds are repaid from the revenue of a particular facility (or group of
facilities) or from proceeds of a specific revenue source. (Examples: bonds used
to raise funds for highways, airports and hospitals.)
The California Tax Free Fund, New York Tax Free Fund and Tax Free Bond Fund may
invest in municipal lease obligations. Municipal lease obligations are
tax-exempt securities that may be supported by a lease or an installment
purchase contract issued by state and local government authorities to acquire
funds to obtain the use of a wide variety of equipment and facilities such as
fire and sanitation vehicles, computer equipment and other capital assets. These
obligations, which may be secured or unsecured, are not general obligations and
have evolved to make it possible for state and local government authorities to
obtain the use of property and equipment without meeting constitutional and
statutory requirements for the issuance of debt. Thus, municipal lease
obligations have special risks not normally associated with municipal bonds.
These obligations frequently contain "nonappropriation" clauses that provide
that the governmental issuer of the obligation has no obligation to make future
payments under the lease or contract unless money is appropriated for such
purposes by the legislative body on a yearly or other periodic basis. In
addition to the "nonappropriation" risk, many municipal lease obligations have
not yet developed the depth of marketability associated with Municipal Bonds;
moreover, although the obligations may be secured by the leased equipment, the
disposition of the equipment in the event of foreclosure might prove difficult.
In order to limit certain of these risks, each Fund will not invest more than
10% of its assets in municipal lease obligations that are illiquid (along with
all other illiquid securities). The liquidity of municipal lease obligations
purchased by a Fund will be determined pursuant to guidelines approved by the
Board of Trustees.
OPTIONS ON FOREIGN CURRENCIES
Each Fund, except the California Tax Free Fund, Equity Index Fund, Government
Fund, Money Market Fund, New York Tax Free Fund and Tax Free Bond Fund, may, to
the extent it invests in foreign securities, 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. As with other kinds of
options transactions, however, the writing of an option on foreign currency will
constitute only a partial hedge up to the amount of the premium received and a
Fund could be required to purchase or sell foreign currencies at disadvantageous
exchange rates, thereby incurring losses. The purchase of an option on foreign
currency may constitute an effective hedge against exchange rate fluctuations,
although, in the event of rate movements adverse to a Fund's position, a Fund
may forfeit the entire amount of the premium plus related transaction costs.
Options on foreign currencies to be written or purchased by a Fund will be
traded on U.S. and foreign exchanges or over-the-counter.
A 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 a Fund seeks to close out an
option position. Furthermore, if trading restrictions or suspensions are imposed
on the options markets, a Fund may be unable to close out a position.
Currency options traded on U.S. or other exchanges may be subject to position
limits which may limit the ability of a Fund to reduce foreign currency risk
using such options. Over-the-counter options differ from traded options in that
they are
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two-party contracts with price and other terms negotiated between buyer and
seller and generally do not have as much market liquidity as exchange-traded
options. Foreign currency exchange-traded options generally settle in cash,
whereas options traded over-the-counter may settle in cash or result in delivery
of the underlying currency upon exercise of the option.
OPTIONS ON SECURITIES AND INDEXES
Each Fund, except the Equity Index Fund, Money Market Fund and Tax Free Bond
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
Government Fund may buy and sell options on securities which are not U.S.
government securities in order to attempt to hedge against changes in interest
rates and to seek current income.
Call options sold by a Fund are agreements by a Fund, for a premium received by
the Fund, to sell a particular security in its portfolio at a specified price if
the option is exercised during the option period. Put options sold by a Fund are
agreements by a 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 Fund's purpose in selling covered options is to realize greater income
than would be realized on portfolio securities transactions alone. A Fund may
forego the benefits of appreciation on securities sold pursuant to call options,
or pay a higher price for securities acquired pursuant to put options written by
the Fund.
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 Trustees have adopted a nonfundamental policy that each of the Capital
Appreciation Fund, Convertible-Equity Income Fund, Government Fund, High
Yield Corporate Bond Fund, Total Return Fund and Value Fund may write covered
call or put options with respect to no more than 25% of the value of its net
assets, may purchase protective puts with a value of up to 25% of its net assets
and may purchase calls and puts other than protective puts, with a value of up
to 5% of the Fund's net assets.
The Funds, other than the California Tax Free Fund, Money Market Fund, New York
Tax Free Fund and Tax Free Bond Fund, may purchase put and call options on
securities indexes to hedge against risks of market-wide price fluctuations. The
Equity Index Fund may buy or sell call options on the S&P 500 Index. Options on
securities indexes are similar to options on securities except that settlement
is in cash. An option on an index is a contract that gives the purchaser of the
option, in return for a premium paid, the right to receive from the writer of
the option cash equal to the difference between the exercise price of the option
and the closing price of an index, expressed in dollars, times the specified
multiple (the "multiplier").
The Equity Index Fund will use these techniques primarily as a temporary
substitute for taking positions in the securities that comprise the Index,
particularly if the Adviser considers these instruments to be undervalued
relative to the prices of the securities that comprise the Index. The Fund may,
in particular, purchase call options on the Index to protect against increases
in the prices of securities underlying the Index that the Fund intends to
purchase pending its ability to invest in such securities in an orderly manner.
Prior to exercise or expiration, an option may be closed out by an offsetting
purchase or sale of an option on the same series. A Fund may sell call options
it has previously purchased, which could result in a net gain or loss, depending
on whether the amount realized on the sale is more or less than the premium and
other transaction costs paid on the call option which is sold.
The purchase and writing of options involves certain risks. The ability of a
Fund to successfully utilize these instruments may depend in part upon the
ability of the Adviser to forecast interest rates and other economic factors
correctly.
REPURCHASE AGREEMENTS
Each Fund may enter into domestic repurchase agreements to earn income. The
International Bond Fund and International Equity Fund may also enter into
foreign repurchase agreements. A repurchase agreement is an agreement whereby a
Fund purchases securities and the seller agrees to repurchase the securities
within a particular time at a specified price. Such price will exceed the
original purchase price, the difference being income to the Fund, and will be
unrelated to any interest rate on the purchased security.
The California Tax Free Fund and New York Tax Free Fund may enter into reverse
repurchase agreements. A reverse repurchase agreement involves the sale of a
security by a Fund and its agreement to repurchase the instrument at a specified
time and price.
The Trustees have reviewed and approved certain sellers who they believe to be
creditworthy and have authorized the Funds to enter into repurchase agreements
with such sellers. If the other party to a repurchase agreement were to become
bankrupt, a Fund could experience delays in recovering its investment or losses.
SHORT SALES AGAINST THE BOX
A short sale is a transaction in which a Fund sells through a broker a security
it does not own in anticipation of a possible decline in market price. A short
sale "against the box" is a
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short sale in which, at the time of the short sale, a Fund owns or has the right
to obtain securities equivalent in kind and amount. Each of the Funds will only
enter into short sales against the box. A Fund may enter into a short sale
against the box, among other reasons, to hedge against a possible market decline
in the value of 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. If a
broker, with which the Fund has open short sales, were to become bankrupt, a
Fund could experience losses or delays in recovering gains on short sales. The
Funds will only enter into short sales against the box with brokers the
Advisers believe are creditworthy.
SWAP AGREEMENTS
The International Bond Fund and International Equity Funds 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. 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. Commonly used swap
agreements include interest rate caps, under which, in return for a premium, one
party agrees to make payments to the other to the extent that interest rates
exceed a specified rate, or "cap"; interest rate floors, under which, in return
for a premium, one party agrees to make payments to the other to the extent that
interest rates fall below a specified level, or "floor"; and interest rate
collars, under which a party sells a cap and purchases a floor or vice versa in
an attempt to protect itself against interest rate movements exceeding given
minimum or maximum levels.
Whether a Fund's use of swap agreements will be successful in furthering its
investment objective will depend on the Adviser's ability to predict correctly
whether certain types of investments are likely to produce greater returns than
other investments. Because they are two-party contracts and because they may
have terms of greater than seven days, swap agreements may be considered to be
illiquid. Moreover, a Fund bears the risk of loss of the amount expected to be
received under a swap agreement in the event of the default or bankruptcy of a
swap agreement counterparty. The Adviser will cause a Fund to enter into swap
agreements only with counterparties that would be eligible for consideration as
repurchase agreement counterparties under the Funds' repurchase agreement
guidelines. Certain restrictions imposed on the Funds by the Internal Revenue
Code may limit the Funds' ability to use swap agreements. The swaps market is a
relatively new market and is largely unregulated. It is possible that
developments in the swaps market and the laws relating to swaps, including
potential government regulation, could adversely affect a Fund's ability to
terminate existing swap agreements, 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
Each 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, each 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 Funds, except the Equity Index 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 a Fund must accrue and distribute every year even though the Fund receives
no payment on the investment in that year. Zero coupon bonds tend to be more
volatile than conventional debt securities.
RISKS OF INVESTING IN HIGH YIELD SECURITIES
("JUNK BONDS")
The Convertible-Equity Income Fund, High Yield Corporate Bond Fund,
International Bond Fund, International Equity Fund, and Total Return Fund may,
to varying degrees as previously described under "Descriptions of Each Fund" and
"General Investment Considerations," invest in debt securities rated lower than
Baa by Moody's or BBB by S&P. Securities
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rated lower than Baa by Moody's or BBB by S&P, or, if not rated, deemed to be of
equivalent quality by the 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. Analysis of the
creditworthiness of issuers of high yield bonds may be more complex than for
issuers of higher quality debt securities, and the ability of a 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, a 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 a 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
Adviser deems it in the best interest of the shareholders.
SPECIAL RISK CONSIDERATIONS FOR THE CALIFORNIA
TAX FREE FUND AND NEW YORK TAX FREE FUND
California Municipal Securities. Investors should be aware that certain
California Constitutional amendments, legislative measures, executive orders,
administrative regulations and voter initiatives could result in certain adverse
consequences affecting California municipal securities. For instance, certain
provisions of the California Constitution and statutes that limit the taxing and
spending authority of California governmental entities may impair the ability of
the issuers of some California municipal securities to maintain debt service on
their obligations. Other measures affecting the taxing or spending authority of
California or its political subdivisions may be approved or enacted in the
future.
New York Municipal Securities. Investors should be aware that New York State and
New York City face long-term economic problems which could seriously affect
their ability and that of other issuers of New York municipal securities to meet
their financial obligations. Moreover, while the long-term prospects for New
York City's economy are uncertain, investors should recognize that the
securities industry played a significant role in the economy of New York City in
recent years and contributed substantially to New York City's tax revenues.
Declines in securities industry activity may have a significant adverse impact
on New York City's fiscal situation.
For a discussion of certain matters relating to the fiscal policies and
financial condition of the states of California and New York and their political
subdivisions, see the SAI.
================================================================================
INVESTMENT RESTRICTIONS
================================================================================
The following restrictions may not be changed with respect to any Fund without
the approval of the majority of outstanding voting securities of that Fund
(which, under the 1940 Act and the rules thereunder and as used in this
Prospectus and the SAI, means the lesser of (1) 67% of the shares of that Fund
present at a meeting if the holders of more than 50% of the outstanding shares
of that Fund are present in person or by proxy, or (2) more than 50% of the
outstanding shares of that Fund). Investment restrictions that appear below or
elsewhere in this 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, a
Fund.
The Trust may not, on behalf of any Fund:
(1) invest more than 5% of the value of the total assets of a Fund in the
securities of any one issuer, except U.S. government securities. This
restriction applies only with respect to 75% of the International Equity
Fund's total assets and does not apply to the California Tax Free Fund,
Equity Index Fund, International Bond Fund and New York Tax Free Fund;
(2) 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 a Fund. This
restriction applies only with respect to 75% of the International Equity
Fund's total
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assets and does not apply to the California Tax Free Fund, Equity Index
Fund, International Bond Fund and New York Tax Free Fund;
(3) 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 in the case of the International Equity Fund and International
Bond Fund, provided that those Funds maintain 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 (10% in
the case of the California Tax Free Fund and New York Tax Free Fund);
(4) pledge, mortgage or hypothecate its assets, except that, to secure
permitted borrowings, it may pledge securities having a market value at the
time of pledge not exceeding 15% (10% in the case of the California Tax
Free Fund and New York Tax Free Fund) of the cost of a Fund's total assets,
and except in connection with permitted transactions in options, futures
contracts and options on futures contracts. This restriction does not apply
to the International Bond Fund or International Equity Fund;
(5) purchase securities (or with respect to the California Tax Free Fund, New
York Tax Free Fund, and Tax Free Bond Fund purchase (i) Pollution Control
and Industrial Development Bonds or (ii) securities the interest from which
is not exempt from regular federal income tax) if such purchase would cause
more than 25% in the aggregate of the market value of the total assets of a
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 in respect to investments in U.S. government securities or,
in the case of the California Tax Free Fund and New York Tax Free Fund,
investments in repurchase agreements with respect thereto (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 (a) the above limitation does not apply to the Equity Index Fund to
the extent that the Standard & Poor's 500 Composite Stock Price Index is so
concentrated; (b) up to 40% of the High Yield Corporate Bond 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 more than 25% 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); (c) more than 25% of the market value
of the total assets of the Money Market Fund will be invested in the
securities of banks and bank holding companies, including certificates of
deposit and bankers' acceptances; and (d) at such time that the 1940 Act is
amended to permit a registered investment company to elect to be "industry
nondiversified," the International Bond Fund and International Equity Fund
elect to be so classified and the foregoing limitation shall no longer
apply with respect to those Funds. With respect to the California Tax Free
Fund and New York Tax Free Fund, private activity bonds ultimately payable
by companies within the same industry are treated as if they were issued by
issuers in the same industry for purposes of this restriction;
(6) purchase or sell real estate (including limited partnership interests but
excluding securities secured by real estate or interests therein or, issued
by companies that invest in or deal in real estate) or, in the case of the
California Tax Free Fund and New York Tax Free Fund, real estate investment
trust securities; interests in oil; gas or mineral leases; commodities and
commodity contracts. The Trust reserves the freedom of action to hold and
to sell real estate acquired for any 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;
(7) make loans to other persons, except loans of portfolio securities (in the
case of the California Tax Free Fund and New York Tax Free Fund, in an
amount not to exceed 10% of the value of each Fund's total assets in
accordance with applicable guidelines approved by the Board of Trustees and
30% in the case of the Equity Index Fund). The purchase of debt obligations
(and bankers' acceptances and commercial paper in the case of the Equity
Index Fund) and the entry into repurchase agreements in accordance with
such Fund's investment objectives and policies are not deemed to be loans
for this purpose; or
(8) with respect to the California Tax Free Fund and New York Tax Free Fund,
purchase securities with contractual or other restrictions on resale or
other illiquid assets (such as repurchase agreements with maturities in
excess of seven days or other securities which are not readily marketable)
if more than 10% of the total assets of the Fund would be invested in such
securities. The Equity Index Fund may not invest more than 10% of its total
assets in repurchase agreements providing for settlement in more than seven
days after notice and in other securities that are not readily marketable.
"Value" for the purposes of all investment restrictions shall mean the value
used in determining a Fund's NAV. Additional fundamental and nonfundamental
investment restrictions may be found in the SAI.
62
<PAGE>
================================================================================
INVESTMENT ADVISERS, ADMINISTRATOR
AND DISTRIBUTOR
================================================================================
THE ADVISERS
The Trust, on behalf of each Fund, pays the Adviser a monthly fee for services
performed at an annual percentage of the average daily net assets of that Fund
as follows:
<TABLE>
<CAPTION>
Rate paid for
the year ended
Annual December 31,
Rate 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
California Tax Free Fund 0.25% %
Capital Appreciation Fund 0.36%* %
Convertible-Equity Income Fund 0.36% %
Equity Index Fund 0.10%+ %
Government Fund 0.30%* %
High Yield Corporate
Bond Fund 0.30%* %
International Bond Fund 0.45%++ %
International Equity Fund 0.60% %
Money Market Fund 0.25%ss. %
New York Tax Free Fund 0.25% %
Tax Free Bond Fund 0.30% %
Total Return Fund 0.32%* %
Value Fund 0.36%|| %
- --------------------------------------------------------------------------------
</TABLE>
* The Administrator and MacKay-Shields have voluntarily established combined
fee breakpoints for certain of the Funds as follows: for the Government
Fund of .55% on assets exceeding $1 billion; for the High Yield Corporate
Bond Fund of .55% on assets in excess of $500 million; for the Total Return
Fund of .60% on assets in excess of $500 million; and for the Capital
Appreciation Fund of .65% on assets in excess of $200 million and .50% on
assets in excess of $500 million.
See "The Administrator" for further information.
+ In the event the expenses of the Fund (including the fees of the Fund's
Adviser and Administrator, but excluding interest, taxes, organizational
expenses, brokerage commissions, litigation and indemnification expenses
and other extraordinary expenses) for any fiscal year exceed the limits set
by any state that regulates mutual fund expenses, Monitor will reduce its
fees payable by the Fund by 20% of such excess.
++ The Adviser and the Administrator have jointly agreed to waive a portion of
their fees payable by the International Bond Fund until such time as the
Fund reaches $50 million in assets. See "If you invest $1,000, you might
pay."
ss. up to $300 million; .225% from $300 to $700 million; .20% from $700 million
to $1.0 billion; and .175% in excess of $1.0 billion
|| up to $200 million; .325% from $200 to $500 million; and .25% in excess of
$500 million
The advisory fees paid by the International Bond Fund and International Equity
Fund are higher than the investment advisory fee paid by most other registered
investment companies that invest only or primarily in domestic securities, but
is comparable to the advisory fees paid by other international funds.
THE ADMINISTRATOR
The Trust, on behalf of each Fund, pays the Administrator a monthly fee for the
services performed and the facilities furnished by the Administrator, pursuant
to the Administration Agreement, at an annual rate of the average daily net
assets of that Fund as follows:
<TABLE>
<CAPTION>
Rate Paid
for Fiscal
Year Ended
Annual December 31,
Rate 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
California Tax Free Fund 0.25% %
Capital Appreciation Fund 0.36%* %
Convertible-Equity Income Fund 0.36% %
Equity Index Fund 0.40%+ %
Government Fund 0.30%* %
High Yield Corporate Bond Fund 0.30%* %
International Bond Fund 0.25%++ %
International Equity Fund 0.40% %
Money Market Fund 0.25%ss. %
New York Tax Free Fund 0.25% %
Tax Free Bond Fund 0.30% %
Total Return Fund 0.32%* %
Value Fund 0.36%|| %
- --------------------------------------------------------------------------------
</TABLE>
* The Administrator and MacKay-Shields have voluntarily established combined
fee breakpoints for the Government Fund of .55% on assets exceeding $1
billion, for the High Yield Corporate Bond Fund of .55% on assets in excess
of $500 million, for the Total Return Fund of .60% on assets in excess of
$500 million and for the Capital Appreciation Fund of .65% on assets in
excess of $200 million and .50% on assets in excess of $500 million. See
"The Advisers" for further information.
+ The Administration Agreement also provides that, in the event the expenses
of the Fund (including the fees of the Fund's Adviser and the
Administrator, but excluding interest, taxes, organization expenses,
brokerage commissions, litigation and indemnification expenses and other
extraordinary expenses) for any fiscal year exceed the limits set by any
state that regulates mutual fund expenses, the Administrator will reduce
its fees payable by the Fund by 80% of such excess. In addition, effective
January 1, 1996, in the event the total expenses of the Equity Index Fund
(including Rule 12b-1 fees) for any fiscal year exceeds .80% of the value
of the Fund's average annual net assets, the Administrator will reduce its
fees payable by the Fund by the difference between the Fund's total
expenses and .80%. This fee waiver is voluntary and may be terminated at
any time.
++ The Adviser and the Administrator have jointly agreed to waive a portion of
their fees payable by the International Bond Fund until such time as the
Fund reaches $50 million in assets. See "If you invest $1,000, you might
pay."
ss. up to $300 million; .225% from $300 to $700 million; .20% from $700 million
to $1.0 billion; and .175% in excess of $1.0 billion
|| up to $200 million; .325% from $200 to $500 million; and .25% in excess of
$500 million
The payment of the Equity Index Fund's investment management and administration
fees, as well as other operating expenses, will have the effect of reducing
investors' returns and will affect the Equity Index Fund's ability to track the
S&P 500 Index exactly.
63
<PAGE>
Each Fund, other than California Tax Free Fund, Equity Index Fund and New York
Tax Free Fund, pursuant to an Accounting Agreement with the Administrator will
bear an allocable portion of the Administrator's cost of performing certain
bookkeeping and pricing services which were previously provided by the Trust's
Custodian and Transfer Agent. Each Fund, other than California Tax Free Fund,
Equity Index Fund and New York Tax Free Fund, pays the Administrator 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,
each Fund pays the Administrator amounts intended to reimburse it for costs
incurred for account maintenance, correspondence and in providing account set-up
services also previously provided by the Trust's Custodian and Transfer Agent.
Finally, the Administrator provides the Funds with certain recordkeeping and
administrative services pursuant to a Services Agreement with the Funds.
The Administrator is not responsible for records maintained by the Funds'
Custodian and Transfer, Dividend Disbursing and Shareholder Servicing Agent,
except those as to which the Administrator has supervisory functions, and other
than those being maintained by the Advisers.
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 Funds, each
Fund, other than the Money Market Fund, has adopted separate distribution plans
pursuant to Rule 12b-1 under the 1940 Act for each class of shares of that Fund
(the "Class A Plans," the "Class B Plans" and, collectively, the "Plans"). The
Equity Index Fund only offers Class A shares and, accordingly, only has a Class
A Plan. Pursuant to the Class A Plans, each Fund pays the Distributor a monthly
fee, which is an expense of the Class A shares of each Fund charged against its
income, at the annual rate of 0.25% of the average daily net assets of each
Fund's Class A shares for distribution or service activities, as designated by
the Distributor. Pursuant to the Class B Plans, each Fund pays the Distributor a
monthly distribution fee, which is an expense of the Class B shares of each
Fund, at the annual rate of 0.75% (0.25% in the case of the California Tax Free
Fund, and New York Tax Free Fund and the Tax Free Bond Fund) of the lesser of:
(a) the aggregate gross sales of the Fund's Class B shares since the inception
of the Fund (not including reinvestments of dividends or capital gains
distributions), less the aggregate net asset value of the Fund's Class B
shares exchanged or redeemed since the Fund's inception upon which a
contingent deferred sales charge has been imposed or upon which such charge
has been waived; or
(b) the average daily net assets of the Fund's Class B shares.
Class B shares of the Funds 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 each Fund as
compensation for personal continuing services rendered to Class B shareholders
of the Funds and the maintenance of shareholder accounts.
The combination of the contingent deferred sales charge and the distribution fee
contributes to a 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 67, "Alternative
Sales Arrangements--Deferred Sales Charge Class B Shares--Contingent Deferred
Sales Charge, Class B."
Under a Plan, a class of shares of a 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 Funds are terminated, the Funds 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 Funds may
receive different compensation with respect to one particular class of shares as
opposed to another in the same Fund.
64
<PAGE>
================================================================================
HOW TO PURCHASE SHARES OF THE FUNDS
================================================================================
GENERAL INFORMATION
The two classes of shares each represent an interest in the same portfolio of
investments of each 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 each Fund has exclusive
voting rights with respect to provisions of the Rule 12b-1 plan for such class
of a Fund 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 generally will be 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 66.
Shares of the Funds may be sold through broker-dealers not affiliated with the
Distributor. Some of those broker-dealers are not participants in the National
Securities Clearing Corporation Fund/SERV clearing system ("Fund/SERV"). Orders
placed through nonaffiliated broker-dealers who are not participants in
Fund/SERV will be effective when received in good order by the Funds' Transfer
Agent, Boston Financial Data Services ("BFDS"), in Boston, Massachusetts.
BY MAIL
Initial purchases of shares of the Funds should be made by mailing the completed
application form to the investor's registered representative. Shares of any
Fund, except the Money Market Fund, may be purchased at the NAV per share plus
any applicable sales charge next determined after receipt and acceptance of the
purchase order by that Fund. In the case of the Money Market Fund (which seeks
to maintain a constant net asset value of $1.00 per share), the share purchase
is effected as of the NAV next determined after receipt and acceptance of the
purchase order by the Fund's Transfer Agent.
BY TELEPHONE
For all Funds, other than the Money Market Fund, 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 Funds and the
Shareholder Servicing Agent for transactions effected by telephone, see page 42,
"Know How to Sell and Exchange Shares."
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________________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 Trust will reduce the time a shareholder must wait before
redeeming or exchanging shares because, when a shareholder purchases by check,
the Trust will reject redemption requests until the Trust is reasonably
satisfied that the funds have been collected (which can take up to 10 calendar
days).
ADDITIONAL INVESTMENTS
Additional investments in a 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
65
<PAGE>
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 a 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 BFDS, 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 a 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 or $1,000 in the case of the Equity Index Fund.
The investment day may be any day from the first through the twenty-eighth of
the respective month. Fund shares purchased by AutoInvest are not redeemable
until 10 days or more 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 and the
Adviser to the particular Fund, purchase shares of a Fund with liquid securities
that are eligible for purchase by that 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. 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.
================================================================================
ALTERNATIVE SALES ARRANGEMENTS
================================================================================
INITIAL SALES CHARGE ALTERNATIVE CLASS A SHARES
The sales charge on Class A shares of the Funds is a variable percentage of the
public offering price depending upon the investment orientation of the Fund and
the amount of the sale.
The sales charge applicable to an investment in Class A shares of the Capital
Appreciation Fund, Convertible-Equity Income Fund, International Equity Fund,
Total Return Fund and Value 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 $99,99 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>
The sales charge applicable to an investment in Class A shares of the California
Tax Free Fund, Government Fund, High Yield Corporate Bond Fund, International
Bond Fund, New York Tax Free Fund and Tax Free Bond 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 $100,000 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>
The sales charge for Class A Shares of the Equity Index Fund is a variable
percentage of the public offering price depending upon the amount of the sale,
as set forth below:
<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 $100,000 3.00% 3.09% 2.75% 0.25%
$100,000 to $249,999 2.50% 2.56% 2.25% 0.25%
$250,000 to $499,999 2.00% 2.04% 1.75% 0.25%
$500,000 to $999,999 1.50% 1.52% 1.25% 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."
66
<PAGE>
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
A 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 a
Fund's shares at NAV without payment of any sales charge. In addition, the Trust
will treat Class A share purchases of Funds, other than the Equity Index Fund
and Money Market 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 Funds may be purchased at net asset value
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 a 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 Funds may pay
reduced sales charges are described on page 39, "Consider Reducing Your Sales
Charge."
Letter of Intent
The LOI is a nonbinding obligation on the Qualified Purchaser to purchase the
full amount indicated in the LOI. For more information, see the SAI or call your
registered representative or MainStay at 1-800-462-6789.
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.
The contingent deferred sales charge will be waived for redemptions from
qualified pension and profit sharing plans.
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 a 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 Funds 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 Funds, 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 any Fund to an amount which is lower than the amount of all
payments by the shareholder for the purchase of Class B shares in that 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
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redeemed does not exceed (a) the current aggregate net asset value of Class B
shares of that Fund purchased more than six years prior to the redemption, plus
(b) the current aggregate net asset value of Class B shares of that Fund
purchased through reinvestment of dividends or distributions, plus (c) increases
in the net asset value of the investor's Class B shares of that Fund above the
total amount of payments for the purchase of Class B shares of that 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 any Fund (other than the Money Market Fund and Equity Index 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 a 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; (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 a 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 ($500 for the Money Market Fund) or less; (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; and (xviii) redemptions by
shareholders of shares purchased with the proceeds of a settlement payment made
in connection with the liquidation and dissolution of a limited partnership
sponsored by New York Life or one of its affiliates. 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.
================================================================================
REDEMPTIONS AND EXCHANGES
================================================================================
Shares may be redeemed directly from a 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
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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 Funds' 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.
The redeeming 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 a Fund may be more or less than the
shareholder's cost, depending on portfolio performance during the period the
shareholder owned the shares.
Redemption by Check
The Money Market Fund and State Street Bank and Trust Company (the "Bank") each
reserve the right at any time to suspend the procedure permitting redemption by
check and intend to do so in the event that federal legislation or regulations
impose reserve requirements or other restrictions deemed by the Trustees to be
adverse to the interest of other shareholders of the Money Market Fund.
Shareholders who arrange to have checkwriting privileges will be subject to the
rules and regulations of the Bank pertaining to this checkwriting privilege as
amended from time to time. The applicable rules and regulations will be made
available by the Bank upon request when a shareholder establishes checkwriting
privileges.
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
same 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 a 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-Equity Income 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 Tax Free Bond Fund
MainStay Total Return Fund
MainStay Value Fund
In addition, an exchange privilege between Class A shares of the Funds and
MainStay Equity Index Fund is offered. Shareholders should note, however, that
Guaranteed Shares exchanged before or after the Guarantee Date will lose the
benefit of the Guarantee. Any exchanges between a 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 Funds and MainStay Equity Index
Fund is offered.
Investors should read the Prospectus carefully before they place an exchange
request.
Generally, shareholders may exchange their Class A shares of a 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. However, where a
shareholder seeks to exchange Class A shares of the Money Market Fund for Class
A shares of another MainStay Fund which are subject to a front-end sales charge,
the applicable sales charge will be imposed on the exchange, unless the
shareholder has previously paid a sales charge with respect to such shares.
Class B shares of a 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 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
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either writing to the Funds' Transfer Agent at the following address: The
MainStay Funds, P.O. Box 8401, Boston, Massachusetts 02266-8401, or by calling
the Funds' Transfer 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 Transfer 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 exchanged 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 68.
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 45, "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 each 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 applicable 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.
Distributions and Redemptions for Equity Index Fund
For the Equity Index Fund, distributions will be paid in additional shares based
on the NAV at the close of business on the payment date of the distribution,
unless the shareholder elects to receive such distributions in cash. Receipt of
dividends in cash by a shareholder will have the effect of reducing the number
of Guaranteed Shares held by that shareholder, and, therefore, the value of the
Guarantee to that shareholder. If, however, the Fund pays a dividend in cash to
all shareholders for the purpose of assuring the Fund's compliance with
applicable provisions of the Code, any such amounts paid in cash will reduce the
Guaranteed Amount applicable to each Guaranteed Share in the amount of the
dividend paid.
For shareholder convenience in monitoring the number and value of a
shareholder's Guaranteed Shares, the Fund currently intends, through reverse
share splits, to combine any additional shares received by a shareholder as
dividends and distributions from the Fund with each originally purchased share
of the Fund to which such dividends and distributions relate, so that a
Guaranteed Share of the Fund will mean a single share of the Fund as purchased
and include in its NAV the value of all dividends and distributions attributable
to such originally purchased share and paid up to that point in time. Following
a reverse share split, a shareholder who has elected to reinvest dividends and
distributions from the Fund will hold the same number of Guaranteed Shares in
the Fund as the shareholder held prior to the reverse share split, but each
share will have a higher NAV (reflecting the added value of the dividends paid).
Shareholders who elect to receive their dividends and distributions from the
Fund in cash will, following a reverse share split, own fewer Guaranteed Shares
of the Fund, but those shares will have the same higher per share NAV as all
other Fund shares. In either case, the overall value of a shareholder's
investment in the Fund will be unaffected by a reverse share split. If reverse
share splits are not authorized, a Guaranteed Share shall mean, on a given date,
that number of shares of the Fund that a shareholder would hold on that date if
he had bought a single share and then held it, plus all shares issued as
dividends and distributions attributable to such share through the Guarantee
Date. This single share and all other shares issued through the reinvestment of
any dividends and distributions attributable to such share will be treated as a
single unit to which the Guaranteed Amount will apply as described above for a
Guaranteed Share. Shareholders who elect to receive dividends and distributions
in cash would hold fewer shares of the Fund and, consequently, fewer units as to
which the Guaranteed Amount would apply.
Equity Index Fund shares may be redeemed by shareholders prior to their
Guarantee Date. However, any such redeemed shares will lose the benefit of the
Guarantee.
Within seven days after acceptance of a redemption request, the Equity Index
Fund is required to make payment of the NAV of the shares on the date the order
was received in proper form, except that where a request is made at least 30
days prior to a dividend or distribution record date to redeem
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the dividend shares immediately upon issuance (to effectively receive the
dividend in cash), redemption and payment will occur at that time.
================================================================================
TAX-DEFERRED RETIREMENT PLANS
================================================================================
Shares of each Fund, except the California Tax Free Fund, New York Tax Free Fund
and the Tax Free Bond 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.
The Internal Revenue Service ("IRS") has specific distribution requirements that
apply to investors who reach age 70 1/2. Therefore, investors over the age of 60
1/2 who wish to preserve the full Guarantee with respect to their investment in
the Equity Index Fund should carefully consider whether shares of the Fund
should be purchased for their retirement plan.
================================================================================
NET ASSET VALUE
================================================================================
For purposes of determining NAV, portfolio securities of the Money Market Fund
are valued at their amortized cost, which does not take into account unrealized
securities gains or losses. This method involves initially valuing an instrument
at its cost and thereafter assuming a constant amortization to maturity of any
premium paid or discount received.
Portfolio securities of each other 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 those Funds, which are valued by the amortized cost
method.
================================================================================
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 Advisers. 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 Advisers may
consider sales of shares of the respective Funds as a factor in the selection of
broker-dealers to execute each Fund's portfolio transactions. NYLIFE Securities
Inc. may act as a broker for the Trust in accordance with applicable
regulations.
Increased portfolio turnover may result in brokerage commissions and in
realization of net short-term capital gains which, when distributed, are taxed
to shareholders (other than retirement plans) at ordinary income tax rates.
================================================================================
TAX INFORMATION
================================================================================
General. A 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.
Taxes in relation to the Equity Index Fund Guarantee. If an amount is paid to
shareholders pursuant to the Guarantee, such amounts probably will be taxable to
shareholders. However, it is possible that such amounts could be regarded as a
tax-free return of capital. The Fund does not undertake to suggest to
shareholders the manner in which any payments that may be made under the
Guarantee are to be treated for tax purposes, and shareholders are specifically
advised to consult their tax advisers about the tax treatment of any payments
that may be made under the Guarantee.
The Guarantee is a relatively new feature that has not previously been offered
by many other mutual funds. As a result, certain tax consequences arising from
the Guarantee are not entirely clear. Consequently, a risk exists that the Fund
would not have attained or be able to retain its status as a regulated
investment company if payments under the Guarantee were made, in which case the
Fund would be liable for corporate level income tax and dividends designated as
capital gain dividends would be taxed as ordinary income to shareholders.
However, management of the Fund believes that the Guarantee will not adversely
affect the status of the Fund as a regulated investment company for federal
income tax purposes. Any witholding of taxes on distributions by the Equity
Index Fund will result in a reduction of the benefit under the Guarantee.
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================================================================================
PERFORMANCE AND YIELD INFORMATION
================================================================================
MONEY MARKET FUND
From time to time quotations of the Money Market Fund's "yield" and "effective
yield" may be included in advertisements and communications to shareholders.
Both yield figures are based on historical earnings and are not intended to
indicate future performance. The "yield" of the Fund refers to the net income
generated by an investment in the Fund over a specified seven-day period. This
income is then "annualized." That is, the amount of income generated by the
investment during that week is assumed to be generated each week over a 52-week
period and is shown as a percentage of the investment. The "effective yield" is
expressed similarly but, when annualized, the income earned by an investment in
the Fund is assumed to be reinvested. The "effective yield" will be slightly
higher than the "yield" because of the compounding effect of this assumed
reinvestment. "Yield" and "effective yield" for the Fund will vary based on
changes in market conditions, the level of interest rates and the level of the
Fund's expenses.
OTHER FUNDS
From time to time a Fund, other than the Money Market 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 Capital Appreciation Fund, Convertible-Equity Income
Fund Government Fund, High Yield Corporate Bond Fund, International Bond
Fund, International Equity Fund, Tax Free Bond Fund, Total Return Fund and Value
Fund began offering Class A shares on January 3, 1995. Thus, the performance
figures for Class A shares of those Funds have been calculated based on the
historical performance of the Funds' Class B shares for the period from
inception through December 31, 1994. The California Tax Free Fund and New York
Tax Free Fund began offering Class B shares on January 3, 1995. Thus, the
performance figures for Class B shares for those Funds have been calculated
using the historical performance of the Funds' Class A shares for the period
from inception through December 31, 1994.
The yield of a class of shares of a Fund will be calculated by dividing the net
investment income per share during a recent 30-day period by the maximum public
offering price per share of the class on the last day of the period. The results
are compounded on a bond equivalent (semiannual) basis and then annualized.
Average annual total return for a class of shares of a Fund is determined by
computing the annual percentage change in value of $1,000 invested at the
maximum public offering price for specified periods ending with the most recent
calendar quarter, assuming reinvestment of all dividends and distributions at
net asset value. The total return calculation assumes a complete redemption of
the investment and the deduction of the maximum initial sales load or contingent
deferred sales charge, as applicable. A Fund may also furnish total return
figures which do not take into account all or a part of the maximum initial
sales load or contingent deferred sales charge.
A Fund may also include its current dividend rate in its prospectus, in
supplemental sales literature, or in communications to shareholders. The
"current dividend rate" is calculated by dividing the Fund's annualized
distributions from net investment income (excluding realized short-term capital
gains and premiums from writing options) during a specific recent period by a
recent offering price (i.e., NAV). A current dividend rate may differ from yield
because it does not reflect the inclusion of amortized discount and premium on
debt obligations in income using the current market value of the obligations, as
is currently required for yield calculations. A current dividend rate may differ
from total return because it does not reflect all components of a Fund's
performance, including realized and unrealized capital gains and losses, which
are reflected in calculations of a Fund's total return. 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.
Each of the California Tax Free Fund, New York Tax Free Fund and Tax Free Bond
Fund may publish its tax-equivalent yield in advertisements and communications
to shareholders. A Fund's tax-equivalent yield is calculated by determining the
rate of return that would have to be achieved on a fully taxable investment to
produce the after-tax equivalent of the Fund's yield, assuming certain tax
brackets for a Fund shareholder.
Performance information for a Fund may be compared, in advertisements, sales
literature, and reports to shareholders, to various indexes and other
performance measures, including the performance of other mutual funds.
Investors should note that the investment results of a Fund will fluctuate over
time, and any presentation of a Fund's yield, current dividend rate, total
return or tax-equivalent yield for 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.
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================================================================================
APPENDIX A
================================================================================
DESCRIPTION OF SECURITIES RATINGS
MOODY'S INVESTORS SERVICE, INC.
Corporate and Municipal Bond Ratings
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high-grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risks appear somewhat larger than the Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper-medium-grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa: Bonds which are rated Baa are considered as medium-grade obligations,
(i.e., they are neither highly protected nor poorly secured). Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
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 is present strong
protection by established cash flows, superior liquidity support or demonstrated
broad-based access to the market for refinancing.
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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 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.
74
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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.
75
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================================================================================
APPENDIX B
================================================================================
TAXABLE EQUIVALENT YIELD TABLE (*)(+)
<TABLE>
<CAPTION>
If your
federal
marginal a tax-free yield of
income tax -------------------------------------------------------------
rate is 4.0% 4.5% 5.0% 5.5% 6.0% 6.5% 7.0%
---- ---- ---- ---- ---- ---- ----
would equal a taxable yield of:
<S> <C> <C> <C> <C> <C> <C> <C>
15.00% ....... 4.71% 5.29% 5.88% 6.47% 7.06% 7.65% 8.24%
28.00% ....... 5.56% 6.25% 6.94% 7.64% 8.33% 9.03% 9.72%
31.00% ....... 5.80% 6.52% 7.25% 7.97% 8.70% 9.42% 10.14%
36.00% ....... 6.25% 7.03% 7.81% 8.59% 9.38% 10.16% 10.94%
39.60% ....... 6.62% 7.45% 8.28% 9.11% 9.93% 10.76% 11.59%
- --------------------------------------------------------------------------------
</TABLE>
* This table reflects application of the regular federal income tax only;
other taxes may be applicable with respect to a particular shareholder.
Such taxes could change the information shown. Tax rates are subject to
change. Investors in the California and New York Tax Free Funds should in
particular note that the chart does not reflect any state and local taxes
that may be deductible in computing federal income tax liability.
+ This table is for illustrative purposes only; investors should consult
their tax advisers with respect to the tax implications of an investment in
a Fund that invests primarily in securities, the interest on which is
exempt from regular federal income tax.
76
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77
<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.
[LOGO] MAINSTAY(R) FUNDS
NYLIFE Distributors Inc.
260 Cherry Hill Road
Parsippany, New Jersey 07054
Administrator & Distributor of The MainStay Funds
NYLIFE Distributors Inc. is an indirect wholly owned
subsidiary of New York Life Insurance Company.
NEW
[LOGO] YORK
LIFE
[GRAPHIC]
78
<PAGE>
THE MAINSTAY FUNDS
- --------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 1997
- --------------------------------------------------------------------------------
The MainStay Funds (the "Trust") is an open-end management investment
company (or mutual fund) currently consisting of thirteen series: California
Tax Free Fund, Capital Appreciation Fund, Convertible Fund, Equity Index Fund,
Government Fund, High Yield Corporate Bond Fund, International Bond Fund,
International Equity Fund, Money Market Fund, New York Tax Free Fund, Tax Free
Bond Fund, Total Return Fund and Value Fund (individually or collectively
referred to as a "Fund" or the "Funds"). The investment adviser for twelve of
the Funds is MacKay-Shields Financial Corporation ("MacKay-Shields" or the
"Adviser"). The investment adviser for the Equity Index Fund is Monitor Capital
Advisors, Inc. ("Monitor" or the "Adviser"). MacKay-Shields and Monitor are
sometimes jointly referred to as the "Advisers."
This Statement of Additional Information is not a prospectus and
should be read in conjunction with the Prospectus of the Trust dated May 1,
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).
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 the Distributor,
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
-----------
<TABLE>
<CAPTION>
<S> <C>
ADDITIONAL INVESTMENT POLICIES OF THE MONEY MARKET FUND...... 5
INVESTMENT PRACTICES AND INSTRUMENTS COMMON TO MULTIPLE
FUNDS................................................... 7
Repurchase Agreements................................... 7
Lending of Portfolio Securities......................... 9
Bank Obligations........................................ 10
U.S. Government Securities.............................. 11
Convertible Securities.................................. 11
Foreign Securities...................................... 11
Foreign Currency Transactions........................... 12
Foreign Index-Linked Instruments........................ 16
Brady Bonds............................................. 16
Municipal Securities.................................... 17
Variable Rate Demand Notes ("VRDNs").................... 22
Floating and Variable Rate Securities................... 23
Zero Coupon Bonds....................................... 23
Standby Commitments -- Obligations with Puts Attached... 24
When-Issued Securities.................................. 25
Mortgage-Related and Other Asset-Backed Securities...... 26
Short Sales Against the Box............................. 34
Options on Securities................................... 35
Securities Index Options................................ 42
Futures Transactions.................................... 43
Swap Agreements......................................... 53
Loan Participation Interests............................ 55
Risks Associated with Debt Securities................... 57
Risks of Investing in High Yield Securities ("Junk
Bonds")............................................ 57
HIGH YIELD CORPORATE BOND FUND
SPECIAL CONSIDERATIONS....................................... 58
CALIFORNIA TAX FREE FUND AND NEW YORK TAX FREE FUND
SPECIAL CONSIDERATIONS....................................... 59
Risk Factors Affecting California Municipal Securities.. 59
Risk Factors Affecting New York Municipal Securities.... 70
THE EQUITY INDEX FUND GUARANTEE.............................. 85
</TABLE>
B-2
<PAGE>
<TABLE>
<S> <C>
ADDITIONAL FUNDAMENTAL INVESTMENT RESTRICTIONS............... 87
ADDITIONAL NON-FUNDAMENTAL INVESTMENT RESTRICTIONS........... 88
TRUSTEES AND OFFICERS........................................ 93
THE ADVISERS, THE ADMINISTRATOR AND THE DISTRIBUTOR.......... 100
Investment Advisory Agreements.......................... 100
Administration Agreements............................... 103
Distribution Agreement.................................. 105
Other Services.......................................... 112
Expenses Borne by the Trust............................. 113
PORTFOLIO TRANSACTIONS AND BROKERAGE......................... 113
NET ASSET VALUE.............................................. 118
SHAREHOLDER INVESTMENT ACCOUNT............................... 121
SHAREHOLDER SERVICING AGENT.................................. 121
PURCHASES, REDEMPTION AND REPURCHASE......................... 121
Letter of Intent ("LOI")................................ 121
Suspension of Redemptions............................... 122
TAX-DEFERRED RETIREMENT PLANS................................ 122
Cash or Deferred Profit Sharing Plans Under Section
401(k) for Corporations and Self-Employed
Individuals 122
Individual Retirement Account ("IRA")................... 122
403(b)(7) Tax Sheltered Account......................... 123
General Information..................................... 124
CALCULATION OF PERFORMANCE QUOTATIONS........................ 124
TAX STATUS................................................... 132
Taxation of the Funds................................... 132
Character of Distributions to Shareholders -- General... 133
Character of Distributions to Shareholders -- The Tax-
Free Funds.............................................
Discount 136
Users of Bond-Financed Facilities....................... 136
Excise Tax.............................................. 137
Taxation of Options, Futures and Similar Instruments.... 137
Passive Foreign Investment Companies.................... 139
Foreign Currency Gains and Losses....................... 140
Commodity Investments................................... 140
Dispositions of Fund Shares............................. 141
Tax Reporting Requirements.............................. 142
Foreign Taxes........................................... 143
</TABLE>
B-3
<PAGE>
<TABLE>
<S> <C>
State and Local Taxes - General......................... 144
Explanation of Fund Distributions....................... 144
Additional Information Regarding the Equity Index Fund.. 145
Additional Information Regarding the California Tax
Free Fund and New York Tax Free Fund
Annual Statements....................................... 147
General Information..................................... 148
ORGANIZATION AND CAPITALIZATION.............................. 148
General 148
Voting Rights........................................... 148
Shareholder and Trustee Liability....................... 149
OTHER INFORMATION............................................ 149
Independent Accountants................................. 149
Legal Counsel........................................... 149
Share Ownership of the Funds............................ 150
Code of Ethics.......................................... 150
FINANCIAL STATEMENTS......................................... 151
</TABLE>
B-4
<PAGE>
ADDITIONAL INVESTMENT POLICIES OF THE MONEY MARKET FUND
Each Fund has a separate investment objective or objectives which it
pursues through separate investment policies, as described in the Prospectus.
The following discussion elaborates on the presentation of the Money Market
Fund's investment policies contained in the Prospectus.
The Fund may invest its assets in U.S. dollar-denominated securities of
U.S. or foreign issuers and in securities of foreign branches of U.S. banks,
such as negotiable certificates of deposit (Eurodollars). Since the portfolio
of the Fund may contain such securities, an investment therein involves
investment risks that are different in some respects from an investment in a
fund which invests only in debt obligations of U.S. domestic issuers. Such
risks may include future political and economic developments, the possible
imposition of foreign withholding taxes on interest income payable on the
securities held in the portfolio, possible seizure or nationalization of foreign
deposits, the possible establishment of exchange controls or the adoption of
other foreign governmental restrictions which might adversely affect the payment
of the principal of and interest on securities in the portfolio.
All of the assets of the Fund generally will be invested in obligations
which mature in thirteen months or less and substantially all of these
investments will be held to maturity; however, securities collateralizing
repurchase agreements may have maturities in excess of thirteen months. The
Fund will, to the extent feasible, make portfolio investments primarily in
anticipation of or in response to changing economic and money market conditions
and trends. The dollar-weighted average maturity of the Fund's portfolio may
not exceed 90 days. Consistent with the provisions of a rule of the Securities
and Exchange Commission ("SEC"), the Fund invests only in U.S. dollar-
denominated money market instruments that present minimal credit risk and, with
respect to 95% of its total assets, measured at the time of investment, that are
of the highest quality. The Adviser shall determine whether a security presents
minimal credit risk under procedures adopted by the Fund's Board of Trustees. A
money market instrument will be considered to be of the highest quality (1) if
rated in the highest rating category (i.e., Aaa or Prime-1 by Moody's, AAA or A-
1 by S&P's) by (i) any two nationally recognized statistical rating
organizations ("NRSROs") or, (ii) if rated by only one NRSRO, by that NRSRO, and
whose acquisition is approved or ratified by the Board of Trustees; (2) if
issued by an issuer that has short-term debt obligations of comparable maturity,
priority, and security, and that are rated in the highest rating category by (i)
any two NRSRO's or, (ii) if rated by only one NRSRO, by that NRSRO, and
B-5
<PAGE>
whose acquisition is approved or ratified by the Board of Trustees; or (3) an
unrated security that is of comparable quality to a security in the highest
rating category as determined by the Adviser and whose acquisition is approved
or ratified by the Board of Trustees. With respect to 5% of its total assets,
measured at the time of investment, the Fund may also invest in money market
instruments that are in the second-highest rating category for short-term debt
obligations (i.e., rated Aa or Prime-2 by Moody's or AA or A-2 by S&P).
The Fund may not invest more than 5% of its total assets, measured at the
time of investment, in securities of any one issuer that are of the highest
quality, except that the Fund may exceed this 5% limitation for up to three
business days after the purchase of a security of any one issuer and except that
this limitation shall not apply to U.S. government securities. The Fund may not
invest more than the greater of 1% of its total assets or one million dollars,
measured at the time of investment, in securities of any one issuer that are in
the second-highest rating category, except that this limitation shall not apply
to U.S. government securities. In the event that an instrument acquired by the
Fund is downgraded or otherwise ceases to be of the quality that is eligible for
the Fund, the Adviser, under procedures approved by the Board of Trustees (or
the Board of Trustees itself if the Adviser becomes aware an unrated security is
downgraded below high quality and the Adviser does not dispose of the security
within five business days) shall promptly reassess whether such security
presents minimal credit risk and determine whether or not to retain the
instrument.
Pursuant to the rule, the Fund uses the amortized cost method of valuing
its investments, which facilitates the maintenance of the Fund's per share net
asset value at $1.00. The amortized cost method, which is normally used to
value all of the Fund's portfolio securities, involves initially valuing a
security at its cost and thereafter amortizing to maturity any discount or
premium, regardless of the impact of fluctuating interest rates on the market
value of the instrument.
The Trustees have also established procedures designed to stabilize, to the
extent reasonably possible, the Fund's price per share as computed for the
purpose of sales and redemptions at $1.00. Such procedures include review of
the Fund's portfolio by the Trustees, at such intervals as they deem
appropriate, to determine whether the Fund's net asset value calculated by using
available market quotations or market equivalents (the determination of value by
reference to interest rate levels, quotations of comparable securities and other
factors) deviates from $1.00 per share based on amortized cost.
B-6
<PAGE>
The extent of deviation between the Fund's net asset value based upon
available market quotations or market equivalents and $1.00 per share based on
amortized cost will be periodically examined by the Trustees. If such deviation
exceeds 1/2 of 1%, the Trustees will promptly consider what action, if any, will
be initiated. In the event the Trustees determine that a deviation exists which
may result in material dilution or other unfair results to investors or existing
shareholders, they will take such corrective action as they regard to be
necessary and appropriate, including the sale of portfolio instruments prior to
maturity to realize capital gains or losses or to shorten average portfolio
maturity; withholding part or all of dividends or payment of distributions from
capital or capital gains; redemptions of shares in kind; or establishing a net
asset value per share by using available market quotations or equivalents. In
addition, in order to stabilize the net asset value per share at $1.00, the
Trustees have the authority (1) to reduce or increase the number of shares
outstanding on a pro rata basis, and (2) to offset each shareholder's pro rata
portion of the deviation between the net asset value per share and $1.00 from
the shareholder's accrued dividend account or from future dividends.
The Fund may hold cash for the purpose of stabilizing its net asset value
per share. Holdings of cash, on which no return is earned, would tend to lower
the yield on the Fund's shares.
The Fund may also, consistent with the provisions of the rule, invest in
securities with a face maturity of more than thirteen months, provided that the
security is either a variable or floating rate U.S. government security, or a
floating or variable rate security with certain demand or interest rate reset
features.
INVESTMENT PRACTICES AND INSTRUMENTS COMMON TO MULTIPLE FUNDS
The Funds may engage in the following investment practices or invest in the
following instruments to the extent permitted in the Prospectus.
REPURCHASE AGREEMENTS
The Funds 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. The Equity Index Fund will enter into repurchase
agreements only with domestic banks with total assets in excess of one billion
dollars or primary government securities dealers reporting to the Federal
Reserve Bank of New York, and with
B-7
<PAGE>
respect to securities of the type in which the Fund may invest. In addition,
the International Bond and International Equity Funds may enter into domestic or
foreign repurchase agreements with certain sellers deemed to be creditworthy
pursuant to guidelines adopted 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 a Fund as a dividend to shareholders. Subject
to applicable limitations, the Tax Free Bond Fund will enter into repurchase
agreements as a means of earning income on its cash reserves when, in the
judgment of the Adviser, shareholders would benefit more from receiving taxable
income thereon than from earning no income or tax-free income at a lower rate on
such reserves.
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. 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
B-8
<PAGE>
and be treated as an unsecured creditor of the seller. As an unsecured
creditor, the Fund would be at the 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 California Tax Free Fund and New York Tax Free Fund may enter into
reverse repurchase agreements. A Fund will maintain a segregated account
consisting of cash, U.S. government securities or high-grade debt obligations,
maturing not later than the expiration of the reverse repurchase agreement, to
cover its obligations under reverse repurchase agreements. Each of the
California Tax Free Fund and New York Tax Free Fund will limit its investments
in reverse repurchase agreements and other borrowing to no more than 10% of its
total assets.
LENDING OF PORTFOLIO SECURITIES
Each Fund, except the Tax Free Bond Fund and the Money Market Fund, may
seek to increase its income by lending portfolio securities. Under guidelines
adopted by the Funds' Board, such loans may be made to institutions, such as
broker-dealers, and would be required to be secured continuously by collateral
in cash or U.S. government securities maintained on a current basis at an amount
at least equal to the market value of the securities loaned. The Fund would
have the right to call a loan and obtain the securities loaned at any time
generally on less than five days' notice. For the duration of a loan, the Fund
would continue to receive the equivalent of the interest or dividends paid by
the issuer on the securities loaned and would also receive compensation from the
investment of the collateral. The Fund would not, however, have the right to
vote any securities having voting rights during the existence of the loan, but
the Fund would call the loan in anticipation of an important vote to be taken
among holders of the securities or of the giving or withholding of their consent
on a material matter affecting the investment. As with other extensions of
credit there are risks of delay in recovery of, or even loss of rights in, the
collateral should the borrower of the securities fail financially or breach its
agreement with a Fund. However, the loans would be
B-9
<PAGE>
made only to firms deemed by the Adviser to be creditworthy and approved by the
Board, and when, in the judgment of the Adviser, the consideration which can be
earned currently from securities loans of this type justifies the attendant
risk. If the Adviser determines to make securities loans, it is intended that
the value of the securities loaned would not exceed 33% of the value of the
total assets of the lending Fund.
Regarding the California Tax Free Fund and New York Tax Free Fund, each
Fund may lend portfolio securities to nonaffiliated brokers, dealers and
financial institutions, provided that cash equal to 102% of the market value of
the securities loaned is deposited by the borrower with the lending Fund and is
maintained each business day. The California Tax Free Fund and New York Tax
Free Fund will not lend more than 10% of the value of each Fund's total assets.
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. The
Equity Index Fund will not be subject to the above restriction to the extent it
invests in banks obligations of United States banks (including foreign branches)
which have more than $1 billion in total assets at the time of investment and
are members of the Federal Reserve System or are examined by the Comptroller of
the Currency or whose deposits are insured by the Federal Deposit Insurance
Corporation. The Equity Index Fund also may invest in certificates of deposit
of savings and loan
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associations (federally or state chartered and federally insured) having total
assets in excess of $1 billion.
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-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." The Equity Index Fund
will invest in such securities only when it is satisfied that the credit risk
with respect to the issuer is minimal.
CONVERTIBLE SECURITIES
The Capital Appreciation Fund, Convertible-Equity Income Fund, High Yield
Corporate Bond Fund, International Bond Fund, International Equity Fund, Total
Return Fund and Value Fund may invest in securities convertible into common
stock. Such investments may be made, for example, if the Adviser believes that
a company's convertible securities are undervalued in the market. Convertible
securities eligible for inclusion in the Funds' portfolios include convertible
bonds, convertible preferred stocks, or warrants.
FOREIGN SECURITIES
Except for the California Tax Free Fund, Government Fund, New York Tax Free
Fund and Tax Free Bond Fund, each 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
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branches of United States banks, to any extent deemed appropriate by the
Advisers. Under current SEC rules relating to the use of the amortized cost
method of portfolio securities valuation, the Money Market Fund is restricted to
purchasing U.S. dollar-denominated securities, but it is not otherwise precluded
from purchasing securities of foreign issuers.
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 Funds 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.
FOREIGN CURRENCY TRANSACTIONS
Many of the foreign securities in which the Funds invest will be
denominated in foreign currencies. Changes in foreign exchange rates will
affect the value of securities denominated or quoted in foreign currencies.
Exchange rate movements can be large and can endure for extended periods of
time, affecting
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either favorably or unfavorably the value of the Funds' assets. However, each
Fund, except the California Tax Free Fund, the Equity Index Fund, the Government
Fund, the Money Market Fund, the New York Tax Free Fund and the Tax Free Bond
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. Each of these Funds 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, a
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 Funds 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 Adviser believes that it is important
to have the flexibility to enter into such forward contracts when it determines
that the best interest of a Fund will be served by entering into such a
contract. Generally, the Adviser believes that the best interest of a Fund will
be served if a Fund is permitted to enter into forward contracts under specified
circumstances. First, when a Fund enters into, or anticipates 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.
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dollars, of the amount of foreign currency involved in the underlying security
transaction, a Fund will be able to insulate itself from a possible loss
resulting from a change in the relationship between the U.S. dollar and the
subject foreign currency during the period between the date on which the
security is purchased or sold and the date on which payment is made or received,
although a Fund would also forego any gain it might have realized had rates
moved in the opposite direction. This technique is sometimes referred to as a
"settlement" hedge or "transaction" hedge.
Second, when the Adviser believes that the currency of a particular foreign
country may suffer a substantial decline against the U.S. dollar, it may enter
into a forward contract to sell, for a fixed amount of dollars, the amount of
foreign currency approximating the value of some or all of a Fund's portfolio
securities denominated in such foreign currency. Such a hedge (sometimes
referred to as a "position" hedge) will tend to offset both positive and
negative currency fluctuations, but will not offset changes in security values
caused by other factors. The Fund also may hedge the same position by using
another currency (or a basket of currencies) expected to perform in a manner
substantially similar to the hedged currency ("proxy hedge"). The precise
matching of the forward contract amounts and the value of the securities
involved will not generally be possible since the future value of such
securities in foreign currencies will change as a consequence of market
movements in the value of those securities between the date the forward contract
is entered into and the date it matures. With respect to positions that
constitute "transaction" or "position" hedges (including "proxy" hedges), a Fund
will not enter into forward contracts to sell currency or maintain a net
exposure to such contracts if the consummation of such contracts would obligate
the Fund to deliver an amount of foreign currency in excess of the value of the
Fund's portfolio securities or other assets denominated in that currency (or the
related currency, in the case of a "proxy" hedge).
Finally, a Fund may enter into forward contracts to shift its investment
exposure from one currency into another currency that is expected to perform
inversely with respect to the hedged currency relative to the U.S. dollar. This
type of strategy, sometimes known as a "cross-currency" hedge, will tend to
reduce or eliminate exposure to the currency that is sold, and increase exposure
to the currency that is purchased, much as if the Fund had sold a security
denominated in one currency and purchased an equivalent security denominated in
another. "Cross-currency" hedges protect against losses resulting from a
decline in the hedged currency, but will cause the Fund to assume the risk of
fluctuations in the value of the currency it purchases.
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At the consummation of the forward contract, a Fund may either make
delivery of the foreign currency or terminate its contractual obligation to
deliver the foreign currency by purchasing an offsetting contract obligating it
to purchase at the same maturity date the same amount of such foreign currency.
If a Fund chooses to make delivery of the foreign currency, it may be required
to obtain such currency for delivery through the sale of portfolio securities
denominated in such currency or through conversion of other assets of the Fund
into such currency. If a Fund engages in an offsetting transaction, the Fund
will realize a gain or a loss to the extent that there has been a change in
forward contract prices. Closing purchase transactions with respect to forward
contracts are usually effected with the currency trader who is a party to the
original forward contract.
A Fund's dealing in forward contracts will be limited to the transactions
described above. Of course, a Fund is not required to enter into such
transactions with regard to its foreign currency-denominated securities and will
not do so unless deemed appropriate by the Adviser. A Fund generally will not
enter into a forward contract with a term of greater than one year.
In cases of transactions which constitute "transaction" 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, a Fund may deem its forward currency hedge
position to be covered by underlying Fund portfolio securities or may establish
a Segregated Account with its Custodian in an amount equal to the value of the
Fund's total assets committed to the consummation of the subject hedge.
Segregated Account will consist of liquid assets. In the case of "anticipatory"
hedges and "cross-currency" hedges that involve the purchase and sale of two
different foreign currencies indirectly through separate forward currency
contracts, the Fund will establish a Segregated Account with its Custodian as
described above. In the event a Fund establishes a Segregated Account, the Fund
will mark-to-market the value of the assets in the Segregated Account. If the
value of the 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.
It should be realized that this method of protecting the value of a Fund's
portfolio securities against a decline in the value of a currency does not
eliminate fluctuations in the underlying prices of the securities. It simply
establishes a rate of exchange which can be achieved at some future point in
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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
Funds cannot assure that the techniques discussed above will be successful.
A Fund's foreign currency transactions may be limited by the requirements
of Subchapter M of the Code for qualification as a regulated investment company.
FOREIGN INDEX-LINKED INSTRUMENTS
The International Bond Fund and International Equity Fund may, subject to
compliance with each Fund's limitations applicable to its investment in debt
securities, invest in instruments issued by the U.S. or a foreign government or
by private issuers that return principal and/or pay interest to investors in
amounts which are linked to the level of a particular foreign index ("foreign
index-linked instruments"). In the case of foreign index-linked instruments
linking the interest component to a foreign index, the amount of interest
payable will adjust periodically in response to changes in the level of the
foreign index during the term of the foreign index-linked instrument.
BRADY BONDS
Each of the Convertible-Equity Income Fund, High Yield Corporate Bond Fund,
International Bond Fund and Total Return 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 Plan debt restructurings have been implemented
in several countries, including Mexico, Uruguay, Venezuela, Argentina, Costa
Rica, Nigeria, the Philippines, Bulgaria, the Dominican Republic, Bolivia,
Ecuador, Niger, Poland and Jordan (collectively, the "Brady Countries"). In
addition, Brazil has concluded a Brady-like plan. It is expected that other
countries will undertake a Brady Plan debt restructuring in the future,
including Peru and Panama. Brady Bonds may be collateralized or
uncollateralized and are issued in various currencies (primarily the U.S.
dollar).
U.S. dollar-denominated, collateralized Brady Bonds, which may be fixed
rate par bonds or floating rate discount bonds, are generally collateralized in
full as to principal by U.S. Treasury zero coupon bonds having the same maturity
as the Brady Bonds. Interest payments on these Brady Bonds generally are
collateralized on a one-year or longer rolling-forward basis by cash or
securities in an amount that, in the case of fixed rate bonds, is equal to at
least one year of interest payments or, in
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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").
Most Mexican Brady Bonds issued to date have principal repayments at final
maturity fully collateralized by U.S. Treasury zero coupon bonds (or comparable
collateral denominated in other currencies) and interest coupon payments
collateralized on an 18-month rolling-forward basis by funds held in escrow by
an agent for the bondholders. A significant portion of the Venezuelan Brady
Bonds and the Argentine Brady Bonds issued to date have principal repayments at
final maturity collateralized by U.S. Treasury zero coupon bonds (or comparable
collateral denominated in other currencies) and/or interest coupon payments
collateralized on a 14-month (for Venezuela) or 12-month (for Argentina)
rolling-forward basis by securities held by the Federal Reserve Bank of New York
as collateral agent.
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
The Prospectus describes the general categories and characteristics of
municipal securities. The following supplements that discussion by providing
additional information concerning certain types of 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.
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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.
Tax Anticipation Notes are used to finance working capital needs of
municipalities and are issued in anticipation of various seasonal tax revenues,
to be payable from these specific future taxes. They are usually general
obligations of the issuer, secured by the taxing power for the payment of
principal and interest.
Revenue Anticipation Notes are issued in expectation of receipt of other
kinds of revenue, such as federal revenues. They, also, are usually general
obligations of the issuer.
Bond Anticipation Notes are normally issued to provide interim financial
assistance until long-term financing can be arranged. The long-term bonds then
provide funds for the repayment of the notes.
Construction Loan Notes are sold to provide construction financing for
specific projects. After successful completion and acceptance, many projects
receive permanent financing through the FHA under the FNMA or GNMA.
Project Notes are instruments sold by the Department of Housing and Urban
Development ("HUD") but issued by a state or local housing agency to provide
financing for a variety of programs. They are backed by the full faith and
credit of the U.S. government, and generally carry a term of one year or less.
Short-Term Discount Notes (tax-exempt commercial paper) are short-term (365
days or less) promissory notes issued by municipalities to supplement their cash
flow.
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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.
Industrial Development Bonds which pay tax-exempt interest are, in most
cases, revenue bonds and are issued by, or on behalf of, public authorities to
raise money to finance various privately operated facilities for business,
manufacturing, housing, sports, and pollution control. These bonds are also
used to finance public facilities such as airports, mass transit systems, ports,
and parking. The payment of the principal and interest on such bonds is solely
dependent on the ability of the facility's user to meet its financial
obligations and the pledge, if any, of the real and personal property so
financed as security for such payments. These bonds 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.
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An entire issue of Municipal Bonds may be purchased by one or a small
number of institutional investors such as the Funds. 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.
The Tax Free Bond Fund may invest more than 25% of its total assets in
Municipal Bonds the issuers of which are located in the same state and may
invest more than 25% of its total assets in Municipal Bonds the security of
which is derived from any one of the following categories: hospitals and health
facilities; turnpikes and toll roads; ports and airports; colleges and
universities; public housing authorities; general obligations of states and
localities; lease rental obligations of states and local authorities; state and
local housing finance authorities; municipal utilities systems; bonds that are
secured or backed by the Treasury or other U.S. government guaranteed
securities; or industrial development and pollution control bonds. There could
be economic, business or political developments which might affect all Municipal
Bonds of a similar type. However, the Fund believes that the most important
consideration affecting risk is the quality of Municipal Bonds.
The Tax Free Bond Fund may engage in short-term trading (selling securities
held for brief periods of time, usually less than three months) if the Adviser
believes that such transactions, net of costs including taxes, if any, would
improve the overall return on its portfolio. The needs of different classes of
lenders and borrowers and their changing preferences and circumstances have in
the past caused market dislocations unrelated to fundamental creditworthiness
and trends in interest rates which have presented market trading opportunities.
There can be no assurance that such dislocations will occur in the future or
that the Fund will be able to take advantage of them. The Fund generally limits
its voluntary short-term trading to the extent necessary to qualify as a
"regulated investment company" under the Code.
There are, in addition, a variety of hybrid and special types of municipal
obligations, such as municipal lease obligations, as well as numerous
differences in the security of Municipal Bonds both within and between the two
principal classifications described above. Municipal lease obligations are
municipal securities that may be supported by a lease or an installment purchase
contract issued by state and local government authorities to acquire funds to
obtain the use of a
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wide variety of equipment and facilities such as fire and sanitation vehicles,
computer equipment and other capital assets. These obligations, which may be
secured or unsecured, are not general obligations and have evolved to make it
possible for state and local governments to obtain the use of property and
equipment without meeting constitutional and statutory requirements for the
issuance of debt. Thus, municipal lease obligations have special risks not
normally associated with Municipal Bonds. These obligations frequently contain
"non-appropriation" clauses that provide that the governmental issuer of the
obligation has no obligation to make future payments under the lease or contract
unless money is appropriated for such purposes by the legislative body on a
yearly or other periodic basis. In addition to the "nonappropriation" risk,
many municipal lease obligations have not yet developed the depth of
marketability associated with Municipal Bonds; moreover, although the
obligations may be secured by the leased equipment, the disposition of the
equipment in the event of foreclosure might prove difficult. For the purpose of
each Fund's investment restrictions, the identification of the "issuer" of
Municipal Bonds which are not General Obligation Bonds is made by the Adviser on
the basis of the characteristics of the Municipal Bonds as described above, the
most significant of which is the source of funds for the payment of principal of
and interest on such Bonds.
In order to limit certain of these risks, the California Tax Free Fund, New
York Tax Free Fund and Tax Free Bond Fund will not invest more than 10% of its
assets in municipal lease obligations that are illiquid (along with all other
illiquid securities). The liquidity of municipal lease obligations purchased by
the Funds will be determined pursuant to guidelines approved by the Board of
Trustees. Factors considered in making such determinations may include: the
frequency of trades and quotes for the obligation; the number of dealers willing
to purchase or sell the security and the number of other potential buyers; the
willingness of dealers to undertake to make a market in the security; the nature
of marketplace trades; the obligation's rating; and, if the security is unrated,
the factors generally considered by a rating agency.
There may be other types of municipal securities that become available
which are similar to the foregoing described municipal securities in which each
Fund may invest.
INCOME LEVEL AND CREDIT RISK Municipal obligations are 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
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of principal or interest, or both, or imposing other constraints upon
enforcement of such obligations or upon 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, principal or
interest on its or their municipal obligations may be materially affected.
Although the Funds' quality standards are designed to minimize the credit risk
of investing in Municipal Bonds, that risk cannot be entirely eliminated.
TAX CONSIDERATIONS With respect to the California Tax Free Fund, New York
------------------
Tax Free Fund and Tax Free Bond Fund, income derived by a Fund from taxable
investments, including but not limited to securities lending transactions,
repurchase transactions, options and futures transactions, and investments in
commercial paper, bankers' acceptances and certificates of deposit will be
taxable for federal, state and local income tax purposes when distributed to
shareholders. Income derived by a Fund from interest on direct obligations of
the U.S. government will be taxable for federal income tax purposes when
distributed to shareholders but, provided that the Fund meets the requirements
of state law and properly designates distributions to shareholders, such
distributions may be excludable from income for state personal income tax
purposes. A portion of original issue discount relating to stripped Municipal
Bonds and their coupons may also be treated as taxable income under certain
circumstances.
VARIABLE RATE DEMAND NOTES ("VRDNS")
The California Tax Free Fund, New York Tax Free Fund and Tax Free Bond Fund
may invest in tax-exempt obligations which contain a floating or variable
interest rate adjustment formula and an unconditional right of demand to receive
payment of the unpaid principal balance plus accrued interest upon a short
notice period prior to specified dates, generally at 30, 60, 90, 180 or 365-day
intervals. The interest rates are adjustable at various intervals to the
prevailing market rate for similar investments, such adjustment formula being
calculated to maintain the market value of the VRDN at approximately the par
value of the VRDN on the adjustment date. The adjustments are typically based
upon the prime rate of a bank or some other appropriate interest rate adjustment
index.
The California Tax Free Fund, New York Tax Free Fund and Tax Free Bond Fund
may also invest in VRDNs in the form of participation interests ("Participating
VRDNs") in variable rate tax-exempt obligations held by a financial institution,
typically a commercial bank ("Institution"). Participating VRDNs provide a Fund
with a specified undivided interest (up to 100%) of the
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underlying obligation and the right to demand payment of the unpaid principal
balance plus accrued interest on the Participating VRDNs from the Institution
upon a specified number of days' notice, not to exceed seven days. In addition,
the Participating VRDN is backed up by an irrevocable letter of credit or
guaranty of the Institution. A Fund has an undivided interest in the underlying
obligation and thus participates on the same basis as the Institution in such
obligation, except that the Institution typically retains fees out of the
interest paid or the obligation for servicing the obligation, providing the
letter of credit and issuing the repurchase commitment.
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 Funds with a certain degree of protection
against rises in interest rates, the Funds 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
Funds' limitations on investments in such securities.
ZERO COUPON BONDS
The Funds 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
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<PAGE>
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.
STANDBY COMMITMENTS -- OBLIGATIONS WITH PUTS ATTACHED
The California Tax Free Fund, New York Tax Free Fund and Tax Free Bond Fund
may purchase municipal securities together with the right to resell the
securities to the seller at an agreed-upon price or yield within a specified
period prior to the maturity date of the securities. Although it is not a put
option in the usual sense, such a right to resell is commonly known as a "put"
and is also referred to as a "standby commitment." Each Fund may pay for a
standby commitment either separately, in cash, or in the form of a higher price
for the securities which are acquired subject to the standby commitment, thus
increasing the cost of securities and reducing the yield otherwise available
from the same security. The Adviser understands that the Internal Revenue
Service (the "IRS") has issued a revenue ruling to the effect that, under
specified circumstances, a registered investment company will be the owner of
tax-exempt municipal obligations acquired subject to a put option. The IRS has
also issued private letter rulings to certain taxpayers (which do not serve as
precedent for other taxpayers) to the effect that tax-exempt interest received
by a regulated investment company with respect to such obligations will be tax-
exempt in the hands of the company and may be distributed to its shareholders as
exempt-interest dividends. The IRS has subsequently announced that it will not
ordinarily issue advance ruling letters as to the identity of the true owner of
property in cases involving the sale of securities or participation interests
therein if the purchaser has the right to cause the security, or the
participation interest therein, to be purchased by either the seller or a third
party. Each of the California Tax Free Fund, New York Tax Free Fund and Tax
Free Bond Fund intends to take the position that it is the owner of any
municipal obligations acquired subject to a standby commitment and that tax-
exempt interest earned with respect to such municipal obligations will be tax-
exempt in its hands; however, no assurance can be given that this position would
prevail if challenged. In addition, there is no assurance that standby
commitments will be available to a Fund, nor has the California Tax Free Fund,
New York Tax
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<PAGE>
Free Fund or Tax Free Bond Fund assumed that such commitments would continue to
be available under all market conditions.
A standby commitment may not be used to affect a Fund's valuation of the
municipal security underlying the commitment. Any consideration paid by a Fund
for the standby commitment, whether paid in cash or by paying a premium for the
underlying security, which increases the cost of the security and reduces the
yield otherwise available from the same security, will be accounted for by the
Fund as unrealized depreciation until the standby commitment is exercised or has
expired.
WHEN-ISSUED SECURITIES
The Funds 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, that Fund would earn no income; however, it is the Trust's intention
that each 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 Trust 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 a 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 a Fund's net asset value or income will be exposed to additional risk by
the purchase of securities on a when-issued basis. Each Fund will establish a
segregated account in which it will maintain cash and U.S. government securities
or other high-grade debt obligations 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.
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<PAGE>
MORTGAGE-RELATED AND OTHER ASSET-BACKED 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 Funds, to the extent permitted in the Prospectus, 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; 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.
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).
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<PAGE>
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 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
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<PAGE>
securities. Pools created by such non-governmental issuers generally offer a
higher rate of interest than government and government-related pools because
there are no direct or indirect government or agency guarantees of payments in
the former pools. However, timely payment of interest and principal of these
pools may be supported by various forms of insurance or guarantees, including
individual loan, title, pool and hazard insurance and letters of credit. The
insurance and guarantees are issued by governmental entities, private insurers
and the mortgage poolers. Such insurance and guarantees and the
creditworthiness of the issuers thereof will be considered in determining
whether a mortgage-related security meets the Funds' 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 Funds 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 Adviser determines that the securities
meet the Funds' quality standards.
PRIVATELY ISSUED MORTGAGE-RELATED SECURITIES The mortgage-related
--------------------------------------------
securities in which the Funds 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.
The California Tax Free Fund, New York Tax Free Fund and Equity Index Fund,
however, may not invest in non-government mortgage pass-through securities.
Although the market for such securities is becoming increasingly liquid,
securities issued by certain private organizations may not be readily
marketable. No Fund will purchase mortgage-related securities or any other
assets which in the Advisers' opinion are illiquid if, as a result, more than
10% (15% in the case of the International Equity Fund and International Bond
Funds) 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
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<PAGE>
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 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
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<PAGE>
holders of the CMOs as additional sinking fund payments. Because of the "pass-
through" nature of all principal payments received on the collateral pool in
excess of FHLMC's minimum sinking fund requirement, the rate at which principal
of the CMOs is actually repaid is likely to be such that each class of bonds
will be retired in advance of its scheduled maturity date.
If collection of principal (including prepayments) on the mortgage loans
during any semiannual payment period is not sufficient to meet FHLMC's minimum
sinking fund obligation on the next sinking fund payment date, FHLMC agrees to
make up the deficiency from its general funds.
Criteria for the mortgage loans in the pool backing the CMOs are identical
to those of FHLMC Pcs. FHLMC has the right to substitute collateral in the
event of delinquencies and/or defaults.
OTHER MORTGAGE-RELATED SECURITIES Other mortgage-related securities
---------------------------------
include securities other than those described above that directly or indirectly
represent a participation in, or are secured by and payable from, mortgage loans
on real property, including CMO residuals or stripped 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
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<PAGE>
amount of administrative expenses and the prepayment experience on the mortgage
assets. In particular, the yield to maturity on CMO residuals is extremely
sensitive to prepayments on the related underlying mortgage assets, in the same
manner as an interest-only ("IO") class of stripped mortgage-backed securities.
See "Stripped Mortgage-Backed Securities." In addition, if a series of a CMO
includes a class that bears interest at an adjustable rate, the yield to
maturity on the related CMO residual will also be extremely sensitive to changes
in the level of the index upon which interest rate adjustments are based. As
described below with respect to stripped mortgage-backed securities, in certain
circumstances a portfolio may fail to recoup fully its initial investment in a
CMO residual.
CMO residuals are generally purchased and sold by institutional investors
through several investment banking firms acting as brokers or dealers. The CMO
residual market has only very recently developed and, 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 a
Fund's limitations on investment in illiquid securities.
Under certain circumstances, a Fund's investment in residual interests in
"real estate mortgage investment conduits" ("REMICs") may cause shareholders of
that 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 a Fund.
GOVERNMENT FUND The Government Fund will not invest in any privately
---------------
issued CMOs that do not meet the requirements of Rule 3a-7 under the 1940 Act
if, as a result of such investment, more than 5% of the Fund's net assets would
be invested in any one CMO, more than 10% of the Fund's net assets would be
invested in CMOs and other investment company securities in the aggregate, or
the Fund would hold more than 3% of any outstanding issue of CMOs.
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<PAGE>
The Government Fund may also invest in securities collateralized by
mortgages or pools of mortgages the issuer of which has qualified to be treated
as a "REMIC". 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 issue to issue and 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
funds that hold such interests. The Government 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.
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<PAGE>
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 Funds may invest may be particularly
sensitive to changes in prevailing interest rates, and, like the other
investments of the Funds, the ability of a Fund to successfully utilize these
instruments may depend in part upon the ability of an Adviser to forecast
interest rates and other economic factors correctly. If an Adviser incorrectly
forecasts such factors and has taken a position in mortgage-backed securities
that is or becomes contrary to prevailing market trends, the Funds could be
exposed to the risk of a loss.
Investment in mortgage-backed securities poses several risks, including
prepayment, market, and credit risk. Prepayment risk reflects the chance that
borrowers may prepay their mortgages faster than expected, thereby affecting the
investment's average life and perhaps its yield. Whether or not a mortgage loan
is prepaid is almost entirely controlled by the borrower. Borrowers are most
likely to exercise their prepayment options at a time when it is least
advantageous to investors, generally prepaying mortgages as interest rates fall,
and slowing payments as interest rates rise. Besides the effect of prevailing
interest rates, the rate of prepayment and refinancing of mortgages may also be
affected by home value appreciation, ease of the refinancing process and local
economic conditions.
Market risk reflects the chance that the price of the security may
fluctuate over time. The price of mortgage-backed securities may be
particularly sensitive to prevailing interest rates, the length of time the
security is expected to be outstanding, and the liquidity of the issue. In a
period of unstable interest rates, there may be decreased demand for certain
types of mortgage-backed securities, and a Fund invested in such securities 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 a Fund may not receive all or part of
its principal because the issuer or credit enhancer has defaulted on its
obligations. Obligations issued by U.S. government-related entities are
guaranteed as to the payment of principal and interest, but are not backed by
the full faith
B-33
<PAGE>
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 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 Advisers expect that other asset-backed securities (unrelated to
mortgage loans) will be offered to investors in the future. Consistent with its
investment objectives and policies, a Fund also may invest in other types of
asset-backed securities.
SHORT SALES AGAINST THE BOX
A short sale is a transaction in which a Fund sells through a broker a
security it does not own in anticipation of a possible decline in market price.
A short sale "against the box" is a short sale in which, at the time of the
short sale, a Fund owns or has the right to obtain securities equivalent in kind
and amount. Each of the Funds will only enter into short sales against the box.
A Fund may enter into a short sale against the box among other reasons, to hedge
against a possible market decline in the value of 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
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<PAGE>
Fund may segregate assets, equal in value to 50% of the value of the short sale,
in a special account with the Fund's custodian. The segregated assets are
pledged to the broker pursuant to applicable margin rules. If a broker, with
which the Fund has open short sales, were to become bankrupt, a Fund could
experience losses or delays in recovering gains on short sales. The Funds will
only enter into short sales against the box with brokers the Advisers believe
are creditworthy. Short sales against the box will be limited to no more than
25% of a Fund's net assets.
OPTIONS ON SECURITIES
WRITING CALL OPTIONS Any Fund, except the Equity Index Fund, the Money
--------------------
Market Fund and the Tax Free Bond Fund, may sell ("write") covered call options
on the portfolio securities of such Fund in an attempt to enhance investment
performance. The California Tax Free Fund and New York Tax Free Fund may
purchase and sell both put and call options on debt securities in standardized
contracts traded on national securities exchanges, boards of trade, or similar
entities, or quoted on NASDAQ, and agreements, sometimes called "cash puts,"
which may accompany the purchase of a new issue of bonds from a dealer. A call
option sold by a Fund is a short-term contract, having a duration of nine months
or less, which gives the purchaser of the option the right to buy, and 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 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's owning the underlying security throughout the
option period, or by holding, on a share-for-share basis, a call on the same
security as the call written, where the exercise price of the call held is equal
to or less than the price of the call written, or greater than the exercise
price of a call written if the difference is maintained by the Fund in liquid
assets in a segregated account with its custodian.
A Fund will write covered call options both to reduce the risks associated
with certain of its investments and to increase total investment return through
the receipt of premiums. In return for the premium income, the Fund will give
up the opportunity to profit from an increase in the market price of the
underlying security above the exercise price so long as its obligations under
the contract continue, except insofar as the premium represents a profit.
Moreover, in writing the call option, the Fund will retain the risk of loss
should the price of the security decline, which loss the premium is intended to
offset in whole or in part. A Fund, in writing call options,
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<PAGE>
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.
A Fund may protect itself from further losses due to a decline in value of
the underlying security or from the loss of ability to profit from appreciation
by buying an identical option, in which case the purchase cost may offset the
premium. In order to do this, the Fund makes a "closing purchase transaction"--
the purchase of a call option on the same security with the same exercise price
and expiration date as the covered call option which it has previously written
on any particular security. The Fund will realize a gain or loss from a closing
purchase transaction if the amount paid to purchase a call option in a closing
transaction is less or more than the amount received from the sale of the
covered call option. Also, because increases in the market price of a call
option will generally reflect increases in the market price of the underlying
security, any loss resulting from the closing out of a call option is likely to
be offset in whole or in part by unrealized appreciation of the underlying
security owned by the Fund. When a security is to be sold from the Fund's
portfolio, the Fund will first effect a closing purchase transaction so as to
close out any existing covered call option on that security.
A closing purchase transaction may be made only on a national or foreign
securities exchange (an "Exchange") which provides a secondary market for an
option with the same exercise price and expiration date, except as discussed
below. There is no assurance that a liquid secondary market on an Exchange or
otherwise will exist for any particular option, or at any particular time, and
for some options no secondary market on an Exchange or otherwise may exist. If
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
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an option writer has received an exercise notice, it cannot effect a closing
purchase transaction in order to terminate its obligation under the option and
must deliver or purchase the underlying securities at the exercise price.
Each Fund pays brokerage commissions and dealer spreads in connection with
writing covered call options and effecting closing purchase transactions, as
well as for purchases and sales of underlying securities. The writing of
covered call options could result in significant increases in a Fund's portfolio
turnover rate, especially during periods when market prices of the underlying
securities appreciate. Subject to the limitation that all call and put option
writing transactions be covered, the Funds may, to the extent determined
appropriate by the Advisers, engage without limitation in the writing of options
on U.S. government securities. Subject to the limitation that all call and put
option writing transactions be covered, and limitations imposed on regulated
investment companies under federal tax law, the International Bond Fund and
International Equity Fund may, to the extent determined appropriate by the
Adviser, engage without limitation in the writing of options on their portfolio
securities.
WRITING PUT OPTIONS Each Fund, except the Equity Index Fund, the Money
-------------------
Market Fund and the Tax Free Bond Fund, may also write covered put options. A
put option written by the Fund is "covered" if the Fund maintains liquid assets
with a value equal to the exercise price in a segregated account with its
custodian. A put option is also "covered" if the Fund holds on a share-for-
share basis a put on the same security as the put written, where the exercise
price of the put held is equal to or greater than the exercise price of the put
written, or less than the exercise price of the put written if the difference is
maintained by the Fund in liquid assets in a segregated account with its
custodian.
The premium which the Funds receive from writing a put option will reflect,
among other things, the current market price of the underlying security, the
relationship of the exercise price to such market price, the historical price
volatility of the underlying security, the option period, supply and demand and
interest rates.
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.
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The Funds may effect a closing purchase transaction to realize a profit on
an outstanding put option or to prevent an outstanding put option from being
exercised. The Funds also may effect a closing purchase transaction, in the
case of a put option, to permit the Funds to maintain their holdings of the
deposited U.S. Treasury obligations, to write another put option to the extent
that the exercise price thereof is secured by the deposited U.S. Treasury
obligations, or to utilize the proceeds from the sale of such obligations to
make other investments.
If a Fund is able to enter into a closing purchase transaction, the Fund
will realize a profit or loss from such transaction if the cost of such
transaction is less or more than the premium received from the writing of the
option respectively. After writing a put option, the Fund may incur a loss
equal to the difference between the exercise price of the option and the sum of
the market value of the underlying security plus the premium received from the
sale of the option.
In addition, the Funds may also write straddles (combinations of covered
puts and calls on the same underlying security). The extent to which the Funds
may write covered put and call options and enter into so-called "straddle"
transactions involving put or call options may be limited by the requirements of
the Internal Revenue Code of 1986, as amended (the "Code") for qualification as
a regulated investment company and the Trust's intention that each Fund qualify
as such. Subject to the limitation that all call and put option writing
transactions be covered, the Funds may, to the extent determined appropriate by
the Advisers, engage without limitation in the writing of options on U.S.
government securities.
PURCHASING OPTIONS Each Fund, except the Equity Index Fund, the Money
------------------
Market Fund and the Tax Free Bond 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 Funds will engage in such
transactions only with firms the Advisers deem to be of sufficient
creditworthiness so as to minimize these risks.
The Funds may purchase put options on securities to protect their holdings
in an underlying or related security against a substantial decline in market
value. Securities are considered related if their price movements generally
correlate with one another. A 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
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paid, to sell a security at a specified price upon exercise of the option during
the option period. The purchase of put options on securities held in the
portfolio or related to such securities will enable a Fund to preserve, at least
partially, unrealized gains occurring prior to the purchase of the option on a
portfolio security without actually selling the security. In addition, the Fund
will continue to receive interest or dividend income on the security. The put
options purchased by the Fund may include, but are not limited to, "protective
puts" in which the security to be sold is identical or substantially identical
to a security already held by the Fund or to a security which the Fund has the
right to purchase. The Fund would ordinarily recognize a gain if the value of
the securities decreased during the option period below the exercise price
sufficiently to cover the premium. The Fund would recognize a loss if the value
of the securities remained above the difference between the exercise price and
the premium.
The Funds may also purchase call options on securities the Funds intend to
purchase to protect against substantial increases in prices of such securities
pending their ability to invest in an orderly manner in such securities. The
purchase of a call option would entitle the Fund, in exchange for the premium
paid, to purchase a security at a specified price upon exercise of the option
during the option period. The Fund would ordinarily realize a gain if the value
of the securities increased during the option period above the exercise price
sufficiently to cover the premium. The Fund would have a loss if the value of
the securities remained below the sum of the premium and the exercise price
during the option period. In order to terminate an option position, the Funds
may sell put or call options identical to those previously purchased, which
could result in a net gain or loss depending on whether the amount received on
the sale is more or less than the premium and other transaction costs paid on
the put or call option when it was purchased.
SPECIAL RISKS ASSOCIATED WITH OPTIONS ON SECURITIES Exchange markets in
---------------------------------------------------
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.
If a put or call option purchased by a Fund is not sold when it has
remaining value, and if the market price of the underlying security, in the case
of a put, remains equal to or greater than the exercise price, or, in the case
of a call, remains less than or equal to the exercise price, the Fund will not
be able to exercise profitably the option and will lose its entire
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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 Capital Appreciation Fund, Convertible-
Equity Income Fund, Government Fund, High Yield Corporate Bond Fund, Money
Market Fund, Total Return Fund and Value Fund will not purchase a put or call
option if, as a result, the amount of premiums paid for all put and call options
then outstanding would exceed 10% of the value of the Fund's total assets.
Regarding the International Bond Fund and International Equity Fund, each Fund
has undertaken to a state securities commission that it will not purchase a put,
call, straddle or spread if, as a result, the amount of premiums paid for such
positions would exceed 5% of the value of the Fund's net assets.
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 Each Fund, except the California Tax Free
-----------------------------
Fund, the Equity Index Fund, the Government Fund, the Money Market Fund, the New
York Tax Free Fund and the Tax Free Bond 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 in which portfolio securities are denominated
will reduce the dollar value of such securities, even if their value in the
foreign currency remains constant. In order to protect against such declines in
the value of portfolio securities, a Fund may purchase put options on the
foreign currency. If the value of the currency does decline, that Fund will
have the right to sell such currency for a fixed amount of dollars which exceeds
the market value of such currency, resulting in a gain that may offset, in whole
or in part, the negative effect of currency depreciation on the value of the
Fund's securities denominated in that currency.
Conversely, if a rise in the dollar value of a currency in which securities
to be acquired are denominated is projected, thereby increasing the cost of such
securities, a Fund may purchase call options on such currency. If the value of
such currency does increase, the purchase of such call options would enable the
Fund to purchase currency for a fixed amount of dollars which is less than the
market value of such currency, resulting in a gain that may offset, at least
partially, the
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effect of any currency-related increase in the price of securities the Fund
intends to acquire. As in the case of other types of options transactions,
however, the benefit a Fund derives from purchasing foreign currency options
will be reduced by the amount of the premium and related transaction costs. In
addition, if currency exchange rates do not move in the direction or to the
extent anticipated, a Fund could sustain losses on transactions in foreign
currency options which would deprive it of a portion or all of the benefits of
advantageous changes in such rates.
A Fund may also write options on foreign currencies for hedging purposes.
For example, if a Fund anticipates a decline in the dollar value of foreign
currency-denominated securities due to declining exchange rates, it could,
instead of purchasing a put option, write a call option on the relevant
currency. If the expected decline occurs, the option will most likely not be
exercised, and the 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, a Fund
could write a put option on the relevant currency. If rates move in the manner
projected, the put option will expire unexercised and allow the Fund to offset
such increased cost up to the amount of the premium. As in the case of other
types of options transactions, however, the writing of a foreign currency option
will constitute only a partial hedge up to the amount of the premium, and only
if rates move in the expected direction. If unanticipated exchange rate
fluctuations occur, the option may be exercised and a Fund would be required to
purchase or sell the underlying currency at a loss which may not be fully offset
by the amount of the premium. As a result of writing options on foreign
currencies, a Fund also may be required to 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 a Fund is "covered" if that
Fund owns the underlying foreign currency subject to the call or securities
denominated in that currency or has an absolute and immediate right to acquire
that foreign currency without additional cash consideration (or for additional
cash consideration held in a segregated account by its custodian) upon
conversion or exchange of other foreign currency held in its portfolio. A call
option is also covered if a Fund holds a call on the same foreign currency for
the same principal amount as the call written where the exercise price of the
call held (a) is equal to or less than the exercise price of the call written or
(b) is greater than the exercise price of the call written if the
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amount of the difference is maintained by a Fund in cash and liquid high grade
debt securities in a segregated account with its custodian.
SECURITIES INDEX OPTIONS
The Funds may purchase call and put options on securities indexes (only
call options on the S&P 500 Composite Price Index in the case of the Equity
Index Fund) for the purpose of hedging against the risk of unfavorable price
movements which may adversely affect the value of a Fund's securities. The
Equity Index Fund may purchase call options on the S&P 500 Index to protect
against increases in the prices of securities underlying the Index that the
Equity Index Fund intends to purchase pending its ability to invest in such
securities in an orderly manner.
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. Options on other types of securities indexes, which do not currently
exist, including indexes on debt securities, may be introduced and traded on
exchanges in the future. If such options are introduced, the Funds will not
purchase them until they have appropriately amended or supplemented the
Prospectus or Statement of Additional Information, or both.
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 a Fund will not exactly
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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 a 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 a Fund's transactions in securities index options
depend on price movements in the 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 a 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.
A Fund may sell securities index options prior to expiration in order to
close out its positions in securities index options which it has purchased. A
Fund may also allow options to expire unexercised.
FUTURES TRANSACTIONS
The California Tax Free Fund, Convertible-Equity Income Fund, Government
Fund, High Yield Corporate Bond Fund, International Bond Fund, International
Equity Fund, New York Tax Free Fund, Tax Free Bond Fund and Total Return Fund
may purchase and sell futures contracts on debt securities and on indexes of
debt securities to hedge against anticipated changes in interest rates that
might otherwise have an adverse effect upon the value of a Fund's portfolio
securities. Each of such Funds may also enter into such futures contracts in
order to lengthen or shorten the average maturity or duration of the Fund's
portfolio. For example, a Fund may purchase futures contracts as a substitute
for the purchase of longer-term debt securities to lengthen the average duration
of a Fund's portfolio of fixed-income securities. The Capital Appreciation
Fund, Convertible-Equity Income Fund, Equity Index Fund, International Equity
Fund, Total Return Fund and Value Fund may purchase and sell stock index futures
to hedge the equity portion of those Funds' securities portfolios 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). These Funds,
and the International Bond Fund, may also purchase and sell other futures when
deemed appropriate, in order to hedge the equity or non-equity portions of their
portfolios. In addition, each Fund, except the California Tax Free Fund, Equity
Index Fund, Government Fund, Money Market Fund, New York Tax Free Fund and Tax
Free Bond Fund may, to the extent it invests in
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foreign securities, enter into contracts for the future delivery of foreign
currencies to hedge against changes in currency exchange rates. Each of the
Funds may also purchase and write put and call options on futures contracts of
the type into which such Fund is authorized to enter and may engage in related
closing transactions. In the United States, all such futures on 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 Funds 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. The International Bond Fund and International Equity Fund are not
limited to the above-listed exchanges.
A futures contract is an agreement to buy or sell a security or currency
(or to deliver a final cash settlement price in the case of a contract relating
to an index or otherwise not calling for physical delivery at the end of trading
in the contracts), for a set price at a future date. When interest rates are
changing and portfolio values are falling, futures contracts can offset a
decline in the value of a Fund's current portfolio securities. When interest
rates are changing and portfolio values are rising, the purchase of futures
contracts can secure better effective rates or 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. Futures contracts trade on
these markets through an "open outcry" auction on the exchange floor.
Currently, there are futures contracts based on a variety of instruments,
indexes and currencies, including long-term U.S. Treasury bonds, Treasury notes,
GNMA certificates, three-month U.S. Treasury bills, three-month domestic bank
certificates of deposit, a municipal bond index and various stock indexes.
When a purchase or sale of a futures contract is made by a Fund, the Fund
is required to deposit with its custodian (or broker, if legally permitted) a
specified amount of cash or U.S. government securities ("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. Each Fund
expects to earn interest income on its initial margin deposits.
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A futures contract held by a Fund is valued daily at the official settlement
price of the exchange on which it is traded. Each day the Fund pays or receives
cash, called "variation margin," equal to the daily change in value of the
futures contract. This process is known as "marking-to-market." Variation
margin does not represent a borrowing or loan by a Fund but is instead a
settlement between the Fund and the broker of the amount one would owe the other
if the futures contract expired. In computing daily net asset value, each Fund
will mark-to-market its open futures positions.
A Fund is also required to deposit and maintain margin with respect to put
and call options on futures contracts written by it. Such margin deposits will
vary depending on the nature of the underlying futures contract (and the related
initial margin requirements), the current market value of the option, and other
futures positions held by the Fund.
Positions taken in the futures markets are not normally held until delivery
or final cash settlement is required, but are instead liquidated through
offsetting transactions which may result in a gain or a loss. While futures
positions taken by a Fund will usually be liquidated in this manner, the Fund
may instead make or take delivery of underlying securities or currencies
whenever it appears economically advantageous to the Fund to do so. A clearing
organization associated with the exchange on which futures are traded assumes
responsibility for closing-out transactions and guarantees that as between the
clearing members of an exchange, the sale and purchase obligations will be
performed with regard to all positions that remain open at the termination of
the contract.
FUTURES ON DEBT SECURITIES A futures contract on a debt security is a
--------------------------
binding contractual commitment which, if held to maturity, will result in an
obligation to make or accept delivery, during a particular future month, of
securities having a standardized face value and rate of return. By purchasing
futures on debt securities--assuming a "long" position--a Fund will legally
obligate itself to accept the future delivery of the underlying security and pay
the agreed-upon price. By selling futures on debt securities--assuming a
"short" position--it will legally obligate itself to make the future delivery of
the security against payment of the agreed-upon price. Open futures positions
on debt securities will be valued at the most recent settlement price, unless
such price does not appear to the Advisers to reflect the fair value of the
contract, in which case the positions will be valued by or under the direction
of the Trustees.
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Hedging by use of futures on debt securities seeks to establish, more
certainly than would otherwise be possible, the effective rate of return on
portfolio securities. A Fund may, for example, take a "short" position in the
futures market by selling contracts for the future delivery of debt securities
held by the Fund (or securities having characteristics similar to those held by
the Fund) in order to hedge against an anticipated rise in interest rates that
would adversely affect the value of the Fund's portfolio securities. When
hedging of this character is successful, any depreciation in the value of
portfolio securities will be substantially offset by appreciation in the value
of the futures position.
On other occasions, a Fund may take a "long" position by purchasing futures
on debt securities. This would be done, for example, when the Fund intends to
purchase particular securities and it has the necessary cash, but expects the
rate of return available in the securities markets at that time to be less
favorable than rates currently available in the futures markets. If the
anticipated rise in the price of the securities should occur (with its
concomitant reduction in yield), the increased cost to the Fund of purchasing
the securities will be offset, at least to some extent, by the rise in the value
of the futures position taken in anticipation of the subsequent securities
purchase. A Fund may also purchase futures contracts as a substitute for the
purchase of longer-term securities to lengthen the average duration of the
Fund's portfolio.
The Fund could accomplish similar results by selling securities with long
maturities and investing in securities with short maturities when interest rates
are expected to increase or by buying securities with long maturities and
selling securities with short maturities when interest rates are expected to
decline. However, by using futures contracts as a risk management technique,
given the greater liquidity in the futures market than in the cash market, it
may be possible to accomplish the same result more easily and more quickly.
Because the only futures contracts currently available to hedge the Tax
Free Bond Fund's portfolio of municipal obligations are futures on various U.S.
government securities and futures on a municipal securities index, perfect
correlation between that Fund's futures positions and portfolio positions may be
difficult to achieve.
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
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parties to the contract. On the contract's expiration date a final cash
settlement occurs and the futures positions are simply closed out. Changes in
the market value of a particular stock index futures contract reflect changes in
the specified index of equity securities on which the contract is based. A
stock index is designed to reflect overall price trends in the market for equity
securities.
Stock index futures may be used to hedge the equity portion of a Fund's
securities portfolio with regard to market (systematic) risk, as distinguished
from stock-specific risk. The Funds may enter into stock index futures to the
extent that they have equity securities in their portfolios. Similarly, the
Funds may enter into futures on debt securities indexes (including the municipal
bond index) to the extent they have debt securities in their portfolios. By
establishing an appropriate "short" position in securities index futures, a Fund
may seek to protect the value of its portfolio against an overall decline in the
market for securities. Alternatively, in anticipation of a generally rising
market, a Fund can seek to avoid losing the benefit of apparently low current
prices by establishing a "long" position in securities index futures and later
liquidating that position as particular securities are in fact acquired. To the
extent that these hedging strategies are successful, the Fund will be affected
to a lesser degree by adverse overall market price movements, unrelated to the
merits of specific portfolio securities, than would otherwise be the case. A
Fund may also purchase futures on debt securities or indexes as a substitute for
the purchase of longer-term debt securities to lengthen the average duration of
the Fund's debt portfolio.
CURRENCY FUTURES A sale of a currency futures contract creates an
----------------
obligation by a Fund, as seller, to deliver the amount of currency called for in
the contract at a specified future time for a specified price. A purchase of a
currency futures contract creates an obligation by a Fund, as purchaser, to take
delivery of an amount of currency at a specified future time at a specified
price. A Fund may sell a currency futures contract, if the 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 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
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offset a currency futures contract sold by a Fund, the Fund purchases a currency
futures contract for the same aggregate amount of currency and delivery date.
If the price in the sale exceeds the price in the offsetting purchase, the Fund
is immediately paid the difference. Similarly, to close out a currency futures
contract purchased by the Fund, the Fund sells a currency futures contract. If
the offsetting sale price exceeds the purchase price, the Fund realizes a gain,
and if the offsetting sale price is less than the purchase price, the Fund
realizes a loss.
A risk in employing currency futures contracts to protect against the price
volatility of portfolio securities denominated in a particular currency is that
changes in currency exchange rates or in the value of the futures position may
correlate imperfectly with changes in the cash prices of a Fund's securities.
The degree of correlation may be distorted by the fact that the currency
futures market may be dominated by short-term traders seeking to profit from
changes in exchange rates. This would reduce the value of such contracts for
hedging purposes over a short-term period. Such distortions are generally minor
and would diminish as the contract approached maturity. Another risk is that
the Adviser could be incorrect in its expectation as to the direction or extent
of various exchange rate movements or the time span within which the movements
take place.
OPTIONS ON FUTURES For bona fide hedging and other appropriate risk
------------------
management purposes, the Funds also may purchase and write call and put options
on futures contracts which are traded on exchanges that are licensed and
regulated by the CFTC for the purpose of options trading, or, subject to
applicable CFTC rules, on foreign exchanges. The Funds 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
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current market price of the contract in the futures market. When an entity
exercises an option and assumes a "long" futures position, in the case of a
"call," or a "short" futures position, in the case of a "put," its gain will be
credited to its futures margin account, while the loss suffered by the writer of
the option will be debited to its account. However, as with the trading of
futures, most participants in the options markets do not seek to realize their
gains or losses by exercise of their option rights. Instead, the writer or
holder of an option will usually realize a gain or loss by buying or selling an
offsetting option at a market price that will reflect an increase or a decrease
from the premium originally paid.
Options on futures contracts can be used by a Fund to hedge substantially
the same risks and for the same duration and risk management purposes as might
be addressed or served by the direct purchase or sale of the underlying futures
contracts. If the Fund purchases an option on a futures contract, it may obtain
benefits similar to those that would result if it held the futures position
itself.
The purchase of put options on futures contracts is a means of hedging a
Fund's portfolio against the risk of rising interest rates, declining securities
prices or declining exchange rates for a particular currency. The purchase of a
call option on a futures contract represents a means of hedging against a market
advance affecting securities prices or currency exchange rates when the Fund is
not fully invested or of lengthening the average maturity or duration of a
Fund's portfolio. Depending on the pricing of the option compared to either the
futures contract upon which it is based or upon the price of the underlying
securities or currencies, it may or may not be less risky than ownership of the
futures contract or underlying securities or currencies.
In contrast to a futures transaction, in which only transaction costs are
involved, benefits received in an option transaction will be reduced by the
amount of the premium paid as well as by transaction costs. In the event of an
adverse market movement, however, the Fund will not be subject to a risk of loss
on the option transaction beyond the price of the premium it paid plus its
transaction costs, and may consequently benefit from a favorable movement in the
value of its portfolio securities or the currencies in which such securities are
denominated that would have been more completely offset if the hedge had been
effected through the use of futures.
If a Fund writes options on futures contracts, the Fund will receive a
premium but will assume a risk of adverse movement in the price of the
underlying futures contract comparable to that
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involved in holding a futures position. If the option is not exercised, the
Fund will realize a gain in the amount of the premium, which may partially
offset unfavorable changes in the value of securities held by or to be acquired
for the Fund. If the option is exercised, the Fund will incur a loss in the
option transaction, which will be reduced by the amount of the premium it has
received, but which may partially offset favorable changes in the value of its
portfolio securities or the currencies in which such securities are denominated.
The writing of a call option on a futures contract constitutes a partial
hedge against declining prices of the underlying securities or the currencies in
which such securities are denominated. If the futures price at expiration is
below the exercise price, the Fund will retain the full amount of the option
premium, which provides a partial hedge against any decline that may have
occurred in the Fund's holdings of securities or the currencies in which such
securities are denominated.
The writing of a put option on a futures contract is analogous to the
purchase of a futures contract. For example, if the Fund writes a put option on
a futures contract on debt securities related to securities that the Fund
expects to acquire and the market price of such securities increases, the net
cost to a Fund of the debt securities acquired by it will be reduced by the
amount of the option premium received. Of course, if market prices have
declined, the Fund's purchase price upon exercise may be greater than the price
at which the debt securities might be purchased in the securities market.
While the holder or writer of an option on a futures contract may normally
terminate its position by selling or purchasing an offsetting option of the same
series, a Fund's ability to establish and close out options positions at fairly
established prices will be subject to the maintenance of a liquid market. The
Funds will not purchase or write options on futures contracts unless the market
for such options has sufficient liquidity such that the risks associated with
such options transactions are not at unacceptable levels.
LIMITATIONS ON PURCHASE AND SALE OF FUTURES CONTRACTS AND OPTIONS ON
--------------------------------------------------------------------
FUTURES CONTRACTS In general, the Funds will engage in transactions in futures
- -----------------
contracts and related options only for bona fide hedging and other appropriate
risk management purposes, and not for speculation. A Fund will not enter into a
futures contract or futures option contract if, immediately thereafter, the
aggregate initial margin deposits relating to such positions plus premiums paid
by it for open futures option positions, less the amount by which any such
options are "in-the-money," would
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exceed 5% of the Fund's total assets. Regarding the California Tax Free Fund,
New York Tax Free Fund, International Bond Fund and International Equity Fund,
with respect to positions in futures and related options that do not constitute
bona fide hedging positions, a Fund will not enter into a futures contract or
futures option contract if, immediately thereafter, the aggregate initial margin
deposits relating to such positions plus premiums paid by it for open futures
option positions, less the amount by which any such options are "in-the-money,"
would exceed 5% of the Fund's total assets. A call option is "in-the-money" if
the value of the futures contract that is the subject of the option exceeds the
exercise price. A put option is "in-the-money" if the exercise price exceeds
the value of the futures contract that is the subject of the option.
When purchasing a futures contract, a Fund will maintain with its custodian
(and mark-to-market on a daily basis) liquid assets that, when added to the
amounts deposited with a futures commission merchant as margin, are equal to the
market value of the futures contract. Alternatively, the Fund may "cover" its
position by purchasing a put option on the same futures contract with a strike
price as high or higher than the price of the contract held by the Fund.
When selling a futures contract, a Fund will maintain with its custodian
(and mark-to-market on a daily basis) liquid assets that, when added to the
amount deposited with a futures commission merchant as margin, are equal to the
market value of the instruments underlying the contract. Alternatively, the
Fund may "cover" its position by owning the instruments underlying the contract
(or, in the case of an index futures contract, a portfolio with a volatility
substantially similar to that of the index on which the futures contract is
based), or by holding a call option permitting the Fund to purchase the same
futures contract at a price no higher than the price of the contract written by
the Fund (or at a higher price if the difference is maintained in liquid assets
with the Fund's custodian).
When selling a call option on a futures contract, a Fund will maintain with
its custodian (and mark-to-market on a daily basis) liquid assets that, when
added to the amounts deposited with a futures commission merchant as margin,
equal the total market value of the futures contract underlying the call option.
Alternatively, the Fund may cover its position by entering into a long position
in the same futures contract at a price no higher than the strike price of the
call option, by owning the instruments underlying the futures contract, or by
holding a separate call option permitting the Fund to purchase the same futures
contract at a price not higher than the strike price of the call option sold by
the Fund.
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When selling a put option on a futures contract, a Fund will maintain with
its custodian (and mark-to-market on a daily basis) liquid assets that equal the
purchase price of the futures contract, less any margin on deposit.
Alternatively, the Fund may cover the position either by entering into a short
position in the same futures contract, or by owning a separate put option
permitting it to sell the same futures contract so long as the strike price of
the purchased put option is the same or higher than the strike price of the put
option sold by the Fund.
The requirements for qualification as a regulated investment company also
may limit the extent to which a Fund may enter into futures, futures options or
forward contracts. See "Tax 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 correlation
depends on circumstances such as variations in speculative market demand for
futures and futures options on securities, including technical influences in
futures trading and futures options, and differences between the financial
instruments being hedged and the instruments underlying the standard contracts
available for trading in such respects as interest rate levels, maturities, and
creditworthiness of issuers. A decision as to whether, when and how to hedge
involves the exercise of skill and judgment, and even a well-conceived hedge may
be unsuccessful to some degree because of market behavior or unexpected interest
rate trends.
Futures exchanges may limit the amount of fluctuation permitted in certain
futures contract prices during a single trading day. The daily limit
establishes the maximum amount that the price of a futures contract may vary
either up or down from the previous day's settlement price at the end of the
current trading session. Once the daily limit has been reached in a futures
contract subject to the limit, no more trades may be made on that day at a price
beyond that limit. The daily limit governs only price movements during a
particular trading day and therefore does not limit potential losses because the
limit may work to prevent the liquidation of unfavorable positions. For
example, futures prices have occasionally moved to the daily limit for several
consecutive trading days with little or no
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trading, thereby preventing prompt liquidation of positions and subjecting some
holders of futures contracts to substantial losses.
There can be no assurance that a liquid market will exist at a time when a
Fund seeks to close out a futures or a futures option position, and the Fund
would remain obligated to meet margin requirements until the position is closed.
In addition, many of the contracts discussed above are relatively new
instruments without a significant trading history. As a result, there can be no
assurance that an active secondary market will develop or continue to exist. 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 International Bond Fund and International Equity 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. A Fund's obligations (or rights)
under a swap agreement will generally be equal only to the net amount to be paid
or received under the agreement based on the relative values of the positions
held by each party to the agreement (the "net amount"). A Fund's obligations
under a swap agreement will be accrued daily (offset against any amounts owing
to the Fund) and any accrued but unpaid net amounts owed to a swap counterparty
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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. A 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 a Fund's use of swap agreements will be successful in furthering
its investment objective will depend on the 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, a Fund bears the risk of loss of the
amount expected to be received under a swap agreement in the event of the
default or bankruptcy of a swap agreement counterparty. The Adviser will cause
a Fund to enter into swap agreements only with counterparties that would be
eligible for consideration as repurchase agreement counterparties under the
Fund's repurchase agreement guidelines. Certain restrictions imposed on the
Funds by the Code may limit the Funds' ability to use swap agreements. The
swaps market is a relatively new market and is largely unregulated. It is
possible that developments in the swaps market, including potential government
regulation, could adversely affect a Fund's ability to terminate existing swap
agreements or to realize amounts to be received under such agreements.
Certain swap agreements are exempt from most provisions of the Commodity
Exchange Act ("CEA") and, therefore, are not regulated as futures or commodity
option transactions under the CEA, pursuant to regulations approved by the 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, governmental entity, broker-
dealer, futures commission merchant,
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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
A Fund's investment in loan participation interests may take the form of
participation interests in, assignments or novations of a corporate loan
("Participation Interests"). The Participation Interests may be acquired from
an agent bank, co-lenders or other holders of Participation Interests
("Participants"). In a novation, a Fund would assume all of the rights of the
lender in a corporate loan, including the right to receive payments of principal
and interest and other amounts directly from the borrower and to enforce its
rights as a lender directly against the borrower. As an alternative, a Fund may
purchase an assignment of all or a portion of a lender's interest in a corporate
loan, in which case, a Fund may be required generally to rely on the assigning
lender to demand payment and enforce its rights against the borrower, but would
otherwise be entitled to all of such lender's rights in the corporate loan. A
Fund also may purchase a Participation Interest in a portion of the rights of a
lender in a corporate loan. In such a case, a 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 a Fund must rely on the lending institution for that purpose. A Fund
will not act as an agent bank, a guarantor or sole negotiator or a structure
with respect to a corporate loan.
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In a typical corporate loan involving the sale of Participation Interests,
the agent bank administers the terms of the corporate loan agreement and is
responsible for the collection of principal and interest and fee payments to the
credit of all lenders which are parties to the corporate loan agreement. The
agent bank in such cases will be qualified under the 1940 Act to serve as a
custodian for a registered investment company such as the Trust. A Fund
generally will rely on the agent bank or an intermediate Participant to collect
its portion of the payments on the corporate loan. The agent bank monitors the
value of the collateral and, if the value of the collateral declines, may take
certain action, including accelerating the corporate loan, giving the borrower
an opportunity to provide additional collateral or seeking other protection for
the benefit of the Participants in the corporate loan, depending on the terms of
the corporate loan agreement. Furthermore, unless under the terms of a
participation agreement a Fund has direct recourse against the borrower (which
is unlikely), a Fund will rely on the agent bank to use appropriate creditor
remedies against the borrower. The agent bank also is responsible for
monitoring compliance with covenants contained in the corporate loan agreement
and for notifying holders of corporate loans of any failures of compliance.
Typically, under corporate loan agreements, the agent bank is given broad
discretion in enforcing the corporate loan agreement, and is obligated to use
only the same care it would use in the management of its own property. For
these services, the borrower compensates the agent bank. Such compensation may
include special fees paid on structuring and funding the corporate loan and
other fees paid on a continuing basis.
A financial institution's employment as an agent bank may be terminated in
the event that it fails to observe the requisite standard of care or becomes
insolvent, or has a receiver, conservator, or similar official appointed for it
by the appropriate bank regulatory authority or becomes a debtor in a bankruptcy
proceeding. A successor agent bank generally will be appointed to replace the
terminated bank, and assets held by the agent bank under the corporate loan
agreement should remain available to holders of corporate loans. If, however,
assets held by the agent bank for the benefit of a Fund were determined by an
appropriate regulatory authority or court to be subject to the claims of the
agent bank's general or secured creditors, a Fund might incur certain costs and
delays in realizing payment on a corporate loan, or suffer a loss of principal
and/or interest. In situations involving intermediate Participants similar
risks may arise.
When a Fund acts as co-lender in connection with a participation interest
or when a Fund acquires a participation
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interest the terms of which provide that a Fund will be in privity of contract
with the corporate borrower, a Fund will have direct recourse against the
borrower in the event the borrower fails to pay scheduled principal and
interest. In all other cases, a Fund will look to the agent bank to enforce
appropriate credit remedies against the borrower. In acquiring participation
interests a Fund will conduct analysis and evaluation of the financial condition
of each such co-lender and participant to ensure that the participation interest
meets a Fund's qualitative standards. There is a risk that there may not be a
readily available market for loan participation interests and, in some cases,
this could result in a Fund disposing of such securities at a substantial
discount from face value or holding such security until maturity. When a Fund
is required to rely upon a lending institution to pay the Fund principal,
interest, and other amounts received by the lending institution for the loan
participation, the Fund will treat both the borrower and the lending institution
as an "issuer" of the loan participation for purposes of certain investment
restrictions pertaining to the diversification and concentration of the Fund's
portfolio. The Funds consider loan participation interests not subject to puts
to be illiquid.
RISKS ASSOCIATED WITH DEBT SECURITIES
To the extent that a Fund invests in debt securities, it will be subject to
certain risks. The value of the debt securities held by a Fund, and thus the
net asset value of the shares of beneficial interest of the Fund, generally will
fluctuate depending on a number of factors, including, among others, changes in
the perceived creditworthiness of the issuers of those securities, movements in
interest rates, the average maturity of the Fund's investments, changes in the
relative values of the currencies in which the Fund's investments are
denominated relative to the U.S. dollar, and the extent to which the Fund hedges
its interest rate, credit and currency exchange rate risks. Generally, a rise
in interest rates will reduce the value of fixed income securities held by a
Fund, and a decline in interest rates will increase the value of fixed income
securities held by a Fund.
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
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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. A Fund records the interest on these securities
annually as income even though it receives no cash interest until 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.
HIGH YIELD CORPORATE BOND FUND
SPECIAL CONSIDERATIONS
Corporate debt securities may bear fixed, contingent, or variable rates of
interest and may involve equity features, such as conversion or exchange rights
or warrants for the acquisition of stock of the same or a different issuer,
participations based on revenues, sales or profits, or the purchase of common
stock in a unit transaction (where corporate debt securities and common stock
are offered as a unit).
When- and if-available, debt securities may be purchased at a discount from
face value. 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 Adviser, such securities have the potential for future income
(or capital appreciation, if any).
Since shares of the Fund represent an investment in securities with
fluctuating market prices, the value of shares of the Fund will vary as the
aggregate value of the Fund's portfolio
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securities increases or decreases. Moreover, the value of the 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.
CALIFORNIA TAX FREE FUND AND NEW YORK TAX FREE FUND
SPECIAL CONSIDERATIONS
RISK FACTORS AFFECTING CALIFORNIA MUNICIPAL SECURITIES
The following information as to certain California State ("State") risk
factors is given to investors in view of the policy of the MainStay California
Tax Free Fund of concentrating its investments in California municipal issuers.
Such information constitutes only a brief discussion, does not purport to be a
complete description and is based on information from sources believed by the
Trust to be reliable, including official statements relating to securities
offerings of California and municipal issuers, and periodic publications by
national ratings organizations. Such information, however, has not been
independently verified by the Trust.
Certain of the California municipal securities in which the Fund may invest
may be obligations of issuers which rely in whole or in part on California State
revenues for payment of these obligations. Property tax revenues and a portion
of the State's General Fund surplus are distributed to counties, cities and
their various taxing entities and the State assumes certain obligations
theretofore paid out of local funds. Whether and to what extent a portion of
the State's General Fund will be distributed in the future to counties, cities
and their various entities, is unclear.
Certain of the California municipal securities may be obligations of
issuers who rely in whole or in part on ad valorem real property taxes as a
source of revenue. On June 6, 1978, Proposition 13 added Article XIIIA to the
California Constitution. The effect of Article XIIIA is to limit ad valorem
taxes on real property and to restrict the ability of taxing entities to
increase real property tax revenues.
Legislation enacted by the California Legislature to implement Article
XIIIA (Statutes of 1978, Chapter 292, as
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amended) provides that notwithstanding any other law, local agencies may not
levy any ad valorem property tax except to pay debt service on indebtedness
approved by the voters prior to July 1, 1978, and that each county will levy the
maximum tax permitted by Article XIIIA of $4.00 per $100 assessed valuation.
The apportionment of property taxes in fiscal years after 1978-79 was revised
pursuant to Statutes of 1979, Chapter 282, which provides relief funds from
State moneys beginning in fiscal year 1979-80 and is designed to provide a
permanent system for sharing State taxes and budget funds with local agencies.
Under Chapter 282, cities and counties receive more of the remaining property
tax revenues collected under Proposition 13 instead of direct State aid. School
districts receive a correspondingly reduced amount of property taxes, but
receive compensation directly from the State and are given additional relief.
The application and interpretation of Article XIIIA has been and will
probably continue to be the subject of numerous lawsuits in the California
courts. It is not possible to predict the outcome of litigation or the ultimate
scope and impact of Article XIIIA, its implementing legislation and regulations
issued by the California State Board of Equalization. The outcome of such
litigation, however, could substantially impact local property tax collections
and the ability of State agencies, local governments and districts to make
future payments on outstanding debt obligations.
On November 4, 1986, California voters approved an initiative statute known
as "Proposition 62." This statute (i) requires that any tax for general
governmental purposes imposed by local governments be approved by resolution or
ordinance adopted by a two-thirds vote of the governmental entity's legislative
body and by a majority vote of the electorate of the governmental entity; (ii)
requires that any special tax (defined as taxes levied for other than general
governmental purposes) imposed by a local governmental entity be approved by a
two-thirds vote of the voters within that jurisdiction; (iii) restricts the use
of revenues from a special tax to the purposes or for the service for which the
special tax was imposed; (iv) prohibits the imposition of ad valorem taxes on
real property by local governmental entities except as permitted by Article
XIIIA of the California Constitution; (v) prohibits the imposition of
transaction taxes and sales taxes on the sale of real property by local
governments; (vi) requires that any tax imposed by a local government on or
after August 1, 1985 be ratified by a majority of the electorate within two
years of the adoption of the initiative or be terminated by November 15, 1988;
(vii) requires that, in the event a local government fails to comply with the
provisions of this measure, a reduction in the amount of tax revenue allocated
to such local government occur in
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an amount equal to the revenues received by such entity attributable to the tax
levied in violation of the initiative; and (viii) permits these provisions to be
amended exclusively by the voters of the State of California. In September
1988, the California Court of Appeals held that it was unconstitutional to
require that local tax measures be submitted to the electorate, as described in
(vi) above.
The State is subject to an annual appropriations limit imposed by Article
XIIIB of the State Constitution (the "Appropriations Limit"). The
Appropriations Limit does not restrict appropriations to pay debt service on the
bonds or other voter-authorized bonds. Article XIIIB prohibits the State from
spending "appropriations subject to limitation" in excess of the Appropriations
Limit. "Appropriations subject to limitation," with respect to the State, are
authorizations to spend "proceeds of taxes," which consist of tax revenues, and
certain other funds, including proceeds from regulatory licenses, user charges
or other fees to the extent that such proceeds exceed "the cost reasonably borne
by that entity in providing the regulation, product or service," but "proceeds
of taxes" exclude most State subventions to local governments, tax refunds and
some benefit payments such as unemployment insurance. No limit is imposed on
appropriations of funds which are not "proceeds of taxes," such as reasonable
user charges or fees and certain other non-tax funds.
Not included in the Appropriations Limit are appropriations for the debt
service costs of bonds existing or authorized by January 1, 1979, or
subsequently authorized by the voters, appropriations required to comply with
mandates of courts or the federal government and, pursuant to Proposition 111,
appropriations for qualified capital outlay projects and appropriations of
revenues derived from any increase in gasoline taxes and motor vehicle weight
fees above January 1, 1990 levels. In addition, a number of recent initiatives
were structured or proposed to create new tax revenues dedicated to certain
specific uses, with such new taxes expressly exempted from the Article XIIIB
limits (e.g., increased cigarette and tobacco taxes enacted by Proposition 99 in
1988). The Appropriations Limit may also be exceeded in cases of emergency.
The State's Appropriations Limit in each year is based on the limit for the
prior year, adjusted annually for changes in State per capita personal income
and changes in population, and adjusted, when applicable, for any transfer of
financial responsibility of providing services to or from another unit of
government. The measurement of change in population is a blended average of
statewide overall population growth, and change in attendance at local school
and community college ("K-14")
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districts. As amended by Proposition 111, the Appropriations Limit is tested
over consecutive two-year periods. Any excess of the aggregate "proceeds of
taxes" received over such a two-year period above the combined Appropriations
Limits for those two years is divided equally between transfers to K-14
districts and refunds to taxpayers.
The legislature enacted legislation to implement Article XIIIB which
defines certain terms used in Article XIIIB and sets forth the methods for
determining the Appropriations Limit. California Government Code Section 7912
requires an estimate of the Appropriations Limit to be included in the
Governor's Budget, and thereafter to be subject to the budget process and
established in the Budget Act.
On November 9, 1988, the State's voters approved Proposition 98, a combined
initiative constitutional amendment and statute called the "Classroom
Instructional Improvement and Accountability Act." Proposition 98 changed State
funding of public education below the university level and the operation of the
State Appropriations Limit, primarily by guaranteeing K-14 schools a minimum
share of General Fund revenues. Under Proposition 98 (as modified by
Proposition 111, enacted on June 5, 1990), K-14 schools are guaranteed the
greater of (a) in general, a fixed percent of General Fund revenues ("Test 1"),
(b) the amount appropriated to K-14 schools in the prior year, adjusted for
changes in the cost of living (measured as in Article XIIIB by reference to
State per capita personal income) and enrollment ("Test 2"), or (c) a third
test, which would replace Test 2 in any year when the percentage growth in per
capita General Fund revenues from the prior year plus one half of one percent is
less than the percentage growth in State per capita personal income ("Test 3").
Under Test 3, schools would receive the amount appropriated in the prior year
adjusted for changes in enrollment and per capita General Fund revenues, plus an
additional small adjustment factor. If Test 3 is used in any year, the
difference between Test 3 and Test 2 would become a "credit" to schools which
would be the basis of payments in future years when per capita General Fund
revenue growth exceeds per capita personal income growth. Legislation adopted
prior to the end of the 1988-89 fiscal year, implementing Proposition 98,
determined the K-14 schools' funding guarantee under Test 1 to be 40.3 percent
of the General Fund tax revenues, based on 1986-87 appropriations. The
percentage has been adjusted to 35 percent, however, to account for a subsequent
redirection of local property taxes, since such redirection directly affects the
share of General Fund revenues to schools. This change is subject to a legal
challenge as described below.
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Proposition 98 permits the legislature by two-thirds vote of both houses,
with the Governor's concurrence, to suspend the K-14 schools' minimum funding
formula for a one-year period. Proposition 98 also contains provisions
transferring certain State tax revenues in excess of the Article XIIIB limit to
K-14 schools.
During the recent recession, General Fund revenues for several years were
less than originally projected, so that the original Proposition 98
appropriations turned out to be higher than the minimum percentage provided in
the law. The legislature responded to these developments by designating "extra"
Proposition 98 payments in one year as a "loan" from future years' Proposition
98 entitlements, and also intended that the "extra" payments would not be
included in the Proposition 98 "base" for calculating future years'
entitlements. In 1992, a lawsuit was filed, called California Teachers'
--------------------
Association v. Gould, which challenged the validity of these off-budget loans.
- --------------------
As part of the negotiations leading to the 1995-96 Budget Act, an oral agreement
was reached to settle this case. It is expected that a formal settlement
reflecting these conditions will be entered into in the near future.
The oral agreement provides that both the State and K-14 schools share in
the repayment of prior years' emergency loans to schools. Of the total $1.76
billion in loans, the State will repay $935 million by forgiveness of the amount
owed, while the K-14 schools will repay $825 million. The State share of the
repayment will be reflected as expenditures above the current Proposition 98
base calculation. The schools' share of the repayment will count as
appropriations that count toward satisfying the Proposition 98 guarantee, or
from "below" the current base. Repayments are spread over the eight-year period
of 1994-95 through 2001-02 to mitigate any adverse fiscal impact. Once a court
settlement is reached, and the Director of Finance certifies that such a
settlement has occurred, approximately $377 million in appropriations from the
1995-96 fiscal year to schools will be disbursed in August 1996.
Certain California municipal securities in the Fund may be obligations
which are secured in whole or in part by a mortgage or deed of trust on real
property. Upon the default of a mortgage or deed of trust with respect to
California real property, the creditor's nonjudicial foreclosure rights under
the power of sale contained in the mortgage or deed of trust are subject to the
constraints imposed by California law upon transfers of title to real property
by private power of sale. During the three-month period beginning with the
filing of a formal notice of default, the debtor is entitled to reinstate the
home mortgage by making any overdue payments. Under standard
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loan servicing procedures, the filing of the formal notice of default does not
occur unless at least three full monthly payments have become due and remain
unpaid. The power of sale is exercised by posting and publishing a notice of
sale for at least 20 days after expiration of the three-month reinstatement
period. Therefore, the effective minimum period for foreclosing on a mortgage
could be in excess of seven months after the initial default. Such time delays
in collections could disrupt the flow of revenues available to an issuer for the
payment of debt service on the outstanding obligations if such defaults occur
with respect to a substantial number of home mortgages or deeds of trust
securing an issuer's obligations.
Certain California municipal securities in the Fund may be obligations
which finance the acquisition of single family home mortgages for low- and
moderate-income mortgagors. These obligations may be payable solely from
revenues derived from the home mortgages, and are subject to the California
statutory limitations described above applicable to obligations secured by real
property. Under California anti-deficiency legislation, there is no personal
recourse against a mortgagor of a single family residence purchased with the
loan secured by the mortgage.
Under California law, mortgage loans secured by single family owner-
occupied dwellings may be prepaid at any time. Prepayment charges on such
mortgage loans may be imposed only with respect to voluntary prepayments made
during the first five years of the term of the mortgage loan, and cannot in any
event exceed six months' advance interest on the amount prepaid in excess of 20
percent of the original principal amount of the mortgage loan. This limitation
could affect the flow of revenues available to an issuer for debt service on the
outstanding debt obligations which financed such home mortgages.
On November 8, 1994, California voters approved "Proposition 187," which
bars public schooling, social services and non-emergency health care to illegal
immigrants. Since its adoption, at least eight lawsuits challenging Proposition
187 have been filed in State and federal courts throughout California. A
federal district court judge has imposed a preliminary injunction blocking
enforcement of nearly all provisions of Proposition 187 until a trial scheduled
for September 1995 determines the constitutionality of the initiative.
Implementation of certain of Proposition 187's provisions could jeopardize the
State's receipt of some federal funds.
From mid-1990 to late 1993, the State suffered a recession with the worst
economic, fiscal and budget conditions since the 1930's. Construction,
manufacturing (especially aerospace), and financial services, among others, were
all severely affected.
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Job losses were the worst of any post-war recession. Employment levels
stabilized by late 1993 and California's economy has been on a steady recovery
since the start of 1994. Employment has grown by over 500,000 in 1994 and 1995,
and the pre-recession level of total employment is expected to be matched by
early 1996. The strongest growth has been in export-related industries,
business services, electronics, entertainment and tourism, all of which have
offset the recession-related losses which were heaviest in aerospace and
defense-related industries, finance and insurance. Residential housing
construction, with new permits for under 100,000 annual new units issued in 1994
and 1995, is weaker than in previous recoveries, but has been growing slowly
since 1993.
The recession seriously affected State tax revenues, which basically mirror
economic conditions. It also caused increased expenditures for health and
welfare programs. The State also faced a structural imbalance in its budget,
with the largest programs supported by the General Fund - education, health,
welfare and corrections - growing at rates significantly higher than the growth
rates for the principal revenue sources of the General Fund. As a result, the
State experienced recurring budget deficits in the late 1980's and early 1990's.
The State Controller reports that expenditures exceeded revenues for four of the
five fiscal years ending with 1991-92; revenues and expenditures were equal in
1992-93; and the State had an operating surplus of $1.1 billion in 1993-94.
However, at June 30, 1994, according to the Department of Finance, the State's
Special Fund for Economic Uncertainties still had an accumulated deficit, on a
budget basis, of approximately $1.5 billion.
The accumulated budget deficits over the past several years, together with
expenditures for school funding, which have not been reflected in the budget,
and reduction of available internal borrowable funds, have combined to
significantly deplete the State's cash resources to pay its ongoing expenses.
As part of its cash management program, the State has regularly issued short-
term obligations to meet cash flow needs. Between spring 1992 and summer 1994,
the State depended upon external borrowing, including borrowings extending into
the subsequent fiscal year, to meet its cash needs, including repayment of
maturing notes and warrants. The State anticipates that it will not have to
resort to such cross-year borrowing during the 1995-96 fiscal year. The State
expects to issue up to $2.0 billion of revenue anticipation notes for the 1995-
96 fiscal year in April, 1996, to mature by June 30, 1996. The Governor's
Proposed Budget for the 1996-97 fiscal year projects issuance of $3.2 billion of
revenue anticipation notes in that year.
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During the 1993-1994 fiscal year, the State implemented the Deficit
Retirement Plan, which was part of the 1993-94 Budget Act, by issuing $1.2
billion of revenue anticipation warrants in February 1994, maturing December 21,
1994. The law also created in the State Treasury a Deficit Retirement Fund.
The State Controller transferred from the General Fund to the Deficit Retirement
Fund the sum of $1.2 billion in two equal installments on September 15, 1994 and
December 15, 1994, which moneys were used to retire the revenue anticipation
warrants.
The Deficit Retirement Plan anticipated a combined program to balance the
budget over the 1993-94 and 1994-95 fiscal years, and projected a General Fund
balance of $260 million on June 30, 1995. Because fiscal conditions did not
improve as projected in the 1993-94 fiscal year, the revenue assumptions of the
Deficit Retirement Plan could not be met, and the Governor indicated in the June
1994 Revision that the General Fund condition would be about $1 billion worse at
June 30, 1994 than was projected at the start of the year. Accordingly, the
1994-95 Budget Act anticipated deferring retirement of about $1 billion of the
carryover budget deficit to the 1995-96 fiscal year, when it is intended to be
fully retired. This 22-month Deficit Reduction Plan uses existing statutory
authority to borrow $4 billion externally of which approximately $1 billion is
the carryover budget deficit. In addition, Chapter 136, Statutes of 1994,
created in the State Treasury the Warrant Payment Fund. The State Controller
was directed to transfer from the General Fund to the Warrant Payment Fund in
September 1995, November 1995, January 1996, and April 1996 in four equal
installments the amount necessary to retire the $4.0 billion of revenue
anticipation warrants maturing on April 25, 1996.
On January 17, 1994, a major earthquake measuring an estimated 6.8 on the
Richter Scale struck Los Angeles. Significant property damage to private and
public facilities occurred in a four-county area including northern Los Angeles
County, Ventura County, and parts of Orange and San Bernardino Counties.
Although some individuals and businesses suffered losses totaling in the
billions of dollars, the overall effect of the earthquake on the regional and
State economy is not expected to be serious.
The State of California entered the 1995-96 budget negotiations with the
smallest nominal "budget gap" to be closed in many years, with strengthening
revenues and reduced caseload growth based on an improving economy.
Nonetheless, serious policy differences between the Governor and the legislature
prevented timely enactment of the budget.
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The 1995-96 Budget Act was signed by the Governor on August 3, 1995, 34
days after the start of the fiscal year. The Budget Act projects General Fund
revenues and transfers of $44.1 billion, a 3.5 percent increase over 1994-95.
Also included in this figure was the projected receipt of $494 million from the
federal government to reimburse the State's cost of incarceration and health
care costs of illegal immigrants, above commitments already made by the federal
government. Expenditures were budgeted at $43.4 billion, a four percent
increase over 1994-95. The Department of Finance projects that, after repaying
the last of the carryover budget deficit, there will be a positive balance of
$28 million in the budget reserve, the Special Fund for Economic Uncertainties,
at June 30, 1996. The Budget Act further projects Special Fund revenues of $12.7
billion and appropriated Special Fund expenditures of $13.0 billion.
Other major features of the 1995-96 Budget Act include an additional $543
million appropriated to the 1994-95 Proposition 98 entitlement, reductions in
health and welfare costs, increases in educational funding, and increased
funding for anticipated growth of the States' prison inmate population. The
1995-96 Budget Act contained no tax increases. Under legislation enacted for
the 1993-94 Budget Act, the renters' tax credit after this year failed at the
June 1994 election. The legislature enacted a further one-year suspension of
the renters' tax credit, for 1995, saving about $390 million in the 1995-96
fiscal year.
The State's cash flow management plan for the 1994-95 fiscal year included
the issuance of $4.0 billion of revenue anticipation warrants on July 26, 1994,
to mature on April 25, 1996, as part of a two-year plan to retire the
accumulated State budget deficit. To assure repayment of the revenue
anticipation warrants, the legislature enacted a backup mechanism which could
result in automatic expenditure cuts if projected revenues did not meet certain
targets (Section 12467 of the California Government Code, enacted by Chapter
135, Statutes of 1994, the "Budget Adjustment Law").
Pursuant to the Budget Adjustment Law, the State Controller issued the
October Trigger Report on October 16, 1995, reviewing the estimated cash
condition of the General Fund for the 1995-96 fiscal year. The State Controller
estimated that the General Fund would have at least $1.4 billion of internal
cash resources on June 30, 1996 (i.e. external borrowing would not be needed on
June 30, 1996). As a result of this finding, certain provisions of the Budget
Adjustment Law, which could have ultimately led to automatic, across-the-board
cuts in the General Fund budget, will not have to be implemented. Likewise, an
earlier report issued on November 15, 1994, avoided implementation of any
automatic budget cuts in the 1994-95 fiscal year.
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On January 10, 1996, the Governor presented his 1996-97 fiscal year Budget
Proposal (the "Proposed Budget" or the "Governor's Budget"). The Proposed
Budget estimates General Fund revenues and transfers of $45.0 billion, and
expenditures to be $44.2 billion. The Special Fund for Economic Uncertainties
is projected to have a positive balance of about $50 million at June 30, 1996,
and on that date available internal borrowable resources (available cash, after
payment of all obligations due) will be about $2.2 billion. The Administration
projects it will issue up to $2.0 billion of revenue anticipation notes in
April, 1996, to mature by June 30, 1996, to assist in cash flow management for
the final two months of the year, after repayment of the $4.0 billion revenue
anticipation warrants issue on April 25, 1996.
The Governor renewed a proposal, which had been rejected by the legislature
in 1995, for a 15 percent phased cut in individual and corporate tax rates over
three years (the budget proposal assumes this will be enacted, reducing revenues
in 1996-97 by about $600 million). There was also a proposal to restructure
trial court funding in a way which would result in a $300 million decrease in
General Fund revenues. The Governor requested legislation to make permanent a
moratorium on cost of living increases for welfare payments, and suspension of a
renters' tax credit, which would otherwise go back into effect in the 1996-97
fiscal year. He further proposed additional cuts in certain health and welfare
programs, and assumed that cuts previously approved by the legislature will
receive federal approval. The Governor's Budget proposes increases in funding
for K-12 schools under Proposition 98, for State higher education systems (with
a second year of no student fee increases), and for corrections. The Governor's
Budget projects external cash flow borrowing of up to $3.2 billion, to mature by
June 30, 1997.
On December 6, 1994, Orange County, California (the "County"), together
with its pooled investment funds (the "Funds") filed for protection under
Chapter 9 of the federal Bankruptcy Code, after reports that the Funds had
suffered significant market losses in their investments, causing a liquidity
crisis for the Funds and the County. More than 200 other public entities, most
of which, but not all, are located in the County, were also depositors in the
Funds. Orange County has reported the Funds' loss at about $1.69 billion, or
about 23 percent of their initial deposits of approximately $7.5 billion. Many
of the entities which deposited moneys in the Funds, including the County, faced
interim and/or extended cash flow difficulties because of the bankruptcy filing
and may be required to reduce programs or capital projects. The County has
embarked on a fiscal recovery plan based on sharp reductions in services and
personnel, and rescheduling of outstanding short term debt
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using certain new revenues transferred to the County from other local
governments pursuant to special legislation enacted in October, 1995. The State
has no existing obligation with respect to any outstanding obligations or
securities of the County or any of the other participating entities.
The State is a party to numerous legal proceedings, many of which normally
recur in governmental operations. In addition, the State is involved in certain
other legal proceedings which, if decided against the State, may require the
State to make significant future expenditures or may impair future revenue
sources.
Among the more significant lawsuits pending against the State are the
following: (i) lawsuits involving the exclusion of small business stock gains
from taxation, one of which was decided against the State, resulting in an $80
million loss to the State; (ii) cases relating to the State's method of
determining the tax on gross insurance premiums, in which the State faces losses
of approximately $200 million; (iii) a lawsuit seeking reimbursement for alleged
state-mandated costs; (iv) lawsuits related to contamination at the Stringfellow
toxic waste site; (v) an action involving damages caused by the Yuba River flood
of February 1986 with potential liability to 3,000 plaintiffs, ranging from $800
million to $1.5 billion; (vi) a claim that payment of wages in registered
warrants violated the Fair Labor Standards Act, which involves maximum damages
of approximately $500 million; (vii) a claim involving the constitutionality of
the 1992-93 Budget Act-related legislation which redirected approximately $1.3
billion in local tax revenues from localities to schools wherein the parties are
currently negotiating a settlement, subject to court approval; (viii) lawsuits
challenging the shift of property taxes included in the 1993-94 Budget Act; (ix)
a lawsuit involving the reduction of the State's Aid to Families with Dependent
Children ("AFDC") payments in 1992, 1993, and 1994; (x) a lawsuit involving the
1994-95 Budget Act's 2.3 percent reduction in AFDC payments; (xi) a lawsuit
challenging the purposes of appropriations of funds from the Cigarette and
Tobacco Products Surtax Fund in the budgets for fiscal years 1994-95 and 1995-
96; (xii) a lawsuit challenging the constitutionality of legislation that
deferred payment of the State's employer contribution to the Public Employees'
Retirement System beginning in fiscal year 1992-93; (xiii) a lawsuit involving
potential damages of approximately $350 million, in which prison inmate
plaintiffs claim they are entitled to minimum wages while working for the Prison
Industry Authority; (xiv) lawsuits challenging the transfer of moneys from the
special fund accounts within the State Treasury to the State's General Fund; and
(xv) a lawsuit challenging the Secretary of the United States Department of
Health and Human Services' approval of California's
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Assistance Payment Demonstration Project, which, in part, granted California a
waiver from complying with requirements for state participation in the federal
program for medical assistance.
In December 1991, S&P downgraded its rating of the State's general
obligation bonds to "AA" from "AAA". As the State's economy worsened and its
budget deficit swelled, rating agency officials closely monitored the State's
budget progress. In February 1992, Moody's downgraded its rating of the State's
general obligation bonds to "Aa1" from "Aaa". In April 1992, S&P placed the
State's general obligation bonds on its CreditWatch, indicating the possibility
of further downgrades should the State's budget and recessionary problems
persist. In July 1992, Moody's and S&P downgraded their ratings of the State's
general obligation bonds to "Aa" from "Aa1", and to "A+" from "AA",
respectively. On July 15, 1993, Moody's confirmed its "Aa" rating of the
State's general obligation bonds. On July 15, 1994, however, Moody's and S&P
downgraded their ratings of the State's general obligation bonds from "Aa" to
"A1" and "A+" to "A", respectively. There can be no assurance that such ratings
will continue for any given period of time or that they will not in the future
be further revised or withdrawn.
RISK FACTORS AFFECTING NEW YORK MUNICIPAL SECURITIES
The following information as to certain New York State ("State") and New
York City ("City") risk factors is given to investors in view of the policy of
the MainStay New York Tax Free Fund of concentrating its investments in New York
municipal issuers. Such information constitutes only a brief discussion, does
not purport to be a complete description and is based on information from
sources believed by the Trust to be reliable, including official statements
relating to securities offerings of New York and municipal issuers, and periodic
publications by national ratings organizations. Such information, however, has
not been independently verified by the Trust.
There are a number of methods by which the State may incur debt. The State
may issue general obligations bonds. Under the State Constitution, the State
may not, with limited exceptions for emergencies, undertake long-term general
obligation borrowing (i.e., borrowing for more than one year) unless the
borrowing is authorized in a specific amount for a single work or purpose by the
legislature and approved by the voters. There is no limitation on the amount of
long-term general obligation debt that may be so authorized and subsequently
incurred by the State. As of March 31, 1995, the total amount of outstanding
general obligation debt was $5.181 billion, including $149.3 million in bond
anticipation notes.
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The State may undertake short-term borrowings without voter approval (i) in
anticipation of the receipt of taxes and revenues, by issuing tax and revenue
anticipation notes; and (ii) in anticipation of the receipt of proceeds from the
sale of duly authorized but unissued general obligation bonds, by issuing bond
anticipation notes. The State may also, pursuant to specific constitutional
authorization, directly guarantee certain obligations of the State's authorities
and public benefit corporations ("Authorities"). Payments of debt service on
State general obligation and State-guaranteed bonds and notes are legally
enforceable obligations of the State.
The State also employs two other types of long-term financing mechanisms
that are State-supported but do not result in general obligations of the State:
moral obligation and lease-purchase or contractual-obligation financing.
Payments for principal and interest due on general obligation bonds,
interest due on bond anticipation notes and tax and revenue anticipation notes
were $793.3 million in the aggregate for the 1994-95 fiscal year, and are
estimated to be $774.4 million for 1995-96. These figures do not include the
interest payable on either State General Obligation Refunding Bonds issued in
July 1992 ("Refunding Bonds") to the extent that such interest is to be paid
from an escrow fund established with the proceeds of such Refunding Bonds or the
State's installment payments relating to the issuance of certificates of
participation.
The State has never defaulted on any of its general obligation indebtedness
or its obligations under lease-purchase or contractual-obligation financing
arrangements and has never been called upon to make any direct payments pursuant
to its guarantees. There has never been a default on any moral obligation debt
of any Authority.
As of September 30, 1994, the date of the latest data available, 18
municipal authorities had outstanding debt of $100 million or more. The
aggregate outstanding debt, including refunding bonds, of these 18 authorities
was $70.3 billion. As of March 31, 1995, aggregate public authority debt
outstanding as State-supported debt was $27.9 billion and as State-related debt
was $36.1 billion.
In recent years the State has provided financial assistance through
appropriations, in some cases of a recurring nature, to certain of the 18
Authorities for operating and other expenses and in fulfillment of its
commitments on moral obligation indebtedness or otherwise, for debt service.
During the 1992-93 fiscal year, the State provided operating assistance of
$935.6
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million for the Metropolitan Transportation Authority (the "MTA") and $19.9
million for four non-transit Authorities (i.e., the Housing Finance Agency (the
"HFA"), the Urban Development Corporation (the "UDC"), the Energy Research and
Development Authority and the Environmental Facilities Corporation). For the
1994-95 State fiscal year, total State assistance to the MTA is estimated at
approximately $1.3 billion. This operating assistance (possibly in increasing
amounts) is expected to continue to be required in future years. The State's
experience has been that if an Authority suffers serious financial difficulties,
both the ability of the State and the Authorities to obtain financing in the
public credit markets and the market price of the State's outstanding bonds and
notes may be adversely affected.
Over the past several years the State has enacted several taxes - including
a surcharge on the profits of banks, insurance corporations and general business
corporations doing business in the 12-county Metropolitan Transportation Region
served by the MTA and a special one-quarter of 1 percent regional sales and use
tax -that provide revenues for mass transit purposes, including assistance to
the MTA. In addition, since 1987, State law has required that the proceeds of a
one-quarter of 1 percent mortgage recording tax paid on certain mortgages in the
Metropolitan Transportation Region be deposited in a special MTA fund for
operating or capital expenses. Further, in 1993, the State dedicated a portion
of the State petroleum business tax to fund operating or capital assistance to
the MTA. For the 1995-96 State fiscal year, total State assistance to the MTA
is estimated at approximately $1.1 billion.
In 1993, State legislation authorized the funding of a $9.56 billion MTA
capital plan for the five-year period extending from 1992 through 1996 (the
"1992-96 Capital Program"). The 1992-96 Capital Program was expected to be
financed in significant part through dedication of State petroleum business
taxes referred to above. In December 1994, however, the proposed bond
resolution based on such tax receipts was not approved by the MTA Capital
Program Review Board. There can be no assurance that all the necessary
governmental actions for the 1992-96 Capital Program will be taken, that funding
sources currently identified will not be decreased or eliminated, or that the
1992-96 Capital Program, or parts thereof, will not be delayed or reduced. If
the 1992-96 Capital Program is delayed or reduced, ridership and fare revenues
may decline, which could, among other things, impair the MTA's ability to meet
its operating expenses without additional State assistance.
Certain localities, including the City, could have financial problems
leading to requests for additional State assistance
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during the State's 1995-96 fiscal years and thereafter. The potential impact on
the State of such requests by localities is not included in the projections of
the State's receipts and disbursements for the 1995-96 fiscal year.
Fiscal difficulties experienced by the City of Yonkers resulted in the re-
establishment of the Financial Control Board for the fiscal affairs of Yonkers.
Future actions taken by the State to assist Yonkers could result in allocation
of State resources in amounts that cannot yet be determined.
Municipalities and school districts have engaged in substantial short-term
and long-term borrowings. To the extent State agencies and local governments
require State assistance to meet their financial obligations, the ability of the
State of New York to meet its own obligations as they become due or to obtain
additional financing could be adversely affected. This financial situation
could result not only in defaults of State and agency obligations but also
impairment of the marketability of securities issued by the State, its agencies
and local governments.
In 1990, as part of a State fiscal reform program, legislation was enacted
creating the "New York Local Government Assistance Corporation" ("LGAC"), a
public benefit corporation empowered to issue long-term obligations to fund
certain payments to local governments traditionally funded through the State's
annual seasonal borrowing. Over a period of years, the issuance of those long-
term obligations, which are to be amortized over no more than 30 years, was
expected to eliminate the need for continued short-term seasonal borrowing. The
legislation also dedicated revenues equal to one-quarter of the four cent State
sales and use tax to pay debt service on these bonds. In addition, the
legislation imposed a cap on the annual seasonal borrowing of the State at $4.7
billion, less net proceeds of bonds issued by LGAC and bonds issued to provide
for capitalized interest, except in cases where the Governor and the legislative
leaders have certified both the need for additional borrowing and a schedule for
reducing it to the cap. If borrowing above the cap is thus permitted in any
fiscal year, it is required by law to be reduced to the cap by the fourth fiscal
year after the limit was first exceeded.
As of June 1995, LGAC had issued bonds and notes to provide net proceeds of
$4.7 billion completing the program. The impact of LGAC's borrowing is that the
State is able to meet its cash flow needs in the first quarter of the fiscal
year without relying on short-term seasonal borrowings. The 1995-96 State
Financial Plan includes no spring borrowing, nor did the 1994-95 State Financial
Plan, which represented the first time in 35
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years there was no short-term seasonal borrowing. This reflects the success of
the LGAC program in permitting the State to accelerate local aid payments from
the first quarter of the current fiscal year to the fourth quarter of the
previous fiscal year.
In June 1994, the legislature passed a proposed constitutional amendment
that would significantly change the long-term financing practices of the State
and its public Authorities. The proposed amendment would permit the State,
within a formula-based cap, to issue revenue bonds, which would be debt of the
State secured solely by a pledge of certain State tax receipts (including those
allocated to State funds dedicated for transportation purposes), and not by the
full faith and credit of the State. In addition, the proposed constitutional
amendment would (i) permit multiple purpose general obligation bond proposals to
be proposed on the same ballot; (ii) require that State debt be incurred only
for capital projects included in a multi-year capital financing plan; and (iii)
prohibit, after its effective date, lease-purchase and contractual-obligation
financing mechanisms for State facilities.
Before the approved constitutional amendment can be presented to the voters
for their consideration, it must be passed by a separately elected legislature.
The amendment must therefore be passed by the newly elected legislature in 1995
prior to presentation to the voters in November 1995. The amendment was passed
by the Senate in June 1995, and the Assembly is expected to pass the amendment
shortly. If approved by the voters, the amendment would become effective
January 1, 1996.
On January 6, 1992, Moody's lowered from "A" to "Baa1" its rating of those
State bonds that are backed by annual legislative appropriations. Moody's also
placed its "A" rating of the State's general obligation bonds under review for
possible downgrading. On January 13, 1992, S&P lowered its rating of the
State's general obligation bonds from "A" to "A-". Moody's and S&P variously
cited the State's continued economic deterioration, chronic operating deficits,
and the legislative stalemate in closing the budget gap, as factors contributing
to the downgrades. On February 14, 1994, S&P raised its outlook to positive
and, on July 13, 1995, Moody's reconfirmed its "A" rating on the State's general
obligation bonds.
The State's budget for the 1995-96 fiscal year was enacted by the
legislature on June 7, 1995, more than two months after the start of the fiscal
year. Prior to adoption of the budget, the legislature enacted appropriations
for disbursements considered to be necessary for State operations and other
purposes, including all necessary appropriations for debt
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service. The State Financial Plan for the 1995-96 fiscal year was formulated on
June 20, 1995 and is based on the State's budget as enacted by the legislature
and signed into law by the Governor.
The State revised the cash-basis 1995-96 State Financial Plan on December
15, 1995, in conjunction with the release of the Executive Budget for the 1996-
97 fiscal year. The 1995-96 General Fund Financial Plan continues to be
balanced, with reductions in projected receipts offset by an equivalent
reduction in projected disbursements. Total General Fund receipts are expected
to be approximately $73 million lower than estimated at the time of the mid-year
update. Tax receipts are now projected to be $29.7 billion, $8 million less
than in the earlier plan. Miscellaneous receipts and transfers from other funds
are estimated at $3.15 billion, $65 million lower than in the mid-year update.
The largest single change in these estimates is attributable to the lag in
achieving $50 million in proceeds from sales of State assets, which are unlikely
to be completed prior to the end of the fiscal year.
Projected General Fund disbursements are reduced by a total of $73 million,
with changes made in most major categories of the 1995-96 State Financial Plan.
The reduction in overall spending masks the impact of deficiency requests
totaling more than $140 million, primarily for school aid and tuition assistance
to college students. Offsetting reductions in spending are attributable to the
continued maintenance of strict controls on spending through the fiscal year by
State agencies, yielding savings of $50 million. Reductions of $49 million in
support for capital projects reflect a stringent review of all capital spending.
Reductions of $30 million in debt service costs reflect savings from refundings
undertaken in the current fiscal year, as well as savings from lower interest
rates in the financial market. Finally, the 1995-96 Financial Plan reflects re-
estimates based on actual results through November, the largest of which is a
reduction of $70 million in projected costs for income maintenance. This
reduction is consistent with declining caseload projections.
The net impact of these and other factors is expected to produce a
potential imbalance in receipts and disbursements in the State fiscal year 1996-
97. The Governor has proposed to close this potential imbalance primarily
through General Fund expenditure reductions and without increases in taxes or
deferrals of scheduled tax reductions.
The State Comptroller prepares a comprehensive annual financial report on
the basis of generally accepted accounting principles ("GAAP") for governments.
In 1996-97, the General
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Fund GAAP-basis Financial Plan shows revenues of $30.40 billion, total
expenditures of $30.98 billion, and net other financing source and uses of $741
million. The surplus of $168 million reflects the expected reservation of $85
million of cash in the Contingency Reserve Fund, as well as the positive fiscal
impact of the recommendations proposed in the Executive Budget. After the
accrual of liabilities expected to be paid in 1997-98, at lower levels than in
1996-97, the General Fund benefits by another $300 million in savings beyond the
levels budgeted on a cash basis. This positive impact is offset by a decline of
$180 million in revenue accruals.
On December 15, 1995, the Governor presented his 1996-97 Executive Budget
to the legislature. There can be no assurance that the legislature will enact
the proposed Executive Budget into law, or that actual results will not differ
materially and adversely from the Executive Budget's projections. As of April
1, 1996, the beginning of fiscal year 1996-97, the legislature had failed to
pass a 1996-97 budget.
The Executive Budget proposes $3.9 billion in actions to balance the 1996-
97 Financial Plan. Before reflecting any actions proposed by the Governor to
restrain spending, General Fund disbursements for 1996-97 were projected at $35
billion, an increase of $2.3 billion or 7 percent from 1995-96. This increase
would have resulted from growth in Medicaid, inflationary increases in school
aid, higher fixed costs such as pensions and debt service, collective bargaining
agreements, inflation, and the loss of non-recurring resources that offset
spending in 1995-96. Receipts would have been expected to fall by $1.6 billion.
This reduction would have been attributable to modest growth in the State's
economy and underlying tax base, the loss of non-recurring revenues available in
1995-96 and implementation of previously enacted tax reduction programs.
The Executive Budget proposes to close this gap primarily through a series
of spending reductions and cost containment measures. The Executive Budget
projects (1) over $1.8 billion in savings from cost containment and other
actions in social welfare programs, including Medicaid, welfare and various
health and mental health programs; (2) $1.3 billion in savings from a reduced
State General Fund share of Medicaid made available from anticipated changes in
the federal Medicaid program, including an increase in the federal share of
Medicaid; (iii) over $450 million in savings from reforms and cost avoidance in
educational services (including school aid and higher education), while
providing fiscal relief from certain State mandates that increase local
spending; and (iv) $350 million in savings from efficiencies and reductions in
other State programs. The assumption regarding an increased share of federal
Medicaid
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funding has received bipartisan congressional support and would benefit 32
states, including New York State.
The Governor has also submitted several amendments to the Executive Budget.
These amendments have a nominal impact on the State's Financial Plan for 1996-97
and the subsequent years. The net impact of the amendments leaves unchanged the
total estimated amount of General Fund spending in 1996-97, which continues to
be projected at $31.22 billion. All funds spending in 1996-97 is increased by
$68 million, primarily reflecting adjustments to projections of federal funds,
and now totals $68.37 billion. The budget amendments advanced by the Governor
involve largely technical revisions, with General Fund spending increases fully
offset by spending decreases. Reductions in estimated 1996-97 disbursements are
recommended primarily for welfare (associated with updated projections showing a
declining caseload) and debt service (reflecting lower interest rates and recent
bond sales). Disbursement increases are projected for snow and ice control, the
AIDS Institute, Health Department utilization review programs and other items.
Estimated disbursements for other funds are increased to accommodate updated
projections of federal funding in certain categorical grant programs and reduced
for welfare as noted for the General Fund.
The annual growth rates of most economic indicators for the State improved
from 1994 to 1995, as the pace of private sector employment expansion, personal
income and wage growth all accelerated. Government employment fell as workforce
reductions were implemented at federal, State and local levels. Similar to the
nation, some moderation of growth is expected in the year ahead. Private sector
employment is expected to continue to rise, although somewhat more slowly than
in 1995, while public employment should continue to fall, reflecting government
budget cutbacks. Anticipated continued restraint in wage settlements, a lower
rate of employment growth and falling interest rates are expected to slow
personal income growth significantly.
The 1996-97 Financial Plan projects General Fund receipts (including
transfers from other funds) of $31.32 billion, a decrease of $1.40 billion from
the 1995-96 projected level. Measured against 1995-96 levels that have been
adjusted for purposes of comparability, the decline is $1.83 billion, or 5.5
percent.
General Fund disbursements totalled $29.842 billion in the State's 1991-92
fiscal year and $30.829 billion in the State's 1992-93 fiscal year and $31.897
billion in the State's 1993-94 fiscal year.
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Constitutional challenges to State laws have limited the amount of taxes
which political subdivisions can impose on real property. In 1979, the State's
highest court declared unconstitutional a State law allowing localities and
school districts to impose a special increase in real estate property taxes in
order to raise funds for pensions and other uses. Additional court actions have
been brought against the State, certain agencies and municipalities relating to
financing, the amount of real estate tax, the use of tax revenues and other
matters.
Certain litigation pending against the State, its subdivisions and their
officers and employees could have a substantial and long-term adverse effect on
State finances. The State is a party to numerous legal proceedings, many of
which normally recur in governmental operations. Because of the prospective
nature of these proceedings, no estimate of the potential loss can be made.
Among the more significant of these cases are those that involve: (i) the
validity and fairness of agreements and treaties by which various Indian tribes
transferred title to the State of approximately six million acres of land in
central New York; (ii) certain aspects of the State's Medicaid policies and its
rates and regulations, including reimbursements to providers of mandatory and
optional Medicaid services; (iii) contamination in the Love Canal area of
Niagara Falls; (iv) alleged employment discrimination by the State of New York
and its agencies; (v) a challenge to the practice of reimbursing certain Office
of Mental Health patient care expenses from the client's Social Security
benefits; (vi) a challenge to the methods by which the State reimburses
localities for the administrative costs of food stamp programs; (vii) an action
in which the State is a third party defendant for injunctive or other
appropriate relief concerning liability for the maintenance of stone groins
constructed along certain areas of Long Island's shoreline; (viii) an action
against New York State and New York City officials alleging inadequate shelter
allowances to maintain proper housing; (ix) the constitutionality of legislation
enacted during the 1990 legislative session which changed actuarial funding
methods for determining state and local contributions to state employee
retirement systems; (x) action by school districts and their employees
challenging the constitutionality of Chapter 175 of the Laws of 1990 which
deferred school district contributions to the public retirement system and
reduced by like amount state aid to the school districts; (xi) the
constitutionality of various public authority financing programs; and (xii) the
constitutionality of bridge and mass transportation bonding programs of the New
York State Thruway Authority and the MTA authorized by Chapter 56 of the Laws of
1993.
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The legal proceedings noted above involve State finances, State programs
and miscellaneous tort, real property and contract claims in which the State is
a defendant and the monetary damages sought are substantial. These proceedings
could affect adversely the financial condition of the State. Adverse
developments in these proceedings or the initiation of new proceedings could
affect the ability of the State to maintain a balanced State Financial Plan. An
adverse decision in any of these proceedings could exceed the amount of the
State Financial Plan reserve for the payment of judgments and, therefore, could
affect the ability of the State to maintain a balanced State Financial Plan.
In addition, New York has reached a settlement agreement with Delaware and
Massachusetts under State of Delaware v. State of New York; however, the claims
--------------------------------------
of other states and the District of Columbia against the State of New York
remain. Although the amount of potential payments, if any, are not presently
determinable, it is the State's opinion that its ultimate liability in these
cases is not expected to have a material adverse effect on the State's financial
position.
The fiscal health of the State of New York is closely related to the fiscal
health of its localities, particularly the City of New York, which has required
and continues to require significant financial assistance from New York State.
In 1975, the City suffered a fiscal crisis that impaired the borrowing ability
of both the City and the State. In that year the City lost access to public
credit markets and was not able to sell debt to the public again until 1979. In
response to the City's fiscal crisis, the State created the Municipal Assistance
Corporation ("MAC") to provide financing assistance to the City, the New York
State Financial Control Board (the "Control Board") to oversee the City's
financial affairs, and a "Control Period" which existed from 1975 to 1986 during
which the City was subject to certain statutorily-prescribed fiscal controls.
Although the Control Board terminated the Control Period in 1986 when certain
statutory conditions were met, thus suspending certain Control Board powers, the
Control Board, MAC and the Office of the State Deputy Comptroller for the City
("OSDC") continue to exercise various fiscal monitoring functions over the City,
and upon the occurrence or "substantial likelihood and imminence" of the
occurrence of certain events, including, but not limited to, a City operating
budget deficit of more than $100 million, the Control Board is required by law
to reimpose a Control Period. Currently, the City and its Covered Organizations
(i.e., those which receive or may receive moneys from the City directly,
indirectly or contingently) operate under a four-year financial plan (the
"Financial Plan") which the City prepares annually and periodically updates.
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The staffs of OSDC, the Control Board and City Comptroller issue periodic
reports on the City's Financial Plans, as modified, analyzing forecasts of
revenues and expenditures, cash flow, and debt service requirements, as well as
compliance with the Financial Plan, as modified, by the City and its Covered
Organizations. OSDC staff reports issued during the mid-1980's noted that the
City's budgets benefitted from a rapid rise in the City's economy, which boosted
the City's collection of property, business and income taxes. These resources
were used to increase the City's workforce and the scope of discretionary and
mandated City services. Subsequent OSDC staff reports, including its periodic
economic reports, examined the 1987 stock market crash and the 1989-92
recession, which affected the New York City region more severely than the
nation, and these reports attributed an erosion of City revenues and increasing
strain on City expenditures to that recession. According to a recent OSDC
economic report, the City's economy was slow to recover from the recession and
is expected to experience a weak employment situation, and moderate wage and
income growth, during the 1995-96 period. Also, Financial Plan reports of OSDC,
the Control Board, and the City Comptroller have variously indicated that many
of the City's balance budgets have been accomplished, in part, through the use
of non-recurring resources, tax and fee increases, personnel reductions and
additional State assistance; that the City has not yet brought its long-term
expenditures in line with recurring revenues; that the City's proposed gap-
closing programs, if implemented, would narrow future budget gaps; that these
programs tend to rely heavily on actions outside the direct control of the City;
and that the City is therefore likely to continue face future projected budget
gaps requiring the City to reduce expenditures and/or increase revenues.
According to the most recent staff reports of the OSDC, the Control Board and
the City Comptroller during the four-year period covered by the current
Financial Plan, the City is relying on obtaining substantial resources from
initiatives needing approval and cooperation of its municipal labor unions,
Covered Organizations, and City Council, as well as the State and federal
governments, among other, and there can be no assurance that such approval can
be obtained.
The Mayor is responsible for preparing the City's four-year financial plan.
On February 10, 1994, the City released a financial plan for the 1996 through
1999 fiscal year (the "1996-1999 Financial Plan" or "Financial Plan"). The
City's projections set forth in the Financial Plan are based on various
assumptions and contingencies which are uncertain and which may not materialize.
Changes in major assumptions could significantly affect the City's ability to
balance its budget as required by State law and to meet its annual cash flow and
financing requirements. Such assumptions and contingencies
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include the condition of the regional and local economies, the impact on real
estate tax revenues of the real estate market, wage increases for City employees
consistent with those assumed in the Financial Plan, employment growth, the
ability to implement proposed reductions in City personnel and other cost
reduction initiatives which may require in certain cases the cooperation of the
City's municipal unions, the ability of the New York City Health and Hospitals
Corporation ("HHC") and the Board of Education ("BOE") to take actions to offset
reduced revenues, the ability to complete revenue generating transactions,
provision of State and federal aid and mandate relief and the impact on City
revenues of proposals for federal and State welfare reform.
The 1996-1999 Financial Plan projects revenues and expenditures for the
1996 fiscal year balanced in accordance with GAAP. The projections for the 1996
fiscal year reflect proposed actions to close a previously projected gap of
approximately $3.1 billion for the 1996 fiscal year. The proposed actions in
the Financial Plan for the 1996 fiscal year include (i) a reduction in spending
of $400 million, primarily affecting public assistance and Medicaid payments by
the City; (ii) expenditure reductions in agencies, totaling $1.2 billion; (iii)
transitional labor savings, totaling $600 million; and (iv) the phase-in of the
increased annual pension funding cost due to revisions resulting from an
actuarial audit of the City pension systems, which would reduce such costs in
the 1996 fiscal year.
The Financial Plan also sets forth projections for the 1997 through 1999
fiscal years and outlines a proposed gap-closing program to close projected
budget gaps of $888 million, $1.5 billion and $1.4 billion for the 1997 through
1999 fiscal years, respectively, after successful implementation of the $3.1
billion gap closing program for the 1996 fiscal year. The proposed gap-closing
actions, a substantial number of which are not specified in detail, include
additional agency expenditure reductions, primarily resulting from a partial
hiring freeze, totaling between $388 million and $684 million in each of the
1997 through 1999 fiscal years; reductions in expenditures resulting from
proposed procurement initiatives totaling between $50 million and $100 million
in each of the 1997 through 1999 fiscal years; the availability in each of the
1997, 1998 and 1999 fiscal years of $100 million of the general reserve
appropriated in the prior year; and additional reduced expenditures resulting
from further revisions in entitlement programs to reduce City expenditures by
$250 million in the 1997 fiscal year, and by $400 million in each of the 1998
and 1999 fiscal years, which may be subject to State or federal approval.
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On July 24, 1995, the City Comptroller issued a report on the Financial
Plan. The report concluded that the Financial Plan includes total risks of $749
million to $1.034 billion for the 1996 fiscal year.
With respect to the 1997 through 1999 fiscal years, the report noted that
the gap-closing program in the Financial Plan does not include information about
how the City will implement the various gap-closing programs, and that the
entitlement cost containment and revenue initiatives will require approval of
the State legislature. Taking into account the same categories of risks for the
1997 through 1999 fiscal years as the report identified for the 1996 fiscal year
and the uncertainty concerning the gap-closing program, the report estimated
that the Financial Plan includes total risks of $2.0 billion to $2.5 billion in
the 1997 fiscal year, $2.8 billion to $3.3 billion in the 1998 fiscal year and
$2.9 billion to $3.4 billion in the 1999 fiscal year.
In early December, 1994, the City Comptroller issued a report which noted
that the City is currently seeking to develop and implement plans which will
satisfy the Federal Environmental Protection Agency that the water supplied by
the City watershed areas does not need to be filtered. The City Comptroller
noted that, if the City is ordered to build filtration plants, they could costs
as much as $4.57 billion to construct, with annual debt service and operating
costs of more than $500 million, leading to a water rate increase of 45 percent.
On December 16, 1994, the City Comptroller issued a report noting that the
capacity of the City to issue general obligation debt could be greatly reduced
in future years due to the decline in value of taxable real property. The
report noted that under the State Constitution, the City is permitted to issue
debt in an amount not greater than ten percent of the average full value of
taxable real estate for the current year and preceding four years, that the
latest estimates produced by the State Board of Equalization and Assessment
relating to the full value of real property, using data from a 1992 survey,
indicate a 19 percent decline in the market value of taxable real property from
the previous survey in 1990, and that the State Board has decided to use a
projected annual growth rate of 8.94 percent, as compared to its previous
projection of 14 percent for estimating full value after 1992. The report
concludes that the City will be within the projected legal debt incurring limit
in the 1996 fiscal year. However, the report noted that, based on the most
likely forecast of full value of real property, the debt incurring power of the
City would be curtailed in the 1997 and 1998 fiscal years substantially. The
City Comptroller recommended, among other things, prioritization of capital
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projects to determine which can be delayed or canceled, and better maintenance
of the City's physical plant and infrastructure, which would result in less
capital spending for repair and replacement of capital structures.
On July 21, 1995, the staff of the Control Board issued a report on the
Financial Plan which identified risks of $873 million, $2.1 billion, $2.8
billion and $2.8 billion for the 1996 through 1999 fiscal years, respectively.
The report noted that substantially more information is needed concerning the
proposed gap-closing actions for the 1997-1999 fiscal years.
On June 14, 1995, the staff of the Office of the State Deputy Comptroller
for the City of New York ("OSDC") issued a report on the Financial Plan with
respect to the 1995 fiscal year. The report noted that, during the 1995 fiscal
year, the City faced adverse financial developments totaling over $2 billion
resulting from the inability to initiate approximately 35 percent of the City's
gap-closing program, as well as newly-identified spending needs and revenue
shortfalls resulting from the adverse impact on the City's personal income,
general corporation and other tax revenues of the policy of the Federal Reserve
of increasing short-term interest rates and the related down turn in the bond
market and profits and bonus income on Wall Street. The report noted that the
City relied heavily on one-time actions to offset these adverse developments,
using $2 billion in one-time resources in the 1995 fiscal year, or nearly double
the 1994 amount.
On July 24, 1995, the staff of the OSDC issued a report on the Financial
Plan. The report concluded that there remains a budget gap for the 1996 fiscal
year of $392 million, largely because the City and its unions have yet to reach
an agreement on how to achieve $160 million in unspecified labor savings and the
remaining $100 million in recurring health insurance savings from last year's
agreement. The report also identified a number of issues that present a net
potential risk of $409 million to the City's revenue and expenditure forecasts
for the 1996 fiscal year. The report further noted that growth in the City
revenues is being constrained by the weak economy in the City, which is likely
to be compounded by the slowing national economy, and that there is a likelihood
of a national recession during the course of the Financial Plan. Moreover, the
report noted that the State and federal budgets are undergoing tumultuous
changes, and that the potential for far-reaching reductions in inter-
governmental assistance is clearly on the horizon, with greater uncertainty
about the impact on City finances and services.
Estimates of the City's revenues and expenditures is based on numerous
assumptions and are subject to various uncertainties.
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If expected federal or State aid is not forthcoming, if unforeseen developments
in the economy significantly reduce revenues derived from economically sensitive
taxes or necessitate increased expenditures for public assistance, if the City
should negotiate wage increases for its employees greater than the amounts
provided for in the City's financial plan or if other uncertainties materialize
that reduce expected revenues or increase projected expenditures, then, to avoid
operating deficits, the City may be required to implement additional actions,
including increases in taxes and reductions in essential City services. The
City might also seek additional assistance from the State.
On February 11, 1991, Moody's lowered its rating on the City's general
obligations bonds to "Baa1" from "A." Moody's expressed doubts about whether
the City's January 16, 1991 Financial Plan presented a "reasonable program to
achieve budget balance in fiscal 1991 and 1992 and assure long-term structural
integrity." Moody's stated "the enormity of the current problem, the severity
of required expenditure cuts, the substantial revenue enhancements that will be
required to achieve balance, the vulnerability to exogenous factors, and the
extremely short time frame within which all this must be accomplished introduce
substantial new risk to the City's short- and long-term credit outlook."
Nevertheless, on October 19, 1992, Moody's confirmed its Baa1 rating noting that
the City's "financial operations continue to be satisfactorily maintained."
On July 10, 1995, S&P revised its rating on the City's general obligation
bonds downward to "BBB+." S&P stated that "structural budgetary balance remains
elusive because of persistent softness in the City's economy, highlighted by
weak job growth and a growing dependence on the historically volatile financial
services sector." Other factors identified by S&P in lowering its ratings on
City general obligation bonds, included a trend of using one-time measures,
including debt refinancings, to close projected budget gaps, dependence on
unratified labor savings to help balance the City's financial plan, optimistic
projections of additional federal and State aid or mandate relief, a history of
cash flow difficulties caused by State budget delays and continued high debt
levels. Since July 15, 1993, Fitch has maintained an "A-" rating on the City's
general obligation bonds. On July 12, 1995, Fitch stated that the City's credit
trend remains "declining."
Both the State and City face potential economic problems which could
seriously affect the ability of both the State and City to meet their financial
obligations. The economic problems of New York City adversely affect the State
in numerous ways. In addition, for decades the State economy has grown more
slowly
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than that of the nation as a whole, resulting in a decline in the position of
New York as one of the country's wealthier states. The causes of this decline
are varied and complex and some causes reflect international and national trends
beyond the State's and City's control.
THE EQUITY INDEX FUND GUARANTEE
NYLIFE Inc. ("NYLIFE") and the Equity Index Fund have entered into a
Guaranty Agreement (the "Guarantee") for the benefit of shareholders. The
Guarantee has been issued for the benefit of all shareholders and has been
issued at no cost to the Equity Index Fund or its shareholders. The Guarantee
Date (as defined in the Prospectus) with respect to a particular Equity Index
Fund share will be 10 years after the purchase date of such share. If, on a
particular Guarantee Date, payments must be made under the terms of the
Guarantee, the terms of the Guarantee will obligate NYLIFE unconditionally and
irrevocably to pay to the Equity Index Fund's transfer and dividend disbursing
agent for the benefit of shareholders with that Guarantee Date an amount equal
to the difference between the Guaranteed Amount and net asset value per each
Guaranteed Share (as defined in the Prospectus) outstanding. The Equity Index
Fund's transfer and dividend disbursing agent will forward the difference
between the Guaranteed Amount and the net asset value directly to each
individual shareholder.
A Guaranteed Share is a unit that will at all times be equal to the net
asset value of one share initially purchased by the investor plus the net asset
value of all dividends and distributions attributable to such share (which
includes cumulative dividends and distributions paid with respect to any
additional shares of the Fund received as dividends and distributions) paid
during the period from the date of purchase to the Guarantee Date. A Guaranteed
Share (the unit to which the Guaranteed Amount will apply) is not the same as a
share of the Fund. Shareholders who redeem shares, or who elect to receive
dividends and distributions in cash, will own fewer units to which the
Guaranteed Amount applies (i.e., they will own fewer Guaranteed Shares) and
----
therefore will lose a portion of the benefit of the Guarantee with respect to
any such redemption or dividends or distributions received in cash.
NYLIFE will pay any amounts owing under the Guarantee to the Fund's
transfer and dividend disbursing agent on the third business day following a
Guarantee Date. A pro rata portion of any amounts so paid will then be
forwarded to each shareholder holding, as of the close of business on such date,
Guaranteed Shares with that Guarantee Date. If the Guarantee Date should fall
on a weekend or on a holiday, the Guarantee Date shall be
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the first business day following the Guarantee Date. The Guarantee is intended
to assure each owner of Guaranteed Shares on a Guarantee Date that he or she
will be able to recover, as of the Guarantee Date, at a minimum, the Guaranteed
Amount (with no adjustment for inflation or the time value of money). The
Guarantee will benefit any holder of such Guaranteed Shares on the relevant
Guarantee Date, who need not be the original purchaser, and who, for example,
may own such shares by gift or inheritance.
Although the Equity Index Fund does not intend to pay dividends and
distributions in cash to shareholders (unless a shareholder elects to receive
payments in cash), such dividends and distributions which are reinvested will be
taxable to shareholders. See "Tax Status." The Guaranteed Amount does not
reflect any adjustment for the payment of taxes by a shareholder on dividends
and distributions received from the Equity Index Fund.
The obligations, if any, of NYLIFE under the Guarantee shall be discharged
when all required payments are made in full to the transfer and dividend
disbursing agent for the benefit of the shareholders or if the Equity Index
Fund's net asset value on a Guarantee Date is such that no amounts are payable
to shareholders under the terms of the Guarantee. Payment obligations under the
Guarantee will be solely the obligations of NYLIFE. Neither the Equity Index
Fund, New York Life Insurance Company, Monitor, NYLIFE Distributors, any of
their affiliates nor any other party is undertaking any obligation to the Equity
Index Fund or its shareholders with respect to the Guarantee.
Although the Guarantee has been arranged for by the Equity Index Fund and
is created under contract between the Equity Index Fund and NYLIFE, the Equity
Index Fund has no interest in, and specifically disclaims any interest in, the
proceeds payable under the Guarantee, which are payable solely to the
shareholders with a particular Guarantee Date. The designation of such
shareholders as the sole beneficiaries of the Guarantee may not be changed by
either the Equity Index Fund or such shareholders. The Guarantee is neither
transferable nor assignable by the Equity Index Fund or the shareholders it
benefits, nor may the Equity Index Fund or its shareholders cancel or waive
rights under the Guarantee. The Guarantee cannot be surrendered by either the
Fund or its shareholders for cash, except in the event that payment is made
pursuant to its terms. Neither the Equity Index Fund nor its shareholders may
use the Guarantee as a pledge for a loan, nor may the Equity Index Fund or its
shareholders obtain any loan from NYLIFE with respect to amounts that may be
payable pursuant to the Guarantee.
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The foregoing is only a summary, and not a complete statement of the
principal terms of the Guarantee. Reference is made to the Guarantee, a
specimen copy of which has been filed as an exhibit to the Registration
Statement. This summary is subject thereto and qualified in its entirety by
such reference.
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
any Fund without the approval of the majority of the outstanding voting
securities of that Fund, as defined under the 1940 Act.
The Trust may not, on behalf of any Fund:
1. Act as an underwriter of securities issued by others, except to the
extent that a 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 as appropriate to evidence indebtedness
that a Fund is permitted to incur and except for shares of existing or
additional series of the Trust.
The following fundamental investment restriction is applicable to the Tax
Free Bond Fund only. The Tax Free Bond Fund must:
1. Invest at least 80% of the Fund's net assets in securities the interest
on which is exempt from regular federal income tax, except that the Fund may
temporarily invest more than 20% of its net assets in securities the interest
income on which may be subject to regular federal income tax.
The following fundamental investment restrictions are applicable to the
Equity Index Fund only. The Equity Index Fund may not:
1. Purchase securities of any company having less than three years'
continuous operations (including operations of any predecessors) if such
purchase would cause the value of the Fund's investments in all such companies
to exceed 5% of the value of its total assets.
2. Purchase securities of closed-end investment companies except (a) in
the open market where no commission other than the ordinary broker's commission
is paid, which purchases are limited to a maximum of (i) 3% of the total
outstanding voting stock of
B-87
<PAGE>
any one closed-end investment company, (ii) 5% of the Fund's net assets with
respect to the securities issued by any one closed-end investment company, and
(iii) 10% of the Fund's net assets in the aggregate, or (b) those received as
part of a merger or consolidation. The Fund may not purchase the securities of
other open-end investment companies.
3. Hold the securities of any issuer when more than 1/2 of 1% of the
issuer's securities are owned beneficially by one or more of the Fund's officers
or Trustees or by one or more of the officers or directors of the Fund's
underwriter or investment manager.
4. Enter into repurchase agreements providing for settlement in more than
seven days after notice or purchase securities which are not readily marketable,
if, in the aggregate, more than 10% of the value of the Fund's total assets
would be so invested.
5. Invest in the securities of a company for the purpose of exercising
management or control, but the Fund will vote the securities it owns in its
portfolio as a shareholder in accordance with its views.
6. Purchase, sell or write puts, calls or combinations thereof, except
that the Fund may enter into transactions in stock index options and futures as
described in the Prospectus and in this Statement of Additional Information.
The following fundamental investment restrictions are applicable only to
the California Tax Free Fund and New York Tax Free Fund. The California Tax
Free Fund and New York Tax Free Fund may not:
1. Sell securities short, or purchase securities on margin, except that
the Fund may enter into and make margin deposits in connection with transactions
in options, futures and options on futures.
2. Invest in companies for the purpose of exercising control.
3. Invest in securities of other investment companies, except as they may
be acquired as part of a merger, consolidation or acquisition of assets.
ADDITIONAL NON-FUNDAMENTAL INVESTMENT RESTRICTIONS
In addition to the Trust's fundamental investment restrictions, the
Trustees of the Trust have voluntarily adopted
B-88
<PAGE>
certain policies and restrictions which are observed in the conduct of the
affairs of the Funds, except the California Tax Free Fund, New York Tax Free
Fund, International Bond Fund, International Equity Fund and Equity Index 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.
In accordance with such policies and restrictions, a Fund may not:
(a) purchase securities of any issuer with a record of less than three
years' continuous operation, including predecessors, except Municipal Bonds
and except obligations issued or guaranteed by the U.S. government or its
agencies or instrumentalities, if such purchase would cause the investments
of a Fund in all such issuers to exceed 5% of the value of the total assets
of that Fund;
(b) purchase from or sell portfolio securities of a Fund to any of the
officers or Trustees of the Trust, its investment advisers, its principal
underwriter or the officers, or directors of its investment advisers or
principal underwriter;
(c) invest more than 10% of the assets of a Fund (taken at market
value at the time of the investment) in "illiquid securities," illiquid
securities being defined to include 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 that a Fund has written, securities for
which market quotations are not available, or other securities which
legally or in the opinion of the Adviser is deemed illiquid;
(d) invest assets in securities of other open-end investment
companies, but a Fund may invest in shares of the Money Market Fund if
double advisory fees are not assessed, may invest up to 5% of its assets in
closed-end investment companies (which would cause a Fund to pay duplicate
fees), and may purchase or acquire up to 10% of the outstanding voting
stock of a closed-end investment company (foreign banks or their agencies
or subsidiaries are not considered investment companies for the purposes of
this limitation);
B-89
<PAGE>
(e) purchase warrants of any issuer, except on a limited basis when,
as a result of such purchases by a Fund, no more than 2% of the value of
the Fund's total assets would be invested in warrants which are not listed
on the New York Stock Exchange or the American Stock Exchange, and no more
than 5% of the value of the total assets of a Fund may be invested in
warrants whether or not so listed, such warrants in each case to be valued
at the lesser of cost or market, but assigning no value to warrants
acquired by a Fund in units with or attached to debt securities;
(f) invest in other companies for the purpose of exercising control or
management;
(g) purchase or retain securities of an issuer any of whose officers,
directors, trustees or security holders is an officer or Trustee of the
Trust or a member, officer, director or trustee of the investment advisers
of the Trust if one or more of such individuals owns beneficially more than
one-half of one percent (1/2 of 1%) of the securities (taken at market
value) of such issuer and such individuals owning more than one-half of one
percent (1/2 of 1%) of such securities together own beneficially more than
5% of such securities or both;
(h) purchase securities on margin or make short sales, except in
connection with arbitrage transactions or unless, by virtue of its
ownership of other securities, it has the right to obtain securities
equivalent in kind and amount to the securities sold and, if the right is
conditional, the sale is made upon the same conditions, except that the
Trust may obtain such short-term credits as may be necessary for the
clearance of purchases and sales of securities and in connection with
transactions involving forward foreign currency exchange contracts;
(i) purchase or sell any put or call options or any combination
thereof, except that the Trust may purchase and sell or write (i) options
on any futures contracts into which it may enter, (ii) put and call options
on currencies, securities indexes and covered put and call options on
securities, and (iii) may also engage in closing purchase transactions with
respect to any put and call option position it has entered into; and except
that the Government Fund may not write any covered put options on U.S.
government securities if, as a result, more than 50% of its total assets
(taken at current value) would be subject to put options written by such
Fund; or
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<PAGE>
(j) purchase, with respect to the Government Fund, any call option,
long futures contract or long option on a futures contract if, at the date
of purchase, realized net losses from such transactions during the fiscal
year to date exceed 5% of such Fund's average net assets during such
period.
The following investment restrictions are non-fundamental, operating
policies of the International Bond Fund and International Equity Fund, and may
be amended by the Board of Trustees without shareholder approval:
(a) As an operating policy, a Fund may not sell securities short,
except for covered short sales or unless it owns or has the right to obtain
securities equivalent in kind and amount to the securities sold short, and
provided that transactions in options, futures and forward contracts are
deemed not to constitute short sales of securities.
(b) As an operating policy, a Fund may not purchase securities on
margin, except that the Fund may obtain such short-term credits as are
necessary for the clearance of transactions, and provided that margin
payments in connection with futures contracts and options on futures
contracts shall not constitute the purchase of securities on margin.
(c) As an operating policy, a Fund may not purchase warrants, valued
at the lower of cost or market, in excess of 5% of the Fund's net assets.
Included within that amount, but not to exceed 2% of net assets, are
warrants whose underlying securities are not traded on principal domestic
or foreign exchanges. Warrants acquired by the Fund in units or attached
to securities are not subject to these restrictions.
(d) As an operating policy, a 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. A 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 Adviser's opinion may be deemed to be
illiquid, such as a certain portion of options traded in the over-the-
counter
B-91
<PAGE>
market, and securities being used to cover options a Fund has written.
(e) As an operating policy, a Fund may not acquire or retain the
securities of any other investment company if, as a result, more than 3% of
such investment company's outstanding shares would be held by the Fund,
more than 5% of the value of the Fund's total assets would be invested in
shares of such investment company or more than 10% of the value of the
Fund's assets would be invested in shares of investment companies in the
aggregate, except in connection with a merger, consolidation, acquisition,
or reorganization.
(f) As an operating policy, a Fund may not invest in securities of an
issuer which, together with any predecessor, has been in operation for less
than three years if, as a result, more than 5% of the total assets of the
Fund would then be invested in such securities.
"Value" for the purposes of all investment restrictions shall mean the
value used in determining a Fund's net asset value.
The MainStay California Tax Free Fund has undertaken to a state securities
commission that: the aggregate premiums paid on all options held at any time by
the Fund will be limited to 20% of the Fund's total net asset value; when
writing a put or call option, the aggregate value of securities underlying the
put or call shall not exceed 25% of the net assets of the Fund; and margin
deposits on all options purchased by the Fund shall not, in the aggregate,
exceed 5% of the Fund's total assets. In addition, though not a fundamental
policy, the Funds will not sell securities short, except that each Fund reserves
the right to sell securities short "against the box."
In addition, though not a fundamental policy, the Equity Index Fund may not
engage in arbitrage transactions, nor may it purchase warrants (excluding those
acquired by the Equity Index Fund in units or attached to securities), nor will
the Equity Index Fund sell securities short or buy on margin, except that the
Fund reserves the right to sell securities short "against the box."
The Equity Index Fund has undertaken with various state securities
commissions that, as a non-fundamental, operating policy, it (i) will not
purchase the securities of any issuer if such purchase at the time thereof would
cause more than ten percent of the voting securities of any issuer to be held by
the
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<PAGE>
Fund, (ii) will not invest in mineral leases, and (iii) will not invest in real
estate limited partnerships.
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.
B-93
<PAGE>
<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
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; and Member,
Board of Governors of the National
Association of Securities Dealers, Inc.,
1994 to present.
</TABLE>
B-94
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION(S)
NAME, ADDRESS AND AGE POSITION(S) WITH TRUST DURING PAST 5 YEARS
- -------------------------------- ---------------------- ------------------------
<S> <C> <C>
Walter W. Ubl* President, Chief Senior Vice President, New York Life
51 Madison Avenue Executive Officer and Insurance Company, 1995 to present;
New York, NY 10010 Trustee 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.
Harry G. Hohn* Trustee Chairman of the Board and Chief
51 Madison Avenue Executive Officer, New York Life
New York, NY 10010 Insurance Company, 1990 to present;
Age 64 Vice Chairman of the Board, New York
Life Insurance Company, 1986 to 1990;
Director, New York Life Insurance
Company, 1985 to 1986; Executive Vice
President and General Counsel, New
York Life Insurance Company, 1982 to
1986; Senior Vice President and General
Counsel, New York Life Insurance
Company, 1977 to 1982; and Chairman,
American Council of Life Insurance,
1995 to 1996.
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.
</TABLE>
B-95
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION(S)
NAME, ADDRESS AND AGE POSITION(S) WITH TRUST DURING PAST 5 YEARS
- -------------------------------- ---------------------- ------------------------
<S> <C> <C>
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.
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.
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
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;
</TABLE>
B-96
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION(S)
NAME, ADDRESS AND AGE POSITION(S) WITH TRUST DURING PAST 5 YEARS
- -------------------------------- ---------------------- ------------------------
<S> <C> <C>
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.
- ------------------------------------------------------------------------------------------------------
OFFICERS (OTHER THAN TRUSTEES)
- ------------------------------------------------------------------------------------------------------
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.
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;
</TABLE>
B-97
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION(S)
NAME, ADDRESS AND AGE POSITION(S) WITH TRUST DURING PAST 5 YEARS
- -------------------------------- ---------------------- ------------------------
<S> <C> <C>
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
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
</TABLE>
B-98
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION(S)
NAME, ADDRESS AND AGE POSITION(S) WITH TRUST DURING PAST 5 YEARS
- -------------------------------- ---------------------- ------------------------
<S> <C> <C>
President, NYL Trust
Company, 1996 to present.
A. Thomas Smith III Secretary Associate General Counsel, New York
51 Madison Avenue Life Insurance Company, 1996 to
New York, NY 10010 present; Assistant General Counsel, New
Age: 39 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 MacKay-Shields, Monitor, 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 certain other investment
companies (as indicated) that have the same investment advisers as the Trust or
an investment adviser that is an affiliated person of one of the Trust's
investment advisers:
<TABLE>
<CAPTION>
Total Compensation
Name of Aggregate From Registrant
Trustee Compensation and Fund Complex
Trustee from the Trust Paid to
- --------------------- -------------- -------
<S> <C> <C>
Edward J. Hogan* $ 0 $ 0
Nancy M. Kissinger $46,000 $46,000
Terry L. Lierman $45,000 $45,000
</TABLE>
B-99
<PAGE>
<TABLE>
<CAPTION>
Total Compensation
Name of Aggregate From Registrant
Trustee Compensation and Fund Complex
Trustee from the Trust Paid to
- --------------------- -------------- -------
<S> <C> <C>
Donald E. Nickelson $45,000 $45,000
Richard S. Trutanic $45,000 $45,000
Ralph A. Pfeiffer** $33,000 $33,000
</TABLE>
* Mr. Hogan was elected to his position as Trustee of the Trust on October 28,
1996.
** Mr. Pfeiffer passed away on September 13, 1996.
As of ______________, 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 each of the Funds.
THE ADVISERS, THE ADMINISTRATOR AND THE DISTRIBUTOR
INVESTMENT ADVISORY AGREEMENTS
Pursuant to the Investment Advisory Agreements for Capital Appreciation
Fund, Value Fund, Convertible-Equity Income Fund, High Yield Corporate Bond
Fund, Government Fund, and Money Market Fund dated May 1, 1986; the Investment
Advisory Agreement for Tax Free Bond Fund dated May 29, 1987; the Investment
Advisory Agreement for Total Return Fund dated December 28, 1987; the Investment
Advisory Agreements for California Tax Free Fund and New York Tax Free Fund
dated September 6, 1991; the Investment Advisory Agreement for Equity Index Fund
dated November 5, 1990; and the Investment Advisory Agreements for International
Bond Fund and International Equity Fund dated August 25, 1994, MacKay-Shields or
Monitor, each subject to the supervision of the Trustees of the Trust and in
conformity with the stated policies of each Fund of the Trust, manages the
investment operations of the respective Funds that it advises and the
composition of each such Fund's portfolio, including the purchase, retention,
disposition and loan of securities.
On April 27, 1987 the shareholders of Capital Appreciation Fund, Value
Fund, Convertible-Equity Income Fund, High Yield Corporate Bond Fund, Government
Fund, and Money Market Fund approved their respective Investment Advisory
Agreements and in connection with the reorganization of such Fund as a series of
the Trust, the shareholders of the MacKay-Shields MainStay Tax Free Bond Fund
approved an Investment Advisory Agreement with MacKay-Shields substantially
identical to the Tax Free Bond Fund's current Investment Advisory Agreement with
MacKay-Shields. On April 25, 1988 the shareholders of Total Return Fund,
approved its Investment Advisory Agreement. On December 8, 1992, shareholders
of California Tax Free Fund and New York Tax Free Fund approved their respective
Investment Advisory Agreements with MacKay-Shields. On September 8, 1994, the
sole initial
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<PAGE>
shareholder of International Bond Fund and International Equity Fund approved
their respective Investment Advisory Agreements with MacKay-Shields. Each
Investment 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 particular 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 Trust or MacKay-Shields
or Monitor (as the term is defined in the 1940 Act). The Investment Advisory
Agreements were last approved by the Trustees, including a majority of the
Trustees who are not "interested persons" of the Trust or MacKay-Shields or
Monitor (as defined in the 1940 Act), at a meeting held on April 29, 1996.
The Investment Advisory Agreement for each Fund also provides that in the
event the expenses of a Fund (including the fees of the Fund's Adviser, but
excluding interest, taxes, organization expenses, brokerage commissions,
distribution expenses, litigation and indemnification expenses and other
extraordinary expenses) for any fiscal year exceed the limits set by a state
securities commission, the Fund's Adviser will reduce its fee payable by each
such Fund by 50% (20% in the case of the Equity Index Fund) of the amount of
such excess to the extent of that Fund's fee. The Capital Appreciation Fund,
Convertible Fund, Government Fund, High Yield Corporate Bond Fund, Money Market
Fund, Tax Free Bond Fund, Total Return Fund and Value Fund have received from
the California Department of Corporations (the state securities commission)
various forms of waivers allowing the exclusion of certain Fund expenses in the
calculation of their expense limitations as set by regulation.
For the fiscal year ended August 31, 1994, for the period September 1, 1994
through December 31, 1994 and for the fiscal year ended December 31, 1995, the
expenses of each Fund did not exceed the most restrictive state expense
limitation.
The Advisers have each authorized any of their 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 Advisers bear the salaries and
expenses of all of its personnel.
For the fiscal years ended December 31, 1996 and December 31, 1995, and the
period September 1, 1994 through December 31, 1994, the amount of the advisory
fee paid by each Fund to the Adviser was as follows:
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<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Year Ended Year Ended September 1, 1994
December 31, December 31, through
1996 1995 December 31, 1994*
------------ ------------ ------------------
<S> <C> <C> <C>
California Tax Free Fund........ $ 29,964++ $ 14,030
Capital Appreciation Fund....... 2,155,386 543,137
Convertible-Equity Income Fund.. 1,027,604 206,175
Equity Index Fund............... 81,072 20,578
Government Fund................. 3,056,716 1,062,816
High Yield Corporate Bond Fund.. 3,930,939 1,068,277
International Bond Fund+........ 52,534++ 10,037++
International Equity Fund+...... 166,703 27,355
Money Market Fund............... 391,304++ 93,386
New York Tax Free Fund.......... 31,482++ 14,397
Tax Free Bond Fund.............. 1,610,982 525,805
Total Return Fund............... 2,396,247 674,170
Value Fund...................... 1,932,406 518,495
- -------------------------
</TABLE>
* The Funds changed their fiscal year end from August 31 to December 31.
+ The International Bond Fund and International Equity Fund commenced
operations on September 13, 1994.
++ After expense reimbursement.
The Adviser and the Administrator have voluntarily agreed to limit the
expenses of the Money Market Fund, described above to the extent that such
expenses for a month would exceed on an annualized basis .70%, respectively, of
the average daily net assets of the Fund. For the period September 1, 1994
through December 31, 1994, $173,990 would have been incurred by the Money Market
Fund had such expenses not been limited. For the fiscal years ended December
31, 1995 and 1996, $674,279 and $_________, respectively, would have been
incurred by the Money Market Fund had such expenses not been limited.
The Adviser voluntarily agreed to reimburse 50% of certain expenses for the
California Tax Free Fund and the New York Tax Free Fund to the extent that
operating expenses exceed on an annualized basis .99% of the daily average net
assets of those Funds. For the fiscal period September 1, 1994 through December
31, 1994, the expense reimbursements to the California Tax Free Fund and the New
York Tax Free Fund totaled $5,418 and $5,167, respectively. For the fiscal year
ended December 31, 1995, the expense reimbursements to the California Tax Free
Fund and New York Tax Free Fund were $16,845 and $14,242, respectively. And,
for the fiscal year ended December 31, 1996, the expense reimbursements to the
California Tax Free Fund and New York Tax Free Fund were $___________ and
$___________, respectively.
B-102
<PAGE>
Regarding the International Bond Fund, the Adviser and Administrator each
agreed that a portion of its fees would not be imposed, pursuant to the
applicable contracts, until such time as the Fund reaches $50 million in net
assets. After deducting the foregoing fee waiver, the advisory fee paid by the
International Bond Fund for the period September 13, 1994 to December 31, 1994
equalled an annual rate of 0.25% and for the fiscal years ended December 31,
1995 and 1996 equalled an annual rate of 0.25% and ____%, respectively.
The Investment Advisory Agreements provide that MacKay-Shields or Monitor
shall not be liable to the Funds for any error of judgment by MacKay-Shields or
Monitor or for any loss sustained by the Funds or NYLIFE Distributors Inc.
except in the case of MacKay-Shields' or Monitor's willful misfeasance, bad
faith, gross negligence or reckless disregard of duty. Each 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.
ADMINISTRATION AGREEMENTS
NYLIFE Distributors Inc. ("NYLIFE Distributors" or the "Administrator") acts
as administrator for the Funds pursuant to the Administration Agreements which
are dated January 1, 1994 (August 25, 1994 in the case of the International Bond
Fund and International Equity Fund). Prior to that time, NYLIFE Securities Inc.
("NYLIFE Securities"), an affiliated company, had acted as administrator. The
Administrator 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
its administration of the business affairs of the Funds, and except as indicated
in the Prospectus under the heading "Investment Advisers, Administrator and
Distributor," the Administrator bears the following expenses:
(a) the salaries and expenses of all personnel of the Trust and the
Administrator, except the fees and expenses of Trustees not affiliated with the
Administrator or the Advisers; and
(b) all expenses incurred by the Administrator in connection with
administering the ordinary course of the Funds' business, other than those
assumed by the Trust.
The Administration Agreements also provide that in the event the expenses of a
Fund (including the fees of the Fund's Adviser and the Administrator, but
excluding interest, taxes, organization expenses, brokerage commissions,
distribution expenses,
B-103
<PAGE>
litigation and indemnification expenses and other extraordinary expenses) for
any fiscal year exceed the limits set by a state securities commission, the
Administrator will reduce its fees payable by each such Fund by 50% (80% in the
case of the Equity Index Fund) of the amount of such excess to the extent of
that Fund's fee.
The Administration Agreements for the Funds were approved by the Trustees,
including a majority of the Trustees who are not "interested persons" of the
Trust or NYLIFE Distributors (as the term is defined in the 1940 Act) at a
meeting held on October 25, 1993 (and at a meeting held on July 25, 1994 for the
International Bond Fund and International Equity Fund). The Administration
Agreements for each Fund were reapproved by the Trustees, including a majority
of the Trustees who are not "interested persons" of the Trust or NYLIFE
Distributors, at a meeting held on April __, 1997.
For the fiscal year ended December 31, 1996, the fiscal year ended December
31, 1995 and the fiscal period September 1, 1994 through December 31, 1994, the
amount of the administration fee paid by each Fund was as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended September 1, 1994
December 31, December 31, through
1996 1995 December 31, 1994*
- -------------------------------- ------------ ------------------
<S> <C> <C>
California Tax Free Fund........ $ 29,964++ $ 14,030
Capital Appreciation Fund....... 2,155,386 543,137
Convertible-Equity Income Fund.. 1,027,604 206,175
Equity Index Fund............... 324,287 20,578
Government Fund................. 3,056,716 1,062,816
High Yield Corporate Bond Fund.. 3,930,939 1,068,277
International Bond Fund+........ 31,522++ 10,037++
International Equity Fund+...... 111,135 27,355
Money Market Fund............... 391,304++ 93,386
New York Tax Free Fund.......... 31,481++ 14,397
Tax Free Bond Fund.............. 1,610,982 525,805
Total Return Fund............... 2,396,247 674,170
Value Fund...................... 1,932,406 518,495
</TABLE>
_______________________
* The Funds changed their fiscal year end from August 31 to December 31.
+ The International Bond Fund and International Equity Fund commenced
operations on September 13, 1994.
++ After expense reimbursement.
B-104
<PAGE>
For the fiscal year ended December 31, 1996, the fiscal year ended December
31, 1995, and the period September 1, 1994 through December 31, 1994, the
expenses of each Fund did not exceed the most restrictive applicable state
expense limitation.
The Administrator and the Adviser have voluntarily agreed to assume the
expenses of the Money Market Fund described above to the extent that such
expenses for a month would exceed on an annualized basis .70% of the average
daily net assets of that Fund. For the fiscal year ended December 31, 1996, the
fiscal year ended December 31, 1995, and the period September 1, 1994 through
December 31, 1994, $___________, $674,279, and $173,990 in expenses would have
been incurred by the Money Market Fund, respectively, had such expenses not been
limited.
The Administrator has voluntarily agreed to reimburse 50% of certain
expenses for the California Tax Free Fund and the New York Tax Free Fund to the
extent that operating expenses exceed on an annualized basis .99% of the daily
average net assets of that Fund. For the period September 1, 1994 to December
31, 1994 the expense reimbursements to the California Tax Free Fund and New York
Tax Free Fund were $5,418 and $5,167, respectively. For the fiscal year ended
December 31, 1995, the expense reimbursements to the California Tax Free Fund
and New York Tax Free Fund were $16,845 and $14,241 respectively. And, for the
fiscal year ended December 31, 1996, the expense reimbursements to the
California Tax Free Fund and New York Tax Free Fund were $___________ and
$___________, respectively. NYLIFE Distributors reserves the right to terminate
or revise this limitation when the assets of a Fund reach $25 million.
Regarding the International Bond Fund, the Adviser and Administrator each
agreed that a portion of its fees would not be imposed, pursuant to the
applicable contracts, until such time as the Fund reaches $50 million in net
assets. After deducting the foregoing fee waiver, the administration fee paid
by the International Bond Fund for the period September 13, 1994 to December 31,
1994 equalled an annual rate of 0.15% and for the fiscal years ended December
31, 1995 and 1996 equalled an annual rate of 0.15% and ______%, respectively.
DISTRIBUTION AGREEMENT
NYLIFE Distributors also acts as the Principal Underwriter and Distributor
of the Funds' shares pursuant to the Distribution Agreement with the Trust dated
January 1, 1994. Prior to that time, NYLIFE Securities Inc., an affiliated
company, had acted as principal underwriter. NYLIFE Securities sells shares of
the Funds pursuant to a dealer agreement with the Distributor. The Distributor
and other broker-dealers will pay commissions to
B-105
<PAGE>
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 Trust 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 Funds 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 October 25, 1993.
The Distribution Agreement for the International Bond Fund and the International
Equity Fund was approved by the Trustees, including a majority of the Trustees
who are not "interested persons" of the Trust (as the term is defined in the
1940 Act) at a meeting held on July 25, 1994. The Distribution Agreements were
reapproved by the Trustees, including a majority of the Independent Trustees, at
a meeting held on April __, 1997.
As disclosed in the Prospectus, each of the Funds (except the Money Market
Fund and the Equity Index Fund, which does not offer Class B shares) has adopted
separate plans of distribution pursuant to Rule 12b-1 under the 1940 Act for
each class of shares of each Fund (the "Class A Plans", the "Class B Plans" and,
collectively, the "Plans"). Under the Class A Plans, Class A shares of each
Fund pay the Distributor a monthly fee at the annual rate of 0.25% of the
average daily net assets of each Fund's Class A shares for distribution or
service activities, as designated by the Distributor. The Class A Plans for
each of the Funds other than the California Tax Free Fund, New York Tax Free
Fund and Equity Index Fund were approved by the sole initial shareholder of the
Class A of shares of each Fund on December 31, 1994. The Class A Plans were
approved by the shareholders of the California Tax Free Fund, New York Tax Free
Fund and the Equity Index Fund at a Special Meeting of Shareholders held on
December 28, 1994. Regarding the California Tax Free Fund, the New York Tax
Free Fund and the Equity Index 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 (the
"Independent Trustees"), by vote cast in person at a meeting called for the
purpose of voting on such Plans, initially approved the Plan now designated as
the Class A Plans on July 25, 1994.
As noted above, the Class B shares of each Fund (except the Money Market
Fund and the Equity Index Fund, which does not offer Class B shares) also have
adopted Rule 12b-1 distribution plans.
B-106
<PAGE>
Originally, Rule 12b-1 plans of distribution were adopted by each of the Funds
(except the California Tax Free Fund, New York Tax Free Fund and Money Market
Fund) for the then sole existing class of shares of the Funds. More
specifically, Rule 12b-1 distribution plans were approved on September 8, 1994
by the sole initial shareholder of each of the International Bond Fund and
International Equity Fund, on April 25, 1988 by the shareholders of the Total
Return Fund, on May 29, 1987 by the sole initial shareholder of the Tax Free
Bond Fund and on April 27, 1987 by the shareholders of the Capital Appreciation
Fund, Convertible-Equity Income Fund, Government Fund, High Yield Corporate Bond
Fund and Value 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 plans of distribution, by
vote cast in person at meetings called for the purpose of voting on such Plans,
initially approved the Plans of the Total Return Fund on October 26, 1987,
initially approved the Plans of the Tax Free Bond Fund on April 27, 1987, and
initially approved the Plans of the Capital Appreciation Fund, Convertible-
Equity Income Fund, Government Fund, High Yield Corporate Bond Fund and Value
Fund on April 28, 1986. In addition, on October 31, 1988, the Trustees of the
Trust, including a majority of the Trustees who are not interested persons,
amended the Tax Free Bond Fund's Plan to permanently reduce the amount of the
distribution fee to be imposed subsequent to that date. On October 26, 1992,
the Trustees of the Trust, including a majority of the Trustees who are not
interested persons of the Trust, amended each of the plans of distribution to
provide that a portion of total amount of the distribution fee as a service fee,
to pay for a variety of account maintenance and personal services to
shareholders after the sale. On October 25, 1993, the Trustees of the Trust,
including a majority of the Trustees who are not interested persons of the
Trust, amended each of the plans of distribution to reflect that NYLIFE
Distributors would serve as principal underwriter of the Funds' shares,
effective January 1, 1994. Prior to the implementation of the multi-class
distribution system the distribution plans in effect for the Funds were amended
and redesignated and, now, are applicable only to the Class B shares of each
Fund. On October 30, 1995, the Trustees of the Trust, including a majority of
the Trustees who are not interested persons of the Trust, amended the Class A
Plans and the Class B Plans to clarify that the Plans contemplate payment for
expenses that may generally be characterized as administrative.
Regarding the California Tax Free Fund and New York Tax Free Fund, the
Class B Plans were approved by the sole initial shareholder of the Class B
shares of each Fund on December 31, 1994. The Trustees of the Trust, including
a majority of the
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<PAGE>
Trustees who are not interested persons of the Trust and who have no direct or
indirect financial interest in the operation of such Plans, by vote cast in
person at meetings called for the purpose of voting on such Plans, initially
approved such Plans now designated as the Class B Plans on October 24, 1994.
Regarding the International Bond Fund and International Equity 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 Plans (the "Independent Trustees"), by vote
cast in person at meetings called for the purpose of voting on such Plans,
initially approved the distribution plans now designated as the Class B Plans on
July 25, 1994, and the Class A Plans on October 24, 1994.
Under the Class B plans, each Fund's Class B shares pay a monthly
distribution fee to the Distributor at the annual rate of 0.75% (0.25% in the
case of the California Tax Free Fund, New York Tax Free Fund and the Tax Free
Bond Fund) of the lesser of (a) the aggregate gross sales of the Fund's Class B
shares since the inception of the Funds (not including reinvestment of dividends
and capital gains distributions from the Fund), less the aggregate net asset
value of the Class B shares exchanged or redeemed since the Fund's inception
upon which a contingent deferred sales charge has been imposed or upon which
such charge has been waived, or (b) the average daily net assets attributable to
the Fund's Class B shares. Pursuant to the Class B Plans, the Class B shares of
each 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 a Fund, each 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 a 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
B-108
<PAGE>
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 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.
At a meeting held on April __, 1997, the Trustees of the Trust, including a
majority of the Independent Trustees, approved the continuation of the Plans.
Pursuant to a rule of the National Association of Securities Dealers, Inc.,
the amount which a 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).
For the fiscal year ended December 31, 1996, the Funds paid distribution
and service fees pursuant to the Class A and Class B Plans as follows:
Amount of Fee Amount of Fee
Pursuant to Pursuant to
Class A Plan Class B Plan
------------- -------------
California Tax Free Fund........ $ $
Capital Appreciation Fund.......
Convertible-Equity Income Fund..
Equity Index Fund...............
Government Fund.................
High Yield Corporate Bond Fund..
International Bond Fund.........
International Equity Fund.......
Money Market Fund...............
New York Tax Free Fund..........
Tax Free Bond Fund..............
Total Return Fund...............
Value Fund......................
For the fiscal year ended December 31, 1996, the fiscal year ended December
31, 1995, and the period September 1, 1994 through December 31, 1994, NYLIFE
Distributors retained the following
B-109
<PAGE>
amounts in sales charges for sales of Class A shares of the Funds, as
applicable:
<TABLE>
<CAPTION>
Year Ended Year Ended September 1, 1994
December 31, December 31, through
1996 1995 December 31, 1994*
- ----------------------------------- ------------ ------------------
<S> <C> <C>
California Tax Free Fund........... $ 57,181 $ 25,670
Capital Appreciation Fund(1)....... 718,806 --
Convertible-Equity Income Fund(1) 529,361 --
Equity Index Fund.................. 308,486 133,857
Government Fund(1)................. 95,975 --
High Yield Corporate Bond Fund(1) 782,534 --
International Bond Fund+(1)........ 10,984 --
International Equity Fund+(1)...... 63,684 --
Money Market Fund(1)............... N/A N/A
New York Tax Free Fund............. 35,722 21,343
Tax Free Bond Fund(1).............. 62,656 --
Total Return Fund(1)............... 233,202 --
Value Fund(1)...................... 413,692 --
</TABLE>
_______________________
* The Funds changed their fiscal year end from August 31 to December 31.
+ The International Bond Fund and International Equity Fund commenced
operations on September 13, 1994.
(1) The Fund began offering Class A shares on January 3, 1995.
For the fiscal year ended December 31, 1996, contingent deferred sales
charges were paid by investors on the redemption of Class B shares of each Fund,
as follows:
Year Ended
December 31,
1996
------------
California Tax Free Fund(2)...... $
Capital Appreciation Fund........
Convertible-Equity Income Fund...
Equity Index Fund................
Government Fund..................
High Yield Corporate Bond Fund...
International Bond Fund..........
International Equity Fund........
Money Market Fund................
New York Tax Free Fund(2)........
Tax Free Bond Fund...............
Total Return Fund................
B-110
<PAGE>
Value Fund.......................
_______________________
* The Funds changed their fiscal year end from August 31 to December 31.
(1) The amount shown represents proceeds from contingent deferred sales charges
which were assessed on redemptions of shares which had previously been
exchanged from other Funds into the Money Market Fund.
(2) The Fund began offering Class B shares on January 3, 1995.
For the fiscal year ended December 31, 1996, it is estimated that the
following amounts were spent with respect to the Class A shares of each Fund:
California Tax Free Fund spent $______ on compensation to dealers; Capital
Appreciation Fund spent $______ on compensation to dealers; Convertible-Equity
Income Fund spent $______ on compensation to dealers; Equity Index Fund spent
$_______ on compensation to dealers; Government Fund spent $______ on
compensation to dealers; High Yield Corporate Bond Fund spent $______ on
compensation to dealers; International Bond Fund spent $______ on compensation
to dealers; International Equity Fund spent $______ on compensation to dealers;
New York Tax Free Bond Fund spent $______ on compensation to dealers; Tax Free
Bond Fund spent $______ on compensation to dealers; Total Return Fund spent
$______ on compensation to dealers; and Value Fund spent $______ on compensation
to dealers.
For the fiscal year ended December 31, 1996, it is estimated that the
following amounts were spent for distribution-related activities with respect to
the Class B shares of each Fund:
<TABLE>
<CAPTION>
Printing And Approximate
Mailing Total Amount
Prospectuses Spent By
Sales to other Compensation Compensation NYLIFE
Material than to to Sales Distributors
and Current Distribution Sales Distribution With Respect
Advertising Shareholders Personnel Personnel Other Costs to Each Fund
----------- ------------ ------------ ----------- ----- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
California Tax Free
Fund $ $ $ $ $ $ $
Capital Appreciation
Fund
Convertible-Equity
Income Fund.............
Government Fund.........
High Yield Corporate
Bond Fund..............
</TABLE>
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<PAGE>
International Bond
Fund...................
International Equity
Fund...................
New York Tax Free Fund
Tax Free Fund...........
Total Return Fund.......
Value Fund..............
OTHER SERVICES
Pursuant to an Accounting Agreement with the Trust, dated January 1, 1994,
NYLIFE Distributors performs certain bookkeeping and pricing services for the
Funds that were previously provided by NYLIFE Securities. Each Fund will bear an
allocable portion of the cost of providing these services to the Trust.
In addition, each Fund reimbursed NYLIFE Securities and NYLIFE Distributors
for the cost of certain correspondence to shareholders and establishing
shareholder accounts.
For fiscal years ended December 31, 1995 and 1996, the period September 1,
1994 through December 31, 1994, the amount of recordkeeping fee paid by each
Fund was as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended September 1, 1994
December 31, December 31, through
1996 1995 December 31, 1994*
- -------------------------------- ------------ ------------------
<S> <C> <C>
California Tax Free Fund........ $ N/A $ N/A
Capital Appreciation Fund....... 95,042 24,684
Convertible-Equity Income Fund.. 57,184 13,603
Equity Index Fund............... N/A N/A
Government Fund................. 128,798 42,333
High Yield Corporate Bond Fund.. 164,329 45,331
International Bond Fund+........ 12,000 3,600
International Equity Fund+...... 12,668 3,600
Money Market Fund............... 53,064 16,047
New York Tax Free Fund.......... N/A N/A
Tax Free Bond Fund.............. 79,801 24,274
Total Return Fund............... 103,032 29,600
Value Fund...................... 85,935 23,809
</TABLE>
________________
* The Funds changed their fiscal year end from August 31 to December 31.
B-112
<PAGE>
+ The International Bond Fund and International Equity Fund commenced
operations on September 13, 1994.
EXPENSES BORNE BY THE TRUST
Except for the expenses to be paid by the Advisers and the Administrator as
described in the Prospectus, the Trust, on behalf of each Fund, is responsible
under its Administration Agreement for the payment of expenses related to each
Fund's operations, including (i) the fees payable to the Advisers and the
Administrator, (ii) the fees and expenses of Trustees who are not affiliated
with the Advisers or the Administrator, (iii) certain fees and expenses of the
Trust's Custodian and Transfer Agent, including the cost of pricing a 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 a Fund, in connection with its
securities transactions, (vi) the fees of any trade association of which a Fund
or the Trust is a member, (vii) the cost of share certificates representing
shares of a Fund, (viii) reimbursement of a portion of the organization expenses
of a Fund and the fees and expenses involved in registering and maintaining
registration of the Trust and of its shares with the SEC and 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 such purposes, (ix) allocable communications
expenses with respect to 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 a 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 a 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 Funds pay a brokerage commission for this service. In
transactions on stock exchanges in the United States, these commissions are
negotiated, whereas on many foreign stock exchanges these commissions are fixed.
In the over-the-counter markets, securities (i.e., Municipal Bonds and other
debt securities) are generally traded on a "net" basis with
B-113
<PAGE>
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.
Regarding the California Tax Free Fund and New York Tax Free Fund, 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 a 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 Advisers attempt to achieve this result by selecting broker-
dealers to execute portfolio transactions on behalf of each Fund and their
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 Advisers may consider sales of shares of the Funds as a factor in the
selection of broker-dealers to execute the Funds' portfolio transactions.
NYLIFE Securities (the "Affiliated Broker") may act as broker for the
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
B-114
<PAGE>
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 each Investment Advisory Agreement and as permitted by Section 28(e)
of the Securities Exchange Act of 1934 (the "1934 Act"), the Adviser may cause a
Fund to pay a broker-dealer (except the Affiliated Broker) which provides
brokerage and research services to the Adviser an amount of commission for
effecting a securities transaction for a Fund in excess of the amount other
broker-dealers would have charged for the transaction if the 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 Adviser's overall
responsibilities to the Trust 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
Advisers, be reasonable in relation to the value of the brokerage services
provided, commissions exceeding those which another broker might charge may be
paid to broker-dealers (except the Affiliated Broker) who were selected to
execute transactions on behalf of the Trust and the Advisers' 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 Advisers for no
consideration other than brokerage or underwriting commissions. Securities may
be bought or sold through such broker-dealers, but at present, unless otherwise
directed by the Trust, a commission higher than one charged elsewhere will not
be paid to such a firm solely because it provided Research to an Adviser.
Research provided by brokers is used for the benefit of all of the Advisers'
clients and not solely or necessarily for the benefit of the Trust. The
Advisers' investment management personnel attempt to evaluate the quality of
Research provided by brokers. Results of this effort
B-115
<PAGE>
are sometimes used by the Advisers as a consideration in the selection of
brokers to execute portfolio transactions.
In certain instances there may be securities which are suitable for a
Fund's portfolio as well as for that of another Fund or one or more of the other
clients of the Advisers. Investment decisions for a Fund and for the Advisers'
other clients are made with a view to achieving their respective investment
objectives. It may develop that a particular security is bought or sold for only
one client even though it might be held by, or bought or sold for, other
clients. Likewise, a particular security may be bought for one or more clients
when one or more other clients are selling that same security. Some simultaneous
transactions are inevitable when several clients receive investment advice from
the same investment adviser, particularly when the same security is suitable for
the investment objectives of more than one client. When two or more clients are
simultaneously engaged in the purchase or sale of the same security, the
securities are allocated among clients in a manner believed to be equitable to
each. It is recognized that in some cases this system could have a detrimental
effect on the price or volume of the security in a particular transaction as far
as a Fund is concerned. The Trust believes that over time its ability to
participate in volume transactions will produce better executions for the Funds.
The investment advisory fee that the Trust pays on behalf of each Fund to
the Advisers will not be reduced as a consequence of the Advisers' receipt of
brokerage and research services. To the extent a Fund's portfolio transactions
are used to obtain such services, the brokerage commissions paid by the Fund
will exceed those that might otherwise be paid, by an amount which cannot be
presently determined. Such services would be useful and of value to the
Advisers in serving both the Funds and other clients and, conversely, such
services obtained by the placement of brokerage business of other clients would
be useful to the Advisers in carrying out their obligations to the Funds.
For the fiscal years ended December 31, 1995 and 1996 and the period
September 1, 1994 through December 31, 1994,* each of the following Funds paid
brokerage commissions as follows:
B-116
<PAGE>
<TABLE>
<CAPTION>
Total Brokerage Total Brokerage Commissions
Commissions Paid Paid to Affiliated Persons
---------------- ----------------------------
September 1, 1994 September 1, 1994
Year Ended Year ended through Year ended Year ended through
Dec. 31, 1996 Dec. 31, 1995 Dec. 31, Dec. 31, 1996 Dec. 31, 1995 Dec. 31, 1994
------------- ------------- ------------------ --------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Capital Appreciation Fund.. $681,250 $126,845 $ --- ---
Convertible-Equity Income
Fund. 674,139 151,524 --- ---
Equity Index Fund.......... 7,018 2,364 --- ---
Government Fund............ 71,818 27,123 --- ---
High Yield Corporate Bond
Fund...................... 1,207,587 333,548 1,970(0%)(1) ---
International Equity Fund+. 135,267 54,215 --- ---
Total Return Fund.......... 436,507 102,550 --- ---
Value Fund................. 1,055,169 246,712 5,074(0%)(1) 1,540(1%)(1)
<CAPTION>
Total Brokerage
Commissions Paid
Total Amount of Transactions to Brokers that
Where Commissions Paid Provided Research
----------------------------------------------------------------------------- ------------------
September 1, 1994
Year Ended Year Ended through Year ended
December 31, 1996 December 31, 1995 December 31, 1994 December 31, 1996
----------------- ----------------- --------------------- -------------------
Capital Appreciation Fund.. $ 391,017,677(0.0)%)(2) $ 71,345,660(0.0%)(2)
Convertible-Equity Income $ 395,570,645(0.0%)(2) 81,374,040(0.0%)(2)
Fund 5,863,505(0.0%)(2) 1,660,008
Equity Index Fund.......... 712,117,650(0.0%)(2) 291,468,420(0.0%)(2)
Government Fund............
High Yield Corporate Bond
Fund...................... 1,414,045,455(0.0%)(2) 375,961,540(0.0%)(2)
International Equity Fund+. 33,559,758(0.0%)(2) 12,781,223
Total Return Fund.......... 604,631,476(0.0%)(2) 153,671,710(0.0%)(2)
Value Fund..................... 544,224,812(0.0%)(2) 141,666,160(0.1%)(2)
</TABLE>
_________________________
* The Funds changed their fiscal year end from August 31 to December 31.
(1) Percent of total commissions paid.
(2) Percent of total transactions involving the payment of commissions effected
through affiliated persons.
+ The International Equity Fund commenced operations on September 13,
1994.
The California Tax Free Fund, International Bond Fund, Money Market Fund,
New York Tax Free Fund and Tax Free Bond Fund paid no brokerage commissions
during the year ended December 31, 1996, the year ended December 31, 1995, and
the period from September 1, 1994 through December 31, 1994.
As of December 31, 1996, the following Funds held securities of issuers
with whose broker-dealer subsidiaries or affiliates the Funds regularly conduct
business: the Capital Appreciation Fund held common stock in
______________________ valued at $_________, commercial paper of
_____________________ valued at $__________ and commercial paper of
__________________ valued at $__________; the Money Market Fund held medium-term
notes of ______________________ valued at $_________ and commercial paper
B-117
<PAGE>
of ____________________ valued at $_________; the Total Return Fund held long-
term bonds of ___________________ valued at $_________, common stock of
__________________ valued at $_________, and commercial paper of
_________________ valued at $_________; and the Value Fund held commercial paper
of ___________________ valued at $__________, and commercial paper of
___________________ valued at $__________.
Investors may, subject to the approval of the Trust, NYLIFE Distributors
and the Adviser to the particular Fund, purchase shares of a Fund with liquid
securities that are eligible for purchase by that 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 each Fund (other than the Money Market
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. The net asset value per share of
the Money Market Fund is also determined at noon on such days.
Portfolio securities of the Money Market Fund are valued at their amortized
cost, which does not take into account unrealized securities gains or losses.
While this method provides certainty in valuation, it may result in periods
during which value, as determined by amortized cost, is higher or lower than the
price the Money Market Fund would receive if it sold the instrument. During
periods of declining interest rates, the quoted yield on shares of the Money
Market Fund may tend to be higher than a like computation made by a fund with
identical investments utilizing a method of valuation based upon market prices
and estimates of market prices for all of its portfolio instruments. Thus, if
the use of amortized cost by the Money Market Fund resulted in a lower aggregate
portfolio value on a particular day, a prospective investor in the Money Market
Fund would be able to obtain a somewhat higher yield if he or she purchased
shares of the Money Market Fund on that day, than would result from investment
in a fund utilizing solely market values, and existing investors in the Money
Market Fund would receive less investment income. The converse would apply in a
period of rising interest rates.
B-118
<PAGE>
Portfolio securities of each other 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 Adviser if those prices are
deemed by the 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 Adviser, which prices reflect
broker-dealer-supplied valuations and electronic data processing techniques if
those prices are deemed by the Adviser to be representative of market values 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 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 Funds 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 Funds are
valued at their respective fair market values determined on the basis of the
mean between the last current bid and asked prices based on dealer or exchange
quotations.
Portfolio securities traded on more than one U.S. national securities
exchange or foreign securities exchange are valued at
B-119
<PAGE>
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 Trust recognizes dividend income and other distributions on the
ex-dividend date, except that certain dividends from foreign securities are
recognized as soon as the Trust 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 Funds' net asset values are not
calculated. Such calculation of net asset value does not take place
contemporaneously with the determination of the prices of the majority of the
portfolio securities used in such calculation.
Events affecting the values of portfolio securities that occur between the
time their prices are determined and the close of the New York Stock Exchange
will not be reflected in the Funds' 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.
Because the Guarantee regarding the Equity Index Fund is payable to
shareholders directly (and not payable to the Equity Index Fund), and because it
represents only a contingent liability rather than an agreement to pay a
definite amount on the Guarantee Date, the Trustees believe that the Guarantee
should have no impact in determining the Equity Index Fund's net asset value.
The proceeds received by each Fund for each issue or sale of its shares,
and all net investment income, realized and unrealized gain and proceeds
thereof, subject only to the rights of creditors, will be specifically allocated
to such Fund and constitute the underlying assets of that Fund. The underlying
assets of each Fund will be segregated on the books of account,
B-120
<PAGE>
and will be charged with the liabilities in respect to such Fund and with a
share of the general liabilities of the Trust. Expenses with respect to any two
or more Funds will be allocated in proportion to the net asset values of the
respective Funds except where 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
Funds, under which a record of the shares of each 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 a Fund (other than the
Money Market 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 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, REDEMPTION AND REPURCHASE
LETTER OF INTENT ("LOI")
The LOI is a non-binding obligation on the Qualified Purchaser to purchase
the full amount indicated; however, on the
B-121
<PAGE>
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 any 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.
TAX-DEFERRED RETIREMENT PLANS
CASH OR DEFERRED PROFIT SHARING PLANS UNDER SECTION 401(K) FOR CORPORATIONS AND
SELF-EMPLOYED INDIVIDUALS
Shares of a Fund, except the California Tax Free Fund, New York Tax Free
Fund and Tax Free Bond 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.
All Funds, except the California Tax Free Fund, New York Tax Free Fund and Tax
Free Bond 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 a Fund, except the California Tax Free Fund, New York Tax Free
Fund and Tax Free Bond Fund, may also be purchased
B-122
<PAGE>
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
each year to an IRA, or an aggregate of $2,250 to IRAs for the person and the
person's spouse if the spouse is treated as having no compensation income.
Contributions may be made to a spousal IRA even if the spouse has earnings for
that year if the spouse elects to be treated as having no earnings (for IRA
contribution purposes) for the year.
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 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.
B-123
<PAGE>
403(B)(7) TAX SHELTERED ACCOUNT
Shares of a Fund, except the California Tax Free Fund, New York Tax Free
Fund and Tax Free Bond 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.
The custodial agreements and forms provided by the Funds' 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.
GENERAL INFORMATION
Shares of a Fund, except the California Tax Free Fund, New York Tax Free
Fund and Tax Free Bond 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 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, quotations of the Money Market Fund's "yield" and
"effective yield" may be included in advertisements or communications to
shareholders. These performance figures are calculated in the following manner:
A. Yield -- the net annualized yield based on a specified seven-
-----
calendar day period calculated at simple interest rates. Yield is
calculated by determining the net change, exclusive of capital changes, in
the value of a hypothetical preexisting account having a balance of one
share at the beginning of the period, subtracting a
B-124
<PAGE>
hypothetical charge reflecting deductions from shareholder accounts, and
dividing the difference by the value of the account at the beginning of the
base period to obtain the base period return. The yield is annualized by
multiplying the base period return by 365/7. The yield figure is stated to
the nearest hundredth of one percent. The yield of the Class A and Class B
shares of the Money Market Fund for the seven-day period ended December 31,
1995 was 5.12% and 5.12%, respectively.
B. Effective Yield -- the net annualized yield for a specified seven-
---------------
calendar day period assuming a reinvestment of dividends (compounding).
Effective yield is calculated by the same method as yield except the yield
figure is compounded by adding one, raising the sum to a power equal to 365
divided by 7, and subtracting one from the result, according to the
following formula: Effective Yield = [(Base Period Return + 1) /365/7/] -
1. The effective yield of the Class A and Class B shares of the Money
Market Fund for the seven-day period ended December 31, 1995 was 5.25% and
5.25%, respectively.
The yield and effective yield of the Money Market Fund reflect the
reduction of certain fees otherwise payable and voluntary expense
limitations. Had there been no reduction of fees or expense limitations,
the yield and effective yield of the Money Market Fund would have been
5.05% and 5.17%, respectively, for Class A shares and 5.05% and 5.17%,
respectively, for Class B shares for the seven-day period ended December
31, 1995.
As described above, yield and effective yield are based on historical
earnings and are not intended to indicate future performance. Yield and
effective yield will vary based on changes in market conditions and the level of
expenses.
The average annual total return of each 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
B-125
<PAGE>
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. The performance information
shown below for the period ended December 31, 1995 provides performance figures
for both Class A and Class B shares of the Funds, except in the case of the
Equity Index Fund which offers only one class of shares, Class A shares.
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 each Fund's average annual total return will be calculated
according to the following SEC formula:
P(1+T)/n /= 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)
As discussed in the Prospectus, each 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 a 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 average annual total returns of the Class A shares of the following
Funds for the one-year and, as applicable,
B-126
<PAGE>
five-year periods ended December 31, 1996 and the period from inception to
December 31, 1996 were as follows:*
<TABLE>
<CAPTION>
Five Average
Year Years Annual
Ended Ended Total Inception
Fund 12/31/96 12/31/96 Return(a) Date
- ----------------------------------- -------- -------- ------- ---------
<S> <C> <C> <C> <C>
California Tax Free Fund........... 10/01/91
Capital Appreciation Fund(b)....... 5/01/86
Convertible-Equity Income Fund(b) 5/01/86
Equity Index Fund.................. 12/20/90
Government Fund(b)................. 5/01/86
High Yield Corporate
Bond Fund(b)...................... 5/01/86
International Bond Fund(b)......... 9/13/94
International Equity Fund(b)....... 9/13/94
New York Tax Free Fund............. 10/01/91
Tax Free Bond Fund(b).............. 5/01/86
Total Return Fund(b)............... 12/29/87
Value Fund(b)...................... 5/01/86
- -----------------
</TABLE>
* Assumes the deduction of the maximum applicable initial sales charge.
(a) From inception to 12/31/96.
(b) Performance figures for the Fund's Class A shares, first offered to the
public on January 3, 1995, include the historical performance of the Fund's
Class B shares for the period from inception through December 31, 1994.
Performance data for the two classes after this date vary based on
differences in their expense structures.
The average annual total returns of the Class B shares of the following
Funds for the one-year and, as applicable, five-year periods ended December 31,
1996, were as follows:
<TABLE>
<CAPTION>
Five Average
Year Years Annual
Ended Ended Total Inception
Fund 12/31/96 12/31/96 Return(a) Date
---- -------- -------- ------ ---------
<S> <C> <C> <C> <C>
California Tax Free Fund(b)...... 10/01/91
Capital Appreciation Fund........ 5/01/86
Convertible-Equity Income Fund. 5/01/86
Government Fund.................. 5/01/86
High Yield Corporate
Bond Fund....................... 5/01/86
International Bond Fund.......... 9/13/94
International Equity Fund........ 9/13/94
New York Tax Free Fund(b)........ 10/01/91
Tax Free Bond Fund............... 5/01/86
Total Return Fund................ 12/29/87
Value Fund....................... 5/01/86
</TABLE>
- -----------------
* Assumes a complete redemption at the end of each year and the deduction of
the maximum applicable contingent deferred sales charge.
(a) From inception to 12/31/96.
(b) Performance figures for the Fund's Class B shares, first offered to the
public on January 3, 1995, include the historical performance of the Fund's
Class A shares for the period from inception through December 31, 1994.
Performance data for the two classes after this date vary based on
differences in their expense structures.
The average annual total returns of the Class A shares of the following
Funds without deducting the applicable initial sales charge is as follows:
B-127
<PAGE>
<TABLE>
<CAPTION>
Five Average
Year Years Annual
Ended Ended Total Inception
Fund 12/31/96 12/31/96 Return(a) Date
---- -------- -------- ------- ---------
<S> <C> <C> <C> <C>
California Tax Free Fund........... 10/01/91
Capital Appreciation Fund(b)....... 5/01/86
Convertible-Equity Income Fund(b) 5/01/86
Equity Index Fund.................. 12/20/90
Government Fund(b)................. 5/01/86
High Yield Corporate
Bond Fund(b)...................... 5/01/86
International Bond Fund(b)......... 9/13/94
International Equity Fund(b)....... 9/13/94
New York Tax Free Fund............. 10/01/91
Tax Free Bond Fund(b).............. 5/01/86
Total Return Fund(b)............... 12/29/87
Value Fund(b)...................... 5/01/86
</TABLE>
- -----------------
(a) From inception to 12/31/96.
(b) Performance figures for the Fund's Class A shares, first offered to the
public on January 3, 1995, include the historical performance of the Fund's
Class B shares for the period from inception through December 31, 1994.
Performance data for the two classes after this date vary based on
differences in their expense structures.
The average annual total returns of the Class B shares of the following
Funds without deducting the applicable contingent deferred sales charge is as
follows:
<TABLE>
<CAPTION>
Five Average
Year Years Annual
Ended Ended Total Inception
Fund 12/31/96 12/31/96 Return(a) Date
- --------------------------------- -------- -------- ------ ---------
<S> <C> <C> <C> <C>
California Tax Free Fund(b)...... 10/01/91
Capital Appreciation Fund........ 5/01/86
Convertible-Equity Income Fund. 5/01/86
Government Fund.................. 5/01/86
High Yield Corporate
Bond Fund....................... 5/01/86
International Bond Fund.......... 9/13/94
International Equity Fund........ 9/13/94
New York Tax Free Fund(b)........ 10/01/91
Tax Free Bond Fund............... 5/01/86
Total Return Fund................ 12/29/87
Value Fund....................... 5/01/86
</TABLE>
- -----------------
(a) From inception to 12/31/96.
(b) Performance figures for the Fund's Class B shares, first offered to the
public on January 3, 1995, include the historical performance of the Fund's
Class A shares for the period from inception through December 31, 1994.
Performance data for the two classes after this date vary based on
differences in their expense structures.
The performance data quoted represents historical performance and the
investment return and principal value of an
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<PAGE>
investment will fluctuate so that an investor's shares, when redeemed, may be
worth more or less than their original cost.
The yield of each Fund, except the Money Market 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)/6/ -1]
---
cd
where:
a = interest earned during the period
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding during the period that
were entitled to receive dividends
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.
For the 30-day period ended December 31, 1996, the yield of each of the
following Funds was:
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<PAGE>
<TABLE>
<CAPTION>
30-Day
Period Ended
December 31,
1996
----------------
Fund Class A Class B
- -------------------------------- ------- -------
<S> <C> <C>
California Tax Free Fund........ % %
Government Fund................. % %
High Yield Corporate Bond Fund.. % %
International Bond Fund......... % %
New York Tax Free Fund.......... % %
Tax Free Bond Fund.............. % %
</TABLE>
The Tax Free Bond Fund may publish its tax equivalent yield in
advertisements and communications to shareholders. The tax equivalent yield is
calculated by determining the rate of return that would have to be achieved on a
fully taxable investment to produce the after-tax equivalent of the Fund's
yield, assuming certain tax brackets for a Fund shareholder.
For the 30-day period ended December 31, 1996, the Federal income tax
equivalent yield for the California Tax Free Fund, New York Tax Free Fund or Tax
Free Bond Fund was as shown in the following table.*+
To Equal a 5.50% Tax
If Free Return, a Taxable
Your Federal Investment Would Have to
Marginal Tax Earn Without Fee Reduction
Rate is: or Expense Limit
------------ ---------------------------
15.00% %
28.00% %
31.00% %
36.00% %
39.60% %
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<PAGE>
____________________
* This table reflects application of the regular Federal income tax only;
other taxes may be applicable with respect to a particular shareholder.
Such taxes could change the information shown. Tax rates are subject to
change. Investors in the California and New York Tax Free Funds should in
particular note that the chart does not reflect any state and local taxes
that may be deductible in computing Federal income tax liability.
+ This table is for illustrative purposes only; investors should consult
their tax advisers with respect to the tax implications of an investment in
a Fund that invests primarily in securities, the interest on which is
exempt from regular Federal income tax.
The current dividend rate of each 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 a Fund's
performance including (i) realized and unrealized capital gains and losses,
which are reflected in calculations of a 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.
In addition, advertising for a Fund may indicate that investors may
consider diversifying their investment portfolios in order to seek protection of
the value of their assets against inflation. From time to time, advertising
materials for a Fund may refer to or discuss current or past business,
political, economic or financial conditions, including events as they relate to
those conditions, such as any U.S. monetary or fiscal policies and the current
rate of inflation. In addition, from time to time, advertising materials for a
Fund may include information concerning retirement and investing for retirement
and may refer to the approximate number of then-current Fund shareholders,
shareholder accounts and Fund assets.
From time to time, advertising and sales literature for a Fund may discuss
the investment philosophy, personnel and assets under management of the Fund's
investment adviser, and other
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<PAGE>
pertinent facts relating to the management of the Fund by the adviser.
From time to time any of the Funds may publish an indication of its past
performance as measured by independent sources such as Lipper Analytical
Services, Incorporated, Weisenberger Investment Companies Service, Donoghue's
Money Fund Report, Spot Market Prices, Barron's, BusinessWeek, Changing Times,
Financial World, Forbes, Money, Morningstar, Personal Investor, Sylvia Porter's
Personal Finance, and The Wall Street Journal.
In addition, performance information for a Fund may be compared, in
advertisements, sales literature, and reports to shareholders, to: (i)
unmanaged indexes, such as the Standard & Poor's 500 Composite Stock Price
Index, the Salomon Brothers Broad Investment Grade Bond Index, the Morgan
Stanley Capital International indexes; the Dow Jones Industrial Average,
Donoghue Money Market Institutional Averages, the Merrill Lynch 1 to 3 Year
Treasury Index, the Salomon Brothers World Government Benchmark Bond Index, the
Salomon Brothers non-U.S. Dollar World Government Bond Index, the Lehman
Brothers Municipal Bond Index and the Lehman Brothers Government Corporate
Index; (ii) other groups of mutual funds tracked by Morningstar Inc. or Lipper
Analytical Services, widely used independent research firms which rank mutual
funds by overall performance, investment objectives and assets, or tracked by
other services, companies, publications or persons who rank mutual funds on
overall performance or other criteria; and (iii) the Consumer Price Index
(measure for inflation) and other measures of the performance of the economy to
assess the real rate of return from an investment in the Funds. Unmanaged
indexes may assume the reinvestment of dividends but generally do not reflect
deductions for administrative and management costs and expenses.
From time to time, advertisements for the Funds may include general
information about the services and products offered by the Funds, 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 statements about this information by the
entities' officers, directors and employees.
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<PAGE>
TAX STATUS
TAXATION OF THE FUNDS
Each 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), each 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 a
Fund qualifies as a regulated investment company, it generally will not be
subject to any excise or income taxes in Massachusetts. A 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 a Fund's earnings will be
subject to tax in their hands.
Each Fund, other than the Equity Index Fund (which offers only one class of
shares) has received a ruling from the IRS to the effect that differing
distributions between the classes of its shares will not result in a Fund's
dividends and other distributions being regarded as "preferential dividends"
under the Code. Generally, a preferential dividend is a dividend which a Fund
cannot treat as having been distributed for purposes of (i) determining whether
the Fund qualifies as a regulated investment company for federal tax purposes,
and (ii) determining the Fund's tax liability.
CHARACTER OF DISTRIBUTIONS TO SHAREHOLDERS -- GENERAL
Assuming a 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
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<PAGE>
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 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 a 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 a Fund within 30
days before or after a purchase of shares of the same 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 a Fund for reinvestment, requiring federal income taxes
to be paid thereon by that 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 the relevant Fund shares by the difference between their pro-rata share
of such gains and their tax credit.
Except for distributions by the Money Market Fund, distributions by a Fund
result in a reduction in the net asset value of a 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,
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<PAGE>
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.
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 a 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.
CHARACTER OF DISTRIBUTIONS TO SHAREHOLDERS -- THE TAX-FREE FUNDS
Subchapter M permits the character of tax-exempt interest distributed by a
regulated investment company to "flow through" as tax-exempt interest to its
shareholders, provided that 50% or more of the value of its assets at the end of
each quarter of its taxable year is invested in state, municipal or other
obligations the interest on which is exempt under Section 103(a) of the Code.
Each of the California Tax Free Fund, New York Tax Free Fund and Tax Free Bond
Fund (collectively, the "Tax Free Funds") intend to satisfy the 50% requirement
in order to permit their distributions of tax-exempt interest to be treated as
such for regular Federal income tax purposes in the hands of their shareholders.
Exempt-interest dividends must be taken into account by individual shareholders
in determining whether their total incomes are large enough to result in
taxation of up to 85% of their social security benefits and certain railroad
retirement benefits. None of the income distributions of such Fund will be
eligible for the deduction for dividends received by corporations.
Although a significant portion of the distributions by the Tax Free Funds
generally is expected to be exempt from federal taxes, each of these Funds may
under certain circumstances invest in obligations the interest from which is
fully taxable, or, although exempt from the regular federal income tax, is
subject to the alternative minimum tax. Similarly, gains from the sale or
exchange of obligations the interest on which is exempt from regular Federal
income tax will constitute taxable income to those Funds. In addition, a sale of
shares in such Fund (including a redemption of such shares and an exchange of
shares
B-135
<PAGE>
between two mutual funds) will be a taxable event, and may result in a
taxable gain or loss to a shareholder. Accordingly, it is possible that a
significant portion of the distributions of these Funds will constitute taxable
rather than tax-exempt income in the hands of a shareholder. Furthermore,
investors should be aware that tax laws may change, and issuers may fail to
follow applicable laws, causing a tax-exempt item to become taxable.
Exempt-interest dividends from the Tax Free Funds; ordinary dividends from
the Tax Free Funds, if any; capital gains distributions from the Tax Free Funds
and any capital gains or losses realized from the sale or exchange of shares may
be subject to state and local taxes. However, the portion of a distribution of
the Funds' tax-exempt income that is attributable to state and municipal
securities issued within the shareholder's own state may not be subject, at
least in some states, to state or local taxes.
Distributions derived from interest on certain private activity bonds which
is exempt from regular federal income tax are treated as a tax preference item
and may subject individual or corporate shareholders to liability (or increased
liability) for the alternative minimum tax. In addition, because a portion of
the difference between adjusted current earnings, as defined in the Code, and
alternative minimum taxable income is an addition to the alternative minimum tax
base, all distributions derived from interest which is exempt from regular
federal income tax are included in adjusted current earnings and may subject
corporate shareholders to or increase their liability for the alternative
minimum tax. In addition, a deductible "environmental tax" of 0.12% is imposed
on a corporation's modified alternative minimum taxable income in excess of $2
million. The environmental tax will be imposed even if the corporation is not
required to pay an alternative minimum tax because the corporation's regular
income tax liability exceeds its minimum tax liability. To the extent that
exempt-interest dividends paid by a Fund are included in alternative minimum
taxable income, corporate shareholders may be subject to the environmental tax.
DISCOUNT
Certain of the bonds purchased by the Funds, 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 a Fund until the maturity of the bond, is
treated for federal income tax
B-136
<PAGE>
purposes as income earned by a 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 a 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 a 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 a 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 a 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.
USERS OF BOND-FINANCED FACILITIES
Section 147(a) of the Code prohibits exemption from taxation of interest on
certain governmental obligations to persons who are "substantial users" (or
persons related thereto) of facilities financed thereby. No investigation as to
the users of the facilities financed by bonds in the portfolios of the Tax Free
Funds has been made by these Funds. Persons who may be "substantial users" (or
"related persons" of substantial users) of facilities financed by private
activity bonds should consult their tax advisers before purchasing shares of a
Fund since the acquisition of shares of the Tax Free Bond Fund, California Tax
Free Fund or New York Tax Free Fund may result in adverse tax consequences to
them.
EXCISE TAX
The Funds are 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 shareholders during a calendar year of
distributions representing at least 98% of each 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 Funds have adjusted their distribution
B-137
<PAGE>
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 a 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 a Fund may result in "straddles" for federal income tax
purposes. The straddle rules may affect the character of gains (or losses)
realized by a Fund. In addition, losses realized by a Fund on positions that
are part of a straddle may be deferred under the straddle rules rather than
being taken into account in 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 a Fund are not entirely clear. The hedging transactions in
which a Fund engages may increase the amount of short-term capital gain realized
by a Fund which is taxed as ordinary income when distributed to shareholders.
A Fund may make one or more of the elections available under the Code which
are applicable to straddles. If a Fund makes any of the elections, the amount,
character and timing of the recognition of gains or losses from the affected
straddle positions will be determined under rules that vary according to the
election(s) made. The rules applicable under certain of the elections operate
to accelerate the recognition of gains or losses from the affected straddle
positions.
Because application of the straddle rules may affect the character of gains
or losses, defer losses and/or accelerate the recognition of gains or losses
from the affected straddle positions, the amount which must be distributed to
shareholders and which will be taxed to shareholders as ordinary income or long-
term capital gain, may be increased or decreased
B-138
<PAGE>
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 a Fund's
status as a regulated investment company may limit the extent to which a Fund
will be able to engage in transactions in options, futures contracts or forward
contracts.
Regarding the Tax Free Bond Fund, the California Tax Free Fund and New York
Tax Free Fund, gains from certain transactions, including, for example,
transactions in options, futures, and other instruments, and from obligations
the interest on which is not exempt from Federal income tax, will be taxable
income to those Funds. The requirements relating to those Funds' qualification
as a regulated investment company and those Funds' investment policies may limit
the extent to which each Fund will be able to engage in transactions in options
and futures contracts.
Regarding the International Bond Fund and International Equity Fund, rules
governing the tax aspects of swap agreements are in a developing stage and are
not entirely clear in certain respects. Accordingly, while the Funds intend 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 a Fund as a
regulated investment company might be affected. The Funds intend to monitor
developments in this area. Certain requirements that must be met under the Code
in order for a Fund to qualify as a regulated investment company may limit the
extent to which a Fund will be able to engage in swap agreements.
PASSIVE FOREIGN INVESTMENT COMPANIES
Certain of the Funds 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 a Fund receives a so-called "excess
distribution" with respect to PFIC stock, the Fund itself may be subject to a
tax on a portion of the excess distribution, whether or not the corresponding
income is distributed by the Fund to Shareholders. In general, under the PFIC
rules, an excess distribution is treated as having been realized ratably over
the period during which 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
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<PAGE>
to the tax, as if the tax had been payable in such prior taxable years. Certain
distributions from a PFIC as well as gain from the sale of PFIC shares are
treated as excess distributions. Excess distributions are characterized as
ordinary income even though, absent application of the PFIC rules, certain
excess distributions might have been classified as capital gain.
A Fund may be eligible to elect alternative tax treatment with respect to
PFIC shares. Under an election that currently is available in some
circumstances, a Fund generally would be required to include in its gross income
its share of the earnings of a PFIC on a current basis, regardless of whether
distributions are received from the PFIC in a given year. If this election were
made, the special rules, discussed above, relating to the taxation of excess
distributions, would not apply. In addition, another election may be available
that would involve marking-to-market a 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 a 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 a 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 a Fund accrues income or other receivables or
accrues expenses or other liabilities denominated in a foreign currency and the
time a Fund actually collects such receivables or pays such liabilities
generally are treated as ordinary income or ordinary loss. Similarly, on 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
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<PAGE>
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 a Fund's net investment income to be distributed to its
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, a 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 a 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 a 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 a 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 a
Fund with respect to which capital gain dividends have been paid will, to the
extent of such capital gain dividends, be treated as long-term capital loss if
such shares have been held by the shareholder for six months or less at the time
of their disposition. Furthermore, a loss realized by a shareholder on the
redemption, sale or exchange of shares of a Fund with respect
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<PAGE>
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 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 a 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 either 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 a 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
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<PAGE>
adviser to determine the tax status of a Fund distribution in his or her own
state and locality.
Under the federal income tax law, a 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 (other than shares of the Money Market Fund), 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 a 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 a 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 a Fund from sources outside the
United States may be subject to foreign taxes which were withheld at the
source. Since the percentage of each Fund's total assets (with the exception of
the International Bond Fund and International Equity Fund) which will be
invested in foreign stocks and securities will not be more than 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 a Fund will be subject depends on the specific countries in which each
Fund's assets will be invested and the extent of the assets invested in each
such country and, therefore, cannot be determined in advance.
The International Bond Fund and the International Equity 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
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paid by the Fund to foreign countries (which taxes relate primarily to
investment income). The U.S. shareholders of a 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 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 a Fund and
any special tax considerations associated with foreign investments of a Fund
should be examined by shareholders with regard to their own tax situations.
Shareholders of the Tax Free Bond Fund, the California Tax Free Fund and
New York Tax Free Fund may be subject to state and local taxes on distributions
from the Fund, including distributions which are exempt from federal income
taxes. Some states exempt from the state personal income tax distributions from
a Fund derived from interest on obligations issued by the U.S. government or by
such state or its municipalities or political subdivisions. Each investor
should consult his or her own tax adviser to determine the tax status of
distributions from the Funds in his or her own state and locality.
Opinions relating to the validity of municipal securities and the exemption
of interest thereon from federal income tax are rendered by bond counsel to the
issuers. The Tax Free Bond Fund, California Tax Free Fund and New York Tax Free
Fund, the Adviser and its affiliates, and the Funds' counsel make no review of
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proceedings relating to the issuance of state or municipal securities or the
bases of such opinions.
Due to the lack of adequate supply of certain types of tax-exempt
obligations, and other reasons, various instruments are being marketed which are
not "pure" state and local obligations, but which are thought to generate
interest excludable from taxable income under Code section 103. While a Fund
may invest in such instruments, it does not guarantee the tax-exempt status of
the income earned thereon or from any other investment. Thus, for example, were
a Fund to invest in an instrument thought to give rise to tax-exempt interest
but such interest ultimately were determined to be taxable, the Fund might have
invested more than 20% of its assets in taxable instruments. In addition, it is
possible in such circumstances that a Fund will not have met the 50% investment
threshold, described above, necessary for it to pay exempt-interest dividends.
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, each Fund will issue to
each shareholder a statement of the federal income tax status of all
distributions, including, in the case of the Tax Free Bond Fund, the California
Tax Free Fund and New York Tax Free Fund, a statement of the percentage of the
prior calendar year's distributions which the Fund has designated as tax-exempt,
the percentage of such tax-exempt distributions treated as a tax-preference item
for purposes of the alternative minimum tax, and in, the case of the Tax Free
Bond Fund, the source on a state-by-state basis of all distributions.
ADDITIONAL INFORMATION REGARDING THE EQUITY INDEX FUND
Distributions of investment company taxable income generally are taxable to
shareholders as ordinary income. As a result of the Guarantee, distributions
from the Fund may not be eligible for the dividends-received deduction available
to corporations. Distributions of net capital gains, if any, designated by the
Fund as capital gain dividends are taxable to shareholders as long-term capital
gain, regardless of the length of time the Fund's shares have been held by a
shareholder, and are not eligible for the dividends-received deduction. All
distributions are taxable to the shareholder whether reinvested in additional
shares or received in cash. Shareholders will be notified annually as to the
Federal tax status of distributions.
In addition, although not considered likely, it is possible that
shareholders could be regarded for tax purposes as receiving
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a constructive distribution(s) (which could be taxable) from the Fund to the
extent that the Guarantee is deemed to have value.
It is anticipated that capital gain or loss from the disposition of shares
will be eligible for treatment as long-term or short-term capital gain or loss
depending upon the shareholder's actual holding period for the shares.
Investors should be aware that, under recent IRS regulations, as a result of the
Guarantee, a shareholder's holding period for Fund shares might be deemed not to
commence until the Guarantee is paid or expires. In that event, the capital
gain or loss on the disposition of Fund shares would be short-term capital gain
or loss until such time as the shares have been held continuously by the
shareholder for the requisite long-term holding period (currently more than one
year for Federal income tax purposes) after the expiration or payment of the
Guarantee. The holding period for shares received from reinvestment of
dividends and distributions will commence no earlier than the reinvestment date
but could be delayed as described previously in this paragraph as a result of
the Guarantee. If reverse stock splits are done, a share may have a split
holding period reflecting the fact that part of the share represents a
reinvested dividend or distribution.
ADDITIONAL INFORMATION REGARDING THE CALIFORNIA TAX FREE FUND AND NEW YORK TAX
FREE FUND
Under California law, a mutual fund which qualifies as a regulated
investment company must have at least 50% of its total assets in obligations
exempt from California personal income tax at the end of each quarter of its
taxable year in order to be eligible to pay dividends which will be exempt from
California personal income tax. Generally, shareholders who are California
residents will not incur California personal income tax on the amount of exempt-
interest dividends received by them from the California Tax Free Fund and
derived from California state and local issues, whether taken in cash or
reinvested in additional shares. However, other taxes, such as the franchise
tax may apply. Shareholders will normally be subject to California personal
income tax on dividends paid from interest income derived from taxable
securities and from securities issued by states other than California and its
subsidiaries and on distributions of capital gains.
Deductions for interest on indebtedness incurred or continued by a
shareholder to purchase or carry shares of the Fund may be disallowed in whole
or in part for California personal income tax purposes.
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<PAGE>
Exempt-interest dividends paid by the New York Tax Free Fund from interest
on qualifying New York bonds generally are exempt from New York State and New
York City personal income taxes, but not corporate franchise taxes. Dividends
and distributions of the Fund derived from taxable income and capital gains are
not exempt from New York State and New York City taxes. Deductions for interest
on indebtedness incurred or continued by a shareholder to purchase or carry
shares of the Fund may be disallowed in whole or in part for New York State or
New York City personal income tax purposes.
Dividends from the California Tax Free Fund or New York Tax Free Fund
(including exempt-interest dividends), capital gains distributions from a Fund,
and any capital gains or losses realized from the sale or exchange of shares may
be subject to state and local taxes (as well as Federal taxes). However, the
portion of a distribution of a Fund's tax-exempt income that is attributable to
state and municipal securities issued within the shareholder's own state
generally will not be subject to state or local taxes. Individuals are often
exempt from state and local personal income taxes on distributions of tax-exempt
interest income derived from obligations of issuers located in the state in
which they reside when these distributions are received directly from these
issuers, but are usually subject to such taxes on income derived from
obligations of issuers located in other jurisdictions. Shareholders are urged to
consult their tax advisers with specific reference to their own federal, state
and local tax situations.
ANNUAL STATEMENTS
Each shareholder of the California Tax Free Fund will be sent after the
close of the calendar year an annual statement as to the federal income tax and
California state personal income tax status of his or her dividends and
distributions from the Fund for the prior calendar year. Any dividends
attributable to interest on municipal obligations that are not California
municipal securities will be taxable as ordinary dividends for California state
personal income tax purposes even if such dividends are excluded from gross
income for federal income tax purposes. These statements will also designate
the amount of exempt-interest dividends that is a specific preference item for
purposes of the federal individual and corporate alternative minimum taxes.
Each shareholder also will receive, if appropriate, various written notices
after the close of the Fund's prior taxable year as to the federal income tax
status of his or her dividends and distributions which were received from the
Fund during the Fund's prior taxable year. Shareholders should consult their
tax advisers as to any other state and local taxes that may apply to these
dividends and distributions. The
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<PAGE>
dollar amount of dividends excluded or exempt from federal income taxation or
California state personal income taxation, if any, will vary for each
shareholder depending upon the size and duration of each shareholder's
investment in the Fund.
Each shareholder of the New York Tax Free Fund will be sent after the close
of the calendar year an annual statement as to the federal income tax and New
York State and New York City personal income tax status of his or her dividends
and distributions from the Fund for the prior calendar year. These statements
will also designate the amount of exempt-interest dividends that is a specified
preference item for purposes of the federal individual and corporate alternative
minimum taxes. Each shareholder also will receive, if appropriate, various
written notices after the close of the Fund's prior taxable year as to the
federal income tax status of his or her dividends and distributions which were
received from the Fund during the Fund's prior taxable year. Shareholders
should consult their tax advisers as to any other state and local taxes that may
apply to these dividends and distributions. The dollar amounts of dividends
excluded or exempt from federal income taxation or New York State and City
personal income taxation and the dollar amount subject to federal income
taxation or New York State and City personal income taxation, if any, will vary
for each shareholder depending upon the size and duration of each shareholder's
investment in the Fund.
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 a 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.
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 Funds are separate series of an open-end investment company, The
MainStay Funds ("Trust"), established under the laws
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<PAGE>
of The Commonwealth of Massachusetts by a Declaration of Trust dated January 9,
1986, as amended. The Tax Free Bond Fund was originally formed as the MacKay-
Shields MainStay Tax Free Bond Fund pursuant to a Declaration of Trust on
January 9, 1986 and became a series of the Trust pursuant to a reorganization
which occurred on May 29, 1987. The Total Return Fund commenced operations on
December 29, 1987. The Equity Index Fund commenced operations on December 20,
1990. The California Tax Free Fund and New York Tax Free Fund commenced
operations on October 1, 1991. The International Bond Fund and International
Equity Fund commenced operations on September 13, 1994.
VOTING RIGHTS
Shares entitle their holders to one vote per share; however, separate votes
will be taken by each Fund or class on matters affecting an individual Fund or a
particular class of shares issued by a 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 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
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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. The
Funds' Annual Reports, which are incorporated by reference in this SAI (included
in the case of the Equity Index Fund) have been so incorporated or included in
reliance on the reports of Price Waterhouse, independent public accountants,
given on the authority of said firm as experts in auditing and accounting.
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.
SHARE OWNERSHIP OF THE FUNDS
The following table sets forth information concerning beneficial and record
ownership, as of April 1, 1997, of the Funds' shares by each person who
beneficially or of record owns more than five percent of the voting securities
of any Fund:
<TABLE>
<CAPTION>
Shares Percentage of
Name and Address Beneficially Outstanding
Name of Fund of Shareholder Owned (1) Shares Owned
- ----------------- --------------------------- ------------------- ----------------
<S> <C> <C> <C>
California NYLIFE Distributors Inc.(2) (Class A) % (Class A)
Tax Free Fund 260 Cherry Hill Road (Class B) % (Class B)
Parsippany, NJ 07054
New York Tax NYLIFE Distributors Inc.(2) (Class A) % (Class A)
Free Fund 260 Cherry Hill Road (Class B) % (Class B)
Parsippany, NJ 07054
International NYLIFE Distributors Inc.(2) (Class A) % (Class A)
Bond Fund 260 Cherry Hill Road (Class B) % (Class B)
Parsippany, NJ 07054
International NYLIFE Distributors Inc.(2) (Class A) % (Class A)
Equity Fund 260 Cherry Hill Road (Class B) % (Class B)
Parsippany, NJ 07054
</TABLE>
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<PAGE>
- ----------------------
(1) This information, not being within the knowledge of the Trust, has been
furnished by each of the above persons. Beneficial ownership is as defined
under Section 13(d) of the Securities Exchange Act of 1934. Fractional
Shares have been omitted.
(2) Mr. George Daoust, in connection with his position with NYLIFE
Distributors, has the power to vote all of the shares shown in the above
table owned by NYLIFE Distributors. Mr. Daoust disclaims beneficial
ownership of such shares.
NYLIFE Distributors Inc. is a corporation organized under the laws of
Delaware. NYLIFE Distributors Inc. is a wholly owned subsidiary of NYLIFE Inc.,
and an indirect wholly owned subsidiary of New York Life Insurance Company.
CODE OF ETHICS
The 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
The financial statements of the Capital Appreciation Fund, California Tax
Free Fund, New York Tax Free Fund, Value Fund, Convertible-Equity Income Fund,
Total Return Fund, High Yield Corporate Bond Fund, Government Fund (formerly
the Government Plus Fund), Tax Free Bond Fund (formerly the MacKay-Shields
MainStay Tax Free Bond Fund), International Bond Fund, International Equity Fund
and the Money Market Fund, including the Portfolio of Investments as of December
31, 1996, the Statement of Assets and Liabilities as of December 31, 1996, the
Statement of Operations for the year ended December 31, 1996, the Statement of
Changes in Net Assets for the years ended December 31, 1996 and 1995, and the
period from September 1, 1994 (September 13, in the case of the International
Bond and Equity Funds) through December 31, 1994, the Notes to the Financial
Statements and the Reports of Independent Accountants, all of which are included
in the 1996 Annual
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<PAGE>
Reports to the Shareholders are hereby incorporated by reference into this
Statement of Additional Information.
Audited financial statements for the Equity Index Fund, including the
Portfolio of Investments as of December 31, 1996, the Statement of Assets and
Liabilities as of December 31, 1996, the Statement of Operations for the year
ended December 31, 1996, the Statement of Changes in Net Assets for year ended
December 31, 1996, the year ended December 31, 1995, and the period from
September 1, 1994 through December 31, 1995, the Notes to the Financial
Statements and the Report of Independent Accountants, all of which are included
in the MainStay Equity Index Fund 1995 Annual Report to the Shareholders, and
audited financial statement for NYLIFE Inc. as of December 31, 1996, are
included in this Statement of Additional Information.
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<PAGE>
THE MAINSTAY FUNDS
PART C. OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
a. Financial Statements:
Included in Part A of this Registration Statement:
- To be filed by amendment
Incorporated by reference in Part B of this Registration Statement:
- To be filed by amendment
Included in Part B of this Registration Statement:
- To be filed by amendment
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*
- --------------------
* Previously filed as part of this Registration Statement and
incorporated herein by reference.
<PAGE>
(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*
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*
- --------------------
* Previously filed as part of this Registration Statement and
incorporated herein by reference.
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<PAGE>
(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*
(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*
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) Transfer Agency and Service Agreement --
Previously filed as Exhibit 9(a)(1) to Pre-
Effective Amendment No. 1*
(2) Fee schedule for Exhibit 9(a)(1) -- Previously
filed as Exhibit 9(a)(2) to Pre-Effective
Amendment No. 2*
(3) Indemnification Agreement -- Previously filed as
Exhibit 9(a)(3) to Post-Effective Amendment No. 1*
- --------------------
* Previously filed as part of this Registration Statement and
incorporated herein by reference.
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<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*
10. Opinion and consent of counsel**
11. Consent of independent accountants***
12. Inapplicable
13. Investment representation letter relating to
initial capital -- Previously filed as Exhibit 13
to Pre-Effective Amendment No. 1*
- --------------------
* 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.
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<PAGE>
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*
(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
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<PAGE>
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*
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
Jurisdiction of Percent of Voting
Name+ Organization Securities Owned
Eagle Strategies Corporation Arizona 100%
Greystone Realty Corporation which Delaware 100%
owns 100% of the shares of:
Greystone Realty Management, Inc.
NYLIFE Administration Corp. Texas 100%
(doing business as NYLACOR)
MacKay-Shields Financial Corporation Delaware 100%
MSC Holding, Inc. (formerly Magnus Software
Corporation, Inc.) Georgia 85.43%
MainStay Institutional Funds Inc. Maryland ***
Monitor Capital Advisors, Inc. Delaware 100%
NYLIFE SFD Holding, Inc.
which owns 83.33% of NYLIFE
Structured Asset Management Company Ltd. Delaware 100%
New York Life Capital Corporation New York 100%
New York Life Fund, Inc. New York *
New York Life Insurance and Annuity
Corporation Delaware 100%
New York Life International Investment Inc. Delaware
which owns 100% of the shares of:
Monetary Research Ltd. Bermuda
and 100% of the shares of:
NYL Management Limited which owns United Kingdom
33.345% of the shares of:
Japan Gamma Asset Management Limited Japan 100%
MainStay VP Series Fund, Inc. Maryland *
New York Life Settlement Corporation Delaware 100%
New York Life Worldwide Holding, Inc., Delaware 100%
which owns 100% of the shares of:
New York Life Worldwide Capital, Inc.
C-7
<PAGE>
Jurisdiction of Percent of Voting
Name+ Organization Securities Owned
New York Life Worldwide Development,
Inc. Bermuda
New York Life Worldwide (Bermuda) Ltd.
New York Life Insurance Worldwide Ltd.
and owns 99.97% of the shares of United Kingdom
New York Life (U.K.) Ltd., which owns
100% of the shares of:
Windsor Construction Company Limited
and owns 51% of the shares of: South Korea
KOHAP New York Life Insurance Ltd.
and owns 50.2% of the shares of: Indonesia
P.T. Asuransi Jiwa Sewu-New York Life
and owns 49% of the shares of: Mexico
GEO New York Life, S.A. and owns
31.25% of the shares of: United Kingdom
Life Assurance Holding Corporation
Limited, which owns 100% of the shares
of:
Windsor Life Assurance Company
Limited
Gresham Life Assurance Society
Limited
NYLCO, Inc. New York 100%
NYLIFE Depositary Corporation which owns Delaware
16.67% of NYLIFE Structured Asset Texas 100%
Management Company Ltd.
New York Life Benefit Services, Inc. Massachusetts 100%
which owns 100% of ADQ Insurance Agency Inc.
NYL Trust Company Massachusetts 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%
NYLIFE Healthcare Management Inc., Delaware
which owns 46.3% of total combined
stock and 89.6% of the voting rights of:
C-8
<PAGE>
Jurisdiction of Percent of Voting
Name+ Organization Securities Owned
Express Scripts, Inc., which Arizona
owns 100% of the shares of: Delaware
Great Plains Reinsurance Company Canada
Practice Patterns Science, Inc.
ESI Canada Holdings, Inc., which owns
100% of the shares of: Texas
ESI Canada, Inc.
IVTx of Houston, Inc.
IVTx of Dallas, Inc. Delaware
PhyNet, Inc.
NYLCare Health Plans, Inc.
(formerly Sanus Corp. Health Systems),
which owns 100% of the shares of:
New York Life and Health Insurance Texas
Company
Avanti Health Systems, Inc., Maryland
which owns 100% of the shares of: Illinois
Avanti of the District, Inc. New York
Avanti of Illinois, Inc. New Jersey
Avanti of New York, Inc.
Avanti of New Jersey, Inc. Maryland
and owns 80% of the shares of:
NYLCare Health Plans of the Mid-
Atlantic, Inc., which owns 100%
of the shares of:
Physicians Health Services Delaware
Foundation, Inc.
Lonestar Holding Co., which owns Texas
100% of the shares of:
Lone Star Health Plan, Inc., New York
which owns 100% of the shares
of:
NYLCare Health Plans of the
Gulf Coast, Inc.
Prime Provider Corp., which owns 100% Texas
of the shares of:
Prime Provider Corp. of Texas Connecticut
NYLCare of Connecticut, Inc. New Jersey
Sanus Dental Plan of New Jersey, Inc. Texas
NYLCare Dental Plans of the
Southwest, Inc. New York
NYLCare Health Plans of New York,
Inc. Connecticut
NYLCare Health Plans of Connecticut,
Inc. Illinois
NYLCare Health Plans of the Midwest,
Inc.
C-9
<PAGE>
Jurisdiction of Percent of Voting
Name+ Organization Securities Owned
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
Southwest
Sanus Preferred Providers West, Inc. California
Sanus Preferred Services, Inc. Maryland
Sanus Preferred Services of Illinois, Inc. Illinois
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 Delaware
Sanus - Northeast, Inc.
NYLCare Health Plans of Maine, Inc. Maine
NYLCare NC Holdings, Inc. North Carolina
WellPath Community Health Plan Delaware
Holdings, L.L.C.
which owns 100% of WPCHP Holdings
and 99% of:
WellPath Preferred Services, L.L.C.
and
WellPath Select Holdings, L.L.C.
WellPath of Carolina, Inc.
WellPath Select, Inc.
Sanus of New York and New Jersey, Inc. New York
NYLCare Health Plans of Pennsylvania
Doc Servco, Inc.
The ETHIX Corporation, which owns Delaware
100% of the shares of:
ETHIX Great Lakes, Inc. Michigan
ETHIX Mid-Atlantic, Inc., which Pennsylvania
owns 100% of the shares of:
PriMed, Inc. New Jersey
ETHIX Midlands, Inc. Delaware
ETHIX Mid-Rivers, Inc. Missouri
ETHIX Northwest Public Services, Washington
Inc.
ETHIX Northwest, Inc.
NYLCare Health Plans of the
Northwest, Inc.
ETHIX Pacific, Inc. Oregon
ETHIX Risk Management, Inc.
ETHIX Southeast, Inc. North Carolina
C-10
<PAGE>
Jurisdiction of Percent of Voting
Name+ Organization Securities Owned
ETHIX Southwest, Inc. Texas
Benefit Panel Services which owns 6.67%
of the shares VivaHealth, Incorporated
One Liberty Plaza Holdings, Inc. New York
NYLIFE Inc. New York 100%
NYLIFE Insurance Company of Arizona Arizona 100%
NYLIFE Realty Inc. which owns 100% of the Delaware
shares of: CNP Realty Investments, Inc. Delaware 100%
NYLIFE Refinery, Inc. Delaware 100%
NYLIFE Resources Inc. Delaware 100%
NYLIFE Securities Inc. New York 100%
NYLINK Insurance Agency Incorporated Delaware 100%
NYLTEMPS Inc. Delaware 100%
- ---------------------
+ 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 DECEMBER 31, 1996)
(2)
(1) NUMBER OF
TITLE OF CLASS RECORD HOLDERS
Shares of Common Stock: Class A Class B
Shares of beneficial interest,
Capital Appreciation Fund 16,321 150,085
Shares of beneficial interest,
Value Fund 7,540 102,336
Shares of beneficial interest,
Convertible-Equity Income Fund 5,615 68,511
Shares of beneficial interest,
High Yield Corporate Bond Fund 6,731 122,496
Shares of beneficial interest,
Government Fund 2,061 57,415
Shares of beneficial interest,
Tax Free Bond Fund 426 18,638
Shares of beneficial interest,
Money Market Fund 5,140 41,922
Shares of beneficial interest,
Total Return Fund 5,954 105,314
Shares of beneficial interest,
Equity Index Fund 14,782 --
Shares of beneficial interest,
California Tax Free Fund 468 189
Shares of beneficial interest,
New York Tax Free Fund 498 152
Shares of beneficial interest,
International Equity Fund 1,338 10,065
Shares of beneficial interest,
International Bond Fund 271 2,522
Shares of beneficial interest,
Strategic Income 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, including related expenses, made against them
while acting in
C-12
<PAGE>
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 faith in the reasonable
belief that his action was in the best interest of the Trust or a Series
thereof;
C-13
<PAGE>
(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 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
C-14
<PAGE>
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 MacKay-Shields Financial Corporation and of 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
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.
ITEM 29. PRINCIPAL UNDERWRITERS
(a) None.
(b)
(3)
(1) (2) Positions and
Name and Principal Position and Office with Offices with
Business Address NYLIFE Distributors Inc. Registrant
Boyce, Jefferson C. Director and President and Chief Senior Vice
51 Madison Avenue Executive Officer President
New York, NY 10010
Adasse, Louis H. Corporate Vice President None
51 Madison Avenue,
New York, NY 10010
Boyle, Patrick G. Director None
260 Cherry Hill Road
Parsippany, NJ 07054
C-15
<PAGE>
(3)
(1) (2) Positions and
Name and Principal Position and Office with Offices with
Business Address NYLIFE Distributors Inc. Registrant
Kane, Alice T. Director Chairperson
51 Madison Avenue
New York, NY 10010
Wecker, Richard A. Director None
51 Madison Avenue
New York, NY 10010
Polis, Anthony W. Vice President and Chief Chief
Morris Corporate Center I Financial Officer Financial
Building A Officer
300 Interpace Parkway
Parsippany, NJ 07054
Calhoun, Jay S. Vice President and Treasurer None
51 Madison Avenue
New York, NY 10010
Ubl, Walter W. Director and Senior Vice President President and
260 Cherry Hill Road Chief
Parsippany, NJ 07054 Executive
Officer
Warga, Thomas J. Senior Vice President and None
51 Madison Avenue General Auditor
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
Brady, Robert E. Vice President None
260 Cherry Hill Road
Parsippany, NJ 07054
Mistero, Frank Vice President None
260 Cherry Hill Road
Parsippany, NJ 07054
Miller, Paul C. Corporate Vice President None
260 Cherry Hill Road
Parsippany, NJ 07054
O'Byrne, John H. Vice President and Chief None
51 Madison Avenue Compliance Officer
New York, NY 10010
C-16
<PAGE>
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
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
(c) Inapplicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS.
Certain accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940 and the Rules promulgated
thereunder are maintained at the offices of the Registrant and 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 duties of the Registrant's
custodian and transfer agent 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
C-17
<PAGE>
Fund, Equity Index Fund and Strategic Income Fund are maintained by The Bank of
New York, 110 Washington Street, New York, NY 10286.
ITEM 31. MANAGEMENT SERVICES.
Inapplicable.
ITEM 32. UNDERTAKINGS.
b. The Registrant hereby undertakes to file a post-effective amendment,
including financial statements relating to the MainStay Strategic
Income Fund, which need not be certified, within four to six months
from the effective date of this Post-Effective Amendment 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-18
<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. 36 to its Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Washington
and the District of Columbia, on the 28th day of February, 1997.
THE MAINSTAY FUNDS
By: ****
-------------------------------
WALTER W. UBL, President
Pursuant to the requirements of the Securities Act of 1933, this Post-
Effective Amendment No. 36 to the Registration Statement has been signed below
by the following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signatures Title Date
- ----------------------- ---------------- -------------------
<S> <C> <C>
***** Chairperson and February 28, 1997
- -----------------------
ALICE T. KANE Trustee
**** President (Chief February 28, 1997
- -----------------------
WALTER W. UBL Executive Officer)
and Trustee
** Chief Financial February 28, 1997
- -----------------------
ANTHONY W. POLIS Officer (Principal
Financial and
Accounting Officer)
******* Trustee February 28, 1997
- -----------------------
HARRY G. HOHN
****** Trustee February 28, 1997
- -----------------------
DONALD E. NICKELSON
* Trustee February 28, 1997
- -----------------------
NANCY M. KISSINGER
*** Trustee February 28, 1997
- -----------------------
TERRY L. LIERMAN
****** Trustee February 28, 1997
- -----------------------
RICHARD S. TRUTANIC
</TABLE>
<PAGE>
*** Trustee February 28, 1997
- ---------------------
DONALD K. ROSS
******* Trustee February 28, 1997
- ---------------------
EDWARD J. HOGAN
/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 -
