<PAGE>
As filed with the Securities and Exchange Commission on December 30, 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. 43 [X]
and
REGISTRATION STATEMENT
UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 45 [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)
<TABLE>
<CAPTION>
It is proposed that this filing will become effective (check appropriate box)
<S> <C> <C> <C>
[ ] Immediately upon filing pursuant to [X] on January 1, 1998 pursuant to paragraph
paragraph (b), or (b), or
[ ] 60 days after filing pursuant to [ ] on ( ) pursuant to paragraph
paragraph (a)(1), or (a)(1), or
[ ] 75 days after filing pursuant to [ ] on ( ) pursuant to paragraph
paragraph (a)(2), or (a)(2), of Rule 485.
</TABLE>
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<PAGE>
PROSPECTUS AND STATEMENT OF
ADDITIONAL INFORMATION RELATING TO
THE MAINSTAY FUNDS
CROSS REFERENCE SHEET
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
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; Manager, Sub-Advisers 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 - Manager, Sub-Advisers 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 Manager, the Sub-Advisers 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 Manager, the Sub-Advisers and the Distributor
22 Calculation of Performance; Quotations; Tax Status
23 Financial Statements
- 3 -
<PAGE>
- --------------------------------------------------------------------------------
The MainStay Funds Prospectus January 1, 1998
- --------------------------------------------------------------------------------
================================================================================
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. It includes information you should know before investing. We hope you
will easily find and understand the information you need but if you have any
suggestions for improvement--or if you need any help--please ask your Registered
Representative.
For even more details, write to NYLIFE Distributors Inc., 300 Interpace Parkway,
Building A, Parsippany, N.J. 07054, call 1-800-MAINSTAY (1-800-624-6782), or
visit our website at http://www.mainstayfunds.com.
The Statement of Additional Information (SAI) is incorporated by reference into
this Prospectus and also has been filed with the Securities and Exchange
Commission (SEC). For a free copy of the SAI write to NYLIFE Distributors, Inc.
or call 1-800-MAINSTAY. The SEC maintains a website (http://www.sec.gov) that
contains the SAI, material incorporated by reference, and other information
regarding registrants that file electronically with the SEC.
- --------------------------------------------------------------------------------
MainStay offers 15 mutual funds, 14 of which are offered in this Prospectus.
<TABLE>
<CAPTION>
================================================================================
Growth
================================================================================
<S> <C>
Capital Appreciation Fund ................................. page 36
Equity Index Fund ......................................... page 37
International Equity Fund ................................. page 38
<CAPTION>
================================================================================
Growth & Income
================================================================================
<S> <C>
Convertible Fund .......................................... page 39
Total Return Fund ......................................... page 40
Value Fund ................................................ page 41
<CAPTION>
================================================================================
Income
================================================================================
<S> <C>
Government Fund ........................................... page 42
High Yield Corporate Bond Fund ............................ page 43
International Bond Fund ................................... page 44
Money Market Fund ......................................... page 45
Strategic Income Fund ..................................... page 46
<CAPTION>
================================================================================
Tax Free
================================================================================
<S> <C>
California Tax Free Fund .................................. page 47
New York Tax Free Fund .................................... page 48
Tax Free Bond Fund ........................................ page 49
</TABLE>
[LOGO] MainStay(R) Funds
<PAGE>
This page intentionally left blank
2
<PAGE>
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What's Inside?
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
================================================================================
Tell Me Quickly page
================================================================================
<S> <C>
The MainStay Funds ......................................................... 1
A Quick Overview...Understanding The MainStay Funds ........................ 4
<CAPTION>
===============================================================================
Tell Me the Key Facts
===============================================================================
<S> <C>
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 .................................................. 36
General Investment Considerations .......................................... 50
Decide Whether to Pay a Sales Charge Now, Later...or Maybe Never ........... 52
Consider Reducing Your Sales Charge ........................................ 53
Open an Account/Buy Shares ................................................. 54
Know How to Sell and Exchange Shares ....................................... 56
Decide How to Receive Your Earnings ........................................ 58
Understand the Tax Consequences ............................................ 59
Know With Whom You're Investing ............................................ 60
Know Your Rights as a Shareholder .......................................... 62
<CAPTION>
================================================================================
Tell Me the Details
================================================================================
<S> <C>
The Trust .................................................................. 63
Other Information About the Funds .......................................... 63
Description of Investments and Investment Practices ........................ 67
Investment Restrictions .................................................... 72
Manager, Sub-Advisers and Distributor ...................................... 74
How to Purchase Shares of the Funds ........................................ 76
Alternative Sales Arrangements ............................................. 77
Redemptions and Exchanges .................................................. 80
Tax-deferred Retirement Plans .............................................. 82
Net Asset Value ............................................................ 82
Portfolio Transactions ..................................................... 82
Tax Information ............................................................ 82
Appendix A: Description of Securities Ratings .............................. 84
Appendix B: Taxable Equivalent Yield Table ................................. 87
</TABLE>
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, or
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 associated with the Funds, see pages 36-49. For
more detailed information, see "Tell Me the Details" in this prospectus and see
the SAI.
- --------------------------------------------------------------------------------
- -----
3
- -----
================================================================================
Evaluate each Fund's track record, fees and expenses
================================================================================
Turn to pages 12-35 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 page
54.
- --------------------------------------------------------------------------------
- -----
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 55 and 82.
- --------------------------------------------------------------------------------
- -----
9
- -----
================================================================================
Ongoing fees
================================================================================
Every mutual fund pays fees for services. These may include distribution and
marketing, investment management, and shareholder services. Fees may be charged
on different schedules but the Fund accrues 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 The 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.
Class B shares will be automatically converted to Class A shares after eight
years.
For a list of the pros and cons of each choice, see page 52.
- --------------------------------------------------------------------------------
- -----
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 53 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 58.
- --------------------------------------------------------------------------------
- -----
11
- -----
================================================================================
Exchange shares/ Redeem shares
================================================================================
You generally may redeem your shares on any business day. The Fund will redeem
shares at the current NAV and send you a check. If you wish, you may exchange
shares of one Fund for shares of another. You can only exchange shares of the
same class. An exchange is considered a sale of one Fund and a purchase of
another and may have tax consequences.
If you own Class B shares you may pay a charge when you redeem your shares,
depending on the length of time you've held the shares. MainStay provides a
number of convenient ways to redeem your shares.
If you buy $1 million or more of Class A shares and redeem them within a year of
the purchase, you may pay a sales charge.
To learn more, see pages 80-82.
- --------------------------------------------------------------------------------
- -----
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 1998 income that will be paid to you in January,
1999, but will apply to your 1998 tax return.
To learn more, see page 59.
- --------------------------------------------------------------------------------
- -----
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 62.
- --------------------------------------------------------------------------------
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, adjusted to reflect the Rule 12b-1 fees approved by shareholders on
October 24, 1997. 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 77-79 for more details.
Ongoing fees. Each Fund pays ongoing operating fees to the manager, 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 74-75
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 74-75 for more details on
fees.
- --------------------------------------------------------------------------------
Why read about costs? Costs are important since they may 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. Before investing, 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 contingent deferred sales
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, conversion of Class B shares to Class A shares after 8
years 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. This, of
course, depends 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.
- --------------------------------------------------------------------------------
Take Note: The lowest sales charge won't
always be the least expensive option.
- --------------------------------------------------------------------------------
The contingent 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. However, if you hold Class B shares for eight years, they will
automatically be converted to Class A shares which pay lower 12b-1 fees.
- --------------------------------------------------------------------------------
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>
Assuming No Assuming Redemption
Shareholder Transaction Expenses Redemption at the End 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 $ 19 $ 69
Expenses after 3 years $ 88 $ 58 $ 88
Expenses after 5 years $112 $100 $120
Expenses after 10 years $181 $196 $196
Deferred Sales Charge
(as a percentage of redemption proceeds)(1) None 5.00%
Annual Fund Operating Expenses [THE FOLLOWING TABLES WERE REPRESENTED BY
(as a percentage of average net assets) PIE CHARTS IN THE PRINTED MATERIAL.]
Management Fees 0.58% 0.58% $ 55 up-front sales charge $ 20 deferred sales charge
12b-1 Fees(2) 0.25% 1.00% 30 management fees 32 management fees
Other Expenses 0.26% 0.26% 13 12b-1 fees 54 12b-1 fees
---- ---- 14 other expenses 14 other expenses
-------------------------- --------------------------
Total Fund Operating Expenses 1.09% 1.84% $112 total sales charges $120 total sales charges
==== ==== and expenses and expenses
<CAPTION>
====================================================================================================================================
EQUITY INDEX FUND CLASS A CLASS A
====================================================================================================================================
<S> <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 $ 38 N/A
Expenses after 3 years $ 55
Expenses after 5 years $ 73
Expenses after 10 years $126
Deferred Sales Charge
(as a percentage of redemption proceeds)(1) None
Annual Fund Operating Expenses [THE FOLLOWING TABLE WAS REPRESENTED BY A
(as a percentage of average net assets) PIE CHART IN THE PRINTED MATERIAL.]
Management Fees(3) 0.32% $ 30 up-front sales charge
12b-1 Fees(2) 0.25% 17 management fees
Other Expenses 0.23% 14 12b-1 fees
---- 12 other expenses
--------------------------
Total Fund Operating Expenses $ 73 total sales charges
After Reimbursement(3) 0.80% and expenses
====
<CAPTION>
====================================================================================================================================
INTERNATIONAL EQUITY FUND CLASS A CLASS B CLASS A CLASS B
====================================================================================================================================
<S> <C> <C> <C> <C> <C>
Assuming No Assuming Redemption
Shareholder Transaction Expenses Redemption at the End of Each Period
Maximum Sales Charge Imposed on Purchase of ----------- -------------------------
Shares (as a percentage of offering price) 5.50% None Expenses after 1 year $ 74 $ 28 $ 78
Expenses after 3 years $115 $ 86 $116
Expenses after 5 years $158 $146 $166
Expenses after 10 years $277 $292 $292
Deferred Sales Charge
(as a percentage of redemption proceeds)(1) None 5.00%
Annual Fund Operating Expenses [THE FOLLOWING TABLES WERE REPRESENTED BY
(as a percentage of average net assets) PIE CHARTS IN THE PRINTED MATERIAL.]
Management Fees 1.00% 1.00% $ 55 up-front sales charge $ 20 deferred sales charge
12b-1 Fees(2) 0.25% 1.00% 51 management fees 53 management fees
Other Expenses 0.77% 0.77% 13 12b-1 fees 53 12b-1 fees
---- ---- 39 other expenses 40 other expenses
-------------------------- --------------------------
Total Fund Operating Expenses 2.02% 2.77% $158 total sales charges $166 total sales charges
==== ==== and expenses and expenses
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Sales Charges and Operating Expenses Examples
- ------------------------------------------------------------------------------------------------------------------------------------
====================================================================================================================================
CONVERTIBLE FUND CLASS A CLASS B CLASS A CLASS B
====================================================================================================================================
<S> <C> <C> <C> <C> <C>
Assuming No Assuming Redemption
Shareholder Transaction Expenses Redemption at the End of Each Period
Maximum Sales Charge Imposed on Purchase of ----------- -------------------------
Shares (as a percentage of offering price) 5.50% None Expenses after 1 year $ 70 $ 23 $ 73
Expenses after 3 years $100 $ 71 $101
Expenses after 5 years $133 $122 $142
Expenses after 10 years $226 $241 $241
Deferred Sales Charge
(as a percentage of redemption proceeds)(1) None 5.00%
Annual Fund Operating Expenses [THE FOLLOWING TABLES WERE REPRESENTED BY
(as a percentage of average net assets) PIE CHARTS IN THE PRINTED MATERIAL.]
Management Fees 0.72% 0.72% $ 55 up-front sales charge $ 20 deferred sales charge
12b-1 Fees(2) 0.25% 1.00% 37 management fees 39 management fees
Other Expenses 0.55% 0.55% 13 12b-1 fees 54 12b-1 fees
---- ---- 28 other expenses 29 other expenses
-------------------------- --------------------------
Total Fund Operating Expenses 1.52% 2.27% $133 total sales charges $142 total sales charges
==== ==== and expenses and expenses
<CAPTION>
====================================================================================================================================
TOTAL RETURN FUND CLASS A CLASS B CLASS A CLASS B
====================================================================================================================================
<S> <C> <C> <C> <C> <C>
Assuming No Assuming Redemption
Shareholder Transaction Expenses Redemption at the End 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 $ 19 $ 69
Expenses after 3 years $ 88 $ 58 $ 88
Expenses after 5 years $112 $100 $120
Expenses after 10 years $182 $197 $197
Deferred Sales Charge
(as a percentage of redemption proceeds)(1) None 5.00%
Annual Fund Operating Expenses [THE FOLLOWING TABLES WERE REPRESENTED BY
(as a percentage of average net assets) PIE CHARTS IN THE PRINTED MATERIAL.]
Management Fees 0.62% 0.62% $ 55 up-front sales charge $ 20 deferred sales charge
12b-1 Fees(2) 0.25% 1.00% 32 management fees 34 management fees
Other Expenses 0.23% 0.23% 13 12b-1 fees 54 12b-1 fees
---- ---- 12 other expenses 12 other expenses
-------------------------- --------------------------
Total Fund Operating Expenses 1.10% 1.85% $112 total sales charges $120 total sales charges
==== ==== and expenses and expenses
<CAPTION>
====================================================================================================================================
VALUE FUND CLASS A CLASS B CLASS A CLASS B
====================================================================================================================================
<S> <C> <C> <C> <C> <C>
Assuming No Assuming Redemption
Shareholder Transaction Expenses Redemption at the End of Each Period
Maximum Sales Charge Imposed on Purchase of ----------- -------------------------
Shares (as a percentage of offering price) 5.50% None Expenses after 1 year $ 65 $ 19 $ 69
Expenses after 3 years $ 87 $ 58 $ 88
Expenses after 5 years $111 $ 99 $119
Expenses after 10 years $179 $195 $195
Deferred Sales Charge
(as a percentage of redemption proceeds)(1) None 5.00%
Annual Fund Operating Expenses [THE FOLLOWING TABLES WERE REPRESENTED BY
(as a percentage of average net assets) PIE CHARTS IN THE PRINTED MATERIAL.]
Management Fees 0.60% 0.60% $ 55 up-front sales charge $ 20 deferred sales charge
12b-1 Fees(2) 0.25% 1.00% 31 management fees 33 management fees
Other Expenses 0.23% 0.23% 13 12b-1 fees 54 12b-1 fees
---- ---- 12 other expenses 12 other expenses
-------------------------- --------------------------
Total Fund Operating Expenses 1.08% 1.83% $111 total sales charges $119 total sales charges
==== ==== 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>
Assuming No Assuming Redemption
Shareholder Transaction Expenses Redemption at the End 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 $ 18 $ 68
Expenses after 3 years $ 77 $ 56 $ 86
Expenses after 5 years $100 $ 97 $117
Expenses after 10 years $166 $191 $191
Deferred Sales Charge
(as a percentage of redemption proceeds)(1) None 5.00%
Annual Fund Operating Expenses [THE FOLLOWING TABLES WERE REPRESENTED BY
(as a percentage of average net assets) PIE CHARTS IN THE PRINTED MATERIAL.]
Management Fees 0.60% 0.60% $ 45 up-front sales charge $ 20 deferred sales charge
12b-1 Fees(2) 0.25% 1.00% 32 management fees 33 management fees
Other Expenses 0.19% 0.19% 13 12b-1 fees 54 12b-1 fees
---- ---- 10 other expenses 10 other expenses
-------------------------- --------------------------
Total Fund Operating Expenses 1.04% 1.79% $100 total sales charges $117 total sales charges
==== ==== and expenses and expenses
<CAPTION>
====================================================================================================================================
HIGH YIELD CORPORATE BOND FUND CLASS A CLASS B CLASS A CLASS B
====================================================================================================================================
<S> <C> <C> <C> <C> <C>
Assuming No Assuming Redemption
Shareholder Transaction Expenses Redemption at the End 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 $ 18 $ 68
Expenses after 3 years $ 75 $ 54 $ 84
Expenses after 5 years $ 97 $ 94 $114
Expenses after 10 years $160 $184 $184
Deferred Sales Charge
(as a percentage of redemption proceeds)(1) None 5.00%
Annual Fund Operating Expenses [THE FOLLOWING TABLES WERE REPRESENTED BY
(as a percentage of average net assets) PIE CHARTS IN THE PRINTED MATERIAL.]
Management Fees 0.56% 0.56% $ 45 up-front sales charge $ 20 deferred sales charge
12b-1 Fees(2) 0.25% 1.00% 30 management fees 31 management fees
Other Expenses 0.17% 0.17% 13 12b-1 fees 54 12b-1 fees
---- ---- 9 other expenses 9 other expenses
-------------------------- --------------------------
Total Fund Operating Expenses 0.98% 1.73% $ 97 total sales charges $114 total sales charges
==== ==== and expenses and expenses
<CAPTION>
====================================================================================================================================
INTERNATIONAL BOND FUND CLASS A CLASS B CLASS A CLASS B
====================================================================================================================================
<S> <C> <C> <C> <C> <C>
Assuming No Assuming Redemption
Shareholder Transaction Expenses Redemption at the End of Each Period
Maximum Sales Charge Imposed on Purchase of ----------- -------------------------
Shares (as a percentage of offering price) 4.50% None Expenses after 1 year $ 59 $ 22 $ 72
Expenses after 3 years $ 89 $ 69 $ 99
Expenses after 5 years $121 $118 $138
Expenses after 10 years $212 $235 $235
Deferred Sales Charge
(as a percentage of redemption proceeds)(1) None 5.00%
Annual Fund Operating Expenses [THE FOLLOWING TABLES WERE REPRESENTED BY
(as a percentage of average net assets) PIE CHARTS IN THE PRINTED MATERIAL.]
Management Fees(4) 0.40% 0.40% $ 45 up-front sales charge $ 20 deferred sales charge
12b-1 Fees(2) 0.25% 1.00% 21 management fees 21 management fees
Other Expenses 0.81% 0.81% 13 12b-1 fees 54 12b-1 fees
---- ---- 42 other expenses 43 other expenses
-------------------------- --------------------------
Total Fund Operating Expenses $121 total sales charges $138 total sales charges
After Reimbursement(4) 1.46% 2.21% and expenses and expenses
==== ====
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Sales Charges and Operating Expenses Examples
- ------------------------------------------------------------------------------------------------------------------------------------
====================================================================================================================================
STRATEGIC INCOME FUND CLASS A CLASS B CLASS A CLASS B
====================================================================================================================================
<S> <C> <C> <C> <C> <C>
Assuming No Assuming Redemption
Shareholder Transaction Expenses Redemption at the End of Each Period
----------- -------------------------
Maximum Sales Charge Imposed on Purchase of Expenses after 1 year $ 56 $ 19 $ 69
Shares (as a percentage of offering price) 4.50% None Expenses after 3 years $ 80 $ 60 $ 90
Expenses after 5 years $105 $103 $123
Deferred Sales Charge Expenses after 10 years $178 $202 $202
(as a percentage of redemption proceeds)(1) None 5.00%
Annual Fund Operating Expenses [THE FOLLOWING TABLES WERE REPRESENTED BY
(as a percentage of average net assets) PIE CHARTS IN THE PRINTED MATERIAL.]
Management Fees(5) 0.33% 0.33% $ 45 up-front sales charge $ 20 deferred sales charge
12b-1 Fees(2) 0.25% 1.00% 17 management fees 18 management fees
Other Expenses 0.57% 0.57% 13 12b-1 fees 54 12b-1 fees
---- ---- 30 other expenses 31 other expenses
-------------------------- --------------------------
Total Fund Operating Expenses $105 total sales charges $123 total sales charges
After Reinbursement(5) 1.15% 1.90% and expenses and expenses
==== ====
<CAPTION>
====================================================================================================================================
MONEY MARKET FUND CLASS A CLASS B CLASS A CLASS B
====================================================================================================================================
<S> <C> <C> <C> <C> <C>
Assuming No Assuming Redemption
Shareholder Transaction Expenses Redemption at the End 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
Annual Fund Operating Expenses [THE FOLLOWING TABLES WERE REPRESENTED BY A
(as a percentage of average net assets) PIE CHART IN THE PRINTED MATERIAL.]
Management Fees(6) 0.22% 0.22% $ 0 up-front sales charge $ 0 deferred sales charge
12b-1 Fees(2) None None 12 management fees 12 management fees
Other Expenses 0.48% 0.48% 0 12b-1 fees 0 12b-1 fees
---- ---- 27 other expenses 27 other expenses
-------------------------- --------------------------
Total Fund Operating Expenses $ 39 total sales charges $ 39 total sales charges
After Reimbursement(6) 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>
Assuming No Assuming Redemption
Shareholder Transaction Expenses Redemption at the End 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 $ 81 $101
Expenses after 10 years $188 $171 $171
Deferred Sales Charge
(as a percentage of redemption proceeds)(1) None 5.00%
Annual Fund Operating Expenses [THE FOLLOWING TABLES WERE REPRESENTED BY
(as a percentage of average net assets) PIE CHARTS IN THE PRINTED MATERIAL.]
Management Fees(7) 0.40% 0.40% $ 45 up-front sales charge $ 20 deferred sales charge
12b-1 Fees(2) 0.25% 0.50% 21 management fees 22 management fees
Other Expenses 0.59% 0.59% 13 12b-1 fees 27 12b-1 fees
---- ---- 31 other expenses 32 other expenses
-------------------------- --------------------------
Total Fund Operating Expenses $110 total sales charges $101 total sales charges
After Reimbursement(7) 1.24% 1.49% and expenses and expenses
==== ====
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Sales Charges and Operating Expenses Examples
- ------------------------------------------------------------------------------------------------------------------------------------
====================================================================================================================================
NEW YORK TAX FREE FUND CLASS A CLASS B CLASS A CLASS B
====================================================================================================================================
<S> <C> <C> <C> <C> <C>
Assuming No Assuming Redemption
Shareholder Transaction Expenses Redemption at the End 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 $ 81 $101
Expenses after 10 years $188 $171 $171
Deferred Sales Charge
(as a percentage of redemption proceeds)(1) None 5.00%
Annual Fund Operating Expenses [THE FOLLOWING TABLES WERE REPRESENTED BY A
(as a percentage of average net assets) PIE CHART IN THE PRINTED MATERIAL.]
Management Fees(7) 0.30% 0.30% $ 45 up-front sales charge $ 20 deferred sales charge
12b-1 Fees(2) 0.25% 0.50% 16 management fees 16 management fees
Other Expenses 0.69% 0.69% 13 12b-1 fees 27 12b-1 fees
---- ---- 36 other expenses 38 other expenses
-------------------------- --------------------------
Total Fund Operating Expenses $110 total sales charges $101 total sales charges
After Reimbursement(7) 1.24% 1.49% and expenses and expenses
==== ====
<CAPTION>
====================================================================================================================================
TAX FREE BOND FUND CLASS A CLASS B CLASS A CLASS B
====================================================================================================================================
<S> <C> <C> <C> <C> <C>
Assuming No Assuming Redemption
Shareholder Transaction Expenses Redemption at the End 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 $ 75 $ 39 $ 69
Expenses after 5 years $ 97 $ 68 $ 88
Expenses after 10 years $161 $143 $143
Deferred Sales Charge
(as a percentage of redemption proceeds)(1) None 5.00%
Annual Fund Operating Expenses [THE FOLLOWING TABLES WERE REPRESENTED BY A
(as a percentage of average net assets) PIE CHART IN THE PRINTED MATERIAL.]
Management Fees 0.60% 0.60% $ 45 up-front sales charge $ 20 deferred sales charge
12b-1 Fees(2) 0.25% 0.50% 32 management fees 33 management fees
Other Expenses 0.14% 0.14% 13 12b-1 fees 27 12b-1 fees
---- ---- 7 other expenses 8 other expenses
-------------------------- --------------------------
Total Fund Operating Expenses 0.99% 1.24% $ 97 total sales charges $ 88 total sales charges
==== ==== 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 purchased
the shares being redeemed. See "Alternative Sales Arrangements--Deferred
Sales Charge Class B Shares--Contingent Deferred Sales Charge, Class B."
2 Under rules of the National Association of Securities Dealers, Inc. (the
"NASD"), a distribution fee of up to 0.75% of average annual net assets is
treated as a sales charge for certain purposes. 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."
3 Absent voluntary fee waiver and/or expense limitation, the management fee
and total fund operating expenses would have been 0.50% and 0.98%,
respectively.
4 Absent voluntary fee waiver and/or expense limitation, the management fee
would have been 0.70% and total fund operating expenses would have been
1.76% and 2.51% for Class A and Class B, respectively.
5 Absent voluntary fee waiver and/or expense limitation, the management fee
is expected to be 0.60% and estimated total fund operating expenses are
expected to be 1.42% and 2.17% for Class A and Class B, respectively.
6 Absent voluntary fee waiver and/or expense limitation, the management fee
and total fund operating expenses would have been 0.50% and 0.98%,
respectively.
7 Absent voluntary fee waiver and/or expense limitation, the management fee
would have been 0.50% and total fund operating expenses would have been
1.34% and 1.59% for Class A and Class B, respectively, of California Tax
Free Fund and 1.44% and 1.69% for Class A and Class B, respectively, of New
York Tax Free Fund.
11
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
Here are the financial histories for each of the MainStay Funds. The information
for the period January 1, 1997 through June 30, 1997 has not been audited by
Price Waterhouse LLP, the Funds' independent accountants. 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. You should read the
related financial information and notes and the independent accountants'
unqualified reports on each Fund incorporated by reference in the SAI.
================================================================================
MAINSTAY CAPITAL APPRECIATION FUND
================================================================================
Selected data for a share outstanding throughout the period January 1, 1997
through June 30, 1997, 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 and August 31, 1987.
<TABLE>
<CAPTION>
Class A Class B Class A Class B Class A Class B
-------- ---------- -------- ---------- ------- --------
January 1 through Year Ended Year Ended
June 30, 1997* December 31, 1996 December 31, 1995
------------------------ ----------------------- -------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value at beginning of period .......... $ 30.56 $ 30.25 $ 25.90 $ 25.77 $ 19.11 $ 19.11
-------- ---------- -------- ---------- ------- --------
Net investment income (loss)** .................. (0.08) (0.15) (0.08) (0.22) 0.03 (0.08)
Net realized and unrealized gain (loss) on
investments ................................... 4.06 4.01 5.05 5.01 6.81 6.79
-------- ---------- -------- ---------- ------- --------
Total from investment operations ................ 3.98 3.86 4.97 4.79 6.84 6.71
-------- ---------- -------- ---------- ------- --------
Less dividends and distributions:
From net investment income ...................... -- -- -- -- -- --
From net realized gain on investments ........... -- -- (0.31) (0.31) (0.05) (0.05)
-------- ---------- -------- ---------- ------- --------
Total dividends and distributions ............... -- -- (0.31) (0.31) (0.05) (0.05)
-------- ---------- -------- ---------- ------- --------
Net asset value at end of period ................ $ 34.54 $ 34.11 $ 30.56 $ 30.25 $ 25.90 $ 25.77
======== ========== ======== ========== ======= ========
Total investment return(b) ...................... 13.02% 12.76% 19.16% 18.56% 35.79% 35.11%
Ratios (to average net assets)/Supplemental Data:
Net investment income (loss) .................. (0.49%)+ (0.97%)+ (0.3%) (0.8%) 0.2% (0.4%)
Expenses ...................................... 1.10%+ 1.58%+ 1.1% 1.6% 1.1% 1.7%
Portfolio turnover rate ......................... 14% 14% 16% 16% 29% 29%
Average commission rate paid .................... $ 0.0582 $ 0.0582 $ 0.0599 $ 0.0599 (c) (c)
Net assets at end of period (in 000's) .......... $171,668 $1,608,562 $126,958 $1,342,578 $44,434 $856,221
</TABLE>
- ----------
* Unaudited.
** 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) Total return is calculated exclusive of sales charges and is not
annualized.
(c) Disclosure of amount required for fiscal years beginning on or after
September 1, 1995.
12
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
Additional performance information is included in each Fund's annual report to
shareholders.
For a free copy of the SAI or the annual reports, ask your Registered
Representative; call 1-800-MAINSTAY (1-800-624-6782); or write to NYLIFE
Distributors, Inc., 300 Interpace Parkway, Building A, Parsippany, N.J. 07054.
================================================================================
================================================================================
<TABLE>
<CAPTION>
Class B
- ------------------------------------------------------------------------------------------------------------------------------------
September 1 Year Ended August 31,
through --------------------------------------------------------------------------------------------------------------------------
December 31,
1994(a) 1994 1993 1992 1991 1990 1989 1988 1987
-------- -------- -------- -------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 19.93 $ 19.47 $ 14.14 $ 15.96 $ 11.35 $ 12.44 $ 9.37 $ 13.14 $ 10.05
-------- -------- -------- -------- ------- ------- ------- ------- -------
(0.03) (0.12) (0.12) (0.19) (0.13) (0.02) (0.11) (0.12) (0.12)
(0.65) 1.13 5.64 1.30 5.16 (0.36) 3.18 (3.65) 3.21
-------- -------- -------- -------- ------- ------- ------- ------- -------
(0.68) 1.01 5.52 1.11 5.03 (0.38) 3.07 (3.77) 3.09
-------- -------- -------- -------- ------- ------- ------- ------- -------
-- -- -- -- -- (0.02) -- -- --
(0.14) (0.55) (0.19) (2.93) (0.42) (0.69) -- -- --
-------- -------- -------- -------- ------- ------- ------- ------- -------
(0.14) (0.55) (0.19) (2.93) (0.42) (0.71) -- -- --
-------- -------- -------- -------- ------- ------- ------- ------- -------
$ 19.11 $ 19.93 $ 19.47 $ 14.14 $ 15.96 $ 11.35 $ 12.44 $ 9.37 $ 13.14
======== ======== ======== ======== ======= ======= ======= ======= =======
(3.40%) 5.36% 39.25% 6.77% 45.89% (3.14%) 32.76% (28.69%) 30.75%
(0.5%)+ (0.6%) (0.7%) (1.2%) (1.0%) (0.2%) (0.8%) (1.3%) (1.5%)
1.8%)+ 1.8% 1.8% 2.0% 2.5% 2.5% 2.8% 2.7% 2.9%
11% 31% 73% 157% 327% 259% 256% 60% 16%
(c) (c) (c) (c) (c) (c) (c) (c) (c)
$499,133 $472,497 $279,300 $128,710 $65,659 $36,062 $34,685 $28,845 $36,954
</TABLE>
13
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
================================================================================
MAINSTAY EQUITY INDEX FUND
================================================================================
Selected data for a share outstanding throughout the period January 1, 1997
through June 30, 1997, 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, August 31, 1993 and August 31, 1992 and the period December 20, 1990
through August 31, 1991.
<TABLE>
<CAPTION>
January 1 September 1
through Year Ended Year Ended through
June 30, December 31, December 31, December 31,
1997* 1996 1995 1994(a)
-------- -------- -------- -------
<S> <C> <C> <C> <C>
Net asset value at
beginning of period .................... $ 23.37 $ 19.15 $ 14.09 $ 14.48
-------- -------- -------- -------
Net investment income ................... 0.12 0.30 0.24 0.09
Net realized and unrealized
gain (loss) on investments ............. 4.59 3.92 4.82 (0.48)
-------- -------- -------- -------
Total from investment operations ........ 4.71 4.22 5.06 (0.39)
-------- -------- -------- -------
Less dividends and distributions:
From net investment income .............. -- (0.54) (0.27) --
From net realized gain on
investments ............................ -- (0.82) (0.27) --
-------- -------- -------- -------
Total dividends and distributions ....... -- (1.36) (0.54) --
-------- -------- -------- -------
Reverse share split ..................... -- 1.36 0.54 --
-------- -------- -------- -------
Net asset value at end of period ........ $ 28.08 $ 23.37 $ 19.15 $ 14.09
======== ======== ======== =======
Total investment return(c) .............. 20.15% 22.04% 35.91% (2.68%)
Ratios (to average net assets)/
Supplemental Data:
Net investment income .................. 1.23%+ 1.8% 1.7% 2.0%+
Expenses ............................... 0.80%+ 0.8% 1.1% 0.9%+
Expenses (before reimbursement) ........ 0.97%+ 1.0% 1.1% 0.9%+
Portfolio turnover rate ................. 4%+ 3% 4% 2%
Average commission rate paid ............ $ 0.0497 $ 0.0465 (d) (d)
Net assets at end of period (in 000's) .. $329,825 $225,750 $109,308 $61,561
<CAPTION>
Dec. 20,
Year Ended 1990(b)
August 31, through
----------------------------- August 31,
1994 1993 1992 1991
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net asset value at
beginning of period .................... $ 13.84 $ 12.15 $ 11.41 $ 9.45
------- ------- ------- -------
Net investment income ................... 0.27 0.22 0.18 0.11
Net realized and unrealized
gain (loss) on investments ............. 0.37 1.47 0.56 1.85
------- ------- ------- -------
Total from investment operations ........ 0.64 1.69 0.74 1.96
------- ------- ------- -------
Less dividends and distributions:
From net investment income .............. (0.25) (0.18) (0.17) --
From net realized gain on
investments ............................ (0.18) (0.02) (0.04) --
------- ------- ------- -------
Total dividends and distributions ....... (0.43) (0.20) (0.21) --
------- ------- ------- -------
Reverse share split ..................... 0.43 0.20 0.21 --
------- ------- ------- -------
Net asset value at end of period ........ $ 14.48 $ 13.84 $ 12.15 $ 11.41
======= ======= ======= =======
Total investment return(c) .............. 4.59% 13.91% 6.49% 20.74%
Ratios (to average net assets)/
Supplemental Data:
Net investment income .................. 1.9% 1.9% 1.8% 1.9%+
Expenses ............................... 0.9% 0.9% 1.2% 1.4%+
Expenses (before reimbursement) ........ 0.9% 0.9% 1.2% 1.4%+
Portfolio turnover rate ................. 12% 4% 3% 1%
Average commission rate paid ............ (d) (d) (d) (d)
Net assets at end of period (in 000's) .. $62,828 $62,921 $41,742 $23,534
</TABLE>
- ----------
* Unaudited.
+ Annualized.
(a) The Fund changed its fiscal year end from August 31 to December 31.
(b) Commencement of operations.
(c) Total return is calculated exclusive of sales charges and is not
annualized.
(d) Disclosure of amount required for fiscal years beginning on or after
September 1, 1995.
14
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
================================================================================
MAINSTAY INTERNATIONAL EQUITY FUND
================================================================================
Selected data for a share outstanding throughout the period January 1, 1997
through June 30, 1997, 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 Class A Class B Class A Class B September 13(a)
------- ------- ------- ------- ------- ------- through
January 1 through Year Ended Year Ended December 31,
June 30, 1997* December 31, 1996 December 31, 1995 1994
------------------ ------------------- ----------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value at beginning of period $ 10.48 $ 10.38 $ 10.05 $ 9.97 $ 9.77 $ 9.77 $ 10.00
------- ------- ------- ------- ------- ------- -------
Net investment income (loss) .......... 0.02 (0.01) 0.29 0.24 0.27 0.26 (0.04)
Net realized and unrealized gain (loss)
on investments ....................... 0.84 0.83 0.07 0.07 0.10 0.07 (0.16)
Net realized and unrealized gain (loss)
on foreign currency transactions ..... 0.32 0.31 0.62 0.59 0.14 0.09 (0.03)
------- ------- ------- ------- ------- ------- -------
Total from investment operations ...... 1.18 1.13 0.98 0.90 0.51 0.42 (0.23)
------- ------- ------- ------- ------- ------- -------
Less dividends and distributions:
From net realized gain on foreign
currency transactions ................ -- -- (0.52) (0.46) (0.15) (0.15) --
In excess of net realized gain
on investments ....................... -- -- (0.03) (0.03) (0.08) (0.07) --
------- ------- ------- ------- ------- ------- -------
Total dividends and distributions
to shareholders ...................... -- -- (0.55) (0.49) (0.23) (0.22) --
------- ------- ------- ------- ------- ------- -------
Net asset value at end of period ...... $ 11.66 $ 11.51 $ 10.48 $ 10.38 $ 10.05 $ 9.97 $ 9.77
======= ======= ======= ======= ======= ======= =======
Total investment return(b) ............ 11.26% 10.89% 9.78% 9.05% 5.25% 4.27% (2.30%)
Ratios (to average net
assets)/Supplemental Data:
Net investment income (loss) ......... 0.64%+ (0.04%)+ (0.1%) (0.8%) (0.2%) (1.0%) (1.6%)+
Expenses ............................. 1.99%+ 2.67%+ 2.0% 2.7% 2.2% 3.0% 3.9%+
Portfolio turnover rate ............... 14% 14% 19% 19% 25% 25% 9%
Average commission rate paid .......... $0.0337 $0.0337 $0.0374 $0.0374 (c) (c) (c)
Net assets at end of period
(in 000's) ........................... $18,515 $65,209 $17,475 $52,709 $12,856 $25,341 $20,549
</TABLE>
- ----------
* Unaudited.
+ Annualized.
(a) Commencement of operations.
(b) Total return is calculated exclusive of sales charges and is not
annualized.
(c) Disclosure of amount required for fiscal years beginning on or after
September 1, 1995.
15
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
================================================================================
MAINSTAY CONVERTIBLE FUND
================================================================================
Selected data for a share outstanding throughout the period January 1, 1997
through June 30, 1997, 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 and August 31, 1987.
<TABLE>
<CAPTION>
Class A Class B Class A Class B Class A Class B
------- -------- ------- -------- ------- --------
January 1 through Year Ended Year Ended
June 30, 1997* December 31, 1996 December 31, 1995
--------------------- --------------------- -----------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value at beginning of period ...... $ 13.81 $ 13.80 $ 13.45 $ 13.45 $ 11.67 $ 11.67
------- -------- ------- -------- ------- --------
Net investment income ....................... 0.27 0.24 0.57 0.48 0.59 0.51
Net realized and unrealized gain (loss)
on investments ............................. 0.58 0.58 1.02 1.02 2.14 2.14
Net realized and unrealized gain (loss)
on foreign currency transactions ........... 0.02 0.02 0.02 0.02 (0.00)(c) (0.00)(c)
------- -------- ------- -------- ------- --------
Total from investment operations ............ 0.87 0.84 1.61 1.52 2.73 2.65
------- -------- ------- -------- ------- --------
Less dividends and distributions:
From net investment income .................. (0.29) (0.25) (0.62) (0.54) (0.55) (0.47)
From net realized gain on investments ....... -- -- (0.63) (0.63) (0.40) (0.40)
------- -------- ------- -------- ------- --------
Total dividends and distributions ........... (0.29) (0.25) (1.25) (1.17) (0.95) (0.87)
------- -------- ------- -------- ------- --------
Net asset value at end of period ............ $ 14.39 $ 14.39 $ 13.81 $ 13.80 $ 13.45 $ 13.45
======= ======== ======= ======== ======= ========
Total investment return(b) .................. 6.38% 6.14% 12.13% 11.39% 23.72% 23.02%
Ratios (to average net
assets)/Supplemental Data:
Net investment income ...................... 4.23%+ 3.61%+ 4.4% 3.8% 4.9% 4.3%
Expenses ................................... 1.46%+ 2.08%+ 1.5% 2.1% 1.5% 2.1%
Portfolio turnover rate ..................... 123% 123% 296% 296% 243% 243%
Average commission rate paid ................ $0.0456 $ 0.0456 $0.0468 $ 0.0468 (d) (d)
Net assets at end of period (in 000's) ...... $64,772 $859,280 $56,621 $797,243 $26,836 $427,461
</TABLE>
- ----------
* Unaudited.
+ Annualized.
(a) The Fund changed its fiscal year end from August 31 to December 31.
(b) Total return is calculated exclusive of sales charges and is not
annualized.
(c) Less than one cent per share.
(d) Disclosure of amount required for fiscal years beginning on or after
September 1, 1995.
16
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
================================================================================
================================================================================
<TABLE>
<CAPTION>
Class B
- ------------------------------------------------------------------------------------------------------------------------------------
September 1
through Year Ended August 31,
December 31, ------------------------------------------------------------------------------------------------------------------
1994(a) 1994 1993 1992 1991 1990 1989 1988 1987
-------- -------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 12.83 $ 13.92 $ 11.46 $ 10.10 $ 8.02 $ 9.16 $ 8.91 $ 10.22 $ 9.88
-------- -------- ------- ------- ------- ------- ------- ------- -------
0.19 0.50 0.92 0.32 0.24 0.40 0.52 0.40 0.42
(0.71) 0.70 2.45 1.32 2.08 (1.06) 0.41 (1.21) 0.33
-- (0.01) -- -- -- -- -- -- --
-------- -------- ------- ------- ------- ------- ------- ------- -------
(0.52) 1.19 3.37 1.64 2.32 (0.66) 0.93 (0.81) 0.75
-------- -------- ------- ------- ------- ------- ------- ------- -------
(0.21) (0.49) (0.42) (0.28) (0.24) (0.48) (0.46) (0.42) (0.41)
(0.43) (1.79) (0.49) -- -- -- (0.22) (0.08) --
-------- -------- ------- ------- ------- ------- ------- ------- -------
(0.64) (2.28) (0.91) (0.28) (0.24) (0.48) (0.68) (0.50) (0.41)
-------- -------- ------- ------- ------- ------- ------- ------- -------
$ 11.67 $ 12.83 $ 13.92 $ 11.46 $ 10.10 $ 8.02 $ 9.16 $ 8.91 $ 10.22
======== ======== ======= ======= ======= ======= ======= ======= =======
(4.09%) 8.95% 30.80% 16.43% 29.58% (7.25%) 10.73% (7.83%) 7.76%
4.8%+ 3.5% 3.4% 2.9% 2.8% 4.7% 5.6% 4.4% 4.1%
1.9%+ 1.9% 1.9% 2.3% 2.7% 2.5% 2.6% 2.6% 2.7%
77% 269% 370% 291% 283% 204% 308% 182% 147%
(d) (d) (d) (d) (d) (d) (d) (d) (d)
$180,304 $160,407 $58,943 $28,899 $20,029 $17,791 $25,651 $29,189 $36,627
</TABLE>
17
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
================================================================================
MAINSTAY TOTAL RETURN FUND
================================================================================
Selected data for a share outstanding throughout the period January 1, 1997
through June 30, 1997, 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 December 29, 1987 through August 31, 1988.
<TABLE>
<CAPTION>
Class A Class B Class A Class B Class A Class B
------- ---------- ------- ---------- ------- --------
January 1 through Year Ended Year Ended
June 30, 1997* December 31, 1996 December 31, 1995
---------------------- ----------------------- ---------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value at beginning of period .... $ 20.09 $ 20.10 $ 18.53 $ 18.53 $ 14.76 $ 14.76
------- ---------- ------- ---------- ------- --------
Net investment income ..................... 0.19 0.14 0.37 0.27 0.42 0.33
Net realized and unrealized gain (loss)
on investments ........................... 1.72 1.71 2.07 2.08 3.77 3.77
------- ---------- ------- ---------- ------- --------
Total from investment operations .......... 1.91 1.85 2.44 2.35 4.19 4.10
------- ---------- ------- ---------- ------- --------
Less dividends and distributions:
From net investment income ................ (0.19) (0.14) (0.37) (0.27) (0.42) (0.33)
From net realized gain on investments ..... -- -- (0.51) (0.51) -- --
------- ---------- ------- ---------- ------- --------
Total dividends and distributions ......... (0.19) (0.14) (0.88) (0.78) (0.42) (0.33)
------- ---------- ------- ---------- ------- --------
Net asset value at end of period .......... $ 21.81 $ 21.81 $ 20.09 $ 20.10 $ 18.53 $ 18.53
======= ========== ======= ========== ======= ========
Total investment return(c) ................ 9.57% 9.27% 13.22% 12.73% 28.66% 27.96%
Ratios (to average net
assets)/Supplemental Data:
Net investment income .................... 1.88%+ 1.42%+ 1.9% 1.4% 2.5% 2.0%
Expenses ................................. 1.15%+ 1.61%+ 1.1% 1.6% 1.1% 1.7%
Portfolio turnover rate ................... 79% 79% 173% 173% 228% 228%
Average commission rate paid .............. $0.0595 $ 0.0595 $0.0599 $ 0.0599 (d) (d)
Net assets at end of period (in 000's) .... $92,244 $1,117,970 $68,975 $1,029,878 $19,206 $860,881
</TABLE>
- ----------
* Unaudited.
+ 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.
(d) Disclosure of amount required for fiscal years beginning on or after
September 1, 1995.
18
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
================================================================================
================================================================================
<TABLE>
<CAPTION>
Class B
- ------------------------------------------------------------------------------------------------------------------------------------
September 1
through Year Ended August 31,
December 31, -----------------------------------------------------------------------------------------------------------------
1994(a) 1994 1993 1992 1991 1990 1989 1988(b)
-------- -------- -------- -------- -------- ------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 15.28 $ 15.42 $ 13.37 $ 13.89 $ 11.07 $ 11.82 $ 10.24 $10.00
-------- -------- -------- -------- -------- ------- ------- ------
0.11 0.38 0.33 0.22 0.26 0.32 0.38 0.18
(0.52) (0.02) 2.31 0.32 2.83 (0.29) 1.67 0.16
-------- -------- -------- -------- -------- ------- ------- ------
(0.41) 0.36 2.64 0.54 3.09 0.03 2.05 0.34
-------- -------- -------- -------- -------- ------- ------- ------
(0.11) (0.37) (0.36) (0.23) (0.27) (0.33) (0.38) (0.10)
-- (0.13) (0.23) (0.83) -- (0.45) (0.09) --
-------- -------- -------- -------- -------- ------- ------- ------
(0.11) (0.50) (0.59) (1.06) (0.27) (0.78) (0.47) (0.10)
-------- -------- -------- -------- -------- ------- ------- ------
$ 14.76 $ 15.28 $ 15.42 $ 13.37 $ 13.89 $ 11.07 $ 11.82 $10.24
======== ======== ======== ======== ======== ======= ======= ======
(2.65%) 2.41% 20.09% 3.96% 28.42% 0.19% 20.69% 3.39%
2.5%+ 2.5% 2.4% 1.7% 2.1% 2.8% 3.6% 3.0%+
1.7%+ 1.7% 1.8% 2.0% 2.4% 2.4% 2.8% 3.4%+
74% 273% 340% 316% 213% 171% 271% 197%
(d) (d) (d) (d) (d) (d) (d) (d)
$648,725 $639,619 $486,959 $292,002 $116,072 $47,008 $21,383 $9,936
</TABLE>
19
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
================================================================================
MAINSTAY VALUE FUND
================================================================================
Selected data for a share outstanding throughout the period January 1, 1997
through June 30, 1997, 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 and August 31, 1987.
<TABLE>
<CAPTION>
Class A Class B Class A Class B Class A Class B
------- ---------- ------- ---------- ------- --------
January 1 through Year Ended Year Ended
June 30, 1997* December 31, 1996 December 31, 1995
---------------------- ---------------------- --------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value at beginning of period ... $ 20.34 $ 20.32 $ 18.25 $ 18.25 $ 14.66 $ 14.66
------- ---------- ------- ---------- ------- --------
Net investment income (loss) ............. 0.13 0.08 0.30 0.20 0.29 0.19
Net realized and unrealized gain (loss)
on investments .......................... 2.06 2.06 3.66 3.64 3.91 3.91
------- ---------- ------- ---------- ------- --------
Total from investment operations ......... 2.19 2.14 3.96 3.84 4.20 4.10
------- ---------- ------- ---------- ------- --------
Less dividends and distributions:
From net investment income ............... (0.13) (0.08) (0.30) (0.20) (0.29) (0.19)
From net realized gain on investments .... -- -- (1.57) (1.57) (0.32) (0.32)
------- ---------- ------- ---------- ------- --------
Total dividends and distributions ........ (0.13) (0.08) (1.87) (1.77) (0.61) (0.51)
------- ---------- ------- ---------- ------- --------
Net asset value at end of period ......... $ 22.40 $ 22.38 $ 20.34 $ 20.32 $ 18.25 $ 18.25
======= ========== ======= ========== ======= ========
Total investment return(b) ............... 10.79% 10.55% 21.84% 21.11% 28.74% 28.01%
Ratios (to average net
assets)/Supplemental Data:
Net investment income (loss) ............ 1.23%+ 0.75%+ 1.6% 1.1% 1.5% 0.9%
Expenses ................................ 1.13%+ 1.61%+ 1.1% 1.6% 1.2% 1.8%
Portfolio turnover rate .................. 36% 36% 47% 47% 48% 48%
Average commission rate paid ............. $0.0595 $ 0.0595 $0.0595 $ 0.0595 (c) (c)
Net assets at end of period (in 000's) ... $96,917 $1,214,708 $73,259 $1,019,307 $25,258 $708,840
</TABLE>
- ----------
* Unaudited.
+ Annualized.
(a) The Fund changed its fiscal year end from August 31 to December 31.
(b) Total return is calculated exclusive of sales charges and is not
annualized.
(c) Disclosure of amount required for fiscal years beginning on or after
September 1, 1995.
20
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
================================================================================
================================================================================
<TABLE>
<CAPTION>
Class B
- ------------------------------------------------------------------------------------------------------------------------------------
September 1
through Year Ended August 31,
December 31, -------------------------------------------------------------------------------------------------------------------
1994(a) 1994 1993 1992 1991 1990 1989 1988 1987
-------- -------- -------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 16.30 $ 15.90 $ 13.82 $ 13.27 $ 10.42 $ 12.55 $ 9.51 $ 11.62 $ 10.37
-------- -------- -------- ------- ------- ------- ------- ------- -------
0.04 0.06 0.07 0.12 0.14 0.25 0.19 0.09 (0.08)
(1.03) 1.04 3.40 1.64 3.07 (1.47) 2.98 (2.09) 1.33
-------- -------- -------- ------- ------- ------- ------- ------- -------
(0.99) 1.10 3.47 1.76 3.21 (1.22) 3.17 (2.00) 1.25
-------- -------- -------- ------- ------- ------- ------- ------- -------
(0.03) (0.06) (0.10) (0.09) (0.20) (0.18) (0.13) (0.06) --
(0.62) (0.64) (1.29) (1.12) (0.16) (0.73) -- (0.05) --
-------- -------- -------- ------- ------- ------- ------- ------- -------
(0.65) (0.70) (1.39) (1.21) (0.36) (0.91) (0.13) (0.11) --
-------- -------- -------- ------- ------- ------- ------- ------- -------
$ 14.66 $ 16.30 $ 15.90 $ 13.82 $ 13.27 $ 10.42 $ 12.55 $ 9.51 $ 11.62
======== ======== ======== ======= ======= ======= ======= ======= =======
(6.03%) 7.26% 26.58% 14.82% 31.79% (10.23%) 33.66% (17.22%) 12.05%
0.8%+ 0.5% 0.5% 0.8% 1.2% 2.2% 1.7% 0.9% (1.1%)
1.8%+ 1.9% 1.9% 1.9% 2.4% 2.6% 2.8% 2.9% 3.3%
11% 53% 77% 145% 150% 117% 107% 88% 41%
(c) (c) (c) (c) (c) (c) (c) (c) (c)
$472,365 $449,789 $226,524 $77,877 $44,548 $30,827 $26,218 $17,252 $20,647
</TABLE>
21
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
================================================================================
MAINSTAY GOVERNMENT FUND (++)
================================================================================
Selected data for a share outstanding throughout the period January 1, 1997
through June 30, 1997, 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 and August 31, 1987.
<TABLE>
<CAPTION>
Class A Class B Class A Class B Class A Class B
------- -------- ------- -------- ------- --------
January 1 through Year Ended Year Ended
June 30, 1997* December 31, 1996 December 31, 1995
------------------- ------------------- ---------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value at beginning of period .............. $ 8.06 $ 8.04 $ 8.41 $ 8.41 $ 7.76 $ 7.76
------- -------- ------- -------- ------- --------
Net investment income ............................... 0.26 0.24 0.50 0.46 0.58 0.54
Net realized and unrealized gain (loss)
on investments ..................................... (0.07) (0.07) (0.35) (0.37) 0.65 0.65
------- -------- ------- -------- ------- --------
Total from investment operations .................... 0.19 0.17 0.15 0.09 1.23 1.19
------- -------- ------- -------- ------- --------
Less dividends and distributions:
From net investment income .......................... (0.25) (0.22) (0.50) (0.46) (0.58) (0.54)
In excess of net investment income .................. -- -- -- -- (0.00)(c) (0.00)(c)
Return of capital ................................... -- -- -- -- -- --
------- -------- ------- -------- ------- --------
Total dividends and distributions ................... (0.25) (0.22) (0.50) (0.46) (0.58) (0.54)
------- -------- ------- -------- ------- --------
Net asset value at end of period .................... $ 8.00 $ 7.99 $ 8.06 $ 8.04 $ 8.41 $ 8.41
======= ======== ======= ======== ======= ========
Total investment return(b) .......................... 2.36% 2.11% 1.97% 1.25% 16.38% 15.69%
Ratios (to average net assets)/Supplemental Data:
Net investment income .............................. 6.45%+ 5.91%+ 6.3% 5.7% 7.3% 6.7%
Expenses ........................................... 1.09%+ 1.63%+ 1.0% 1.6% 1.0% 1.7%
Portfolio turnover rate ............................. 150% 150% 307% 307% 540% 540%
Net assets at end of period (in 000's) .............. $17,302 $677,486 $16,413 $782,970 $12,784 $990,184
</TABLE>
- ----------
* Unaudited.
+ Annualized.
(++) Formerly Government Plus Fund.
(a) The Fund changed its fiscal year end from August 31 to December 31.
(b) Total return is calculated exclusive of sales charges and is not
annualized.
(c) Less than one cent per share.
22
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
================================================================================
================================================================================
<TABLE>
<CAPTION>
Class B
- ------------------------------------------------------------------------------------------------------------------------------------
September 1
through Year Ended August 31,
December 31, -----------------------------------------------------------------------------------------------------------------
1994(a) 1994 1993 1992 1991 1990 1989 1988 1987
---------- ---------- ---------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 8.04 $ 8.77 $ 8.88 $ 8.82 $ 8.48 $ 9.01 $ 8.96 $ 9.40 $ 10.00
---------- ---------- ---------- -------- -------- -------- -------- -------- --------
0.19 0.57 0.68 0.73 0.81 0.83 0.99 0.95 0.95
(0.29) (0.71) (0.09) 0.07 0.35 (0.52) (0.04) (0.44) (0.51)
---------- ---------- ---------- -------- -------- -------- -------- -------- --------
(0.10) (0.14) 0.59 0.80 1.16 0.31 0.95 0.51 0.44
---------- ---------- ---------- -------- -------- -------- -------- -------- --------
(0.18) (0.57) (0.70) (0.74) (0.82) (0.84) (0.90) (0.95) (1.04)
-- (0.01) -- -- -- -- -- -- --
-- (0.01) -- -- -- -- -- -- --
---------- ---------- ---------- -------- -------- -------- -------- -------- --------
(0.18) (0.59) (0.70) (0.74) (0.82) (0.84) (0.90) (0.95) (1.04)
---------- ---------- ---------- -------- -------- -------- -------- -------- --------
$ 7.76 $ 8.04 $ 8.77 $ 8.88 $ 8.82 $ 8.48 $ 9.01 $ 8.96 $ 9.40
========== ========== ========== ======== ======== ======== ======== ======== ========
(1.24%) (1.63%) 6.92% 9.46% 14.33% 3.53% 11.18% 5.53% 4.62%
7.1%+ 7.1% 7.8% 8.3% 9.5% 9.4% 10.2% 10.3% 9.7%
1.7%+ 1.7% 1.7% 1.8% 1.8% 2.0% 2.0% 2.0% 1.9%
143% 491% 629% 613% 318% 228% 383% 476% 594%
$1,024,492 $1,119,586 $1,210,998 $957,010 $622,550 $463,010 $512,669 $436,836 $349,817
</TABLE>
23
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
================================================================================
MAINSTAY HIGH YIELD CORPORATE BOND FUND
================================================================================
Selected data for a share outstanding throughout the period January 1, 1997
through June 30, 1997, 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 and August 31, 1987.
<TABLE>
<CAPTION>
Class A Class B Class A Class B Class A Class B
-------- ---------- -------- ---------- ------- ----------
January 1 through Year Ended Year Ended
June 30, 1997* December 31, 1996 December 31, 1995
----------------------- ----------------------- ---------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value at beginning of period ....... $ 8.27 $ 8.26 $ 7.92 $ 7.92 $ 7.44 $ 7.44
-------- ---------- -------- ---------- ------- ----------
Net investment income ........................ 0.35 0.32 0.72 0.67 0.84 0.81
Net realized and unrealized gain (loss)
on investments .............................. 0.18 0.18 0.52 0.52 0.61 0.61
Net realized and unrealized gain (loss)
on foreign currency transactions ............ (0.00)(c) (0.00)(c) (0.00)(c) (0.00)(c) (0.00)(c) (0.00)(c)
-------- ---------- -------- ---------- ------- ----------
Total from investment operations ............. 0.53 0.50 1.24 1.19 1.45 1.42
-------- ---------- -------- ---------- ------- ----------
Less dividends and distributions:
From net investment income ................... (0.36) (0.34) (0.71) (0.67) (0.84) (0.81)
In excess of net investment income ........... -- -- -- -- (0.01) (0.01)
From net realized gain on investments ........ -- -- (0.18) (0.18) (0.10) (0.10)
In excess of net realized gain
on investments .............................. -- -- -- -- (0.02) (0.02)
-------- ---------- -------- ---------- ------- ----------
Total dividends and distributions ............ (0.36) (0.34) (0.89) (0.85) (0.97) (0.94)
-------- ---------- -------- ---------- ------- ----------
Net asset value at end of period ............. $ 8.44 $ 8.42 $ 8.27 $ 8.26 $ 7.92 $ 7.92
======== ========== ======== ========== ======= ==========
Total investment return(b) ................... 6.58% 6.15% 16.33% 15.58% 20.28% 19.71%
Ratios (to average net
assets)/Supplemental Data:
Net investment income ....................... 8.54%+ 7.95%+ 9.0% 8.4% 10.2% 9.5%
Net expenses ................................ 1.00%+ 1.59%+ 1.0% 1.6% 1.0% 1.6%
Portfolio turnover rate ...................... 55% 55% 118% 118% 137% 137%
Average commission rate paid ................. $ 0.0570 $ 0.0570 $ 0.0630 $ 0.0630 (d) (d)
Net assets at end of period (in 000's) ....... $176,232 $2,945,504 $116,805 $2,441,180 $42,850 $1,601,238
</TABLE>
- ----------
* Unaudited.
+ Annualized.
(a) The Fund changed its fiscal year end from August 31 to December 31.
(b) Total return is calculated exclusive of sales charges and is not
annualized.
(c) Less than one cent per share.
(d) Disclosure of amount required for fiscal years beginning on or after
September 1, 1995.
24
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
================================================================================
================================================================================
<TABLE>
<CAPTION>
Class B
- ------------------------------------------------------------------------------------------------------------------------------------
September 1
through Year Ended August 31,
December 31, ------------------------------------------------------------------------------------------------------------------
1994(a) 1994 1993 1992 1991 1990 1989 1988 1987
---------- ---------- -------- -------- -------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 7.70 $ 7.93 $ 7.41 $ 6.66 $ 6.54 $ 8.34 $ 9.10 $ 9.37 $ 9.95
---------- ---------- -------- -------- -------- -------- -------- -------- -------
0.23 0.69 0.70 0.79 0.89 1.01 1.41 1.08 0.99
(0.27) (0.08) 0.54 0.75 0.15 (1.77) (0.85) (0.30) (0.48)
-- -- -- -- -- -- -- -- --
---------- ---------- -------- -------- -------- -------- -------- -------- -------
(0.04) 0.61 1.24 1.54 1.04 (0.76) 0.56 0.78 0.51
---------- ---------- -------- -------- -------- -------- -------- -------- -------
(0.22) (0.67) (0.72) (0.79) (0.92) (1.04) (1.32) (1.05) (1.09)
-- -- -- -- -- -- -- -- --
-- (0.17) -- -- -- -- -- -- --
-- -- -- -- -- -- -- -- --
---------- ---------- -------- -------- -------- -------- -------- -------- -------
(0.22) (0.84) (0.72) (0.79) (0.92) (1.04) (1.32) (1.05) (1.09)
---------- ---------- -------- -------- -------- -------- -------- -------- -------
$ 7.44 $ 7.70 $ 7.93 $ 7.41 $ 6.66 $ 6.54 $ 8.34 $ 9.10 $ 9.37
========== ========== ======== ======== ======== ======== ======== ======== =======
(0.48%) 7.95% 18.58% 24.55% 18.25% (9.51%) 6.71% 8.98% 5.45%
9.1%+ 8.7% 9.9% 11.0% 14.4% 14.3% 15.3% 12.1% 11.2%
1.6%+ 1.6% 1.7% 1.9% 2.1% 2.1% 2.1% 2.2% 2.1%
45% 190% 207% 226% 214% 305% 403% 437% 48%
(d) (d) (d) (d) (d) (d) (d) (d) (d)
$1,128,913 $1,090,261 $808,538 $447,819 $262,103 $201,052 $181,496 $109,569 $85,786
</TABLE>
25
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
================================================================================
MAINSTAY INTERNATIONAL BOND FUND
================================================================================
Selected data for a share outstanding throughout the period January 1, 1997
through June 30, 1997, 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 Class A Class B Class A Class B September 13(a)
-------- ------- -------- ------- ------- --------- through
January 1 through Year Ended Year Ended December 31,
June 30, 1997* December 31, 1996 December 31, 1995 1994
-------------------- -------------------- --------------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value at beginning of period ..... $ 10.95 $ 10.98 $ 10.43 $ 10.45 $ 9.90 $ 9.90 $ 10.00
-------- -------- -------- -------- -------- -------- --------
Net investment income ...................... 0.28 0.21 0.72 0.64 1.15 1.06 0.12
Net realized and unrealized gain (loss) on
investments ............................... (0.56) (0.47) 0.27 0.27 0.59 0.61 (0.08)
Net realized and unrealized gain (loss) on
foreign currency transactions ............. 0.29 0.24 0.41 0.42 0.07 0.07 (0.02)
-------- -------- -------- -------- -------- -------- --------
Total from investment operations ........... 0.01 (0.02) 1.40 1.33 1.81 1.74 0.02
-------- -------- -------- -------- -------- -------- --------
Less dividends and distributions:
From net investment income ................. (0.31) (0.27) (0.73) (0.65) (0.61) (0.56) (0.12)
From net realized gain on investments
and foreign currency transactions ......... -- -- (0.15) (0.15) (0.28) (0.28) --
In excess of net realized gain on
investments and foreign currency
transactions .............................. -- -- -- -- (0.39) (0.35) --
-------- -------- -------- -------- -------- -------- --------
Total dividends and distributions .......... (0.31) (0.27) (0.88) (0.80) (1.28) (1.19) (0.12)
-------- -------- -------- -------- -------- -------- --------
Net asset value at end of period ........... $ 10.65 $ 10.69 $ 10.95 $ 10.98 $ 10.43 $ 10.45 $ 9.90
======== ======== ======== ======== ======== ======== ========
Total investment return(b) ................. 0.16% (0.14%) 13.90% 13.13% 18.68% 17.96% 0.20%
Ratios (to average net assets)/
Supplemental Data:
Net investment income ..................... 5.27%+ 4.62%+ 5.4% 4.8% 5.6% 4.9% 4.8%+
Net Expenses .............................. 1.49%+ 2.14%+ 1.5% 2.1% 1.5% 2.2% 2.8%+
Expenses (before waiver) .................. 1.79%+ 2.44%+ 1.8% 2.4% 1.8% 2.5% 3.1%+
Portfolio turnover rate .................... 100% 100% 59% 59% 103% 103% 4%
Net assets at end of period (in 000's) ..... $ 11,615 $ 20,911 $ 11,965 $ 19,020 $ 11,494 $ 13,212 $ 17,155
</TABLE>
- ---------
* Unaudited.
+ Annualized.
(a) Commencement of operations.
(b) Total return is calculated exclusive of sales charges and is not
annualized.
26
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
================================================================================
MAINSTAY STRATEGIC INCOME FUND
================================================================================
Selected data for a share outstanding throughout the period February 28, 1997
through June 30, 1997.
<TABLE>
<CAPTION>
Class A Class B
---------- ----------
February 28, 1997(a)
through
June 30, 1997*
-------------------------
<S> <C> <C>
Net asset value at beginning of period .......................... $ 10.00 $ 10.00
---------- ----------
Net investment income ........................................... 0.18 0.16
Net realized and unrealized gain on investments ................. 0.08 0.08
Net realized and unrealized gain on foreign currency transactions 0.03 0.03
---------- ----------
Total from investment operations ................................ 0.29 0.27
---------- ----------
Less dividends:
From net investment income ...................................... (0.17) (0.16)
---------- ----------
Net asset value at end of period ................................ $ 10.12 $ 10.11
========== ==========
Total investment return (b) ..................................... 2.97% 2.68%
Ratios (to average net assets)/Supplemental Data:
Net investment income .......................................... 6.54%+ 5.79%+
Net expenses ................................................... 1.15%+ 1.90%+
Expenses (before reimbursement) ................................ 1.41%+ 2.16%+
Portfolio turnover rate ......................................... 129% 129%
Net assets at end of period (in 000's) .......................... $ 28,740 $ 24,539
</TABLE>
- ----------
* Unaudited.
+ Annualized.
(a) Commencement of operations.
(b) Total return is calculated exclusive of sales charges and is not
annualized.
27
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
================================================================================
MAINSTAY MONEY MARKET FUND
================================================================================
Selected data for a share outstanding throughout the period January 1, 1997
through June 30, 1997, 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 and August 31, 1987.
<TABLE>
<CAPTION>
Class A Class B Class A Class B Class A Class B
-------- ---------- -------- ---------- ------- ----------
January 1 through Year Ended Year Ended
June 30, 1997* December 31, 1996 December 31, 1995
----------------------- ----------------------- ---------------------
<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 ....................... 0.02 0.02 0.05 0.05 0.05 0.05
-------- --------- --------- --------- -------- ---------
Less dividends from net investment income ... (0.02) (0.02) (0.05) (0.05) (0.05) (0.05)
-------- --------- --------- --------- -------- ---------
Net asset value at end of period ............ $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ========= ========= ========= ======== =========
Total investment return(b) .................. 2.46% 2.46% 4.91% 4.91% 5.51% 5.51%
Ratios (to average net
assets)/Supplemental Data:
Net investment income ...................... 4.91%+ 4.91%+ 4.8% 4.8% 5.4% 5.4%
Net expenses ............................... 0.70%+ 0.70%+ 0.7% 0.7% 0.7% 0.7%
Expenses (before waiver and reimbursement) 0.96%+ 0.96%+ 1.0% 1.0% 0.9% 0.9%
Net assets at end of period (in 000's) ...... $ 70,392 $ 339,492 $ 53,890 $ 317,483 $ 34,880 $ 279,843
</TABLE>
- ----------
* Unaudited.
+ Annualized.
(a) The Fund changed its fiscal year end from August 31 to December 31.
(b) Total return is not annualized.
28
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
================================================================================
================================================================================
<TABLE>
<CAPTION>
Class B
- ------------------------------------------------------------------------------------------------------------------------------------
September 1
through Year Ended August 31,
December 31, ------------------------------------------------------------------------------------------------------------------
1994(a) 1994 1993 1992 1991 1990 1989 1988 1987
---------- ---------- -------- -------- -------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
- --------- --------- --------- --------- --------- --------- --------- -------- --------
0.02 0.03 0.03 0.04 0.06 0.08 0.08 0.06 0.05
- --------- --------- --------- --------- --------- --------- --------- -------- --------
(0.02) (0.03) (0.03) (0.04) (0.06) (0.08) (0.08) (0.06) (0.05)
- --------- --------- --------- --------- --------- --------- --------- -------- --------
$ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
========= ========= ========= ========= ========= ========= ========= ======== ========
1.54% 3.08% 2.71% 3.80% 6.63% 8.36% 8.75% 6.76% 5.11%
4.6%+ 3.1% 2.7% 4.0% 6.5% 7.7% 8.6% 6.5% 5.1%
0.7%+ 0.7% 0.7% 0.7% 0.7% 0.7% 0.7% 0.8% 1.3%
0.9%+ 1.0% 0.9% 1.0% 0.9% 0.9% 1.0% 1.0% 1.6%
$ 221,912 $ 192,477 $ 149,907 $ 182,567 $ 246,954 $ 256,489 $ 171,088 $ 59,572 $ 24,646
</TABLE>
29
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
================================================================================
MAINSTAY CALIFORNIA TAX FREE FUND
================================================================================
Selected data for a share outstanding throughout the period January 1, 1997
through June 30, 1997, 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 through August 31,
1992.
<TABLE>
<CAPTION>
Class A Class B Class A Class B
---------- ---------- ---------- ----------
January 1 through Year Ended
June 30, 1997* December 31, 1996
------------------------- -------------------------
<S> <C> <C> <C> <C>
Net asset value at beginning of period .......... $ 9.78 $ 9.75 $ 9.95 $ 9.91
---------- ---------- ---------- ----------
Net investment income ........................... 0.24 0.23 0.49 0.45
Net realized and unrealized gain (loss) on
investments .................................... (0.02) (0.01) (0.16) (0.16)
---------- ---------- ---------- ----------
Total from investment operations ................ 0.22 0.22 0.33 0.29
---------- ---------- ---------- ----------
Less dividends and distributions:
From net investment income ...................... (0.24) (0.23) (0.50) (0.45)
From net realized gain on investments ........... -- -- -- --
---------- ---------- ---------- ----------
Total dividends and distributions ............... (0.24) (0.23) (0.50) (0.45)
---------- ---------- ---------- ----------
Net asset value at end of period ................ $ 9.76 $ 9.74 $ 9.78 $ 9.75
========== ========== ========== ==========
Total investment return(c) ...................... 2.29% 2.28% 3.44% 3.10%
Ratios (to average net assets)/Supplemental Data:
Net investment income .......................... 5.03%+ 4.78%+ 5.0% 4.7%
Net expenses ................................... 1.24%+ 1.49%+ 1.24% 1.49%
Expenses (before reimbursement) ................ 1.29%+ 1.54%+ 1.3% 1.6%
Portfolio turnover rate ......................... 44%+ 44%+ 79% 79%
Net assets at end of period (in 000's) .......... $ 16,605 $ 6,071 $ 18,098 $ 5,089
</TABLE>
- ----------
* Unaudited.
+ Annualized.
(a) The Fund changed its fiscal year end from August 31 to December 31.
(b) Commencement of operations.
(c) Total return is calculated exclusive of sales charges and is not
annualized.
30
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
================================================================================
================================================================================
<TABLE>
<CAPTION>
Class A
---------------------------------------------------------
October 1,
Class A Class B September 1 Year Year 1991(b)
- ---------- ---------- through Ended Ended through
Year Ended December 31, August 31, August 31, August 31,
December 31, 1995 1994(a) 1994 1993 1992
- ------------------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
$ 9.10 $ 9.10 $ 9.57 $ 10.38 $ 9.90 $ 9.55
- ---------- ---------- ---------- ---------- ---------- ----------
0.50 0.52 0.17 0.53 0.55 0.45
0.85 0.81 (0.47) (0.51) 0.64 0.30
- ---------- ---------- ---------- ---------- ---------- ----------
1.35 1.33 (0.30) 0.02 1.19 0.75
- ---------- ---------- ---------- ---------- ---------- ----------
(0.50) (0.52) (0.17) (0.52) (0.59) (0.40)
-- -- -- (0.31) (0.12) --
- ---------- ---------- ---------- ---------- ---------- ----------
(0.50) (0.52) (0.17) (0.83) (0.71) (0.40)
- ---------- ---------- ---------- ---------- ---------- ----------
$ 9.95 $ 9.91 $ 9.10 $ 9.57 $ 10.38 $ 9.90
========== ========== ========== ========== ========== ==========
15.18% 14.91% (3.11%) 0.12% 12.58% 8.02%
5.3% 5.1% 5.5%+ 5.4% 5.6% 5.6%+
1.24% 1.49% 0.99%+ 0.99% 0.99% 0.99%+
1.4% 1.7% 1.2%+ 1.1% 1.2% 1.6%+
107% 107% 24% 96% 154% 87%
$ 19,825 $ 1,963 $ 16,667 $ 17,356 $ 14,603 $ 10,085
</TABLE>
31
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
================================================================================
MAINSTAY NEW YORK TAX FREE FUND
================================================================================
Selected data for a share outstanding throughout the period January 1, 1997
through June 30, 1997, 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 through August 31,
1992.
<TABLE>
<CAPTION>
Class A Class B Class A Class B
---------- ---------- ---------- ----------
January 1 through Year Ended
June 30, 1997* December 31, 1996
------------------------- -------------------------
<S> <C> <C> <C> <C>
Net asset value at beginning of period .......... $ 9.91 $ 9.84 $ 10.12 $ 10.02
---------- ---------- ---------- ----------
Net investment income ........................... 0.24 0.23 0.50 0.45
Net realized and unrealized gain (loss) on
investments .................................... 0.03 0.03 (0.21) (0.18)
---------- ---------- ---------- ----------
Total from investment operations ................. 0.27 0.26 0.29 0.27
---------- ---------- ---------- ----------
Less dividends and distributions:
From net investment income ...................... (0.24) (0.23) (0.50) (0.45)
From net realized gain on investments ........... -- -- -- --
---------- ---------- ---------- ----------
Total dividends and distributions ............... (0.24) (0.23) (0.50) (0.45)
---------- ---------- ---------- ----------
Net asset value at end of period ................ $ 9.94 $ 9.87 $ 9.91 $ 9.84
========== ========== ========== ==========
Total investment return(c) ...................... 7.35% 7.08% 3.06% 2.86%
Ratios (to average net assets)/Supplemental Data:
Net investment income .......................... 5.09%+ 4.84%+ 5.0% 4.7%
Net expenses ................................... 1.24%+ 1.49%+ 1.24% 1.49%
Expenses (before reimbursement) ................ 1.40%+ 1.65%+ 1.4% 1.6%
Portfolio turnover rate ......................... 81% 81% 114% 114%
Net assets at end of period (in 000's) .......... $ 13,789 $ 4,746 $ 15,572 $ 4,100
</TABLE>
- ----------
* Unaudited.
+ Annualized.
(a) The Fund changed its fiscal year end from August 31 to December 31.
(b) Commencement of operations.
(c) Total return is calculated exclusive of sales charges and is not
annualized.
32
<PAGE>
- -------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
================================================================================
================================================================================
<TABLE>
<CAPTION>
Class A
---------------------------------------------------------
October 1,
Class A Class B September 1 Year Year 1991(b)
- ---------- ---------- through Ended Ended through
Year Ended December 31, August 31, August 31, August 31,
December 31, 1995 1994(a) 1994 1993 1992
- ------------------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
$ 9.20 $ 9.20 $ 9.58 $ 10.43 $ 9.95 $ 9.55
---------- ---------- ---------- ---------- ---------- ----------
0.52 0.59 0.19 0.56 0.60 0.49
0.91 0.82 (0.39) (0.59) 0.54 0.34
---------- ---------- ---------- ---------- ---------- ----------
1.43 1.41 (0.20) (0.03) 1.14 0.83
---------- ---------- ---------- ---------- ---------- ----------
(0.51) (0.59) (0.18) (0.57) (0.65) (0.43)
-- -- -- (0.25) (0.01) --
---------- ---------- ---------- ---------- ---------- ----------
(0.51) (0.59) (0.18) (0.82) (0.66) (0.43)
---------- ---------- ---------- ---------- ---------- ----------
$ 10.12 $ 10.02 $ 9.20 $ 9.58 $ 10.43 $ 9.95
========== ========== ========== ========== ========== ==========
15.97% 15.67% (2.11%) (0.35%) 11.88% 8.95%
5.4% 5.1% 6.1%+ 5.7% 6.0% 5.9%+
1.24% 1.49% 0.99%+ 0.99% 0.98% 0.99%+
1.4% 1.6% 1.2%+ 1.1% 1.2% 1.5%+
114% 114% 39% 169% 131% 23%
$ 18,248 $ 1,588 $ 17,106 $ 17,862 $ 15,665 $ 10,605
</TABLE>
33
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
================================================================================
MAINSTAY TAX FREE BOND FUND
================================================================================
Selected data for a share outstanding throughout the period January 1, 1997
through June 30, 1997, 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 and August 31, 1987.
<TABLE>
<CAPTION>
Class A Class B Class A Class B Class A Class B
-------- ---------- -------- ---------- ------- ----------
January 1 through Year Ended Year Ended
June 30, 1997* December 31, 1996 December 31, 1995
----------------------- ----------------------- ---------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value at beginning of period $ 9.84 $ 9.84 $ 10.02 $ 10.03 $ 9.20 $ 9.20
--------- --------- --------- ----------- ------- ---------
Net investment income ................. 0.26 0.25 0.54 0.51 0.52 0.51
Net realized and unrealized gain (loss)
on investments ....................... 0.02 0.03 (0.19) (0.19) 0.83 0.83
--------- --------- --------- ----------- ------- ---------
Total from investment operations ...... 0.28 0.28 0.35 0.32 1.35 1.34
--------- --------- --------- ----------- ------- ---------
Less dividends and distributions:
From net investment income ............ (0.25) (0.24) (0.53) (0.51) (0.53) (0.51)
From net realized gain on investments . -- -- -- -- -- --
--------- --------- --------- ----------- ------- ---------
Total dividends and distributions ..... (0.25) (0.24) (0.53) (0.51) (0.53) (0.51)
--------- --------- --------- ----------- ------- ---------
Net asset value at end of period ...... $ 9.87 $ 9.88 $ 9.84 $ 9.84 $ 10.02 $ 10.03
========= ========= ========= =========== ======= =========
Total investment return(b) ............ 2.92% 2.90% 3.63% 3.33% 15.00% 14.86%
Ratios (to average net assets)
/Supplemental Data:
Net investment income ................ 5.37%+ 5.17%+ 5.4% 5.2% 5.5% 5.2%
Net expenses ......................... 1.01%+ 1.21%+ 1.0% 1.2% 1.0% 1.2%
Portfolio turnover rate ............... 58% 58% 95% 95% 110% 110%
Net assets at end of period (in 000's) $ 12,441 $ 478,743 $ 16,486 $ 496,231 $ 9,752 $ 543,314
</TABLE>
- ----------
* Unaudited.
+ Annualized.
(a) The Fund changed its fiscal year end from August 31 to December 31.
(b) Total return is calculated exclusive of sales charges and is not
annualized.
34
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
================================================================================
================================================================================
<TABLE>
<CAPTION>
Class B
- ------------------------------------------------------------------------------------------------------------------------------------
September 1
through Year Ended August 31,
December 31, ------------------------------------------------------------------------------------------------------------------
1994(a) 1994 1993 1992 1991 1990 1989 1988 1987
---------- ---------- -------- -------- -------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 9.71 $ 10.39 $ 10.21 $ 9.82 $ 9.40 $ 9.74 $ 9.60 $ 9.73 $ 10.02
- ----------- ----------- ---------- ---------- ---------- --------- --------- ---------- ---------
0.17 0.54 0.57 0.59 0.59 0.61 0.70 0.65 0.67
(0.51) (0.61) 0.47 0.40 0.43 (0.33) 0.08 (0.13) (0.29)
- ----------- ----------- ---------- ---------- ---------- --------- --------- ---------- ---------
(0.34) (0.07) 1.04 0.99 1.02 0.28 0.78 0.52 0.38
- ----------- ----------- ---------- ---------- ---------- --------- --------- ---------- ---------
(0.17) (0.53) (0.60) (0.60) (0.60) (0.62) (0.64) (0.65) (0.67)
-- (0.08) (0.26) -- -- -- -- -- --
- ----------- ----------- ---------- ---------- ---------- --------- --------- ---------- ---------
(0.17) (0.61) (0.86) (0.60) (0.60) (0.62) (0.64) (0.65) (0.67)
- ----------- ----------- ---------- ---------- ---------- --------- --------- ---------- ---------
$ 9.20 $ 9.71 $ 10.39 $ 10.21 $ 9.82 $ 9.40 $ 9.74 $ 9.60 $ 9.73
=========== =========== ========== ========== ========== ========= ========= ========== =========
(3.53%) (0.69%) 10.81% 10.42% 11.21% 2.88% 8.34% 5.60% 3.30%
5.6%+ 5.4% 5.6% 5.9% 6.1% 6.4% 6.8% 6.8% 7.0%
1.2%+ 1.2% 1.2% 1.3% 1.4% 1.4% 1.6% 1.5% 1.5%
37% 92% 138% 97% 52% 44% 186% 215% 153%
$ 513,781 $ 552,156 $ 476,761 $ 292,936 $ 174,625 $ 131,342 $ 111,787 $ 82,042 $ 67,559
</TABLE>
35
<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.
- --------------------------------------------------------------------------------
WHO'S MANAGING YOUR MONEY?
EDMUND SPELMAN AND RUDOLPH CARRYL OF MACKAY-SHIELDS FINANCIAL CORPORATION.
Mr. Spelman is a Managing 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 and
became a Managing Director in 1997. 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.
================================================================================
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. Mackay-Shields
selects investments according to the economic environment and the attractiveness
of particular markets. Generally, 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
stocks 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 50-51,
"General Investment Considerations" and pages 67-72, "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.
- --------------------------------------------------------------------------------
36
<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 pages 63-64 for more details about the Fund.
- --------------------------------------------------------------------------------
Guarantee. This Fund comes with an unconditional guarantee from NYLIFE, Inc.
that, 10 years from your date of purchase, the net asset value of a unit (equal
to the NAV of a Fund share when purchased, plus the value of all cumulative
reinvested dividends and distributions attributable to such share paid during
the 10-year period) will not be less than the price you paid for the Fund share.
For details and limitations of the guarantee, see "Other Information About the
Funds--Equity Index Fund."
- --------------------------------------------------------------------------------
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 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 represented 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 50-51,
"General Investment Considerations" and pages 67-72, "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.
- --------------------------------------------------------------------------------
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 Manager or
Sub-Adviser takes any stance on the stock's investment value.
37
<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 pages 65-66 for more details about the Fund.
- --------------------------------------------------------------------------------
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.
================================================================================
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 Sub-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 pages 65-66,
"Other Information About the Funds--International Equity Fund.")
...other investments suitable for most or all MainStay Funds. (See pages 50-51,
"General Investment Considerations" and pages 67-72, "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 and 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 68, "Description of Investments and
Investment Practices--Foreign Securities.")
- --------------------------------------------------------------------------------
Securities of issuers in one country may be denominated in the currency of
another country.
38
<PAGE>
================================================================================
Convertible 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 or the cash value of a stock or
a basket or index of equity securities.
See page 63 for more details about the Fund.
- --------------------------------------------------------------------------------
WHO'S MANAGING YOUR MONEY?
DENIS LAPLAIGE, NEIL FEINBERG AND THOMAS WYNN OF MACKAY-SHIELDS FINANCIAL
CORPORATION.
Mr. Laplaige is President, Senior Managing Director and Chief Investment Officer
of MacKay-Shields. He joined the firm in 1982, became a Director in 1988,
Managing Director in 1991, a member of the Board of Directors in 1993, Senior
Managing Director, and Chief Investment Officer in 1996. He has managed this
Fund since 1991 and is also a manager of the Strategic Value Fund, 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 Fund since
he joined the firm in 1992 and is a Manager of the Strategic Income and
Strategic Value Funds. 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. Mr. Wynn has been a
portfolio manager for the Convertible Fund since 1997 and joined the firm in
1995 as a research analyst. He was previously a portfolio manager at Fiduciary
Trust for nine years and has over twelve years experience in investment
management and research.
================================================================================
The Fund invests in:
================================================================================
Under normal market conditions...
...at least 65% of net assets in convertible securities (such as preferred
stock, bonds, debentures, corporate notes, and others which can be converted
into common stock or the cash value of a stock or a basket or index of equity
securities).
The Fund takes a flexible approach by 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 Sub-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 non-convertible 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 50-51,
"General Investment Considerations" and pages 67-72, "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.
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 71, "Risks of Investing in High Yield Securities ('Junk
Bonds')" for more details; and Appendix A for a description of ratings.)
- --------------------------------------------------------------------------------
39
<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 67 for more details about the Fund.
- --------------------------------------------------------------------------------
WHO'S MANAGING YOUR MONEY?
RAVI AKHOURY, EDMUND SPELMAN AND RUDOLPH 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, Chairman
and CEO in 1992 and Senior Managing Director of Mackay-Shields and Executive
Vice President of New York Life Insurance Company and Chief Executive Officer of
New York Life Asset Management, a division of New York Life Insurance Company in
1997 . 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 36.
================================================================================
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 Sub-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
Sub-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 Sub-Adviser to be
of comparable quality.
...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 50-51,
"General Investment Considerations" and pages 67-72, "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) are considered speculative and are sometimes called "junk
bonds." (See page 71 for more details; and Appendix A for ratings descriptions.)
- --------------------------------------------------------------------------------
40
<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.
- --------------------------------------------------------------------------------
WHO'S MANAGING YOUR MONEY?
DENIS LAPLAIGE AND JEFFREY A. SIMON OF MACKAY-SHIELDS FINANCIAL CORPORATION.
Mr. Laplaige, President, Senior Managing Director and Chief Investment Officer
of MacKay-Shields, has served as a portfolio manager of the Value Fund since
1986. His biography is on page 39. Mr. Simon joined MacKay-Shields in 1993. Mr.
Simon is a Managing 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.
================================================================================
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 Sub-Adviser believes were "undervalued" (selling below their value)
when purchased;
o typically pay dividends, although there may be non-dividend-paying stocks
if they meet the "undervalued" criteria; 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 50-51,
"General Investment Considerations" and pages 67-72, "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 Sub-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 Sub-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.
- --------------------------------------------------------------------------------
41
<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 64 for more details about the Fund.
- --------------------------------------------------------------------------------
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 40.
Mr. Munshower is a Director of MacKay-Shields and has been a portfolio manager
for the Government Fund since 1986. Mr. Munshower is also the portfolio manager
for the Strategic Income Fund. 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.
================================================================================
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 total assets in mortgage-backed and asset-backed securities that
are not U.S. government securities.
...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 50-51,
"General Investment Considerations" and pages 67-72, "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, and 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.
- --------------------------------------------------------------------------------
42
<PAGE>
================================================================================
High Yield Corporate Bond Fund
The Fund's 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 pages 64-65 for more details about the Fund.
- --------------------------------------------------------------------------------
WHO'S MANAGING YOUR MONEY?
DENIS LAPLAIGE AND STEVEN TANANBAUM OF MACKAY-SHIELDS FINANCIAL CORPORATION.
Mr. Laplaige, President, Senior Managing Director and Chief Investment Officer
of MacKay-Shields, has served as portfolio manager of the High Yield Corporate
Bond Fund since 1991. His biography is on page 39. Mr. Tananbaum has been a
portfolio manager for the Fund since he joined MacKay-Shields in 1989 and is a
portfolio manager for the Strategic Income Fund and the Strategic Value Fund. He
is also a Managing Director at MacKay-Shields. Previously, he worked as a high
yield and merger associate intern in the corporate finance department at Kidder
Peabody.
================================================================================
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).
...without restriction in securities rated at least Ba or B by Moody's, BB or B
by S&P, or unrated securities determined by the Sub-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 50-51,
"General Investment Considerations" and pages 67-72, "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 71, "Risks of Investing in High Yield
Securities ('Junk Bonds').") Seeking to reduce risk, the Fund's Sub-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.)
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 68, "Description of Investments and
Investment Practices--Foreign Securities.")
If the Sub-Adviser is incorrect in its expectations of changes in interest
rates, or in its evaluation of the normal yield relationship between two
securities, the Fund's income, NAV and potential capital gains could decrease,
or the potential loss could increase. This and other factors may affect the
income available for distribution to shareholders.
- --------------------------------------------------------------------------------
43
<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 65 for more details about the Fund.
- --------------------------------------------------------------------------------
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 is also a portfolio manager for the Strategic Income Fund. 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 to 1991.
================================================================================
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 five 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 Sub-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, determined by the Sub-Adviser to be of
comparable 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 65,
"Other Information About the Funds--International Bond Fund.")
...other investments suitable for most or all MainStay Funds. (See pages 50-51,
"General Investment Considerations" and pages 67-72, "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 71, "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 68, "Description of Investments and
Investment Practices--Foreign Securities.")
There are certain risks associated with investments in securities with floating
or inverse floating rates of interest. (See page 68, "Description of Investments
and Investment Practices--Floaters and Inverse Floaters.")
- --------------------------------------------------------------------------------
Securities of issuers in one country may be denominated in the currency of
another country.
44
<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 397
days).
...bank and bank holding company obligations (including CDs and bankers'
acceptances).
...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 and securities
subject to certain puts) except, up to 25% of total assets may be invested in
securities of a single 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,
determined to be of comparable quality by the Sub-Adviser.
...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, determined to be of comparable quality by the Sub-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 Sub-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).
- --------------------------------------------------------------------------------
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.)
45
<PAGE>
================================================================================
Strategic Income Fund
The Fund's objective is:
================================================================================
to provide current income and competitive overall return by investing primarily
in domestic and foreign debt securities.
Who should invest? Investors who seek an opportunity for potentially higher
income and overall return by investing in multiple bond market sectors.
See page 66 for more details about the Fund.
- --------------------------------------------------------------------------------
WHO'S MANAGING YOUR MONEY?
NEIL FEINBERG, JOSEPH PORTERA, EDWARD MUNSHOWER AND STEVEN TANANBAUM OF
MACKAY-SHIELDS FINANCIAL CORPORATION. Messrs. Feinberg, Portera and Tananbaum
have served as portfolio managers since the Fund started in 1997. Their
biographies appear on pages 39, 44, and 43, respectively. Mr. Munshower also
serves as portfolio manager for the Fund. His biography appears on page 42.
================================================================================
The Fund invests in:
================================================================================
Under normal market conditions...
...at least 65% of total assets in a diversified portfolio of domestic and
foreign debt or debt-related securities issued by government and corporate
issuers. The securities may be denominated in U.S. or foreign currency, and may
have fixed, variable, floating or inverse floating rates of interest. Maturities
of the securities held by the Fund will vary.
...various bond market sectors (U.S. government--including mortgage-related
securities, foreign government, U.S. corporate and foreign corporate including
high yield securities in each of the foregoing sectors). The Sub-Adviser will
allocate the Fund's investments among the various bond market sectors based on
current and projected economic and market conditions.
... a variety of countries, which may include 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 Sub-Adviser believes present favorable opportunities.
...securities rated below BBB by S&P or Baa by Moody's or, if unrated,
determined by the Sub-Adviser to be of comparable quality.
...not more than 15% of net assets in securities rated lower than B by S&P or
Moody's.
...up to 30% of total assets in equity securities, including common stocks,
preferred stocks, warrants and rights.
...securities in which the Fund may invest include:
o obligations issued or guaranteed by the U.S. or foreign governments, their
agencies, subdivisions or instrumentalities, obligations of supranational
entities or international agencies;
o debt securities issued by domestic or foreign corporate entities, zero
coupon bonds, and municipal bonds;
o mortgage-backed and other asset-backed securities;
o loan participation interests;
o securities that are privately issued and/or convertible into common stock,
or securities traded together with warrants for the purchase of common
stock; and
o cash equivalents.
...futures on debt securities and bond index futures, options on these futures
and options on debt securities.
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.
...other investments suitable for the Fund. (See pages 50-51, "General
Investment Considerations" and pages 67-72, "Description of Investments and
Investment Practices.")
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Risks? The NAV of the Fund's shares will fluctuate depending on a number of
factors. Generally, when interest rates fall, the NAV rises, and when interest
rates rise, the NAV declines. Other factors such as changes in the perceived
creditworthiness of certain issuers, changes in the relative values of currency,
and changes in the average maturity of the Fund's investments can also affect
NAV.
The risks of investing in particular types of debt securities also may vary. For
example, some types of debt securities are particularly sensitive to interest
rate changes (e.g. zero coupon bonds and some mortgage- or asset-backed
securities) and may therefore be especially volatile. Others may entail unique
or special risks that can affect value. For example, securities rated below BBB
or Baa (sometimes called "junk bonds") are not considered "investment-grade" and
run greater risks of price fluctuations, loss of principal and interest, default
or bankruptcy by the issuer, and other risks which is why these securities are
considered speculative.
Investments in foreign securities could be more volatile and more difficult to
sell than U.S. investments, and involve additional risks, including currency
fluctuations and political and economic instabilities.
There are certain risks associated with investments in securities with floating
or inverse floating rates of interest.
Securities of issuers in one country may be denominated in the currency of
another country.
For additional information regarding risks associated with investment in the
Fund, see pages 67-72, "Description of Investments and Investment Practices."
- --------------------------------------------------------------------------------
46
<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.
- --------------------------------------------------------------------------------
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 40. Mr. Flood, a
Director of MacKay-Shields, has been a portfolio manager for the Fund since
1992. His biography appears on page 49.
================================================================================
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; or
o unrated securities determined by the Sub-Adviser to be of comparable
quality.
The two main types of municipal bonds are "General Obligation" and "Revenue"
bonds. (See page 69, "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 50-51,
"General Investment Considerations" and pages 67-72, "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 the Fund's NAV--may rise or fall due
to various factors. These factors include 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 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. (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 70,
"Description of Investments and Investment Practices--Risk Management
Techniques.")
- --------------------------------------------------------------------------------
To help you decide whether taxable or non-taxable yields are better for you, see
page 87 for a comparative yield table.
47
<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.
- --------------------------------------------------------------------------------
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 40. Mr. Flood, a
Director of MacKay-Shields, has been a portfolio manager for the Fund since
1992. His biography appears on page 49.
================================================================================
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; or
o unrated securities determined by the Sub-Adviser to be of comparable
quality.
The two main types of municipal bonds are "General Obligation" and "Revenue"
bonds. (See page 69, "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 50-51,
"General Investment Considerations" and pages 67-72, "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 the Fund's NAV--may rise or fall due
to various factors. These factors may include 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 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. (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 70,
"Description of Investments and Investment Practices--Risk Management
Techniques.")
- --------------------------------------------------------------------------------
To help you decide whether taxable or non-taxable yields are better for you, see
page 87 for a comparative yield table.
48
<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 67 for more details about the Fund.
- --------------------------------------------------------------------------------
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 1986. His biography appears on page 36. 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.
================================================================================
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 Sub-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 69, "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 determined
by the Sub-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 net assets in illiquid municipal lease obligations and
other securities that are "illiquid" (can't be easily sold). (See page 51 for
more details.)
...other investments suitable for most or all MainStay Funds. (See pages 50-51,
"General Investment Considerations" and pages 67-72, "Description of Investments
and Investment Practices," for details.)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Risks? The value of these securities--and the Fund's NAV--may rise or fall due
to various factors. These factors include changes in interest rates, and the
ablility 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.
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 Fund" and "Tax Free Bond Fund" in
the SAI.)
- --------------------------------------------------------------------------------
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 87 for a comparative yield table.
49
<PAGE>
- --------------------------------------------------------------------------------
General Investment Considerations
- --------------------------------------------------------------------------------
================================================================================
SOME IMPORTANT POINTS TO UNDERSTAND ABOUT INVESTING IN MUTUAL FUNDS
================================================================================
- --------------------------------------------------------------------------------
[ARROW] 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 which seeks to maintain a stable NAV of $1 per
share) 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 pages 63-64,
"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.
The Money Market Fund, in order to comply with Rule 2a-7 of the 1940 Act, has
adopted a non-fundamental investment restriction that with respect to 100% 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 pages 67-68 under "Description of
Investments and Investment Practices--Cash Equivalents"). In addition, under
such circumstances:
50
<PAGE>
- --------------------------------------------------------------------------------
General Investment Considerations
- --------------------------------------------------------------------------------
...The 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;
...The International Equity Fund may invest up to 5% of its total assets in debt
instruments rated below investment-grade;
...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 Sub-Adviser, no suitable tax-exempt
securities are available, the California Tax Free Fund and New York Tax Free
Fund may each 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 that it will not invest more than 10% of
its net assets (15% for the International Bond, International Equity and
Strategic Income 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 or Section 4(1) under the Securities
Act of 1933 ("1933 Act") determined to be liquid pursuant to procedures
established by the Board of Trustees), 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 Sub-Adviser are deemed
illiquid.
There may be undesirable delays and added costs in selling restricted
securities.
- --------------------------------------------------------------------------------
The effects of trading costs on your total return
"Portfolio turnover" is the term used in the industry for measuring the amount
of trading 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 (over 100%) often have higher transaction costs
(which are paid by the fund) and may generate short-term capital gains (on which
you'll pay taxes, even if you don't sell any shares by year-end).
You can find the turnover rate for any fund, except for Money Market 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.
- --------------------------------------------------------------------------------
================================================================================
[ARROW] Take note:
================================================================================
The High Yield Corporate Bond and International Bond Funds normally must each
invest at least 65% of its total assets in "bonds," and the Tax Free Bond Fund
normally must invest at least 80% 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 64, 65 and 67.
- --------------------------------------------------------------------------------
51
<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 of Trustees 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 shares of the Money Market Fund only to
track exchanges from other Funds within the same class.
================================================================================
[ARROW] Take note: The Equity Index Fund only offers Class A shares.
================================================================================
================================================================================
WHAT ARE THE DIFFERENCES IF YOU...
...PAY UP-FRONT (CLASS A SHARES)?
vs
...PAY WHEN YOU REDEEM/SELL (CLASS B 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 53, "Consider Reducing Your
Sales Charge," for details).
You pay lower ongoing Rule 12b-1 fees--which means there's more net income to
pay you higher dividends per share.
You pay no sales charge when you redeem/sell your shares (except if you bought
more than $1 million of shares and redeemed within 1 year, see page 53).
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 78, "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.
================================================================================
[ARROW] Take note: If you hold Class B shares for eight years they will be
automatically converted to Class A shares which pay lower 12b-1 fees.
================================================================================
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
52
<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 shares you own--excluding Money
Market Fund shares. This is helpful because the more you invest with MainStay,
the lower the sales charge. (See "Alternative Sales Arrangements," page 77.)
Make your actions known
To receive the reduced sales charge, you must convey the information about the
shares you already own at the time you buy on the new account application. This
privilege of "Rights of Accumulation" may be ended or altered at any time upon
written notice.
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 77. For more
information on LOIs, call your Registered Representative or MainStay Shareholder
Services, Inc. ("MSS") at 1-800-MAINSTAY.
INVEST $1,000,000 OR MORE
If you invest $1,000,000 or more in Class A shares of one or more MainStay
Funds, and don't sell the shares for at least one year, the up-front sales
charge is waived. If you sell the shares within one year, you may pay a sales
charge of 1% upon sale. See page 78, "Reduced Sales Charges on Class A
Shares--Contingent Deferred Sales Charge, Class A," for details. (This rule
doesn't apply to exchanges between MainStay Funds.) Purchases of $1,000,000 or
more must be for Class A shares only.
================================================================================
[ARROW] 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 78 for the full listing.)
- --------------------------------------------------------------------------------
53
<PAGE>
- --------------------------------------------------------------------------------
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 MSS,
help you complete the application correctly and send it in for you.
MSS 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; and
o other requested information.
================================================================================
HOW TO BUY SHARES
================================================================================
[GRAPHIC] 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: The MainStay Funds, PO Box 8401, Boston, MA
02266-8401. Please include your fund and account number and class of shares with
all checks.
[GRAPHIC] 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 in good order, plus any sales charge for Class A shares. Have your
Registered Representative call MSS. 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. MSS must receive your payment (and the
application, if it's your initial investment) within the next 3 business days.
All calls are recorded.
54
<PAGE>
- --------------------------------------------------------------------------------
...Buy Shares
- --------------------------------------------------------------------------------
MAKE SURE YOU ARE USING THE PROPER FORMS
Your order to buy is only accepted when received by MSS 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.
[ARROW] 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 attributable to that class; and
o dividing the remainder by the total number of shares owned of that class.
(See page 82 and the SAI for the full details on calculating NAV.)
[ARROW] Make sure your application is complete
MainStay and MSS 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 receive checks for the dividends or capital gains you
earn, you must grant authorization on the application.
If you do not want the ability to sell shares by telephone, you must
indicate that on the application.
================================================================================
================================================================================
[GRAPHIC] WIRE MONEY FROM YOUR BANK ACCOUNT
Have your Registered Representative call MSS for an account number and wiring
instructions. Give them to your bank, which may charge a fee for wiring. MSS
must receive your payment (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 MSS before 4:00 pm Eastern time.
(See page 76, "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 may withhold payment for up to 10 days to allow the check to
clear.
[GRAPHIC] SET UP A SYSTEMATIC INVESTMENT 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 pages 76-77, "How to Purchase Shares of the
Funds--Systematic Investment Plans," for waiving minimums and for details on
AutoInvest.)
55
<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 MSS 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 BY 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.
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 80, "Redemptions and
Exchanges--Exchange Privileges," for details.)
OPTION 1
WRITE A CHECK (IF YOU OWN SHARES OF THE MONEY MARKET FUND) [GRAPHIC]
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.
================================================================================
[ARROW] 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 allow you to add to your account and
avoid the redemption.
To avoid paying a reporting penalty, we may also redeem your shares if you
haven't given us a certified Taxpayer I.D. number.
- --------------------------------------------------------------------------------
OPTION 2
USE A SYSTEMATIC WITHDRAWAL PLAN [GRAPHIC]
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.
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OPTION 3
MAKE A TELEPHONE REQUEST:
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. Transfers
between different accounts are only allowed if made in writing and include
the proper information--ask your Registered Representative.
Telephone redemptions are not permitted for shares:
o represented by certificates;
o bought within the previous 10 calendar days; or
o owned by someone whose address of record has changed within the previous 30
days.
Telephone exchanges are not permitted for shares represented by certificates.
================================================================================
[ARROW] 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 MSS will be liable for following instructions via the phone that they
reasonably believe are genuine. When using the MainStay Audio Response System,
you bear the risk of any loss from your errors in using the System, unless the
Fund or MSS 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; and
o written confirmation of every transaction is sent to your address of
record.
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- --------------------------------------------------------------------------------
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 may withhold payment for up to 10
days to allow the check to clear.
- --------------------------------------------------------------------------------
If you're requesting a wire transfer by phone
o Minimum amount: $5,000
o Limit: One every 30 days
o Authorization: You must select this option on your application initially or
request it in writing at a later date.
After receiving your sell order by phone, we will send the proceeds by bank wire
to your designated bank account the next business day. Your bank may charge you
a fee to receive the wire transfer.
If you're requesting a check by phone
o Maximum amount: $100,000
The check will be payable to you--as the name (or names) appear on the
account--and mailed to the address appearing on the account. (See page 80,
"Redemptions and Exchanges," for more details.)
Requests to redeem shares valued at more than $100,000 must be made in writing
and require a signature guarantee.
You may change your mind
To cancel any telephone privilege, call 1-800-MAINSTAY between 8:00 AM and 6:00
PM Eastern time. We reserve the right to suspend or end telephone privileges at
any time without notice.
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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, Government, Tax Free Bond, International Bond, Strategic
Income, California Tax Free and New York Tax Free Funds 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. If the balance results in a gain, the Fund will distribute the gain to
shareholders.
HOW TO TAKE YOUR EARNINGS
You may choose how to receive earnings (and change your choice as often as you
like) by notifying your 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
- --------------------------------------------------------------------------------
When are you paid? On the first business day of each month after a dividend is
declared.
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<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, New York Tax Free and the Tax Free Bond Funds) 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 and International Equity Funds.) Income
earned from investments in foreign countries may be withheld by those countries
as income taxes. Under certain circumstances, the Fund may elect to pass along
tax credits or deductions to you for foreign income taxes paid, although there
are no assurances that the Fund will be able to do so, or that the credits or
deductions will result in a tax benefit to you.
See pages 82-83 for the tax consequences of the Equity Index Fund guarantee.
- --------------------------------------------------------------------------------
[ARROW] 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.
- --------------------------------------------------------------------------------
[ARROW] "Tax Free" rarely means "totally tax-free"
o The California Tax Free, New York Tax Free and Tax Free Bond Funds (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.
- --------------------------------------------------------------------------------
59
<PAGE>
- --------------------------------------------------------------------------------
Know With Whom You're Investing
- --------------------------------------------------------------------------------
================================================================================
WHO RUNS THE FUND'S DAY-TO-DAY BUSINESS?
================================================================================
MainStay Management, Inc. (the "Manager"), 300 Interpace Parkway, Building A,
Parsippany, NJ 07054, serves as the Funds' manager, handling business affairs
for the Funds. MainStay Management, Inc. is a corporation organized under the
laws of Delaware and is an indirect wholly owned subsidiary of New York Life
Insurance Company. The Manager provides offices and conducts clerical,
recordkeeping and bookkeeping services, and keeps most of the financial and
accounting records required for the Funds. The Manager has delegated its
portfolio management responsibilities to the Sub-Advisers.
The Manager pays the salaries and expenses of all personnel affiliated with the
Funds, and all the operational expenses that aren't the responsibility of the
Funds, including the fee paid to the Sub-Advisers. (See page 74, "Manager,
Sub-Advisers and Distributor," and the SAI for more details.)
For its services, the Fund pays the Manager a monthly fee. (See page 74,
"Manager, Sub-Advisers and Distributor".)
================================================================================
WHO MANAGES YOUR MONEY?
================================================================================
MacKay-Shields Financial Corporation ("MacKay-Shields"), 9 West 57th St., New
York, NY 10019, is the Sub-Adviser to all the Funds in this prospectus, except
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 June 30, 1997, MacKay-Shields managed over $26.9 billion in
assets.
Monitor Capital Advisors, Inc. ("Monitor"), 504 Carnegie Center, Princeton, NJ
08540, is the Sub-Adviser to the Equity Index Fund. Monitor is 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 June
30, 1997, Monitor managed assets totaling approximately $2.2 billion, mainly of
index funds.
Under the supervision of the Funds' Trustees and the Manager, MacKay-Shields and
Monitor (the "Sub-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 Sub-Advisers are paid a monthly fee by the Manager, not
the Funds. (See "Manager, Sub-Advisers and Distributor," page 74, for a
breakdown of fees.)
================================================================================
[ARROW] 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 the
Trust or its service providers.
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60
<PAGE>
- --------------------------------------------------------------------------------
Know With Whom You're Investing
- --------------------------------------------------------------------------------
WHO DISTRIBUTES THE MAINSTAY FUNDS?
NYLIFE Distributors Inc., 300 Interpace Parkway, Building A, 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 law 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., an indirect wholly owned subsidiary of New York Life
Insurance Company, 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--and retains
a portion of sales charges. (See page 74, "Manager, Sub-Advisers, and
Distributor--The Distributor" for more details.)
WHO KEEPS TRACK OF YOUR ACCOUNT?
MainStay Shareholder Services Inc. (MSS) is the Funds' Transfer, Dividend
Disbursing and Shareholder Servicing Agent. MSS, whose address is 260 Cherry
Hill Road, Parsippany, NJ 07054, is an indirect wholly owned subsidiary of New
York Life Insurance Company. MSS provides customer service, is responsible for
preparing and sending statements, confirms and checks, and keeps certain
financial and accounting records. MSS has entered into an agreement with Boston
Financial Data Services (BFDS), whose address is 2 Heritage Drive, North Quincy,
MA 02171. BFDS will perform certain of the services for which MSS is
responsible. In addition, the Funds may contract with other service
organizations, including broker-dealers and other financial institutions, which
will establish a single omnibus account for their clients with the 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,
International Bond, International Equity, Strategic Income, California Tax Free
and New York Tax Free Funds 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, Convertible, Government, High Yield Corporate Bond, Money
Market, Tax Free Bond, Total Return and Value Funds, and has subcustodial
agreements for holding the Funds' foreign securities.
61
<PAGE>
- --------------------------------------------------------------------------------
Know Your Rights as a Shareholder
- --------------------------------------------------------------------------------
YOU HAVE THE RIGHT TO ASK ANY QUESTIONS
Any time you have a question about your account, you should:
o ask your Registered Representative;
o call 1-800-MAINSTAY (between 8:00 AM and 6:00 PM Eastern time); or
o write to The MainStay Funds, P.O. Box 8401,
Boston, Massachusetts, 02266-8401.
THE RIGHT TO RECEIVE INFORMATION ABOUT YOUR INVESTMENT -- CALL 1-800-MAINSTAY
You receive quarterly statements (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 as of the end of the reporting period:
o the investments owned by the Fund;
o the market value of each investment; and
o other financial information.
================================================================================
[ARROW] 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 upon the election of MainStay Trustees and to
ratify independent accountants.
o You're entitled to approve the adoption of a 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 upon
removal of a Trustee for cause. Removing a Trustee requires the approval of
two-thirds of the outstanding shares of The MainStay Funds. Generally,
shareholder meetings are only held when the Trustees recommend an action which
requires shareholder approval.
62
<PAGE>
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Tell Me The Details
- --------------------------------------------------------------------------------
================================================================================
THE TRUST
================================================================================
The Trust is registered with the SEC as an open-end management investment
company 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 6 through 62 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. The Trust was established as a Massachusetts business trust
on January 9, 1986 by a Declaration of Trust.
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 December 8, 1997,
NYLIFE Distributors Inc. owned a controlling interest (as that term is defined
under the 1940 Act) of the New York Tax Free Fund Class A shares, International
Equity Fund Class A shares and International Bond Fund Class A shares and New
York Life Insurance Company General Account owned a controlling interest of the
Strategic Income Fund Class A shares and Strategic Value Fund Class A shares.
As of December 1, 1997, the Trust had aggregate assets of approximately $12.4
billion, and 388,257 shareholders.
================================================================================
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 Sub-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 FUND
- --------------------------------------------------------------------------------
In selecting convertible securities for purchase or sale, the Sub-Adviser takes
into account a variety of investment considerations, including credit risk,
projected interest return and the premium for the convertible security relative
to the underlying common stock.
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):
8.82% in securities rated AAA
10.74% in securities rated AA
4.91% in securities rated A
18.65% in securities rated BBB
8.76% in securities rated BB
25.60% in securities rated B
2.52% in securities rated CCC
0.13% in securities rated C
17.65% in cash and cash equivalents
2.22% 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 Sub-Adviser may not necessarily agree with a
rating assigned by any credit rating agency.
The Fund may sell short against the box, among other reasons, to hedge against a
possible market decline in the value of the security owned or to enhance
liquidity. For more information on short sales against the box see pages 70-71.
- --------------------------------------------------------------------------------
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
63
<PAGE>
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, 1996, 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 Sub-Adviser seeks to provide investment results which
mirror the performance of the Index. The Sub-Adviser attempts to achieve this
objective by investing in all stocks in the Index in the same proportion as
their representation 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 0.95. 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.
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 Sub-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 Sub-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).
64
<PAGE>
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 Sub-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 "Description of
Investments and Investment Practices--Risks of Investing in High Yield
Securities ('Junk Bonds')" and "Description of Investments and Investment
Practices--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):
24.25% in securities rated AAA
13.96% in securities rated BB
39.24% in securities rated B
7.83% in securities rated CCC
0.14% in securities rated D
2.07% in unrated securities
1.57% in cash and cash equivalents
10.94% 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 Sub-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 Sub-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
Sub-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.
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 Sub-Adviser.
- --------------------------------------------------------------------------------
INTERNATIONAL EQUITY FUND
- --------------------------------------------------------------------------------
In making investments for the Fund, the Sub-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
Sub-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
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currency markets, instead of or in addition to buying and selling stocks and
currencies, or (2) in an effort to hedge against a decline in the value of
securities or currencies owned by it or an increase in the price of securities
which it plans to purchase. The Fund may also purchase and sell foreign currency
exchange contracts for purposes of seeking to enhance portfolio returns and
manage portfolio risk more efficiently. See pages 67-72, "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.
- --------------------------------------------------------------------------------
STRATEGIC INCOME FUND
- --------------------------------------------------------------------------------
In managing the Fund, the Sub-Adviser conducts a continuing review of yields and
other information derived from a data base which it maintains in managing
fixed-income portfolios. Fundamental economic cycle analysis, credit quality and
interest rate trends are among the principal factors considered by the
Sub-Adviser in determining whether to increase or decrease the emphasis placed
upon a particular type of security or bond market sector within the Fund's
investment portfolio.
In making investment decisions with respect to maturity shifts, the Sub-Adviser
takes into account a broad range of fundamental and technical indicators. The
Sub-Adviser will alter the average maturity of the portfolio in accordance with
its judgment based on the research and other methods described above.
In seeking a competitive overall return, capital appreciation may be sought by
lengthening the maturities of high yield debt securities held in the Fund's
portfolio during periods when the Sub-Adviser expects interest rates to decline.
If the Sub-Adviser is incorrect in its expectations of changes in interest
rates, or in its evaluation of the normal yield relationship between two
securities, the Fund's income, NAV and potential capital gains could decrease;
or the potential loss could increase. This and other factors may affect the
income available for distribution to shareholders.
Since available yields and yield differentials vary over time, no specific level
of income or yield differential can ever be ensured.
Debt securities in which the Fund may invest include all types of debt
obligations of both domestic and foreign issuers, such as bonds, debentures,
notes, equipment lease certificates, equipment trust certificates, conditional
sales contracts, commercial paper, foreign government securities and U.S.
government securities (including obligations, such as repurchase agreements,
secured by such instruments).
The Fund may invest up to 30% of its total assets in equity securities. These
may include capital notes, which are securities representing beneficial
interests in a trust for which the controlling common stock is owned by a bank
holding company. These beneficial interests are commonly issued as preferred
stock but may also be issued as other types of instruments. The trust owns
debentures issued by the bank holding company and issues the preferred stock to
investors. In making investments in foreign securities the Sub-Adviser will
determine, using good faith and judgement, (1) country allocation; (2) currency
exposure (asset allocation across currencies); and (3) diversified security
holdings within each market. The Sub-Adviser may consider factors such as
prospects for currency exchange and interest rates and inflation in each
country, relative economic growth, government policies influencing exchange
rates and business conditions, and quality of individual issuers.
To hedge the market value of securities held, proposed to be held or sold or
relating to foreign currency exchange rates, the Fund may enter into or purchase
securities or securities index options, foreign currency options, and futures
contracts and related options with respect to securities, indexes of securities,
or currencies. The Fund also may buy and sell currencies on a spot or forward
basis. Subject to compliance with applicable rules, futures contracts and
related options may be used for any legally permissible purpose, including as a
substitute for acquiring a basket of securities and to reduce transaction costs.
The Fund may also purchase and sell foreign currency exchange contracts for
purposes of seeking to enhance portfolio returns and manage portfolio risk more
efficiently.
Generally, the average maturity of the foreign securities held by the Fund 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 Sub-Adviser.
The Sub-Adviser seeks to reduce risk through diversification, credit analysis
and attention to current developments and trends in both the economy and
financial markets. For a further discussion of the special risks of investing in
lower-rated and foreign securities, see "Description of Investments and
Investment Practices--Risks of Investing in High Yield Securities ('Junk
Bonds')" and "Description of Investments and Investment Practices--Foreign
Securities" in this prospectus.
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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 Sub-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 68, "Description of Investments and Investment Practices--Industrial
Development and Pollution Control Bonds" and page 69, "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 Sub-Adviser.
- --------------------------------------------------------------------------------
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.
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 Sub-Adviser.
================================================================================
DESCRIPTION OF INVESTMENTS AND
INVESTMENT PRACTICES
================================================================================
Information about the following types of investments, investment practices and
related risks appears below: Brady Bonds, Cash Equivalents, Floaters and Inverse
Floaters, Foreign Index-Linked Instruments, Foreign Securities, Industrial
Development and Pollution Control Bonds, Lending of Portfolio Securities, Loan
Participation Interests, Mortgage-Backed and Asset-Backed Securities, Municipal
Securities and Municipal Lease Obligations, Repurchase Agreements, Risk
Management Techniques, 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 New York Tax Free Fund. For more information about
the investments, investment practices and risks described in this section,
please see the SAI.
- --------------------------------------------------------------------------------
BRADY BONDS
- --------------------------------------------------------------------------------
The Convertible Fund, High Yield Corporate Bond Fund, International Bond Fund,
Strategic Income 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. (For more information, see 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
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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.
- --------------------------------------------------------------------------------
FLOATERS AND INVERSE FLOATERS
- --------------------------------------------------------------------------------
Each Fund, other than the Capital Appreciation Fund and the Equity Index Fund,
may invest in floating rate debt instruments ("floaters"). The interest rate on
a floater is a variable rate which is tied to another interest rate, such as a
money-market index or Treasury bill rate. The California Tax Free Fund,
Convertible Fund, High Yield Corporate Bond Fund, International Bond Fund,
International Equity Fund, New York Tax Free Fund, Strategic Income Fund, Tax
Free Bond Fund and Total Return Fund, may invest in leveraged inverse floating
rate debt instruments ("inverse floaters"). The interest rate on an inverse
floater resets in the opposite direction from the market rate of interest to
which the inverse floater is indexed. The leverage associated with inverse
floaters may result in greater volatility in their market values. Certain
inverse floaters may be determined to be illiquid securities.
- --------------------------------------------------------------------------------
FOREIGN INDEX-LINKED INSTRUMENTS
- --------------------------------------------------------------------------------
The International Bond Fund, International Equity Fund and Strategic Income Fund
may 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. In the case
of foreign-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. The risks of such investments 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 difficulties in receiving or
interpreting financial and economic information, possible imposition of taxes,
higher brokerage and custodian fees, possible currency exchange controls or
other government restrictions, including possible seizure or nationalization of
foreign deposits or assets. Foreign securities may also be less liquid and more
volatile than U.S. securities. There may also be difficulty in invoking legal
protections across borders. In addition, investment in emerging market countries
presents risks in greater degree than those presented by investment in foreign
issuers in countries with developed securities markets and more advanced
regulatory systems.
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 70, "Risk
Management Techniques."
- --------------------------------------------------------------------------------
INDUSTRIAL DEVELOPMENT AND POLLUTION CONTROL BONDS
- --------------------------------------------------------------------------------
The California Tax Free Fund, High Yield Corporate Bond Fund, New York Tax Free
Fund, Strategic Income 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. (For more information, see the SAI.)
- --------------------------------------------------------------------------------
LENDING OF PORTFOLIO SECURITIES
- --------------------------------------------------------------------------------
Each Fund, except the Money Market Fund and Tax Free Bond Fund may lend its
investment securities to brokers, dealers and financial institutions for the
purpose of realizing additional income pursuant to guideliness adopted by the
Board of Trustees. The total market value of securities loaned will not at any
time exceed 33% of the total assets of a Fund. The risks in lending portfolio
securities, as with other extensions of credit, consist of possible loss of
rights in the collateral should the borrower fail financially. In determining
whether to lend securities, a Fund's Sub-Adviser will consider
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<PAGE>
all relevant facts and circumstances, including the creditworthiness of the
borrower. (For more information see the SAI.)
- --------------------------------------------------------------------------------
LOAN PARTICIPATION INTERESTS
- --------------------------------------------------------------------------------
The Funds 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. A 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.
In a typical corporate loan syndication, a number of institutional lenders lend
a corporate borrower a specified sum pursuant to the terms and conditions of a
loan agreement. One of the co-lenders usually agrees to act as the agent bank
with respect to the loan. The loan agreement among the corporate borrower and
the co-lenders identifies the agent bank as well as sets forth the rights and
duties of the parties. The agreement often (but not always) provides for the
collateralization of the corporate borrower's obligations thereunder and
includes various types of restrictive covenants which must be met by the
borrower.
The principal credit risk associated with acquiring participation interests from
a co-lender or another participant is the credit risk associated with the
underlying corporate borrower. A Fund may incur additional credit risk, however,
when it is in the position of participant rather than a co-lender because the
Fund must assume the risk of insolvency of the co-lender from which the
participation interest was acquired and that of any person interpositioned
between the Fund and the co-lender.
- --------------------------------------------------------------------------------
MORTGAGE-BACKED AND ASSET-BACKED SECURITIES
- --------------------------------------------------------------------------------
Mortgage-backed and asset-backed securities are securities that derive their
value from underlying pools of loans that may include interests in pools of
lower-rated debt securities, consumer loans or mortgages, or complex instruments
such as collateralized mortgage obligations and stripped mortgage-backed
securities. The value of these securities may be significantly affected by
changes in interest rates, the market's perception of issuers and the
creditworthiness of the parties involved. The ability of a Fund to successfully
utilize these instruments may depend in part upon the ability of the Sub-Adviser
to forecast interest rates and other economic factors correctly. Some securities
may have a structure that makes their reaction to interest rate changes and
other factors difficult to predict, making their value highly volatile. These
securities may also be subject to prepayment risk and if the security has been
purchased at a premium the amount of some or all of the premium may be lost in
the event of prepayment.
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
REPURCHASE AGREEMENTS
- --------------------------------------------------------------------------------
Each Fund may enter into domestic repurchase agreements to earn income. The
International Bond Fund, International Equity Fund and Strategic Income Fund may
also enter into foreign repurchase agreements. A repurchase agreement is an
agreement whereby a Fund purchases a portfolio eligible security from a bank or
broker-dealer that agrees to repurchase the security at the Fund's cost plus
interest within a specified time (normally one day).
The Strategic Income Fund, 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 Fund will maintain a segregated
account consisting of liquid assets to cover its obligations under reverse
repurchase agreements. Each Fund will limit its investments in reverse
repurchase agreements and other borrowing to no more than one-third of its total
assets. The use of reverse repurchase agreements by a Fund creates leverage
which increases a Fund's investment risk. If the income and gains on securities
purchased with the proceeds of reverse repurchase agreements exceed the cost of
the agreements, the Fund's earnings or NAV will increase faster than otherwise
would be the case; conversely, if the income and gains fail to exceed the costs,
earnings or NAV would decline faster than otherwise would be the case.
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<PAGE>
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.
- --------------------------------------------------------------------------------
RISK MANAGEMENT TECHNIQUES
- --------------------------------------------------------------------------------
The Funds can use various techniques to increase or decrease their exposure to
changing security prices, interest rates, currency exchange rates, commodity
prices or other factors that affect security values. These techniques may
involve derivative transactions such as buying and selling futures contracts and
options on futures contracts, entering into foreign currency transactions (such
as forward foreign currency exchange contracts and options on foreign
currencies) and purchasing put or call options on securities and securities
indexes.
The Funds can use these practices in an attempt to adjust the risk and return
characteristics of their portfolios of investments. When a Fund uses such
techniques in an attempt to reduce risk it is known as "hedging". If a Fund's
Sub-Adviser judges market conditions incorrectly or employs a strategy that does
not correlate well with the Fund's investments, these techniques could result in
a loss, regardless of whether the intent was to reduce risk or increase return.
These techniques may increase the volatility of a Fund and may involve a small
investment of cash relative to the magnitude of the risk assumed. In addition,
these techniques could result in a loss if the counterparty to the transaction
does not perform as promised.
The California Tax Free Fund, Convertible Fund, Government Fund, High Yield
Corporate Bond Fund, International Bond Fund, International Equity Fund,
Strategic Income 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. The Government Fund may enter into futures contracts and purchase
and write options on futures, which are not U.S. government securities.
Similarly, the Capital Appreciation Fund, Convertible 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, purchase and
write put and call options on foreign currencies for the purpose of protecting
against declines in the dollar value of foreign portfolio securities and against
increases in the U.S. dollar cost of foreign securities to be acquired, and
enter into a variety of foreign currency transactions, including forward foreign
currency exchange contracts in order to protect or hedge against the adverse
effect that changes in future foreign currency exchange rates may have on its
investment portfolio or on its investment activities that are undertaken in
foreign currencies.
The Tax Free Bond Fund will only purchase or sell futures or related options
(such as U.S. Treasury or municipal securities index futures and related
options) when, in the opinion of the Sub-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.
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
Equity Index Fund may purchase calls on individual securities. 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.
Each Fund, except the Equity Index Fund, Money Market Fund and Tax Free Bond
Fund may engage in a strategy known as "married puts." This strategy is most
typically used when the Fund owns a particular common stock or security
convertible into common stock and wishes to effect a short sale against the box
(see "short sales against the box") but for various reasons is unable to do so.
Subject to limitations with respect to options described below, the Fund may
enter into a series of stock and related option transactions to achieve the
economic equivalent of a short sale against the box. To implement this trading
strategy, the Fund will simultaneously execute with the same broker a purchase
of shares of the common stock and an "in the money" over-the-counter put option
to sell the common stock to the broker and generally will write an
over-the-counter "out of the money" call option in the same stock with the same
exercise price as the put option. The options are linked and may not be
exercised, transferred or terminated independently of the other.
The Trustees have adopted a nonfundamental policy that each of the Capital
Appreciation Fund, Convertible 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
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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.
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 Sub-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.
(For more information, see the SAI.)
- --------------------------------------------------------------------------------
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. To effect a short
sale against the box, the Fund borrows from a broker the securities which are
sold in the short sale, and the broker holds the proceeds until the borrowed
securities are replaced. If the value of a security sold short against the box
increases, the Fund would suffer a loss when it purchases or delivers to the
selling broker the security sold short. If a broker with which the Fund has open
short sales were to become bankrupt, 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 Sub-Advisers believe are creditworthy. Short
sales against the box will be limited to no more than 25% of a Fund's total
assets.
- --------------------------------------------------------------------------------
SWAP AGREEMENTS
- --------------------------------------------------------------------------------
The International Bond Fund, International Equity Fund and Strategic Income Fund
may enter into interest rate, index and currency exchange rate swap agreements
for purposes of attempting to obtain a particular desired return at a lower cost
to the Fund than if the Fund had invested directly in an instrument that yielded
that desired return.
Whether a Fund's use of swap agreements will be successful in furthering its
investment objective will depend on the Sub-Adviser's ability to predict
correctly movements in interest rates, indexes and currency exchange rates.
Because they are two-party contracts and because they may have terms of greater
than seven days, swap agreements may be considered to be illiquid. Moreover, a
Fund bears the risk of loss of the amount expected to be received under a swap
agreement in the event of the default or bankruptcy of a swap agreement
counterparty. The Sub-Adviser will cause a Fund to enter into swap agreements
only with counterparties that would be eligible for consideration as repurchase
agreement counterparties under the 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 (or yield) 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. Zero coupon bonds tend to be more volatile than conventional debt
securities.
- --------------------------------------------------------------------------------
RISKS OF INVESTING IN HIGH YIELD SECURITIES ("JUNK BONDS")
- --------------------------------------------------------------------------------
The Convertible Fund, High Yield Corporate Bond Fund, International Bond Fund,
International Equity Fund, Strategic Income 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 or, if not rated, determined to be of equivalent
quality by the Sub-Adviser. Such securities are sometimes referred to as junk
bonds and are considered speculative.
71
<PAGE>
Investment in high yield bonds involves special risks in addition to the risks
associated with investments in higher rated debt securities. High yield bonds
may be regarded as predominantly speculative with respect to the issuer's
continuing ability to meet principal and interest payments. Moreover, such
securities may, under certain circumstances, be less liquid than higher rated
debt securities.
Analysis of the creditworthiness of issuers of high yield securities may be more
complex than for issuers of higher quality debt securities, and the ability of 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
Sub-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. The credit standings of New York State and of
certain local governments (including New York City) have been, and could be
further, reduced.
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 the outstanding voting securities of that Fund
(as defined in the 1940 Act). Investment restrictions that appear below or
elsewhere in this Prospectus that 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) with respect to 75% of each Fund's total assets 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, or purchase the securities of any issuer
if such purchase would cause more than 10% of the voting securities of such
issuer to be held by a Fund. This restriction does not apply to the
California Tax Free Fund, Equity Index Fund, International Bond Fund and
New York Tax Free Fund;
(2) borrow money except from banks on a temporary basis for extraordinary or
emergency purposes, including the meeting of redemption requests, or by
engaging in reverse repurchase agreements or comparable portfolio
transactions provided that these 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 total assets
(10% in the case of the California Tax Free Fund and New York Tax Free
Fund);
72
<PAGE>
(3) 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
25% or more 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
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 and
Strategic Income Fund's total assets, taken at market value, may be
invested in each of the electric utility and telephone industries, but each
Fund will not invest 25% or more in either of those industries unless
yields available for four consecutive weeks in the four highest rating
categories on new issue bonds in such industry (issue size of $50 million
or more) have averaged in excess of 105% of yields of new issue long-term
industrial bonds similarly rated (issue size of $50 million or more); (c)
25% or more 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 "periodically industry concentrated"
(i.e., a fund that does not concentrate its investments in a particular
industry would be permitted, but not required, to invest 25% or more of its
total assets in a particular industry) the Funds elect to be so classified
and the foregoing limitation shall no longer apply with respect to the
Funds. 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;
(4) purchase or sell real estate (excluding securities secured by real estate
or interests therein or issued by companies that invest in or deal in real
estate) or, in the case of the California Tax Free Fund and New York Tax
Free Fund, real estate investment trust securities; 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, futures
contracts on currencies or securities indices and options on such futures
contracts are not deemed to be an investment in a prohibited commodity or
commodity contract for the purpose of this restriction; or
(5) make loans to other persons, except loans of portfolio securities (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.
"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.
73
<PAGE>
================================================================================
MANAGER, SUB-ADVISERS AND DISTRIBUTOR
================================================================================
- --------------------------------------------------------------------------------
THE MANAGER
- --------------------------------------------------------------------------------
The Trust, on behalf of each Fund, pays the Manager 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 0.50%* 0.40%
Capital Appreciation Fund 0.72%** 0.58%
Convertible Fund 0.72% 0.72%
Equity Index Fund 0.50%+ 0.32%
Government Fund 0.60%** 0.60%
High Yield Corporate Bond Fund 0.60%** 0.56%
International Bond Fund 0.70%++ 0.40%
International Equity Fund 1.00% 1.00%
Money Market Fund 0.50%ss. 0.22%
New York Tax Free Fund 0.50%* 0.30%
Strategic Income Fund 0.60%*** N/A
Tax Free Bond Fund 0.60% 0.60%
Total Return Fund 0.64%* 0.62%
Value Fund 0.72%|| 0.60%
................................................................................
</TABLE>
* The Manager has voluntarily agreed to reimburse the expenses of California
Tax Free Fund and New York Tax Free Fund to the extent that operating
expenses would exceed on an annual basis 1.24% and 1.49% of the average
daily net assets for the Class A and Class B shares, respectively.
** The Manager has voluntarily established fee breakpoints for certain of the
Funds as follows: for the Government Fund of .55% on assets in excess of $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.
*** The Manager has agreed to voluntarily reduce its fee payable by the
Strategic Income Fund to the extent necessary such that total expenses do
not exceed on an annual basis 1.15% and 1.90% of the average daily net
assets for Class A and B shares, respectively, until such time as the Fund
reaches $100 million in assets or one year from the date of the Fund's
commencement of operations, whichever may occur first.
+ In the event the total expenses of 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 Manager will reduce its fees payable by the Fund by
the difference between the Fund's total expenses and .80%.
++ The Manager has agreed to waive a portion of its fee payable by the
International Bond Fund until such time as the Fund reaches $50 million in
net assets.
ss. up to $300 million; .45% from $300 to $700 million; .40% from $700 million
to $1.0 billion; and .35% in excess of $1.0 billion. The Manager has
voluntarily agreed to assume the expenses of Money Market Fund to the
extent that such expenses would exceed on an annual basis .70% of the
average daily net assets of the Fund.
|| up to $200 million; .65% from $200 to $500 million; and .50% in excess of
$500 million.
Each expense limitation, fee waiver and fee breakpoint arrangement discussed
above, except for the fee breakpoints with respect to Money Market and Value
Funds, is voluntary and may be discontinued at any time.
The payment of the Equity Index Fund's investment management 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.
Each Fund, other than California Tax Free Fund, Equity Index Fund and New York
Tax Free Fund, pursuant to an Accounting Agreement with the Manager, will bear
an allocable portion of the Manager's cost of performing certain bookkeeping and
pricing services. Each Fund, other than California Tax Free Fund, Equity Index
Fund and New York Tax Free Fund, pays the Manager a monthly fee for services
provided under the Accounting Agreement at the annual rate of 1/20 of 1% for the
first $20 million of average monthly net assets, 1/30 of 1% of the next $80
million of average monthly net assets and 1/100 of 1% of any amount in excess of
$100 million of average monthly net assets.
The Manager is not responsible for records maintained by the Funds' Custodians,
Transfer Agent, Dividend Disbursing and Shareholder Servicing Agent, or
Sub-Advisers.
- --------------------------------------------------------------------------------
THE SUB-ADVISERS
- --------------------------------------------------------------------------------
Pursuant to the terms of the Sub-Advisory Agreements between the Manager and the
Sub-Advisers on behalf of each Fund, the Manager, not the Fund, pays the
Sub-Advisers a monthly fee for services performed at the annual rates as
follows:
<TABLE>
<CAPTION>
Rate Paid
for the
Year Ended
Annual December 31,
Rate 1996
................................................................................
<S> <C> <C>
California Tax Free Fund 0.25%* 0.20%
Capital Appreciation Fund 0.36%* 0.29%
Convertible Fund 0.36% 0.36%
Equity Index Fund 0.10% 0.10%
Government Fund 0.30%* 0.30%
High Yield Corporate Bond Fund 0.30%* 0.28%
International Bond Fund 0.45%** 0.25%
International Equity Fund 0.60% 0.60%
Money Market Fund 0.25%*+ 0.11%
New York Tax Free Fund 0.25%* 0.15%
Strategic Income Fund 0.30%* N/A
Tax Free Bond Fund 0.30% 0.30%
Total Return Fund 0.32%* 0.31%
Value Fund 0.36%++ 0.30%
................................................................................
</TABLE>
* To the extent that the Manager has agreed to voluntarily waive all or a
portion of its fee or reimburse expenses or has established fee
breakpoints, the Sub-Adviser has voluntarily agreed do so
proportionately.
** The Sub-Advisor has voluntarily agreed to waive a portion of its fee until
such time as the International Bond Fund reaches $50 million in
net assets.
+ 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.
74
<PAGE>
- --------------------------------------------------------------------------------
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 fee which is an expense of the Class B shares of the Fund, at the annual
rate of 0.75% of the average daily net assets of the Fund's Class B shares
(0.25% in the case of California Tax Free Fund, New York Tax Free Fund and Tax
Free Bond Fund).
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 assets 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 68, "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.
Class B shares will be automatically converted to Class A shares, which pay
lower 12b-1 fees, at the end of the calendar quarter occurring eight years after
(i) October 27, 1997 or (ii) the date a shareholder purchases his Class B
shares, whichever is later. It is the Trust's intention that all share
conversions be made on a tax-free basis, and if this cannot be reasonably
assured, the Trustees reserve the right to modify or eliminate this share class
conversion feature.
75
<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 77.
- --------------------------------------------------------------------------------
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 in good order of the
purchase order by that Fund plus any applicable sales charge. 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 in good order 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 MSS 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 in good order by
MSS within three business days. All telephone calls are recorded to protect
shareholders and MSS. For a description of certain limitations on the liability
of the Funds and MSS for transactions effected by telephone, see pages 56-57,
"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 MSS 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 ____________________________
DDA Account Number 99029415
An application must be received by MSS 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 MSS 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 withhold payment for up to 10 days of purchase or until the check
clears, whichever is first.
- --------------------------------------------------------------------------------
ADDITIONAL INVESTMENTS
- --------------------------------------------------------------------------------
Additional investments in a Fund may be made at any time by mailing a check
payable to The MainStay Funds, P.O. Box 8401, Boston, Massachusetts 02266-8401.
The shareholder's account number and the name of the Fund and class of shares
must be included with each investment. Purchases will be effected at the NAV per
share plus any applicable sales charge as described above.
- --------------------------------------------------------------------------------
SYSTEMATIC INVESTMENT PLANS
- --------------------------------------------------------------------------------
The Trust's officers may waive the initial and subsequent investment minimums
for certain purchases when they deem it appropriate, including, but not limited
to, purchases by certain qualified retirement plans, New York Life employee and
agent investment plans, investments resulting from distributions by other New
York Life products and NYLIFE Distributors products, and purchases by certain
individual participants.
Investors whose bank is a member of the Automated Clearing House ("ACH") may
purchase shares of a Fund through AutoInvest. AutoInvest facilitates investments
by using electronic debits, authorized by the shareholder, to a checking
76
<PAGE>
or savings account, for share purchases. When the authorization is accepted
(usually within two weeks of receipt) a shareholder may purchase shares by
calling MSS, 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 in good order 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. Redemption proceeds from Fund shares
purchased by AutoInvest may not be paid 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, the
Manager and the Sub-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 Sub-Adviser intends to retain the security in the Fund as an investment.
The Trust reserves the right to amend or terminate this practice at any time. An
investor must call MainStay at 1-800-MAINSTAY before sending any
securities.
An investor in certain qualified retirement plans may open an account with a
minimum investment of a lesser amount when permitted under such qualified
retirement plan. The Trust and the Distributor reserve the right to redeem
shares of any shareholder who has failed to provide the Trust with a certified
Taxpayer I.D. number or such other tax-related certifications as the Trust may
require. A notice of redemption, sent by first class mail to the shareholder's
address of record, will fix a date not less than 30 days after the mailing date,
and shares will be redeemed at the NAV determined as of the close of business on
that date unless a certified Taxpayer I.D. number (or such other information as
the Trust has requested) has been provided.
================================================================================
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 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 $99,999 4.50% 4.71% 4.00% 0.50%
$100,000 to $249,999 3.50% 3.63% 3.00% 0.50%
$250,000 to $499,999 2.50% 2.56% 2.00% 0.50%
$500,000 to $999,999 2.00% 2.04% 1.75% 0.25%
$1,000,000 or more* None None See Below* None
- --------------------------------------------------------------------------------
</TABLE>
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, Strategic Income 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 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 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."
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%
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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 who sell Fund shares. 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, other than 403(b) 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 non-Erisa
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 53, "Consider Reducing
Your Sales Charges."
Letter of Intent
Qualified Purchasers may obtain reduced sales charges by signing an LOI. The LOI
is a nonbinding obligation on the Qualified Purchaser to purchase the full
amount indicated in the LOI. The sales charge is based on the total amount
invested during a 24-month period. A 90-day back-dated period can be used to
include earlier purchases; the 24-month period would then begin on the date of
the first purchase during the 90-day period. For more information, see the SAI
or call your Registered Representative or MainStay at 1-800-MAINSTAY.
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% may be imposed on
redemptions of such investments made within one year of the date of purchase.
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
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<PAGE>
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 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 qualified retirement plans and
nonqualified deferred compensation plans resulting from separation of service,
loans, hardship withdrawals, QDRO's and excess contributions pursuant to
applicable IRS rules; and Required Minimum Distributions at age 70 1/2 for IRA
and 403(b) participants; (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 a MainStay IRA, the New York Life Separate
Account or any guaranteed investment contract written by New York Life or any of
its affiliates, as well as preretirement transfers within a retirement plan
administered by New York Life Benefit Services, Inc. or TRAC-2000; (iv) required
distributions by charitable trusts under Section 664 of the Code; (v)
redemptions following the death of the shareholder or the beneficiary of a
living revocable trust or within one year following the disability of a
shareholder occurring subsequent to the purchase of shares; (vi) redemptions
under the Systematic Withdrawal Plan used to pay scheduled monthly premiums on
insurance policies issued by New York Life or an affiliate; (vii) continuing,
periodic monthly or quarterly withdrawals, under the Systematic Withdrawal Plan,
up to an annual total of 10% of the value of a shareholder's Class B shares in a
Fund; (viii) redemptions by New York Life or any of its affiliates or by
accounts managed by New York Life or any of its affiliates; (ix) redemptions
effected by registered investment companies by virtue of transactions with a
Fund; (x) involuntary redemptions of an account with a net asset value of $250
($500 for the Money Market Fund) or less; and (xi) 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. Additional waivers in effect prior to
January 1, 1998 will apply to redemptions of Class B shares by accounts
established before that date. 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 MSS 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.
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<PAGE>
================================================================================
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 MSS receives the redemption request in "good order." "Good
order" with respect to a redemption request generally means that a stock power
or certificate must be endorsed by the record owner(s) exactly as the shares are
registered and the signature(s) must be guaranteed by an eligible guarantor
institution. In cases where redemption is requested by a corporation,
partnership, trust, fiduciary or any other person other than the record owner,
written evidence of authority acceptable to MSS must be submitted before the
redemption request will be accepted. The signature guarantee may be waived on a
redemption of $100,000 or less which is payable to the shareholder(s) of record
and mailed to the address of record, or under such other circumstances as the
Trust may allow.
Upon the redemption of shares the 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. MSS 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 Fund
MainStay Government Fund
MainStay High Yield Corporate Bond Fund
MainStay International Bond Fund
MainStay International Equity Fund
MainStay Money Market Fund
MainStay New York Tax Free Fund
MainStay Strategic Income Fund
MainStay Strategic Value 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
80
<PAGE>
Market Fund from another MainStay Fund, the applicable contingent deferred sales
charge will be assessed when the shares are redeemed from the Money Market Fund
even though the Money Market Fund does not otherwise assess a contingent
deferred sales charge on redemptions. Class B shares of a Fund acquired as a
result of subsequent investments, except reinvested dividends and distributions,
will be subject to the contingent deferred sales charge when ultimately redeemed
or repurchased without purchasing shares of another MainStay Fund.
Exchanges may only be made with respect to Funds registered in the state of
residence of the investor or where an exemption from registration is available.
An exchange may be made by either writing to MSS at the following address: The
MainStay Funds, P.O. Box 8401, Boston, Massachusetts 02266-8401, or by calling
MSS 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 MSS. However, in times of drastic economic or
market changes, the telephone exchange privilege may be difficult to implement.
When calling MSS 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 transferred 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.
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 59, "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
81
<PAGE>
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 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/ROTH IRA/SEP/SARSEP and SIMPLE IRA
plans, and for 403(b)(7) Custodial Accounts. Plan administration is also
available for select qualified retirement plans.
Contributions made to such plans to the extent provided in federal income tax
law currently in effect, and earnings thereon, will not be taxable to the plan
participant until distribution. An investor should consult with his or her tax
adviser before establishing any tax-deferred retirement plan.
The Internal Revenue Service ("IRS") has specific distribution requirements that
apply to investors who reach age 70 1/2. 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 Sub-Advisers. Consistent with the foregoing primary
consideration, the Conduct Rules of the National Association of Securities
Dealers, Inc. and such other policies as the Trustees may determine, the
Sub-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.
Some securities considered for investment by the Funds may also be appropriate
for other clients served by the Funds' Sub-Advisers. If a purchase or sale of
securities consistent with the investment policies of a Fund and one or more of
the clients served by the Fund's Sub-Adviser is considered at or about the same
time, transactions in such securities may be executed together and will, to the
extent practicable, be allocated among the Fund and clients in a manner deemed
equitable to the Funds and the clients by the Fund's Sub-Adviser. Although there
is no specified formula for allocating such transactions, the various allocation
methods used by a Fund's Sub-Adviser, and the results of such allocations, are
subject to periodic review by the Trustees.
================================================================================
TAX INFORMATION
================================================================================
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
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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
withholding of taxes on distributions by the Equity Index Fund will result in a
reduction of the benefit under the Guarantee.
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<PAGE>
================================================================================
APPENDIX A
================================================================================
DESCRIPTION OF SECURITIES RATINGS
MOODY'S INVESTORS SERVICE, INC.
Corporate and Municipal Bond Ratings
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high-grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long-term risks appear somewhat larger than the Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes and are
to be considered as upper-medium-grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa: Bonds which are rated Baa are considered as medium-grade obligations,
(i.e., they are neither highly protected nor poorly secured). Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca: Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
Moody's applies numerical modifiers, 1, 2, and 3, in each generic rating
classified from Aa through B in its corporate bond rating system. The modifier 1
indicates that the security ranks in the higher end of its generic rating
category; the modifier 2 indicates a midrange ranking; and the modifier 3
indicates that the issue ranks in the lower end of its generic rating category.
Designations Applicable to Municipal Bond Ratings
In its municipal bond rating system, Moody's designates those bonds within the
Aa, A, Baa, Ba and B categories that it believes possess the strongest credit
attributes with the symbols Aa1, A1, Baa1, Ba1 and B1.
Advance refunded issues that are secured by escrowed funds held in cash, held in
trust, reinvested in direct noncallable United States government obligations or
noncallable obligations unconditionally guaranteed by the U.S. government are
identified with a hatchmark (#) symbol, i.e., #Aaa.
Moody's assigns conditional ratings to bonds for which the security depends upon
the completion of some act or the fulfillment of some condition. These are bonds
secured by: (a) earnings of projects under construction; (b) earnings of
projects unseasoned in operating experience; (c) rentals that begin when
facilities are completed; or (d) payments to which some other limiting condition
attaches. The parenthetical rating denotes probable credit stature upon
completion of construction or elimination of basis of condition, e.g.,
Con.(Baa).
Issues that are subject to a periodic reoffer and resale in the secondary market
in a "dutch auction" are assigned a long-term rating based only on Moody's
assessment of the ability and willingness of the issuer to make timely principal
and interest payments. Moody's expresses no opinion as to the ability of the
holder to sell the security in a secondary market "dutch auction." Such issues
are identified by the insertion of the words "dutch auction" into the name of
the issue.
Municipal Short-Term Loan Ratings
Issues or the features associated with MIG, VMIG or SQ ratings are identified by
date of issue, date of maturity or maturities or rating expiration date and
description to distinguish each rating from other ratings. Each rating
designation is unique with no implication as to any other similar issue of the
same obligor. MIG ratings terminate at the retirement of the obligation while
VMIG rating expiration will be a function of each issue's specific structural or
credit features.
MIG 1/VMIG 1: This designation denotes best quality. There 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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<PAGE>
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.
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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.
86
<PAGE>
================================================================================
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.
87
<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.
300 Interpace Parkway
Building A
Parsippany, New Jersey 07054
Distributor of The MainStay Funds
NYLIFE Distributors Inc. is an indirect wholly owned
subsidiary of New York Life Insurance Company.
[LOGO] NEW YORK LIFE
[RECYCLE LOGO]
88
<PAGE>
THE MAINSTAY FUNDS
- --------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
JANUARY 1, 1998
- --------------------------------------------------------------------------------
The MainStay Funds (the "Trust") is an open-end management investment
company (or mutual fund) currently consisting of fifteen series, the following
fourteen of which are discussed herein: 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, Strategic Income Fund, Tax Free Bond
Fund, Total Return Fund and Value Fund (individually or collectively referred to
as a "Fund" or the "Funds"). MainStay Management, Inc. (the "Manager") serves
as the manager for the Funds and has entered into Sub-Advisory agreements with
Mackay-Shields Financial Corporation ("Mackay-Shields") the Sub-Adviser for
thirteen of the Funds and Monitor Capital Advisors, Inc. ("Monitor"), Sub-
Adviser for the Equity Index Fund. MacKay-Shields and Monitor are sometimes
jointly referred to as the "Sub-Advisers."
This Statement of Additional Information is not a prospectus and
should be read in conjunction with the Prospectus of the Trust dated January 1,
1998, 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") 300 Interpace Parkway, 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 MainStay
Shareholder Services, Inc., P.O. Box 8401, Boston, Massachusetts 02266-8401, or
by calling 1-800-MAINSTAY. In addition, you can make inquiries through your
registered representative.
<PAGE>
TABLE OF CONTENTS
PAGE IN
STATEMENT OF
ADDITIONAL
INFORMATION
-----------
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
Debt Securities......................................... 11
Convertible Securities.................................. 12
Arbitrage............................................... 13
Foreign Securities...................................... 13
Foreign Currency Transactions........................... 14
Foreign Index-Linked Instruments........................ 18
Brady Bonds............................................. 18
Municipal Securities.................................... 19
Industrial Development and Pollution Control Bonds...... 24
Variable Rate Demand Notes ("VRDNs").................... 25
Floating and Variable Rate Securities................... 25
Zero Coupon Bonds....................................... 26
Standby Commitments -- Obligations with Puts Attached... 26
When-Issued Securities.................................. 27
Mortgage-Related and Other Asset-Backed Securities...... 28
Short Sales Against the Box............................. 37
Options on Securities................................... 38
Options on Foreign Currencies........................... 44
Securities Index Options................................ 46
Futures Transactions.................................... 48
Swap Agreements......................................... 58
Loan Participation Interests............................ 60
Risks Associated with Debt Securities................... 62
Risks of Investing in High Yield Securities ("Junk
Bonds")............................................... 62
HIGH YIELD CORPORATE BOND FUND
AND STRATEGIC INCOME FUND
SPECIAL CONSIDERATIONS....................................... 63
EQUITY INDEX FUND
SPECIAL CONSIDERATIONS....................................... 64
B-2
<PAGE>
TOTAL RETURN FUND
SPECIAL CONSIDERATIONS....................................... 64
CALIFORNIA TAX FREE FUND AND NEW YORK TAX FREE FUND
SPECIAL CONSIDERATIONS....................................... 65
Risk Factors Affecting California Municipal Securities.. 65
Risk Factors Affecting New York Municipal Securities.... 75
Special Considerations Affecting Puerto Rico............ 91
THE EQUITY INDEX FUND GUARANTEE.............................. 94
ADDITIONAL FUNDAMENTAL INVESTMENT RESTRICTIONS............... 96
ADDITIONAL NON-FUNDAMENTAL INVESTMENT RESTRICTIONS........... 96
TRUSTEES AND OFFICERS........................................ 100
THE MANAGER, THE SUB-ADVISERS AND THE DISTRIBUTOR............ 108
Management Agreement.................................... 108
Distribution Agreement.................................. 113
Other Services.......................................... 120
Expenses Borne by the Trust............................. 121
PORTFOLIO TRANSACTIONS AND BROKERAGE......................... 122
NET ASSET VALUE.............................................. 127
SHAREHOLDER INVESTMENT ACCOUNT............................... 130
SHAREHOLDER SERVICING AGENT.................................. 130
PURCHASES, REDEMPTION AND REPURCHASE......................... 130
Letter of Intent ("LOI")................................ 130
Suspension of Redemptions............................... 131
TAX-DEFERRED RETIREMENT PLANS................................ 131
Cash or Deferred Profit Sharing Plans Under Section
401(k) for Corporations and Self-Employed
Individuals............................................ 131
Individual Retirement Account ("IRA")................... 131
403(b)(7) Tax Sheltered Account......................... 134
General Information..................................... 134
CALCULATION OF PERFORMANCE QUOTATIONS........................ 135
TAX STATUS................................................... 143
Taxation of the Funds................................... 143
Character of Distributions to Shareholders -- General... 144
Character of Distributions to Shareholders -- The Tax-
Free Funds............................................ 146
B-3
<PAGE>
Discount................................................ 147
Users of Bond-Financed Facilities....................... 148
Excise Tax.............................................. 148
Taxation of Options, Futures and Similar Instruments.... 148
Passive Foreign Investment Companies.................... 150
Foreign Currency Gains and Losses....................... 151
Commodity Investments................................... 152
Dispositions of Fund Shares............................. 152
Tax Reporting Requirements.............................. 153
Foreign Taxes........................................... 154
State and Local Taxes - General......................... 155
Explanation of Fund Distributions....................... 156
Additional Information Regarding the Equity Index Fund.. 156
Additional Information Regarding the California Tax
Free Fund and New York Tax Free Fund
Annual Statements....................................... 158
General Information..................................... 159
ORGANIZATION AND CAPITALIZATION.............................. 159
General 159
Voting Rights........................................... 160
Shareholder and Trustee Liability....................... 160
OTHER INFORMATION............................................ 160
Independent Accountants................................. 160
Legal Counsel........................................... 161
Share Ownership of the Funds............................ 161
Code of Ethics.......................................... 162
FINANCIAL STATEMENTS......................................... 162
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 397 days or less and substantially all of these investments will
be held to maturity; however, securities collateralizing repurchase agreements
may have maturities in excess of 397 days. The Fund will, to the extent
feasible, make portfolio investments primarily in anticipation of or in response
to changing economic and money market conditions and trends. The dollar-
weighted average maturity of the Fund's portfolio may not exceed 90 days.
Consistent with the provisions of a rule of the Securities and Exchange
Commission ("SEC"), the Fund invests only in U.S. dollar-denominated money
market instruments that present minimal credit risk and, with respect to 95% of
its total assets, measured at the time of investment, that are of the highest
quality. The Sub-Adviser shall determine whether a security presents minimal
credit risk under procedures adopted by the 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 whose
acquisition is
B-5
<PAGE>
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 Sub-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 with respect to 25%
of its total assets 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 or securities subject to certain puts. 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 or securities subject to certain
puts. In the event that an instrument acquired by the Fund is downgraded or
otherwise ceases to be of the quality that is eligible for the Fund, the Sub-
Adviser, under procedures approved by the Board of Trustees (or the Board of
Trustees itself if the Sub-Adviser becomes aware an unrated security is
downgraded below high quality and the Sub-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,
B-6
<PAGE>
quotations of comparable securities and other factors) deviates from $1.00 per
share based on amortized cost.
The extent of deviation between the Fund's net asset value based upon
available market quotations or market equivalents and $1.00 per share based on
amortized cost will be periodically examined by the 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 397 days, provided that the
security is a variable or floating rate security that meets the guidelines of
Rule 2a-7 with respect to maturity.
INVESTMENT PRACTICES AND INSTRUMENTS COMMON TO MULTIPLE FUNDS
The 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
B-7
<PAGE>
of one billion dollars or primary government securities dealers reporting to the
Federal Reserve Bank of New York, and with 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. Repurchase agreements with foreign banks may be
available with respect to government securities of the particular foreign
jurisdiction. The custody of the Obligation will be maintained by the Fund's
Custodian. The 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 Sub-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
B-8
<PAGE>
has not perfected a security interest in the Obligation, the Fund may be
required to return the Obligation to the seller's estate and be treated as an
unsecured creditor of the seller. As an unsecured creditor, the Fund would be
at risk of losing some or all of the principal and income involved in the
transaction. As with any unsecured debt instrument purchased for the Funds, the
Sub-Advisers seek to minimize the risk of loss from repurchase agreements by
analyzing the creditworthiness of the obligor, in this case the seller of the
Obligation. Apart from the risk of bankruptcy or insolvency proceedings, there
is also the risk that the seller may fail to repurchase the security. However,
if the market value of the Obligation subject to the repurchase agreement
becomes less than the repurchase price (including accrued interest), the Fund
will direct the seller of the Obligation to deliver additional securities so
that the market value of all securities subject to the repurchase agreement
equals or exceeds the repurchase price.
The Strategic Income Fund, 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 liquid assets 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. The Strategic
Income Fund will limit its investments in reverse repurchase agreements to no
more than 5% 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 are required to be secured continuously by collateral in
cash or U.S. government securities maintained on a current basis at an amount at
least equal to the market value of the securities loaned. The Fund would have
the right to call a loan and obtain the securities loaned at any time generally
on less than five days' notice. For the duration of a loan, the Fund would
continue to receive the equivalent of the interest or dividends paid by the
issuer on the securities loaned and would also receive compensation from the
investment of the collateral. The Fund would not, however, have the right to
vote any securities having voting rights during the existence of the loan, but
the Fund would call the loan in anticipation of an important vote to be taken
among holders of the securities or of the giving or withholding of their consent
on a material matter affecting the investment. The Trust, on behalf of certain
of the Funds, has
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entered into an agency agreement with Merrill Lynch Portfolio Services, Inc.
which acts as the Funds' agent in making loans of portfolio securities and
short-term money market investments of the cash collateral received, under the
supervision and control of the Funds' Sub-Advisers.
As with other extensions of credit there are risks of delay in recovery of,
or even loss of rights in, the collateral should the borrower of the securities
fail financially or breach its agreement with a Fund. However, the loans would
be made only to firms deemed by the Sub-Adviser to be creditworthy and approved
by the Board, and when, in the judgment of the Sub-Adviser, the consideration
which can be earned currently from securities loans of this type justifies the
attendant risk. The value of securities loaned will not exceed 33% of the value
of the total assets of the lending Fund. In addition, pursuant to guidelines
adopted by the Board, each Fund is prohibited from lending more than 5% of its
total assets to any one counterparty.
BANK OBLIGATIONS
Time deposits are nonnegotiable deposits maintained in a banking
institution for a specified period of time at a stated interest rate. Time
deposits which may be held by the Funds will not benefit from insurance from the
Bank Insurance Fund or the Savings Association Insurance Fund administered by
the Federal Deposit Insurance Corporation.
Certificates of deposit are certificates evidencing the obligation of a
bank to repay funds deposited with it for a specified period of time.
Bankers' acceptances are credit instruments evidencing the obligation of a
bank to pay a draft drawn on it by a customer. These instruments reflect the
obligation both of the bank and of the drawer to pay the full amount of the
instrument upon maturity.
Investments in the obligations of banks are deemed to be "cash equivalents"
if, at the date of investment, the banks have capital surplus and individual
profits (as of the date of their most recently published financials) in excess
of $100,000,000, or if, with respect to the obligations of other banks and
savings and loan associations, such obligations are federally insured. The
Equity Index Fund will not be subject to the above restriction to the extent it
invests in bank 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
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Federal Deposit Insurance Corporation. The Equity Index Fund also may invest in
certificates of deposit of savings and loan 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.
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
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.
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CONVERTIBLE SECURITIES
The Capital Appreciation Fund, Convertible Fund, High Yield Corporate Bond
Fund, International Bond Fund, International Equity Fund, Strategic Income Fund,
Total Return Fund and Value Fund may invest in securities convertible into
common stock or the cash value of a single equity security or a basket or index
of equity securities. Such investments may be made, for example, if the Sub-
Adviser believes that a company's convertible securities are undervalued in the
market. Convertible securities eligible for inclusion in the Funds' portfolios
include convertible bonds, convertible preferred stocks, warrants or notes or
other debt instruments that may be exchanged for cash payable in an amount that
is linked to the value of a particular security, basket of securities, index or
indices of securities or currencies.
Convertible securities, until converted, have the same general
characteristics as other fixed income securities insofar as they generally
provide a stable stream of income with generally higher yields than those of
equity securities of the same or similar issuers. By permitting the holder to
exchange his investment for common stock or the cash value of a security or a
basket or index of securities, convertible securities may also enable the
investor to benefit from increases in the market price of the underlying
securities. Therefore, convertible securities generally offer lower interest or
dividend yields than non-convertible securities of similar quality.
As with all fixed income securities, the market value of convertible
securities tends to decline as interest rates increase and, conversely, tends to
increase as interest rates decline. The unique feature of the convertible
security is that as the market price of the underlying common stock declines, a
convertible security tends to trade increasingly on a yield basis, and so may
not experience market value declines to the same extent as the underlying common
stock. When the market price of the underlying common stock increases, the
price of a convertible security increasingly reflects the value of the
underlying common stock and may rise accordingly. While no securities
investment is without some risk, investments in convertible securities generally
entail less risk than investments in the common stock of the same issuer.
Holders of fixed income securities (including convertible securities) have
a claim on the assets of the issuer prior to the holders of common stock in case
of liquidation. However, convertible securities are typically subordinated to
similar non-convertible securities of the same issuer.
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Accordingly, convertible securities have unique investment characteristics
because (i) they have relatively high yields as compared to common stocks, (ii)
they have defensive characteristics since they provide a fixed return even if
the market price of the underlying common stock declines, and (iii) they provide
the potential for capital appreciation if the market price of the underlying
common stock increases.
A convertible security may be subject to redemption at the option of the
issuer at a price established in the charter provision or indenture pursuant to
which the convertible security is issued. If a convertible security held by a
Fund is called for redemption, the Fund will be required to surrender the
security for redemption, convert it into the underlying common stock or cash or
sell it to a third party.
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.
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 branches of U.S. banks. 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
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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 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
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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 Sub-Adviser believes that it is
important to have the flexibility to enter into such forward contracts when it
determines that the best interest of a Fund will be served by entering into such
a contract. Generally, the Sub-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. 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.
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Second, when the Sub-Adviser believes that the currency of a particular
foreign country may suffer a substantial decline against the U.S. dollar, it may
enter into a forward contract to sell, for a fixed amount of dollars, the amount
of foreign currency approximating the value of some or all of 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.
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
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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 Sub-Adviser. A Fund generally will
not enter into a forward contract with a term of greater than one year.
In cases of transactions which constitute "transaction" 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. The
Segregated Account will consist of liquid assets. In the case of "anticipatory"
hedges and "cross-currency" hedges that involve the purchase and sale of two
different foreign currencies indirectly through separate forward currency
contracts, the Fund will establish a Segregated Account with its Custodian as
described above. In the event a Fund establishes a Segregated Account, the Fund
will mark-to-market the value of the assets in the Segregated Account. If the
value of the liquid assets placed in the Segregated Account declines, additional
liquid assets will be placed in the account by the Fund on a daily basis so that
the value of the account will equal the amount of the Fund's commitments with
respect to such contracts.
It should be realized that this method of protecting the value of a Fund's
portfolio securities against a decline in the value of a currency does not
eliminate fluctuations in the underlying prices of the securities. It simply
establishes a rate of exchange which can be achieved at some future point in
time. It also reduces any potential gain which may have otherwise occurred had
the currency value increased above the settlement price of the contract. The
Funds cannot assure that the techniques discussed above will be successful.
Successful use of forward contracts depends on the investment manager's skill in
analyzing and predicting relative currency values. Forward contracts alter 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
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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 Sub-Adviser believes active currency management can be employed as an
overall portfolio risk management tool. For example, in their view, foreign
currency management can provide overall portfolio risk diversification when
combined with a portfolio of foreign securities, and the market risks of
investing in specific foreign markets can at times be reduced by currency
strategies which may not involve the currency in which the foreign security is
denominated.
A Fund's foreign currency transactions may be limited by the requirements
of Subchapter M of the Code for qualification as a regulated investment company.
FOREIGN INDEX-LINKED INSTRUMENTS
As part of its investment program, and to maintain greater flexibility, the
International Bond Fund, International Equity Fund and Strategic Income 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"). Foreign index-linked
instruments have the investment characteristics of particular securities,
securities indexes, futures contracts or currencies. Such instruments may take
a variety of forms, such as debt instruments with interest or principal payments
determined by reference to the value of a currency or commodity at a future
point in time.
A foreign index may be based upon the exchange rate of a particular
currency or currencies or the differential between two currencies, or the level
of interest rates in a particular country or countries, or the differential in
interest rates between particular countries. In the case of foreign index-
linked instruments linking the interest 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 Fund, High Yield Corporate Bond Fund, International
Bond Fund, Strategic Income Fund and Total Return Fund may invest a portion of
its assets in Brady Bonds, which are securities created through the exchange of
existing
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commercial bank loans to sovereign entities for new obligations in connection
with debt restructurings. Brady Bonds may be collateralized or uncollateralized
and are issued in various currencies (primarily the U.S. dollar). Brady bonds
are not considered U.S. government securities.
U.S. dollar-denominated, collateralized Brady Bonds, which may be fixed
rate par bonds or floating rate discount bonds, are generally collateralized in
full as to principal by U.S. Treasury zero coupon bonds having the same maturity
as the Brady Bonds. Interest payments on these Brady Bonds generally are
collateralized on a one-year or longer rolling-forward basis by cash or
securities in an amount that, in the case of fixed rate bonds, is equal to at
least one year of interest payments or, in the case of floating rate bonds,
initially is equal to at least one year's interest payments based on the
applicable interest rate at that time and is adjusted at regular intervals
thereafter. Certain Brady Bonds are entitled to "value recovery payments" in
certain circumstances, which in effect constitute supplemental interest payments
but generally are not collateralized. Brady Bonds are often viewed as having
three or four valuation components: (i) the collateralized repayment of
principal at final maturity; (ii) the collateralized interest payments; (iii)
the uncollateralized interest payments; and (iv) any uncollateralized repayment
of principal at maturity (these uncollateralized amounts constitute the
"residual risk").
Brady Bonds involve various risk factors including the history of defaults
with respect to commercial bank loans by public and private entities of
countries issuing Brady Bonds. There can be no assurance that Brady Bonds in
which the Fund may invest will not be subject to restructuring arrangements or
to requests for new credit, which may cause the Fund to suffer a loss of
interest or principal on any of its holdings.
MUNICIPAL SECURITIES
Municipal securities generally are understood to include debt obligations
issued by, or on behalf of, states, territories and possessions of the United
States and their political sub-divisions, agencies and instrumentalities and the
District of Columbia, to obtain funds for various public purposes, including
construction of a wide range of public facilities, refunding of outstanding
obligations, payment of general operating expenses and extensions of loans to
public institutions and facilities. The yields on municipal securities depend
upon a variety of factors, including general economic and monetary conditions,
general money market conditions, general conditions of the municipal securities
market, the financial condition of the issuer, the size of a particular
offering, the maturity of the
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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.
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
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proceeds of these obligations are used to fund a wide range of public projects,
including construction or improvement of schools, highways and roads, and water
and sewer systems. The basic security behind general obligation bonds is the
issuer's pledge of its full faith, credit and taxing power for the payment of
principal and interest. The taxes that can be levied for the payment of debt
service may be limited or unlimited as to the rate or amount of special
assessments.
A revenue bond is not secured by the full faith, credit and taxing power of
an issuer. Rather, the principal security for a revenue bond is generally the
net revenue derived from a particular facility, group of facilities or, in some
cases, the proceeds of a special excise or other specific revenue source.
Revenue bonds are issued to finance a wide variety of capital projects,
including: electric, gas, water, and sewer systems; highways, bridges, and
tunnels; port and airport facilities; colleges and universities; and hospitals.
Although the principal security behind these bonds may vary, many provide
additional security in the form of a debt service reserve fund which may be used
to make principal and interest payments on the issuer's obligations. Housing
finance authorities have a wide range of security and credit enhancement
guarantees available to them, including partially or fully insured mortgages,
rent subsidized and/or collateralized mortgages, and/or the net revenues from
housing or other public projects. Some authorities are provided further
security in the form of a state's assurance (although without obligation) to
make up deficiencies in the debt service reserve fund.
An entire issue of Municipal Bonds may be purchased by one or a small
number of institutional investors such as the 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
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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 Sub-
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 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
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Bonds which are not General Obligation Bonds is made by the Sub-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% (15% in
the case of the Strategic Income Fund) of its total 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 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
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<PAGE>
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.
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 detailed
and 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. The Funds intend to monitor
developments in the municipal bond market to determine whether any defensive
action should be taken.
INDUSTRIAL DEVELOPMENT AND POLLUTION CONTROL BONDS
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.
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,
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<PAGE>
private activity bonds issued after that date qualify to pay tax-exempt
interest.
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 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
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<PAGE>
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, 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 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, Strategic Income 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
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<PAGE>
reducing the yield otherwise available from the same security. The Sub-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 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
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<PAGE>
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 liquid assets at least equal in
value to commitments for when-issued securities. Such segregated securities
either will mature or, if necessary, be sold on or before the settlement date.
MORTGAGE-RELATED AND OTHER ASSET-BACKED SECURITIES
Each Fund may buy Mortgage-related securities. Mortgage-related securities
are interests in pools of residential or commercial mortgage loans or leases,
including mortgage loans made by savings and loan institutions, mortgage
bankers, commercial banks and others. Pools of mortgage loans are assembled as
securities for sale to investors by various governmental, government-related and
private organizations (see "Mortgage Pass-Through Securities"). The 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
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<PAGE>
"pass-through" of the monthly payments made by the individual borrowers on their
residential mortgage loans, net of any fees paid to the issuer or guarantor of
such securities. Additional payments are caused by repayments of principal
resulting from the sale of the underlying residential property, refinancing or
foreclosure, net of fees or costs which may be incurred. Some mortgage-related
securities (such as securities issued by the GNMA) are described as "modified
pass-through." These securities entitle the holder to receive all interest and
principal payments owed on the mortgage pool, net of certain fees, at the
scheduled payment dates regardless of whether or not the mortgagor actually
makes the payment. Some mortgage pass-through certificates may include
securities backed by adjustable-rate mortgages which bear interest at a rate
that will be adjusted periodically.
Early repayment of principal on mortgage pass-through securities (arising
from prepayments of principal due to sale of the underlying property,
refinancing, or foreclosure, net of fees and costs which may be incurred) may
expose a Fund to a lower rate of return upon reinvestment of principal. Also,
if a security subject to prepayment has been purchased at a premium, in the
event of prepayment the value of the premium would be lost.
Payment of principal and interest on some mortgage pass-through securities
(but not the market value of the securities themselves) may be guaranteed by the
full faith and credit of the U.S. government (in the case of securities
guaranteed by GNMA); or guaranteed by agencies or instrumentalities of the U.S.
Government (in the case of securities guaranteed by FNMA or FHLMC, which are
supported only by the discretionary authority of the U.S. government to purchase
the agency's obligations).
The principal governmental guarantor of mortgage-related securities is the
GNMA. GNMA is a wholly owned U.S. government corporation within the U.S.
Department of Housing and Urban Development ("HUD"). GNMA is authorized to
guarantee, with the full faith and credit of the U.S. government, the timely
payment of principal and interest on securities issued by institutions approved
by GNMA (such as 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
B-29
<PAGE>
any government agency) residential mortgages from a list of approved
seller/servicers which include state and federally chartered savings and loan
associations, mutual savings banks, commercial banks and credit unions and
mortgage bankers. Pass-through securities issued by FNMA are guaranteed as to
timely payment of principal and interest by FNMA but are not backed by the full
faith and credit of the U.S. government. FNMA is authorized to borrow from the
U.S. Treasury to meet its obligations.
FHLMC was created by Congress in 1970 for the purpose of increasing the
availability of mortgage credit for residential housing. It is a government-
sponsored corporation and acts as a government instrumentality under authority
granted by Congress. FHLMC was formerly owned by the twelve Federal Home Loan
Banks and is now owned entirely by private stockholders. FHLMC issues
Participation Certificates ("Pcs") which represent interests in conventional
mortgages from FHLMC's national portfolio. FHLMC guarantees the timely payment
of interest and collection of principal, but Pcs are not backed by the full
faith and credit of the U.S. government.
If either fixed or variable rate pass-through securities issued by the U.S.
government or its agencies or instrumentalities are developed in the future, the
Funds reserve the right to invest in them.
Commercial banks, savings and loan institutions, private mortgage insurance
companies, mortgage bankers and other secondary market issuers also create pass-
through pools of conventional residential mortgage loans. Such issuers may, in
addition, be the originators and/or servicers of the underlying mortgage loans
as well as the guarantors of the mortgage-related securities. Pools created by
such non-governmental issuers generally offer a higher rate of interest than
government and government-related pools because there are no direct or indirect
government or agency guarantees of payments in the former pools. However,
timely payment of interest and principal of these pools may be supported by
various forms of insurance or guarantees, 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
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<PAGE>
the originator/servicers and poolers, the Sub-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 Sub-Advisers' opinion are illiquid if, as a result, more
than 10% (15% in the case of the International Equity, International Bond
and Strategic Income 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 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.
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<PAGE>
An investor is partially guarded against a sooner than desired return of
principal because of the sequential payments.
In a typical CMO transaction, a corporation ("issuer") issues multiple
series (e.g., A, B, C, Z) of CMO bonds ("Bonds"). Proceeds of the Bond Offering
are used to purchase mortgages or mortgage pass-through certificates
("Collateral"). The Collateral is pledged to a third-party trustee as security
for the Bonds. Principal and interest payments from the Collateral are used to
pay principal on the Bonds in the order A, B, C, Z. The Series A, B, and C
Bonds all bear current interest. Interest on the Series Z Bond is accrued and
added to principal and a like amount is paid as principal on the Series A, B or
C Bond currently being paid off. When the Series A, B and C Bonds are paid in
full, interest and principal on the Series Z Bond begins to be paid currently.
With some CMOs, the issuer serves as a conduit to allow loan originators
(primarily builders or savings and loan associations) to borrow against their
loan portfolios.
FHLMC COLLATERALIZED MORTGAGE OBLIGATIONS FHLMC CMOs are debt obligations
-----------------------------------------
of FHLMC issued in multiple classes having different maturity dates which are
secured by the pledge of a pool of conventional mortgage loans purchased by
FHLMC. Unlike FHLMC Pcs, payments of principal and interest on the CMOs are
made semiannually, as opposed to monthly. The amount of principal payable on
each semiannual payment date is determined in accordance with FHLMC's mandatory
sinking fund schedule, which, in turn, is equal to approximately 100% of FHA
prepayment experience applied to the mortgage collateral pool. All sinking fund
payments in the CMOs are allocated to the retirement of the individual classes
of bonds in the order of their stated maturities. Payment of principal on the
mortgage loans in the collateral pool in excess of the amount of FHLMC's minimum
sinking fund obligation for any payment date are paid to the holders of the CMOs
as additional sinking fund payments. Because of the "pass-through" nature of
all principal payments received on the collateral pool in excess of FHLMC's
minimum sinking fund requirement, the rate at which principal of the CMOs is
actually repaid is likely to be such that each class of bonds will be retired in
advance of its scheduled maturity date.
If collection of principal (including prepayments) on the mortgage loans
during any semiannual payment period is not 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
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<PAGE>
substitute collateral in the event of delinquencies and/or defaults.
OTHER MORTGAGE-RELATED SECURITIES Other mortgage-related securities
---------------------------------
include securities other than those described above that directly or indirectly
represent a participation in, or are secured by and payable from, mortgage loans
on real property, including CMO residuals or stripped mortgage-backed
securities, and may be structured in classes with rights to receive varying
proportions of principal and interest. Other mortgage-related securities may be
equity or debt securities issued by agencies or instrumentalities of the U.S.
government or by private originators of, or investors in, mortgage loans,
including savings and loan associations, homebuilders, mortgage banks,
commercial banks, investment banks, partnerships, trusts and special purpose
entities of the foregoing.
CMO RESIDUALS CMO residuals are derivative mortgage securities issued by
-------------
agencies or instrumentalities of the U.S. government or by private originators
of, or investors in, mortgage loans, including savings and loan associations,
homebuilders, mortgage banks, commercial banks, investment banks and special
purpose entities of the foregoing.
The cash flow generated by the mortgage assets underlying a series of CMOs
is applied first to make required payments of principal and interest on the
CMOs and second to pay the related administrative expenses of the issuer. The
residual in a CMO structure generally represents the interest in any excess cash
flow remaining after making the foregoing payments. Each payment of such excess
cash flow to a holder of the related CMO residual represents income and/or a
return of capital. The amount of residual cash flow resulting from a CMO will
depend on, among other things, the characteristics of the mortgage assets, the
coupon rate of each class of CMO, prevailing interest rates, the amount of
administrative expenses and the prepayment experience on the mortgage assets.
In particular, the yield to maturity on CMO residuals is extremely sensitive to
prepayments on the related underlying mortgage assets, in the same manner as an
interest-only ("IO") class of stripped mortgage-backed securities. See
"Stripped Mortgage-Backed Securities." In addition, if a series of a CMO
includes a class that bears interest at an adjustable rate, the yield to
maturity on the related CMO residual will also be extremely sensitive to changes
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.
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<PAGE>
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.
CMOs and REMICs may offer a higher yield than U.S. government securities,
but they may also be subject to greater price fluctuation and credit risk. In
addition, CMOs and REMICs typically will be issued in a variety of classes or
series, which have different maturities and are retired in sequence. Privately
issued CMOs and REMICs are not government securities nor are they supported in
any way by any governmental agency or instrumentality. In the event of a
default by an issuer of a CMO or a REMIC, there is no assurance that the
collateral securing such CMO or REMIC will be sufficient to pay principal and
interest. It is possible that there will be limited opportunities for trading
CMOs and REMICs in the over-the-counter market, the depth and liquidity of which
will vary from time to time. Under recent legislation, holders of "residual"
interests in REMICs (including the Fund) could be required to recognize
potential phantom income, as could shareholders (including unrelated business
taxable income for tax-exempt shareholders) of funds that hold such interests.
The Fund will consider this legislation in determining whether to invest in
residual interests.
GOVERNMENT FUND The Government Fund may invest in securities
---------------
collateralized by mortgages or pools of mortgages the
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<PAGE>
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 instrumen tality. 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.
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.
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
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rapid rate of principal payments may have a material adverse effect on a Fund's
yield to maturity from these securities. If the underlying mortgage assets
experience greater than anticipated prepayments of principal, a Fund may fail to
fully recoup its initial investment in these securities even if the security is
in one of the highest rating categories.
Although SMBS are purchased and sold by institutional investors through
several investment banking firms acting as brokers or dealers, these securities
were only recently developed. As a result, established trading markets have not
yet developed and, accordingly, these securities may be deemed "illiquid" and
subject to a Fund's limitations on investment in illiquid securities.
RISKS ASSOCIATED WITH MORTGAGE-BACKED SECURITIES The value of some
------------------------------------------------
mortgage-backed securities in which the 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 Sub-Adviser to forecast
interest rates and other economic factors correctly. If a Sub-Adviser
incorrectly forecasts such factors and has taken a position in mortgage-backed
securities that is or becomes contrary to prevailing market trends, the Funds
could be exposed to the risk of a loss.
Investment in mortgage-backed securities poses several risks, including
prepayment, market, and credit risk. Prepayment risk reflects the chance that
borrowers may prepay their mortgages faster than expected, thereby affecting the
investment's average life and perhaps its yield. Whether or not a mortgage loan
is prepaid is almost entirely controlled by the borrower. Borrowers are most
likely to exercise their prepayment options at a time when it is least
advantageous to investors, generally prepaying mortgages as interest rates fall,
and slowing payments as interest rates rise. Besides the effect of 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
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to find a buyer, which may in turn decrease the price at which they may be sold.
Credit risk reflects the chance that a Fund may not receive all or part of
its principal because the issuer or credit enhancer has defaulted on its
obligations. Obligations issued by U.S. government-related entities are
guaranteed as to the payment of principal and interest, but are not backed by
the full faith and credit of the U.S. government. The performance of private
label mortgage-backed securities, issued by private institutions, is based on
the financial health of those institutions.
OTHER ASSET-BACKED SECURITIES 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 Sub-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
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decline in the value of the security owned by the Fund. If the value of a
security sold short against the box increases, the Fund would suffer a loss when
it purchases or delivers to the selling broker the security sold short. The
proceeds of the short sale are retained by the broker pursuant to applicable
margin rules. In addition, the Fund may segregate assets, equal in value to 50%
of the value of the short sale, in a special account with the Fund's custodian.
The segregated assets are pledged to the broker pursuant to applicable margin
rules. If a broker, with which the Fund has open short sales, were to become
bankrupt, 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 Sub-Advisers believe are creditworthy. Short sales against the box will be
limited to no more than 25% of a Fund's total assets.
OPTIONS ON SECURITIES
WRITING CALL OPTIONS Any Fund, except 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 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
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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, 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
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<PAGE>
option, the Fund will not sell the underlying security until the option expires
or the Fund delivers the underlying security upon exercise. A closing purchase
transaction for an over-the-counter option may be made only with the other party
to the option. Once an option writer has received an exercise notice, it cannot
effect a closing purchase transaction in order to terminate its obligation under
the option and must deliver or purchase the underlying securities at the
exercise price.
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 Sub-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 Sub-Adviser, engage without limitation in the writing of options on their
portfolio securities.
WRITING PUT OPTIONS Each Fund, except the Money Market Fund and the Tax
-------------------
Free Bond Fund, may also write covered put options. Put options written 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 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.
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<PAGE>
A covered put writer assumes the risk that the market price for the
underlying security will fall below the exercise price, in which case the writer
could be required to purchase the security at a higher price than the then-
current market price of the security. In both cases, the writer has no control
over the time when it may be required to fulfill its obligation as a writer of
the option.
The 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 Sub-Advisers, engage without limitation in the writing of options on U.S.
government securities.
PURCHASING OPTIONS Each Fund, except 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 Sub-Advisers deem to be of sufficient creditworthiness so as to
minimize these risks.
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<PAGE>
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 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.
MARRIED PUTS. Each Fund, except the Equity Index Fund, Money Market Fund
------------
and Tax Free Bond Fund may engage in a strategy known as "married puts." This
strategy is most typically used when the Fund owns a particular common stock or
security convertible into common stock and wishes to effect a short sale
against the box (see "short sales against the box") but for various reasons is
---
unable to do so. The Fund may then enter into a series of stock and related
option
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transactions to achieve the economic equivalent of a short sale against the box.
To implement this trading strategy, the Fund will simultaneously execute with
the same broker a series of related transactions. The Fund will purchase shares
of the common stock and an "in the money" over-the-counter put option to sell
the common stock to the broker and generally will write an over-the-counter "out
of the money" call option in the same stock with the same exercise price as the
put option. The options are linked and may not be exercised, transferred or
terminated independently of the other.
Holding the put option places the Fund in a position to profit on the
decline in price of the security just as it would by effecting a short sale and
to, thereby, hedge against possible losses in the value of a security or
convertible security held by the Fund. The writer of the put option may require
that the Fund write a call option, which would enable the broker to profit in
the event the price of the stock rises above the exercise price of the stock
(see "writing call options" above). In the event the stock price were to
- ----
increase above the strike or exercise price of the option, the Fund would suffer
a loss unless it first terminated the call by exercising the put.
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.
A Fund's purpose in selling covered options is to realize greater income
than would be realized on portfolio securities transactions alone. A Fund may
forego the benefits of appreciation on securities sold pursuant to call options,
or pay a higher price for securities acquired pursuant to put options written by
the Fund. If a put or call option purchased by a Fund is not sold when it has
remaining value, and if the market price of the underlying security, in the case
of a put, remains equal to or greater than the exercise price, or, in the case
of a call, remains less than or equal to the exercise price, the Fund will not
be able to exercise profitably the option and will lose its entire investment in
the option. Also, the price of a put or call option purchased to hedge against
price movements in a related security may move more or less than the price of
the related security. The Capital Appreciation Fund, Convertible 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
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the value of the Fund's total assets.
The Fund would ordinarily realize a gain if the value of the securities
increased during the option period above the exercise price sufficiently to
cover the premium. The Fund would have a loss if the value of the securities
remained below the sum of the premium paid and the exercise price during the
option period. The ability of a Fund to successfully utilize options may depend
in part upon the ability of the Sub-Adviser to forecast interest rates and other
economic factors correctly.
The hours of trading for options on securities may not conform to the hours
during which the underlying securities are traded. To the extent that the
options markets close before the markets for the underlying securities,
significant price and rate movements can take place in the underlying markets
that cannot be reflected in the options markets.
OPTIONS ON FOREIGN CURRENCIES
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
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dollars which is less than the market value of such currency, resulting in a
gain that may offset, at least partially, the effect of any currency-related
increase in the price of securities the Fund intends to acquire. As in the case
of other types of options transactions, however, the benefit a Fund derives from
purchasing foreign currency options will be reduced by the amount of the premium
and related transaction costs. In addition, if currency exchange rates do not
move in the direction or to the extent anticipated, a Fund could sustain losses
on transactions in foreign currency options which would deprive it of a portion
or all of the benefits of advantageous changes in such rates.
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
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equal to or less than the exercise price of the call written or (b) is greater
than the exercise price of the call written if the amount of the difference is
maintained by a Fund in liquid assets in a segregated account with its
custodian.
As with other kinds of options transactions, the writing of an option on
foreign currency will constitute only a partial hedge up to the amount of the
premium received and 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 two-party contracts with price and other terms negotiated between
buyer and seller and generally do not have as much market liquidity as
exchanged-traded options. Foreign currency exchange-traded options generally
settle in cash, whereas options traded over-the-counter may settle in cash or
result in delivery of the underlying currency upon exercise of the option.
SECURITIES INDEX OPTIONS
The 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.
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<PAGE>
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 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.
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<PAGE>
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 Fund, Government Fund, High Yield
Corporate Bond Fund, International Bond Fund, International Equity Fund, New
York Tax Free Fund, Strategic Income Fund, Tax Free Bond Fund and Total Return
Fund may purchase and sell futures contracts on debt securities and on indexes
of debt securities in order to attempt to protect against the effects of adverse
changes in interest rates, to lengthen or shorten the average maturity or
duration of a Fund's portfolio and for other appropriate risk management
purposes. 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 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. The Capital Appreciation Fund, Convertible Fund, Equity Index Fund,
International Equity Fund, Strategic Income 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 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
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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 purchase prices for the Fund than
might later be available in the market when the Fund makes anticipated
purchases. In the United States, futures contracts are traded on boards of
trade which have been designated "contract markets" by the CFTC. Currently,
there are futures contracts based on a variety of instruments, indexes and
currencies, including long-term U.S. Treasury bonds, Treasury notes, GNMA
certificates, three-month U.S. Treasury bills, three-month domestic bank
certificates of deposit, a municipal bond index and various stock indexes.
When a purchase or sale of a futures contract is made by a Fund, the Fund
is required to deposit with its custodian (or broker, if legally permitted) a
specified amount of liquid assets ("initial margin"). The margin required for a
futures contract is set by the exchange on which the contract is traded and may
be modified during the term of the contract. The initial margin is in the
nature of a performance bond or good faith deposit on the futures contract which
is returned to the Fund upon termination of the contract assuming all
contractual obligations have been satisfied. Each Fund expects to earn interest
income on its initial margin deposits. A futures contract held by a Fund is
valued daily at the official settlement price of the exchange on which it is
traded. Each day 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.
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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 Sub-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.
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.
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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
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
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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.
The Funds do not intend to use U.S. stock index futures to hedge positions
in securities of non-U.S. companies.
CURRENCY FUTURES A sale of a currency futures contract creates an
----------------
obligation by 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 Sub-Adviser
anticipates that exchange rates for a particular currency will fall, as a hedge
against a decline in the value of the Fund's securities denominated in such
currency. If the Sub-Adviser anticipates that exchange rates will rise, the
Fund may purchase a currency futures contract to protect against an increase in
the price of securities denominated in a particular currency the Fund intends to
purchase. Although the terms of currency futures contracts specify actual
delivery or receipt, in most instances the contracts are closed out before the
settlement date without the making or taking of delivery of the currency.
Closing out of a currency futures contract is effected by entering into an
offsetting purchase or sale transaction. To offset a currency futures contract
sold by 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.
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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 Sub-Adviser could be incorrect in its expectation as to the direction or
extent of various exchange rate movements or the time span within which the
movements take place.
OPTIONS ON FUTURES For bona fide hedging and other appropriate risk
------------------
management purposes, the Funds also may purchase and write call and put options
on futures contracts which are traded on exchanges that are licensed and
regulated by the CFTC for the purpose of options trading, or, subject to
applicable CFTC rules, on foreign exchanges. 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 also
may engage in related closing transactions with respect to options on futures.
A "call" option on a futures contract gives the purchaser the right, in return
for the premium paid, to purchase a futures contract (assume a "long" position)
at a specified exercise price at any time before the option expires. A "put"
option gives the purchaser the right, in return for the premium paid, to sell a
futures contract (assume a "short" position), for a specified exercise price at
any time before the option expires.
Upon the exercise of a "call," the writer of the option is obligated to
sell the futures contract (to deliver a "long" position to the option holder) at
the option exercise price, which will presumably be lower than the current
market price of the contract in the futures market. Upon exercise of a "put,"
the writer of the option is obligated to purchase the futures contract (deliver
a "short" position to the option holder) at the option exercise price, which
will presumably be higher than the current market price of the contract in the
futures market. When an entity exercises an option and assumes a "long" futures
position, in the case of a "call," or a "short" futures position, in the case of
a "put," its gain will be credited to its futures margin account, while the loss
suffered by the writer of the option will be debited to its account. However,
as with the trading of futures, most participants in the options markets do not
seek to realize their gains or losses by exercise of their
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option rights. Instead, the writer or holder of an option will usually realize
a gain or loss by buying or selling an offsetting option at a market price that
will reflect an increase or a decrease from the premium originally paid.
Options on futures contracts can be used by a Fund to hedge substantially
the same risks and for the same duration and risk management purposes as might
be addressed or served by the direct purchase or sale of the underlying futures
contracts. If the Fund purchases an option on a futures contract, it may obtain
benefits similar to those that would result if it held the futures position
itself.
The purchase of put options on futures contracts is a means of hedging a
Fund's portfolio against the risk of rising interest rates, declining securities
prices or declining exchange rates for a particular currency. The purchase of a
call option on a futures contract represents a means of hedging against a market
advance affecting securities prices or currency exchange rates when the Fund is
not fully invested or of lengthening the average maturity or duration of a
Fund's portfolio. Depending on the pricing of the option compared to either the
futures contract upon which it is based or upon the price of the underlying
securities or currencies, it may or may not be less risky than ownership of the
futures contract or underlying securities or currencies.
In contrast to a futures transaction, in which only transaction costs are
involved, benefits received in an option transaction will be reduced by the
amount of the premium paid as well as by transaction costs. In the event of an
adverse market movement, however, the Fund will not be subject to a risk of loss
on the option transaction beyond the price of the premium it paid plus its
transaction costs, and may consequently benefit from a favorable movement in the
value of its portfolio securities or the currencies in which such securities are
denominated that would have been more completely offset if the hedge had been
effected through the use of futures.
If a Fund writes options on futures contracts, the Fund will receive a
premium but will assume a risk of adverse movement in the price of the
underlying futures contract comparable to that involved in holding a futures
position. If the option is not exercised, the Fund will realize a gain in the
amount of the premium, which may partially offset unfavorable changes in the
value of securities held by or to be acquired for the Fund. If the option is
exercised, the Fund will incur a loss in the option transaction, which will be
reduced by the amount of the premium it has received, but which may partially
offset favorable changes
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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. 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.
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When purchasing a futures contract, a Fund will maintain with its custodian
(and mark-to-market on a daily basis) liquid assets that, when added to the
amounts deposited with a futures commission merchant as margin, are equal to the
market value of the futures contract. Alternatively, the Fund may "cover" its
position by purchasing a put option on the same futures contract with a strike
price as high or higher than the price of the contract held by the Fund.
When selling a futures contract, a Fund will maintain with its custodian
(and mark-to-market on a daily basis) liquid assets that, when added to the
amount deposited with a futures commission merchant as margin, are equal to the
market value of the instruments underlying the contract. Alternatively, the
Fund may "cover" its position by owning the instruments underlying the contract
(or, in the case of an index futures contract, a portfolio with a volatility
substantially similar to that of the index on which the futures contract is
based), or by holding a call option permitting the Fund to purchase the same
futures contract at a price no higher than the price of the contract written by
the Fund (or at a higher price if the difference is maintained in liquid assets
with the Fund's custodian).
When selling a call option on a futures contract, a Fund will maintain with
its custodian (and mark-to-market on a daily basis) liquid assets that, when
added to the amounts deposited with a futures commission merchant as margin,
equal the total market value of the futures contract underlying the call option.
Alternatively, the Fund may cover its position by entering into a long position
in the same futures contract at a price no higher than the strike price of the
call option, by owning the instruments underlying the futures contract, or by
holding a separate call option permitting the Fund to purchase the same futures
contract at a price not higher than the strike price of the call option sold by
the Fund.
When selling a put option on a futures contract, a Fund will maintain with
its custodian (and mark-to-market on a daily basis) liquid assets that equal the
purchase price of the futures contract, less any margin on deposit.
Alternatively, the Fund may cover the position either by entering into a short
position in the same futures contract, or by owning a separate put option
permitting it to sell the same futures contract so long as the strike price of
the purchased put option is the same or higher than the strike price of the put
option sold by the Fund.
The requirements for qualification as a regulated investment company also
may limit the extent to which a Fund may enter into futures, futures options or
forward contracts. See "Tax Status."
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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. It is also possible that, when a Fund has sold stock index futures
to hedge its portfolio against a decline in the market, the market may advance
while the value of the particular securities held in the Fund's portfolio may
decline. If this occurred, the Fund would incur a loss on the futures contracts
and also experience a decline in the value of its portfolio securities.
Futures exchanges may limit the amount of fluctuation permitted in certain
futures contract prices during a single trading day. The daily limit
establishes the maximum amount that the price of a futures contract may vary
either up or down from the previous day's settlement price at the end of the
current trading session. Once the daily limit has been reached in a futures
contract subject to the limit, no more trades may be made on that day at a price
beyond that limit. The daily limit governs only price movements during a
particular trading day and therefore does not limit potential losses because the
limit may work to prevent the liquidation of unfavorable positions. For
example, futures prices have occasionally moved to the daily limit for several
consecutive trading days with little or no trading, thereby preventing prompt
liquidation of positions and subjecting some holders of futures contracts to
substantial losses.
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
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maintenance of a liquid market in the options. It is not certain that such a
market will develop. Although the Funds generally will purchase only those
options and futures contracts for which there appears to be an active market,
there is no assurance that a liquid market on an exchange will exist for any
particular option or futures contract at any particular time. In the event no
such market exists for particular options, it might not be possible to effect
closing transactions in such options with the result that a Fund would have to
exercise options it has purchased in order to realize any profit and would be
less able to limit its exposure to losses on options it has written.
Many of the contracts discussed above are relatively new instruments
without a significant trading history. As a result, there can be no assurance
that an active secondary market will develop or continue to exist. If the price
of a futures contract changes more than the price of the securities or
currencies, the Fund will experience either a loss or a gain on the futures
contracts which will not be completely offset by changes in the price of the
securities or currencies which are the subject of the hedge. In addition, it is
not possible to hedge fully or perfectly against currency fluctuations affecting
the value of securities denominated in foreign currencies because the value of
such securities is likely to fluctuate as a result of independent factors not
related to currency fluctuations.
SWAP AGREEMENTS
The International Bond Fund, International Equity Fund and Strategic Income
Fund may enter into interest rate, index and currency exchange rate swap
agreements for purposes of attempting to obtain a particular desired return at a
lower cost to the Fund than if the Fund had invested directly in an instrument
that yielded that desired return or for other portfolio management purposes.
Swap agreements are two party contracts entered into primarily by institutional
investors for periods ranging from a few weeks to more than one year. In a
standard "swap" transaction, two parties agree to exchange the returns (or
differentials in rates of return) earned or realized on particular predetermined
investments or instruments. The gross returns to be exchanged or "swapped"
between the parties are calculated with respect to a "notional amount," i.e.,
----
the return on or increase in value of a particular dollar amount invested at a
particular interest rate, in a particular foreign currency, or in a "basket" of
securities representing a particular index. The "notional amount" of the swap
agreement is only a fictive basis on which to calculate the obligations which
the parties to a swap agreement have agreed to exchange. Commonly used swap
agreements include interest rate caps, under which, in return for a premium, one
party agrees to make payments to the other to the extent that
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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's obligations (or rights)
under a swap agreement will generally be equal only to the net amount to be paid
or received under the agreement based on the relative values of the positions
held by each party to the agreement (the "net amount"). A Fund's obligations
under a swap agreement will be accrued daily (offset against any amounts owing
to the Fund) and any accrued but unpaid net amounts owed to a swap counterparty
will be covered by the maintenance of a segregated account consisting of liquid
assets to avoid any potential leveraging of the Fund's portfolio. 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 Sub-Adviser's ability correctly to
predict whether certain types of investments are likely to produce greater
returns than other investments. Because they are two party contracts and
because they may have terms of greater than seven days, swap agreements may be
considered to be illiquid. Moreover, a Fund bears the risk of loss of the
amount expected to be received under a swap agreement in the event of the
default or bankruptcy of a swap agreement counterparty. The Sub-Adviser will
cause a Fund to enter into swap agreements only with counterparties that would
be eligible for consideration as repurchase agreement counterparties under the
Fund's repurchase agreement guidelines. Certain restrictions imposed on the
Funds by the 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.
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
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1940 Act, commodity pool, corporation, partnership, proprietorship,
organization, trust or other entity, employee benefit plan, governmental entity,
broker-dealer, futures commission merchant, natural person, or regulated foreign
person. To be eligible, natural persons and most other entities must have total
assets exceeding $10 million; commodity pools and employee benefit plans must
have assets exceeding $5 million. In addition, an eligible swap transaction must
meet three conditions. First, the swap agreement may not be part of a fungible
class of agreements that are standardized as to their material economic terms.
Second, the creditworthiness of parties with actual or potential obligations
under the swap agreement must be a material consideration in entering into or
determining the terms of the swap agreement, including pricing, cost or credit
enhancement terms. Third, swap agreements may not be entered into and traded on
or through a multilateral transaction execution facility.
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
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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 of a structure with respect to a
corporate loan.
In a typical corporate loan involving the sale of Participation Interests,
the agent bank administers the terms of the corporate loan agreement and is
responsible for the collection of principal and interest and fee payments to the
credit of all lenders which are parties to the corporate loan agreement. The
agent bank in such cases will be qualified under the 1940 Act to serve as a
custodian for a registered investment company such as the 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.
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In situations involving intermediate Participants similar risks may arise.
When a Fund acts as co-lender in connection with a participation interest
or when a Fund acquires a participation interest the terms of which provide
that 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
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than higher grade bonds. The prices of high yield bonds have been found to be
less sensitive to interest-rate changes than more highly rated investments, but
more sensitive to adverse economic downturns or individual corporate
developments. A projection of an economic downturn or of a period of rising
interest rates, for example, could cause a decline in high yield bond prices
because the advent of a recession could lessen the ability of a highly leveraged
company to make principal and interest payments on its debt securities.
Adverse publicity and investor perceptions, whether or not based on
fundamental analysis, may decrease the values and liquidity of high yield bonds,
especially in a thinly traded market.
Legislation designed to limit the use of high yield bonds in corporate
transactions may have a material adverse effect on a Fund's net asset value and
investment practices. In addition, there may be special tax considerations
associated with investing in high yield bonds structured as zero coupon or
payment-in-kind securities. 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
AND STRATEGIC INCOME 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 Funds do 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, each Fund may
purchase securities not paying interest or dividends at the time acquired if, in
the opinion of the Sub-Adviser, such securities
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have the potential for future income (or capital appreciation, if any).
Since shares of the Funds represent an investment in securities with
fluctuating market prices, the value of shares of each Fund will vary as the
aggregate value of the Funds' portfolio securities increases or decreases.
Moreover, the value of the debt securities that each 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 Funds but will be reflected in the net asset
value of the Funds' shares.
EQUITY INDEX FUND
SPECIAL CONSIDERATIONS
The Equity Index Fund is managed using mathematical algorithms to determine
which stocks are to be purchased or sold to replicate the S&P 500 Index to the
extent feasible. From time to time, adjustments may be made in the Fund's
portfolio because of changes in the composition of the 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 Sub-Adviser believes that the indexing approach described above is an
effective method of simulating percentage changes in the S&P 500 Index.
TOTAL RETURN FUND
SPECIAL CONSIDERATIONS
Although the Total Return Fund does not intend to seek short-term profits,
securities in its portfolio will be sold whenever the Sub-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.
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[TO BE UPDATED BY DECHERT]
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 California constitutional amendments, legislative measures,
executive orders, administrative regulations and voter initiatives, as discussed
below, could adversely affect the market values and marketability of, or result
in default of, existing obligations of the State. Obligations of the State or
local governments may also be affected by budgetary pressures affecting the
State and economic conditions in the State. The following information
constitutes only a brief summary and is not intended as a complete description.
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 Constitu tion. 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 amended) provides that notwithstanding
any other law, local
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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 an amount equal to the revenues received by
such entity
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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.
In September 1995, the California Supreme Court upheld the
constitutionality of Proposition 62, creating uncertainty as to the legality of
certain local taxes enacted by non-charter cities in California without voter
approval. It is not possible to predict the impact of the decision.
In November 1996, California voters approved Proposition 218. The
initiative applied the provisions of Proposition 62 to all entities, including
charter cities. It requires that all taxes for general purposes obtain a simple
majority popular vote and that taxes for special purposes obtain a two-thirds
majority vote. Prior to the effectiveness of Proposition 218, charter cities
could levy certain taxes such as transient occupancy taxes and utility user's
taxes without a popular vote. Proposition 218 will also limit the authority of
local governments to impose property-related assessments, fees and charges,
requiring that such assessments be limited to the special benefit conferred and
prohibiting their use for general governmental services. Proposition 218 also
allows voters to use their initiative power to reduce or repeal previously-
authorized taxes, assessments, fees and charges.
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
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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, and
appropriation of certain special taxes imposed by initiative (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") 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
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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 approximately 35 percent to
account for a subsequent redirection of local property taxes, since such
redirection directly affects the share of General Fund revenues to schools.
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. The formal settlement required adoption of
legislation satisfactory to the parties to implement its terms, which has
occurred. The court gave final approval of the settlement in late July, 1996.
The settlement provides, among other things, 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 schools will repay $825 million. The
State share of the repayment will be reflected as an appropriation 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
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current base. Repayments are spread over the eight-year period of 1994-95
through 2001-02 to mitigate any adverse fiscal impact. The Director of Finance
has certified that a settlement has occurred, allowing approximately $351
million in appropriations from the 1995-96 fiscal year to be disbursed to
schools in August 1996.
Substantially increased General Fund revenues, above initial budget
projections, in the 1994-95 and 1995-96 fiscal years have resulted in
retroactive increases in Proposition 98 appropriations from subsequent fiscal
years' budgets.
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 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
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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.
After suffering through a severe recession, since the start of 1994
the State's economy has been on a steady recovery. Employment increased by over
500,000 in 1994 and 1995, and the pre-recession employment level 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.
The recession seriously affected State tax revenues and caused an
increase in expenditures for health and welfare programs. 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 six
years, and the State accumulated a budget deficit of about $2.8 billion at its
peak at June 30, 1993.
The State's cash condition became so serious from late spring 1992
until 1995 that the State had to rely on the issuance of short-term notes which
matured in a subsequent fiscal year to finance its ongoing deficit and pay
current obligations. With the repayment of the last of these deficit notes in
April, 1996, the State does not plan to rely further on external borrowing
across fiscal years, but will continue its normal cash flow.
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.
The possibility exists that another such earthquake could create a major
dislocation of the State economy.
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. 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 projected General Fund revenues and transfers of $44.1 billion, a 3.5
percent increase
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from the prior year. Expenditures were budgeted at $43.4 billion, a four
percent increase. The Department of Finance projected that, after repaying the
last of the carryover budget deficit, there would be a positive balance of $28
million in the budget reserve, the Special Fund for Economic Uncertainties
("SFEU"), at June 30, 1996. The Budget Act also projected Special Fund revenues
of $12.7 billion and appropriated Special Fund expenditures of $13.0 billion.
The Governor's proposed budget for 1996-97 projected General Fund
revenues and transfers of about $45.6 billion and proposed total General Fund
appropriations of about $45.2 billion. The Governor's proposed budget renewed a
proposal, which had been rejected by the legislature in 1995, for a 15% cut in
personal and corporate tax rates, phased in over a three-year period. In May
1996, the State Department of Finance updated revenue estimates to $47.1 billion
for 1996-97, assuming enactment of the Governor's proposed tax cut, and
expenditure estimates to $46.5 billion.
The Department of Finance's May Revision to the 1996-97 Governor's
Budget, released on May 21, 1996 (the "May Revision"), updated the projections
for the 1995-96 fiscal year, so that revenues and transfers were estimated to be
$46.1 billion, some $2 billion over the original fiscal year estimate, which was
attributed to the strong economic recovery. Expenditures also increased, to an
estimated $45.4 billion, as a result of the requirement to expend revenues for
schools under Proposition 98, and, among other things, failure of the federal
government to enact welfare reform and to budget new aid for illegal immigrant
costs.
The 1996-97 Budget Act was signed by the Governor on July 15, 1996,
along with various implementing bills. The Governor vetoed about $82 million of
appropriations (both General Fund and Special Fund). With the signing of the
Budget Act, the State implemented its regular cash flow borrowing program with
the issuance of $3.0 billion of Revenue Anticipation Notes to mature on June 30,
1997. The Budget Act appropriates a modest budget reserve in the SFEU of $305
million, as of June 30, 1997. The Department of Finance projects that, on June
30, 1997, the State's available internal borrowable (cash) resources will be
$2.9 billion, after payment of all obligations due by that date, so that no
cross-fiscal year borrowing will be needed.
The legislature rejected the Governor's proposed 15% cut in personal
income taxes (to be phased over three years), but did approve a 5% cut in bank
and corporation taxes, to be effective for income years starting on January 1,
1997. As a result, revenues for the fiscal year will be an estimated $550
million
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higher than projected in the May Revision, and are now estimated to total
$47.643 billion, a 3.3 percent increase over the final estimated 1995-96
revenues. Special Fund revenues are estimated to be $13.3 billion. The Budget
Act contains General Fund appropriations totaling $47.251 billion, a 4.0 percent
increase over the final estimated 1995-96 expenditures. Special Fund
expenditures are budgeted at $12.6 billion.
Other major features of the 1996-1997 Budget Act include an increase
of 1.6 billion (General Fund) and $1.65 billion total above revised 1995-96
levels for Proposition 98 funding, reductions in health and welfare costs,
increases in educational funding, and increased funding for the State's prison
inmate population. The 1996-97 Budget Act contained no tax increases. There
was a reduction in corporate taxes. In addition, the legislature adopted a
further one-year suspension of the Renters Tax Credit, saving $520 million in
expenditures.
Following enactment of the 1996-97 Budget Act, Congress passed and the
President signed (on August 22, 1996) the Personal Responsibility and Work
Opportunity Act of 1996 making a fundamental reform of the current welfare
system. Among many provisions, the Law includes: (i) conversion of Aid to
Families with Dependent Children from an entitlement program to a block grant
titled Temporary Assistance for Needy Families (TANF), with lifetime time limits
on TANF recipients, work requirements and other changes; (ii) provisions denying
certain federal welfare and public benefits to legal noncitizens, allowing
states to elect to deny additional benefits (including TANF) to legal
noncitizens, and generally denying almost all benefits to illegal immigrants;
and (iii) changes in the Food Stamp program, including reducing maximum benefits
and imposing work requirements.
The states are required to implement the new TANF program not later
than July 1, 1997 and provides California approximately $3.7 billion in block
grant funds for fiscal year 1996-97 for the provisions of the law. States are
allowed to implement TANF as soon as possible and will receive a prorated block
grant effective the date of application. The California State Plan is to be
submitted in time to allow grant reductions to be implemented effective January
1, 1997 and to allow the State to capture approximately $267 million in
additional federal block grant funds over the currently budgeted level. None of
the other federal changes needed to achieve the balance of the $660 million cost
savings were enacted. Thus, in lieu of the $660 million savings initially
assumed to be saved, it is now projected that savings will total approximately
$360 million.
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On January 9, 1997,the Governor released his proposed budget for
fiscal year 1997-98. Assuming continuing strength in the economy, the Governor
projects General Fund revenues of $50.7 billion, and proposes expenditures of
$50.3 billion, to leave a budget reserve in the SFEU of $550 million at June 30,
1998. The Governor proposed further programs to reduce class size in lower
primary grades, using excess revenues from fiscal year 1996-97. He also
proposed a further cut in corporate taxes, and sweeping changes in public
assistance programs to respond to the new federal welfare reform law.
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. The bankruptcy filing stemmed from approximately $1.7 billion in losses
suffered by the County's investment pool due to investments in high risk
"derivative" securities. On June 12, 1996, it emerged from bankruptcy after the
successful sale of $880 million in municipal bonds allowed the County to pay off
the last of its creditors. On January 7, 1997, the County returned to the
municipal bond market with a $136 million bond issue maturing in 13 years at an
insured yield of 7.23%.
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) 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; (ii) on appeal, an action seeking reimbursement for alleged state-
mandated costs, in which the State faces losses of approximately $1 billion, if
all potentially eligible school districts pursue timely claims; (iii) lawsuits
related to contamination at the Stringfellow toxic waste site; (iv) 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; (v) a
claim that payment of wages in registered warrants violated the Fair Labor
Standards Act, which involves maximum damages of approximately $500 million;
(vi) a claim involving the constitutionality of the 1992-93 Budget Act-related
legislation
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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; (vii) a lawsuit involving the reduction
of the State's Aid to Families with Dependent Children ("AFDC") payments in
1992, 1993, and 1994; (viii) a lawsuit involving the 1994-95 Budget Act's 2.3
percent reduction in AFDC payments; (ix) an appeal by the State of a judgment
that legislation unconstitutionally impaired the vested contract rights of
Public Employees' Retirement System members.
Due to the State's continuing budget problems, the State's general
obligation bonds were downgraded in July 1994 from A1" to "Aa" by Moody's, from
"A+" to "A" by S&P. The ratings companies expressed uncertainty in the State's
ability to balance its budget by 1996. However, on July 30, 1996, citing the
State's improving economy and budget situation, S&P upgraded the State's general
obligation bonds from "A" to "A+." 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.
[TO BE UPDATED BY DECHERT]
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.
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
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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
("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 additional long-term financing mechanisms,
lease-purchase and contractual-obligation financings, which involve obligations
of public authorities or municipalities that are State-supported but not general
obligations of the State. As of March 31, 1996, the total amount of outstanding
general obligation debt was $5.05 billion, including $293.6 billion in bond
anticipation notes.
The fiscal stability of the State is related in part to the fiscal
stability of its public authorities. As of September 30, 1995, the date of the
latest data available, 17 public authorities had outstanding debt of $100
million or more. The aggregate outstanding debt, including refunding bonds, of
all State public authorities was $73.45 billion.
Public authority operating expenses and debt service costs are
generally paid by revenues generated by the projects financed or operated, such
as tolls charged for the use of highways, bridges or tunnels, rentals charged
for housing units, and charges for occupancy at medical care facilities. In
addition, State legislation authorizes several financing techniques for public
authorities. Also, there are statutory arrangements providing for State local
assistance payments otherwise payable to localities to be made under certain
circumstances to public authorities. Although the State has no obligation to
provide additional assistance to localities whose local assistance payments have
been paid to public authorities under these arrangements, if local assistance
payments are diverted, the affected localities could seek additional State
assistance. Some authorities also receive moneys from State appropriations to
pay for the operating costs of certain of their programs. The Metropolitan
Transit Authority (the "MTA") receives the bulk of this money in order to
provide transit and commuter services.
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
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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 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.
On January 6, 1992, Moody's lowered from "A" to "Baa1" its rating of
those State bonds that are backed by annual legislative appropriations. On
February 11, 1997, Moody's downgraded its rating of the State's general
obligation bonds from "A" to "A2." On January 13, 1992, S&P lowered its rating
of the State's general obligation bonds from "A" to "A-."
OVERVIEW
The State's previous fiscal year commenced on April 1, 1996, and ended
on March 31, 1997, and is referred to herein as the State's 1996-97 fiscal year.
The State's budget for the 1996-97 fiscal year was enacted by the legislature on
July 13, 1996, more than three months after the start of the fiscal year. The
State Financial Plan for the 1996-97 fiscal year was formulated on July 25, 1996
and is based on the State's budget as enacted by the legislature and signed into
law by the Governor, as well as actual results for the first quarter of the
current fiscal year.
After adjustments for comparability between fiscal years, the adopted
1996-97 budget projects a year-over-year increase in General Fund disbursements
of 0.2 percent. Adjusted State Funds (excluding federal grants) disbursements
are projected to increase by 1.6 percent from the prior fiscal year. All
Governmental Funds projected disbursements increase by 4.1
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percent over the prior fiscal year, after adjustments for comparability.
The 1996-97 State Financial Plan is projected to be balanced on a cash
basis. As compared to the Governor's proposed budget as revised on March 20,
1996, the State's adopted budget for 1996-97 increases General Fund spending by
$842 million, primarily from increases for education, special education and
higher education ($563 million). The balance represents funding increases to a
variety of other programs, including community projects and increased assistance
to fiscally distressed cities. Resources used to fund these additional
expenditures include $540 million in increased revenues projected for 1996-97
based on higher-than-projected tax collections during the first half of calendar
1996, $110 million in projected receipts from a new State tax amnesty program,
and other resources including certain non-recurring resources. The total amount
of non-recurring resources included in the 1996-97 State budget is projected by
DOB to be $1.3 billion, or 3.9 percent of total General Fund receipts.
The General Fund is the principal operating fund of the State and is
used to account for all financial transactions, except those required to be
accounted for in another fund. It is the State's largest fund and receives
almost all State taxes and other resources not dedicated to particular purposes.
The General Fund is projected to be balanced on a cash basis for the
1996-97 fiscal year. Total receipts and transfers from other funds are
projected to be $33.17 billion, an increase of $365 million from the prior
fiscal year. Total General Fund disbursements and transfers to other funds are
projected to be $33.12 billion, an increase of $444 million from the total in
the prior 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
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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 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.
The Governor presented his 1997-98 Executive Budget to the legislature
on January 14, 1997. There can be no assurance that the legislature will enact
the Executive Budget as proposed by the Governor into law, or that the State's
adopted budget projections will not differ materially and adversely from the
projections set forth in the Executive Budget. As of April 1, 1997, the
beginning of fiscal year 1997-1998, the legislature had failed to pass a 1997-
1998 budget.
The Executive Budget proposes $2.3 billion in actions to balance the
1997-98 Financial Plan. Before reflecting any actions proposed by the Governor
to restrain spending, General Fund disbursements for 1997-98 were projected to
grow by approximately 4 percent. This increase would have resulted from growth
in Medicaid, higher fixed costs such as pensions and debt service, collective
bargaining agreements, inflation, and the loss of non-recurring resources that
offset spending in 1996-97. General Fund receipts were projected to fall by
roughly 3 percent. 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 1996-97 and implementation of previously enacted tax
reduction programs.
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The Executive Budget proposes to close this gap primarily through a
series of spending reductions and Medicaid cost containment measures, the use of
a portion of the 1996-97 projected budget surplus, and other actions. The 1997-
98 Financial Plan projects receipts of $32.88 billion and spending $32.84
billion.
The Division of the Budget believes that the economic assumptions and
projections of receipts and disbursements accompanying the 1997-98 Executive
Budget are reasonable. However, the economic and financial condition of the
State may be affected by various financial, social, economic and political
factors. Those factors can be very complex, can vary from fiscal year to fiscal
year, and are frequently the result of actions taken not only by the State but
also by entities, such as the federal government, that are outside the State's
control. Because of the uncertainty and unpredictability of changes in these
factors, their impact cannot be fully included in the assumptions underlying the
State's projections. There can be no assurance that the State economy will not
experience results that are worse than predicted, with corresponding material
and adverse effects on the State's financial projections.
To make progress toward addressing recurring budgetary imbalances, the
1997-98 Executive Budget proposes significant actions to align recurring
receipts and disbursements in future fiscal years. However, there can be no
assurance that the legislature will enact the Governor's proposals or that the
State's actions will be sufficient to preserve budgetary balance or to align
recurring receipts and disbursements in either 1997-98 or in future fiscal
years.
In addition, there has been discussion of additional tax reductions,
beyond those reflected in the State's current projections for 1997-98 and the
out years that, if enacted, could make it more difficult to achieve budget
balance over this period. In particular, modifying the State's sales tax
treatment of clothing has been discussed. The State now receives approximately
$700 million annually under the current tax statutes from taxation on clothing,
and localities receive a roughly equivalent amount.
Uncertainties with regard to both the economy and potential decisions
at the federal level add further pressure on future budget balance in New York
State. Risks to the Financial Plan include either a financial market or broader
economic "correction" during the period, a risk heightened by the relatively
lengthy expansions currently underway. In addition, a normal "forecast error"
of one percentage point in the expected growth rate could raise or lower
receipts by $600 million during
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the last year of the projection period. Potential changes to federal tax law
could alter the federal definitions of income on which many State taxes rely.
Similarly, the Financial Plan assumes no significant federal disallowances or
other actions which could affect State finances.
On August 22, 1996, the President signed into law the Personal
Responsibility and Work Opportunity Reconciliation Act of 1996. This federal
legislation fundamentally changed the programmatic and fiscal responsibilities
for administration of welfare programs at the federal, state and local levels.
The new law abolishes the federal Aid to Families with Dependent Children
program (AFDC), and creates a new Temporary Assistance to Needy Families program
(TANF) funded with a fixed federal block grant to states. The new law also
imposes (with certain exceptions) a five-year durational limit on TANF
recipients, requires that virtually all recipients be engaged in work or
community service activities within two years of receiving benefits, and limits
assistance provided to certain immigrants and other classes of individuals.
States are required to meet work activity participation targets for their TANF
caseload; these requirements are phased in over time. State that fail to meet
these federally mandated job participation rates, or that fail to conform with
certain other federal standards, face potential sanctions in the form of a
reduced federal block grant.
On October 16, 1996, the Governor submitted the State's TANF
implementation plan to the federal government as required under the new federal
welfare law. On December 13, 1996, the State's plan was approved by the federal
government. Legislation will be required to implement the State's TANF plan,
and the Governor has introduced legislation necessary to conform with federal
law. States are required to comply with the new federal welfare reform law no
later than July 1, 1997. There can be no assurances that the State legislature
will enact welfare reform proposals as submitted by the Governor and as required
under federal law.
The State Financial Plan is based upon forecasts of national and State
economic activity developed through both internal analysis and review of State
and national economic forecasts prepared by commercial forecasting services and
other public and private forecasters. Economic forecasts have frequently failed
to predict accurately the timing and magnitude of changes in the national and
the State economies. Many uncertainties exist in forecasts of both the national
and State economies, including consumer attitudes toward spending, the extent of
corporate and governmental restructuring, federal fiscal and monetary policies,
the level of interest rates, and the condition of the world economy, which could
have an adverse effect on the State. There can be no assurance that the State
economy will not experience
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results in the current fiscal year that are worse than predicted, with
corresponding material and adverse effects on the State's projections of
receipts and disbursements.
Projections of total State receipts in the State Financial Plan are
based on the State tax structure in effect during the fiscal year and on
assumptions relating to basic economic factors and their historical
relationships to State tax receipts. In preparing projections of State
receipts, economic forecasts relating to personal income, wages, consumption,
profits and employment have been particularly important. The projection of
receipts from most tax or revenue sources is generally made by estimating the
change in yield of such tax or revenue source caused by economic and other
factors, rather than by estimating the total yield of such tax or revenue source
from its estimated tax base. The forecasting methodology, however, ensures that
State fiscal year estimates for taxes that are based on a computation of annual
liability, such as the business and personal income taxes, are consistent with
estimates of total liability under such taxes.
Projections of total State disbursements are based on assumptions
relating to economic and demographic factors, levels of disbursements for
various services provided by local governments (where the cost is partially
reimbursed by the State), and the results of various administrative and
statutory mechanisms in controlling disbursements for State operations. Factors
that may affect the level of disbursements in the fiscal year include
uncertainties relating to the economy of the nation and the State, the policies
of the federal government, and changes in the demand for and use of State
services.
The Division of the Budget believes that its projections of receipts
and disbursements relating to the current State Financial Plan, and the
assumptions on which they are based, are reasonable. Actual results, however,
could differ materially and adversely from any projections. In the past, the
State has taken management actions and made use of internal sources to address
potential State Financial Plan shortfalls, and DOB believes it could take
similar actions should variances occur in its projections for the current fiscal
year.
In recent years, State actions affecting the level of receipts and
disbursements, the relative strength of the State and regional economy, actions
of the federal government and other factors, have created structural budget gaps
for the State. These gaps resulted from a significant disparity between
recurring revenues and the costs of maintaining or increasing the level of
support for State programs. To address a potential imbalance in any given fiscal
year, the State would be required
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to take actions to increase receipts and/or reduce disbursements as it enacts
the budget for that year, and under the State Constitution, the Governor is
required to propose a balanced budget each year. There can be no assurance,
however, that the legislature will enact the Governor's proposals or that the
State's actions will be sufficient to preserve budgetary balance in a given
fiscal year or to align recurring receipts and disbursements in future fiscal
years.
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
Nigeria Falls; (iv) alleged responsibility of State officials to assist in
remedying racial segregation in the City of Yonkers; (v) 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; (vi) a challenge to the practice of
reimbursing certain Office of Mental Health patient care expenses from the
client's Social Security benefits; (vii) an action against New York State and
New York City officials alleging inadequate shelter allowances to maintain
proper housing;(viii) an action challenging the assessment of the petroleum
business tax as unconstitutional; (ix) an action seeking reimbursement from the
State for certain costs arising out of the provision of preschool services and
programs for children with physical disabilities;
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(x) actions challenging regulations that establish excess medical malpractice
premium rates for the 1986-87 through 1995-96 and 1996-97 fiscal years,
respectively; and (xi) an action challenging the enactment of the Clean
Water/Clean Air Bond Act of 1996 and its implementing legislation as against the
State Constitution.
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.
The fiscal health of the State may also be affected by the fiscal
health of New York City ("the City"), which continues to require significant
financial assistance from the State. The City depends on State aid both to
enable the City to balance its budget and to meet its cash requirements. The
State could also be affected by the ability of the City to market its securities
successfully in the public credit markets. The City has achieved balanced
operating results for each of its fiscal years since 1981 as reported in
accordance with the then-applicable GAAP standards.
Certain localities outside New York City have experienced financial
problems and have requested and received additional State assistance during the
last several State fiscal years. The potential impact on the State of any
future requests by localities for additional assistance is not included in the
projections of the State's receipts and disbursements for the State's 1996-97
fiscal year.
Fiscal difficulties experienced by the City of Yonkers resulted in the
re-establishment of the Financial Control Board for the City of Yonkers by the
State in 1984. That Board is charged with oversight of the fiscal affairs of
Yonkers. Future actions taken by the State to assist Yonkers could result in
increased State expenditures for extraordinary local assistance.
Beginning in 1990, the City of Troy experienced a series of budgetary
deficits that resulted in the establishment of a Supervisory Board for the City
of Troy in 1994. The Supervisory Board's powers were increased in 1995, when
Troy MAC was created to help Troy avoid default on certain obligations. The
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legislation creating Troy MAC prohibits the City of Troy from seeking federal
bankruptcy protection while Troy MAC bonds are outstanding.
Seventeen municipalities received extraordinary assistance during the
1996 legislative session through $50 million in special appropriations targeted
for distressed cities.
From time to time, federal expenditure reductions could reduce, or in
some cases eliminate, federal funding of some local programs and accordingly
might impose substantial increased expenditure requirements on affected
localities. If the State, the City or any of the public authorities were to
suffer serious financial difficulties jeopardizing their respective access to
the public credit markets, the marketability of notes and bonds issued by
localities within the State could be adversely affected. Localities also face
anticipated and potential problems resulting from certain pending litigation,
judicial decisions and long-range economic trends. Long-range potential
problems of declining urban population, increasing expenditures and other
economic trends could adversely affect localities and require increasing State
assistance in the future.
NEW YORK CITY
The national economic downturn which began in July 1990 adversely
affected the local economy, which had been declining since late 1989. As a
result, the City experienced job losses in 1990 and 1991 and real Gross City
Product ("GCP") fell in those two years. Beginning in calendar year 1992, the
improvement in the national economy helped stabilize conditions in the City.
Employment losses moderated toward year end and real GCP increased, boosted by
strong wage gains. After noticeable improvements in the City's economy during
calendar year 1994, economic growth slowed in calendar year 1995, and the City's
current four-year financial plan assumes that moderate economic growth will
continue through calendar year 2000.
For each of the 1981 through 1995 fiscal years, the City achieved
balanced operating results as reported in accordance with generally accepted
accounting principles ("GAAP"). The City was required to close substantial
budget gaps in recent years in order to maintain balanced operating results.
For fiscal year 1995, the City adopted a budget which halted the trend in recent
years of substantial increases in City-funded spending from one year to the
next. There can be no assurance that the City will continue to maintain a
balanced budget as required by State law without additional tax or other revenue
increases or reductions in City services, which could adversely affect the
City's economic base.
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Currently, the City and its Covered Organizations (i.e., these 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. The City's Financial
Plan includes its capital, revenue and expense projections and outlines proposed
gap closing programs for years with projected budget gaps. The City's
projections set forth in the Financial Plan are based on various assumptions and
contingencies, some of which are uncertain and may not materialize. Unforeseen
developments and 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.
The staffs of the Control Board, OSDC and the City Comptroller issue
periodic reports on the City's Financial Plans which analyze the City's
forecasts of revenues and expenditures, cash flow, and debt service requirements
for, and Financial Plan compliance by, the City and its Covered Organizations.
According to recent staff reports, the City's economy has experienced weak
employment and moderate wage and income growth throughout the mid-1990s.
Although this trend is expected to continue for the rest of the decade, there is
the risk of a slowdown in the City's economy in the next few years, which would
depress revenue growth and put further strains on the City's budget. These
reports have also indicated that recent City budgets have been balanced in part
through the use of non-recurring resources; that the City's Financial Plan tends
to rely on actions outside its direct control; that the City has not yet brought
its long-term expenditure growth in line with recurring revenue growth; and that
the City is therefore likely to continue to face substantial future budget gaps
that must be closed with reduced expenditures and/or increased revenues.
Implementation of the Financial Plan is also dependent upon the City's
ability to market its securities successfully in the public credit markets. The
City's financing program for fiscal years 1997 through 2000 contemplates the
issuance of $5.7 billion of general obligation bonds and $4.5 billion of bonds
to be issued by the proposed New York City Infrastructure Finance Authority
primarily to reconstruct and rehabilitate the City's infrastructure and physical
assets and to make other capital investments. The creation of the
Infrastructure Finance Authority, which is subject to the enactment of State
legislation, is being proposed by the City as part of the City's effort to avoid
conflict with the forecast level of the constitutional restrictions on the
amount of debt the City is authorized to issue. In addition, the City issues
revenue and tax anticipation notes to finance its seasonal working capital
requirements. The success of projected public sales of City bonds
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and notes and Infrastructure Finance Authority bonds will be subject to
prevailing market conditions, and no assurance can be given that such sales will
be completed. If the City were unable to sell its general obligation bonds and
notes or bonds of the proposed Infrastructure Finance Authority, it would be
prevented from meeting its planned capital and operating expenditures. Future
developments concerning the City and public discussion of such developments, as
well as prevailing market conditions, may affect the market for outstanding City
general obligation bonds and notes.
The 1997-2000 Financial Plan projects revenues and expenditures for
the 1996 fiscal year balanced in accordance with generally accepted accounting
principles ("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.
In connection with its Financial Plan, the City has outlined a gap-
closing program for the 1998 through 2000 fiscal years to eliminate the
remaining $1.2 billion, $2.1 billion and $3.0 billion projected budget gaps for
such fiscal years. This program, which is not specified in detail, assumes
additional agency programs to reduce expenditures or increase revenues by $400
million, $950 million and $1.4 billion in the 1998 through 2000 fiscal years,
respectively; additional revenue initiatives and asset sales of $76 million,
$229 million and $281 million in the 1998 through 2000 fiscal years,
respectively; additional Federal and State aid of $250 million, $250 million and
$325 millon in the 1998 through 2000 fiscal years, respectively; additional
reductions in entitlement costs of $400 million, $600 million and $975 million
in the 1998 through 2000 fiscal years, respectively; and availability in each of
the 1998 through 2000 fiscal years of $100 million of the General Reserve.
The City's projected budget gaps for the 1999 and 2000 fiscal years do
not reflect the savings expected to result from prior years' programs to close
the gaps set forth in the Financial Plan. Thus, for example, recurring savings
anticipated from the actions which the City proposes to take to balance the
fiscal year 1998 budget are not taken into account in projecting the budget gaps
for the 1999 and 2000 fiscal years.
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Although the City has maintained balanced budgets in each of its last
sixteen fiscal years and is projected to achieve balanced operating results for
the 1997 fiscal year, there can be no assurance that the gap-closing actions
proposed in the Financial Plan can be successfully implemented or that the City
will maintain a balanced budget in future years without additional State aid,
revenue increases or expenditure reductions. Additional tax increases and
reductions in essential City services could adversely affect the City's economic
base.
On November 14, 1996, the City submitted to the Control Board the
Financial Plan for the 1997 through 2000 fiscal years, which relates to the
City, BOE and the City University of New York ("CUNY").
The 1997-2000 Financial Plan published on November 14, 1996 reflects
actual receipts and expenditures and changes in forecast revenues and
expenditures since the prior financial plan submitted to the Control Board on
June 21, 1996 (the "June Financial Plan". The 1997-2000 Financial Plan projects
revenues and expenditures for 1997 fiscal year balanced in accordance with GAAP,
and projects gaps of $1.2 billion, $2.1 billion and $3.0 billion for the 1998,
1999 and 2000 fiscal years, respectively. Changes since the June Financial Plan
include (i) an increase in projected tax revenues of $450 million, $120 million,
$50 million and $45 millon in fiscal years 1997 through 2000, respectively; (ii)
a delay in the assumed receipt of $304 million relating to projected rent
payments for the City airports from the 1997 fiscal year to the 1998 and 1999
fiscal years, and a $34 million reduction in assumed State and Federal aid for
the 1997 fiscal year; (iii) an approximately $200 million increase in projected
overtime and other expenditures in each of the fiscal years 1997 through 2000;
(iv) a $70 million increase in expenditures for BOE in the 1997 fiscal year for
school text books; (v) a reduction in projected pension costs of $34 million,
$50 million, $49 million and $47 million in fiscal years 1997 through 2000,
respectively; and (vi) additional agency actions totaling $179 millon, $386
million, $473 million and $589 million in fiscal years 1997 through 2000,
including personnel reductions through attrition and early retirement.
The Financial Plan assumes (i) approval by the Governor and the State
legislature of the extension of the 12.5% personal income tax surcharge, which
expired on December 31, 1996 and is projected to provide revenue of $170
million, $463 million, $492 million, and $521 million, in the 1997 through 2000
fiscal years, respectively; (ii) collection of the projected rent payments for
the City's airports, totalling $270 million and $180 million in the 1998 and
1999 fiscal years, respectively, which may depend on the successful completion
of negotiations with the Port Authority
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or the enforcement of the City's rights under the existing leases thereto
through pending legal actions; (iii) the ability of HHC and BOE to identify
actions to offset substantial City and State revenue reductions and the receipt
by BOE of additional State aid; (iv) State approval of the cost containment
initiatives and State aid proposed by the City; and (v) a reduction in City
funding for labor settlements for certain public authorities or corporations.
Legislation extending the 12.5% personal income tax surcharge beyond December
31, 1996, was not enacted in the special legislative session held in December
1996. Such legislation may be enacted in the 1997 State legislative session.
The Financial Plan does not reflect any increased costs which the City might
incur as a result of welfare legislation recently enacted by Congress or
legislation proposed by the Governor, which would, if enacted, implement such
Federal welfare legislation. In addition, the economic and financial condition
of the City may be affected by various financial, social, economic and political
factors which could have a material effect on the City.
In January, the Mayor is expected to publish a Modification (the
"January Modification") to the financial plan for the City's 1997 through 2001
fiscal years and a preliminary budget for the City's 1998 fiscal year. The
January Modification will reflect changes since the Financial Plan, including
the City's program to address the currently forecasted gap of approximately $1.2
billion in the 1998 fiscal year. The gap-closing program, as proposed in the
Financial Plan, is currently being further developed and is subject to change in
connection with the January Modification. The Governor released the 1997-1998
Executive Budget on January 14, 1997, which will be considered for adoption by
the State legislature. Based on a preliminary evaluation of currently available
information, the City's Office of Management and Budget ("OMB") believes that
the reductions in Medicaid reimbursement rates and other entitlement and welfare
initiatives proposed in the 1997-1998 Executive Budget, if approved by the State
legislature without change, would provide the City with a portion of the $650
million of additional aid and reductions in entitlement costs assumed in the
City's gap-closing program for the 1998 fiscal year. OMB expects that the
January Modification will reflect additional initiatives proposed by the City
relating to reductions in entitlement costs and additional intergovernmental
aid, which would be dependent upon State legislative approval. Certain proposed
cost containment and other initiatives have been previously considered and
rejected by the State legislature. The nature and extent of the impact on the
City of the State budget, when adopted, is uncertain, and no assurance can be
given that the State actions included in the State adopted budget may not have a
significant adverse impact on the City's budget and its Financial Plan. It can
be expected
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that the proposals contained in the January Modification to close the projected
budget gap for the 1998 fiscal year will engender substantial public debate
which will continue through the time the budget is scheduled to be adopted in
June 1997.
The City Comptroller and other agencies and public officials have
issued reports and made public statements which, among other things, state that
projected revenues may be less and future expenditures may be greater than
forecasted in the City Plan. It is reasonable to expect that such reports and
statements will continue to be issued and to engender public comment.
On July 16, 1996, the staff of the City Comptroller issued a report on
the Financial Plan. The report concluded that the City's fiscal situation
remains serious, and that the City faces budgetary risks of approximately $787
million to $941 million for the 1997 fiscal year, which may increase to as much
as $4.31 billion for fiscal year 2000.
Estimates of the City's revenues and expenditures is based on numerous
assumptions and are subject to various uncertainties. 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 January 20, 1995, Moody's lowered its rating on the City's general
obligations bonds to "Baa1" from "A." In July 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.
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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 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.
[TO BE UPDATED BY DECHERT]
SPECIAL CONSIDERATIONS AFFECTING PUERTO RICO
The following highlights some of the more significant financial trends
and problems affecting the Commonwealth of Puerto Rico (the Commonwealth or
Puerto Rico) and is based on information drawn from official statements and
prospectuses relating to the securities offerings of Puerto Rico and its
agencies and instrumentalities. Such information, however, has not been
independently verified by the Trust.
The economy of Puerto Rico is closely integrated with that of the
United States. In fiscal 1994, trade with the United States accounted for
approximately 87% of Puerto Rico's exports and approximately 67% of its imports.
In this regard, Puerto Rico experienced a $4.3 billion positive adjusted
merchandise trade balance in fiscal 1994. Since 1983, Puerto Rico has
experienced a wide ranging economic expansion with growth in almost every sector
of its economy and record levels of employment.
Since fiscal 1985, personal income, both aggregate and per capita,
have increased consistently each fiscal year. In fiscal 1994, aggregate personal
income was $25.7 billion and personal income per capita was $7,047. Gross
domestic product in fiscal year 1991, 1992, 1993, 1994, and 1995 was $22.8
billion, $23.7 billion, $25.2 billion, $26.6 billion, and $28.3 billion,
respectively. For fiscal 1996, an increase in gross product of 2.7% over fiscal
1995 was forecasted. However, actual growth in the Puerto Rico economy will
depend on several factors, including the state of the U.S. economy, the exchange
rate for the U.S. dollar, increases in exports and visitors to the Commonwealth,
the price stability of oil imports, the level of federal transfers, and the cost
of borrowing. Due to uncertainties with respect to these factors, there is no
assurance that the economy of Puerto Rico will continue to grow.
Puerto Rico's economy continued to expand throughout the five year
period from fiscal 1990 through fiscal 1994. While trends in the Puerto Rico
economy generally follow those of the
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United States, Puerto Rico did not experience a recession in 1991 as the United
States did. This was primarily because of low oil prices, low interest rates,
and Puerto Rico's strong manufacturing base, which has a large component of non-
cyclical industries. Other factors contributing to Puerto Rico's decade-long
expansion include commonwealth-sponsored economic development programs, the
relatively stable prices of oil imports, low exchange rates for the U.S. dollar,
the level of federal transfers, and the relatively low cost of borrowing funds
during the period. These factors will continue to affect Puerto Rico's economic
growth rate in fiscal 1996 and beyond.
Puerto Rico has made marked improvements in fighting unemployment.
Although unemployment is at relatively low historical levels for the
Commonwealth, it remains above the U.S. average. The unemployment rate declined
from 16.0% to 13.8% from fiscal 1994 to fiscal 1995. As of October 1995, the
unemployment rate stood at 15.0%. Despite this relative downturn, there is a
possibility that the unemployment rate will increase if there are changes in
factors that directly impact the economy of Puerto Rico.
Puerto Rico has a diversified economy with the manufacturing and
service sectors comprising the principal sectors. Manufacturing is the largest
sector in terms of gross domestic product. In fiscal 1995, manufacturing
generated $17.7 billion (or 41.8%) of gross domestic product. In the last two
decades, industrial development has tended to be more capital intensive and more
dependent on skilled labor. Manufacturing has experienced a basic change over
the years as a result of the influx of higher wage, high technology industries
such as pharmaceuticals, electronics, computers, microprocessors, scientific
instruments, and high technology machinery. The service sector, which includes
wholesale and retail trade, finance and real estate, ranks second in its
contribution to gross domestic product and is the economic sector that employs
the greatest number of people. In fiscal 1995, the service sector generated $15
billion in gross domestic product (or 37.5%) and employed over 478,000 people.
Growth in construction and tourism also contributed to increased economic
activity in fiscal 1995. The government sector of the Commonwealth also plays
an important role in the economy of the island. In fiscal 1994, the government
accounted for $4.1 billion of Puerto Rico's gross domestic product and provided
22.2% of total employment. Tourism also contributed significantly to the island
economy and total visitor expenditures amounted to $1.8 million in fiscal 1995.
One of the factors assisting the development of the manufacturing
sector is the federal and Commonwealth tax incentives, most notably section 936
of the United States
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Internal Revenue Code of 1986, as amended and the Commonwealth's Industrial
Incentives Program. Section 936 currently grants U.S. corporations that meet
certain criteria and elect its application a credit (the Section 936 credit)
against their U.S. corporate income tax on the portion of the tax attributable
to (i) income derived from the active conduct of a trade or business in Puerto
Rico (active business income) or from the sale or exchange of substantially all
of the assets used in the active conduct of such trade or business, and (ii)
qualified possession source investment income. The Industrial Incentives
Program, through the 1987 Industrial Incentives Act, grants corporations engaged
in certain qualified activities a fixed 90% exemption from Commonwealth income
and property taxes and a 60% exemption from municipal license taxes.
Pursuant to amendments to the Internal Revenue Code (the Code) for
taxable years commencing after 1993, two alternative limitations apply to the
Section 936 credit against active business income and sale of assets income, as
previously described. The first option limits the credit against such income to
40% of the credit allowable previous to the amendments of 1993, with a five-year
phase-in period starting at 60% of the current allowable credit (the Percentage
Limitation). The second option limits the allowable credit to the sum of (i)
60% of qualified compensation paid to employees (as defined in the Code), (ii) a
specified percentage of depreciation deductions,and (iii) a portion of the
Puerto Rico income taxes paid by the Section 936 corporation, up to a 9%
effective tax rate (the Economic Activity Limitation).
On August 20, 1996, President Clinton signed into law a bill that will
phase out Section 936 tax credits over a nine-year period, ending January 1,
2006. The effect on Puerto Rico's economy of the phased elimination of Section
936 tax credit will not be certain for a number of years. The impact on future
investment and employment is more uncertain.
The Constitution of Puerto Rico provides a limitation on the amount of
general obligation debt that can be issued. The Commonwealth's policy has been
and continues to be to maintain the level of such debt within a prudent range
below the constitutional limitation. Historically, the Commonwealth has
maintained a fiscal policy which provides for a prudent relationship between the
growth of public sector debt and the growth of the economic base required to
service that debt. The Commonwealth also has sought opportunities to realize
debt service savings by refunding outstanding debt with obligations bearing
lower interest rates. In certain years, this policy has had the effect of
causing the rate of growth of public sector debt to be higher than the rate of
growth of gross domestic
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product. Over the fiscal years 1991 to 1995, public sector debt increased 24.7%
while gross product rose 24.4%. Short-term debt outstanding relative to total
debt was 7.5% as of November 30, 1995.
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 the first business day
following the Guarantee Date. The
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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 to the extent permitted under the
Investment Company Act of 1940.
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.
ADDITIONAL NON-FUNDAMENTAL INVESTMENT RESTRICTIONS
In addition to the Trust's fundamental investment restrictions, the
Trustees of the Trust have voluntarily adopted certain policies and restrictions
which are observed in the conduct of the affairs of the Funds, except the
California Tax Free Fund, New York Tax Free Fund, International Bond Fund,
International Equity Fund, Equity Index Fund and Strategic Income 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.
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In accordance with such policies and restrictions, a Fund may not:
(a) 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 Sub-Advisers or principal
underwriter;
(b) invest more than 10% of the net 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 Sub-Adviser is deemed illiquid];
(c) 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% total 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);
(d) invest in other companies for the purpose of exercising control or
management;
(e) purchase securities on margin except in connection with arbitrage
transactions or make short sales, 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;
(f) 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
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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
(g) 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 are non-fundamental restrictions of the California Tax Free
Fund, Equity Index Fund and New York Tax Free Fund:
(a) A Fund may not purchase the securities of other investment
companies except to the extent permitted by the 1940 Act or in connection
with a merger, consolidation or reorganization.
(b) The Funds may not invest more than 10% of the net 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).
(c) A Fund may not invest in other companies for the purpose of
exercising control or management.
(d) A Fund may not purchase securities on margin, except in connection
with arbitrage transactions, or make short sales, unless it owns the
securities sold short or 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. (This restriction has no application to
transactions in futures, options and foreign currency exchange contracts).
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The following investment restrictions are non-fundamental, operating
policies of the International Bond Fund, International Equity Fund and Strategic
Income 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. This
restriction is not applicable to the Strategic Income Fund.
(c) 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 Sub-Adviser's opinion may be deemed to be
illiquid, such as a certain portion of options traded in the over-the-
counter market, and securities being used to cover options a Fund has
written.
(d) 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 total assets would be invested in shares of investment companies in
the aggregate, except in connection with a merger, consolidation,
acquisition, or reorganization.
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"Value" for the purposes of all investment restrictions shall mean the
value used in determining a Fund's net asset value.
In addition, though not a fundamental policy, the California Tax Free and
New York Tax Free 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."
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.
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<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION(S)
NAME, ADDRESS AND AGE POSITION(S) WITH TRUST DURING PAST 5 YEARS
- ----------------------- ---------------------- -------------------------------------------
<S> <C> <C>
Donald K. Ross* Trustee Retired Chairman and Chief Executive
953 Cherokee Lane Officer, New York Life Insurance Company;
Franklin Lakes, NJ 07417 Director, New York Life Insurance Company,
Age: 71 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>
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<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION(S)
NAME, ADDRESS AND AGE POSITION(S) WITH TRUST DURING PAST 5 YEARS
- ----------------------- ---------------------- -------------------------------------------
<S> <C> <C>
Stephen C. Roussin* President, Chief Senior Vice President, New York Life Insurance
51 Madison Avenue Executive Officer and Company, 1997 to present; Senior
New York, NY 10010 Trustee Vice President, Smith Barney, 1994 to
Age: 34 1997; and Division Sales Manager,
Prudential Securities, 1989 to 1994.
Walter W. Ubl* Trustee Senior Vice President, New York Life
51 Madison Avenue Insurance Company, 1995 to present;
New York, NY 10010 Vice President, 1984 to 1995; Vice
Age: 55 President in charge of Mutual Funds
Department, 1989 to present; Director
and Vice President, NYLIFE
Distributors Inc., 1993 to present; and
Director and Senior Vice President
NYLIFE Securities Inc., 1996 to present.
Harry G. Hohn* Trustee Retired Chairman and Chief Executive
51 Madison Avenue Officer, New York Life Insurance
New York, NY 10010 Company; Chairman of the Board and
Age: 65 Chief Executive Officer, New York Life
Insurance Company, 1990 to 1997; Vice
Chairman of the Board, New York Life
Insurance Company, 1986 to 1990;
Director, New York Life Insurance
Company, 1985 to 1986; Director,
Million Dollar Roundtable Foundation,
1996 to present; Director, Insurance
Marketplace Standards Association, 1996
to present; Director, Witco Corporation,
1989 to present; Member, International
Advisory Board of Credit Commercial de
France, 1995 to present; and a Life
Fellow of the American Bar Foundation.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION(S)
NAME, ADDRESS AND AGE POSITION(S) WITH TRUST DURING PAST 5 YEARS
- ----------------------- ---------------------- -------------------------------------------
<S> <C> <C>
Donald K. Ross* Trustee Retired Chairman and Chief Executive
953 Cherokee Lane Officer, New York Life Insurance Company;
Franklin Lakes, NJ 07417 Director, New York Life Insurance Company,
Age: 71 1978 to 1996; President, New York
Life Insurance Company, 1986 to 1990; Chairman
of the Board, New York Life Insurance Company,
1981 to 1990; Chief Executive Officer, New York
Life Insurance Company, 1981 to 1990; Director,
MacKay-Shields Financial Corporation, 1984 to
present; and Trustee, Consolidated Edison Company
of New York, Inc., 1976 to present.
Edward J. Hogan Trustee Independent management consultant,
Box 2321 1991 to 1995; President, Westinghouse -
Sun Valley, ID 83353 Airship Industries, Inc. and Managing
Age: 64 Director, Airship Industries U.K., Ltd.,
1987 to 1990.
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.
</TABLE>
B-103
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION(S)
NAME, ADDRESS AND AGE POSITION(S) WITH TRUST DURING PAST 5 YEARS
- ----------------------- ---------------------- -------------------------------------------
<S> <C> <C>
John B. McGuckian Trustee Chairman of the Board, Ulster Television
Ardverna plc, 1990 to present; Director, Ulster
Cloughmills Television plc, 1970 to present; Chairman
Northern Ireland of the Board, Tedcastle Holding Ltd.
BT4 49NL (energy), 1995 to present; Director,
Age: 57 Cooneen Textiles Ltd. (clothing
manufacturer), 1967 to present; Director
Allied Irish Banks plc, 1977 to
present; Director, First Trust Bank, 1991
to present; Director, Unidare plc
(engineering), 1986 to present; Director,
Irish Continental Group plc (ferry
operations), 1988 to present; Director,
Harbour Group Ltd. (management company),
1980 to present; Chairman, Industrial
Development Board, 1990 to present; and
Chairman of Senate and Senior Pro-Chancellor,
Queen's University, 1986 to present.
Donald E. Nickelson Trustee Vice Chairman, Harbour Group
1701 Highway A-1-A Industries, Inc., 1991 to present;
Suite 101 Director, PaineWebber Group, 1980 to
Vero Beach, FL 32963 1993; President, PaineWebber Group,
Age: 63 1988 to 1990; Chairman of the Board,
PaineWebber Properties, 1985 to 1989;
Director, Harbour Group, 1986 to
present; Director, CPA 10 Real Estate
Inv. Trust, 1990 to present; Director,
CIP 11 Real Estate Inv. Trust, 1991 to
present; Chairman of the Board and
Director, Rapid Rock Industries, Inc.,
1986 to present; Director and Chairman
of the Board, Del Industries, 1990 to
present; Trustee, Jones Foundation (Los
Angeles), 1978 to present; Director,
Allied Healthcare Products, Inc., 1992 to
present; Director, Sugen, Inc., 1992 to
present; Director and Chairman of the
Board, Greenfield Industries, Inc., 1993
to present; Director, DT Industries, 1992
to present; Chairman of the Board,
Omniquip International, Inc., 1996 to
present; and Advisory Panel, Sedgwick
James of NY, 1996 to present.
</TABLE>
B-104
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION(S)
NAME, ADDRESS AND AGE POSITION(S) WITH TRUST DURING PAST 5 YEARS
- ----------------------- ---------------------- -------------------------------------------
<S> <C> <C>
Richard S. Trutanic Trustee Managing Director, The Somerset Group
1155 Connecticut Ave. (financial advisory firm), 1990 to present;
N.W., Suite 400 Senior Vice President, Washington
Washington, DC 20036 National Investment Corporation
Age: 44 (financial advisory firm), 1985 to 1990;
Director, Allin Communications
Corporation, 1996 to present; and
Director and Member of Executive
Committee, Southern Net, Inc., 1986 to
1990.
</TABLE>
- ------------------------------------------------------------------------------
OFFICERS (OTHER THAN TRUSTEES)
- ------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Jefferson C. Boyce Senior Vice President Chairman, Monitor Capital Advisors,
51 Madison Avenue Inc., 1997 to present;
New York, NY 10010 Senior Vice President, MainStay
Age: 39 Institutional Funds Inc., 1995 to present;
Senior Vice President, New York Life
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; Vice President
and Chief Financial Officer, Eagle
Strategies Corp. (registered investment
adviser), 1993 to present.
</TABLE>
B-105
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION(S)
NAME, ADDRESS AND AGE POSITION(S) WITH TRUST DURING PAST 5 YEARS
- ----------------------- ---------------------- -------------------------------------------
<S> <C> <C>
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 Vice President, NYL Trust
Company, 1996 to present.
</TABLE>
B-106
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION(S)
NAME, ADDRESS AND AGE POSITION(S) WITH TRUST DURING PAST 5 YEARS
- ----------------------- ---------------------- -------------------------------------------
<S> <C> <C>
A. Thomas Smith III Secretary Vice President and Associate General
51 Madison Avenue Counsel, New York Life Insurance
New York, NY 10010 Company, 1997 to present; Associate
Age: 39 General Counsel, New York Life
Insurance Company, 1996 to 1997;
Assistant General Counsel, New York
Life Insurance Company, 1994 to 1996;
Secretary, Eclipse Financial Asset Trust,
1994 to present; Secretary, MainStay
Institutional Funds Inc., MainStay VP
Series Fund, Inc., New York Life Fund Inc.,
Assistant Secretary, Eagle Strategies Corp.
(registered investment adviser) 1997 to
present; 1994 to 1997; 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:
B-107
<PAGE>
<TABLE>
<CAPTION>
Total Compensation
Aggregate From Registrant
Name of Compensation and Fund Complex
Trustee from the Trust Paid to Trustees
- ------- ---------------- ------------------
<S> <C> <C>
Edward J. Hogan* $0 $0
Nancy M. Kissinger $46,000 $46,000
Terry L. Lierman $45,000 $45,000
Donald E. Nickelson $45,000 $45,000
Richard S. Trutanic $44,000 $44,000
Ralph A. Pfeiffer** $33,000 $33,000
John B. McGuckian*** $0 $0
</TABLE>
* Mr. Hogan was elected to his position as Trustee of the Trust on October
28, 1996, effective January 27, 1997.
** Mr. Pfeiffer passed away on September 13, 1996.
*** Mr. McGuckian was elected to his position as Trustee of the Trust on July
28, 1997.
As of December __, 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 MANAGER, THE SUB-ADVISERS AND THE DISTRIBUTOR
MANAGEMENT AGREEMENT
Pursuant to the Management Agreement for the Funds dated October 24, 1997,
MainStay Management, Inc. (the "Manager"), subject to the supervision of the
Trustees of the Trust and in conformity with the stated policies of the Funds,
administers the Funds' business affairs and has investment advisory
responsibilities.
The Trustees, including the Independent Trustees, approved the Management
Agreement at an in-person meeting held July 28, 1997. On October 24, 1997, the
shareholders of each of the Funds approved the Management Agreement. The
Management Agreement will remain in effect for two years following its effective
date, and will continue in effect thereafter only if such continuance is
specifically approved at least annually by the Trustees or by vote of a majority
of the outstanding voting securities of each of the Funds (as defined in the
1940 Act and in a rule under the 1940 Act) and, in either case, by a majority of
the Trustees who are not "interested persons" of the Trust or the Manager (as
the term is defined in the 1940 Act).
The Manager has authorized any of its directors, officers and employees who
have been elected or appointed as Trustees or
B-108
<PAGE>
officers of the Trust to serve in the capacities in which they have been elected
or appointed.
The Management Agreement provides that the Manager shall not be liable to a
Fund for any error or judgment by the Manager or for any loss sustained by a
Fund except in the case of the Manager's willful misfeasance, bad faith, gross
negligence or reckless disregard of duty. The Management Agreement also
provides that it shall terminate automatically if assigned and that it may be
terminated without penalty by either party upon no more than 60 days' nor less
than 30 days' written notice.
In connection with its administration of the business affairs of each of
the Funds, and except as indicated in the Prospectus under the heading "Manager,
Sub-Advisers and Distributor," the Manager bears the following expenses:
(a) the salaries and expenses of all personnel of the Trust and the
Manager, except the fees and expenses of Trustees not affiliated with the
Manager or the Sub-Adviser;
(b) the fees to be paid to the Sub-Advisers pursuant to the Sub-Advisory
Agreements; and
(c) all expenses incurred by the Manager in connection with administering
the ordinary course of the Funds' business, other than those assumed by the
Trust.
SUB-ADVISORY AGREEMENTS
Pursuant to Sub-Advisory Agreements between the Manager and MacKay-Shields
and between the Manager and Monitor on behalf of each Fund (each a "Sub-Adviser"
and collectively the "Sub-Advisers"), MacKay-Shields and Monitor, subject to the
supervision of the Trustees of the Trust and the Manager and in conformity with
the stated policies of each of the Funds and the Trust, manage the Funds'
portfolios, including the purchase, retention, disposition and loan of
securities.
The Trustees, including the Independent Trustees, approved the Sub-Advisory
Agreements at an in-person meeting held July 28, 1997. On October 24, 1997, the
shareholders of each of the Funds approved the Sub-Advisory Agreements with
MacKay-Shields and Monitor. The Sub-Advisory Agreements will remain in effect
for two years following their effective date, and will continue in effect
thereafter only if such continuance is specifically approved at least annually
by the Trustees or by vote of a majority of the outstanding voting securities of
each of the Funds (as defined in the 1940 Act and in a rule under the 1940 Act)
and, in either case, by a majority of the Trustees who are not
B-109
<PAGE>
"interested persons" of the Trust, the Manager, MacKay-Shields or Monitor (as
the term is defined in the 1940 Act).
The Sub-Advisers have 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 they render, the Sub-Advisers bear the salaries
and expenses of all of their personnel.
The Sub-Advisory Agreements provide that MacKay-Shields and Monitor shall
not be liable for any error of judgment by MacKay-Shields or Monitor or for any
loss suffered by any of the Funds except in the case of MacKay-Shields' or
Monitor's willful misfeasance, bad faith, gross negligence or reckless disregard
of duty. The Agreements also provide that they shall terminate automatically if
assigned and that they may be terminated without penalty by either party upon no
more than 60 days' nor less than 30 days' written notice.
In previous years, prior to a change in management structure, the Funds
paid an advisory fee directly to Mackay-Shields or Monitor. 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 Mackay-Shields or Monitor 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> <C>
California Tax Free Fund.... $ 45,307++ $ 29,964++ $ 8,612++
Capital Appreciation Fund... 3,429,258 2,155,386 543,137
Convertible Fund............ 2,444,000 1,027,604 206,175
Equity Index Fund........... 163,785 81,072 20,578
Government Fund............. 2,643,801 3,056,716 1,062,816
High Yield Corporate Bond
Fund.................... 5,816,110 3,930,939 1,068,277
International Bond Fund+.... 68,489++ 52,534++ 10,037++
International Equity Fund+.. 342,100 166,703 27,355
Money Market Fund........... 397,071++ 391,304++ 93,386++
New York Tax Free Fund...... 29,457++ 31,482++ 9,230++
Strategic Income Fund....... N/A+++
Tax Free Bond Fund.......... 1,579,820 1,610,982 525,805
Total Return Fund........... 3,087,111 2,396,247 674,170
Value Fund.................. 2,682,642 1,932,406 518,495
- -------------------------
</TABLE>
* The Funds changed their fiscal year end from August 31 to December 31.
7 B-110
<PAGE>
+ The International Bond Fund and International Equity Fund commenced
operations on September 13, 1994.
++ After expense reimbursement.
+++ The Strategic Income Fund commenced operations on February 28, 1997.
In previous years, prior to a change in management structure, the Funds paid
an administrative fee directly to NYLIFE Distributors Inc. as administrator.
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> <C>
California Tax Free Fund.... $ 45,307++ $ 29,964++ $ 8,612++
Capital Appreciation Fund... 3,429,258 2,155,386 543,137
Convertible Fund............ 2,444,000 1,027,604 206,175
Equity Index Fund........... 365,118++ 324,287 20,578
Government Fund............. 2,643,801 3,056,716 1,062,816
High Yield Corporate Bond
Fund.................... 5,816,110 3,930,939 1,068,277
International Bond Fund+.... 41,100++ 31,522++ 10,037++
International Equity Fund+.. 228,066 111,135 27,355
Money Market Fund........... 397,071++ 391,304++ 93,386++
New York Tax Free Fund...... 29,457++ 31,481++ 9,230++
Strategic Income Fund....... N/A+++
Tax Free Bond Fund.......... 1,579,820 1,610,982 525,805
Total Return Fund........... 3,087,111 2,396,247 674,170
Value Fund.................. 2,682,642 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-111
<PAGE>
The Manager and the Sub-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, $870,226, $674,279, and $173,990 in expenses would have been
incurred by the Money Market Fund, respectively, had such expenses not been
limited pursuant to a similar arrangement under the previous management
structure.
The Sub-Adviser and the Manager have voluntarily agreed to reimburse
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 1.24% and 1.49% for
the Class A and Class B shares, respectively, of the daily average net assets.
For the period September 1, 1994 to December 31, 1994, pursuant to the expense
limitation arrangement under the previous management structure, the expense
reimbursements to the California Tax Free Fund and the New York Tax Free Fund
were $10,836 and $10,334, 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 $33,690 and $28,484, respectively. And, for the fiscal year
ended December 31, 1996, the expense reimbursements to the California Tax Free
Fund and the New York Tax Free Fund were $22,456 and $39,824, respectively.
Effective January 1, 1996, in the event the total expenses of the Equity
Index Fund for any fiscal year exceed 0.80% of the value of the Fund's average
annual net assets, the Manager will reduce its fee payable by the Fund by the
difference between the Fund's total expenses and 0.80%. Under the previous
management structure this reduction amounted to $290,022 for the year ended
December 31, 1996. This fee waiver is voluntary and may be terminated at any
time.
The Sub-Adviser and the Manager 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 net assets. Pursuant to a similar arrangement under the
previous management structure, 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 0.25%, respectively. Under that arrangement, 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
B-112
<PAGE>
for the fiscal years ended December 31, 1995 and 1996 equalled an annual rate of
0.15% and 0.15%, respectively.
DISTRIBUTION AGREEMENT
NYLIFE Distributors acts as the Principal Underwriter and Distributor of
the Funds' shares pursuant to the Distribution Agreement with the Trust dated
January 1, 1994. NYLIFE Securities Inc., an affiliated company, sells shares of
the Funds pursuant to a dealer agreement with the Distributor. The Distributor
and other broker-dealers will pay commissions to salesmen as well as the cost of
printing and mailing prospectuses to potential investors and of any advertising
incurred by them in connection with their distribution of 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
Independent Trustees at a meeting held on July 25, 1994. The Distribution
Agreement for the Strategic Income Fund was approved by the Trustees, including
a majority of the Independent Trustees at a meeting held on January 27, 1997.
The Distribution Agreements were reapproved by the Trustees, including a
majority of the Independent Trustees, at a meeting held on April 28, 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, Equity Index Fund and Strategic Income 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
B-113
<PAGE>
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
and the Class A Plan was approved by the sole initial shareholder of the
Strategic Income Fund on February 3, 1997. 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 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. Regarding the
Strategic Income Fund, the Trustees of the Trust, including a majority of the
Independent Trustees, by vote cast in person at a meeting called for the purpose
of voting on such Plan, initially approved the Class A Plan on January 27, 1997.
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. 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 February 3, 1997 by the sole initial shareholder of the
Strategic Income Fund, 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 Fund, Government
Fund, High Yield Corporate Bond Fund and Value Fund. The Trustees of the Trust,
including a majority of the Independent Trustees, 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 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 Independent
Trustees, 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
B-114
<PAGE>
the Trust, including a majority of the Independent Trustees, 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 Independent Trustees, 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 Independent
Trustees, 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 Independent Trustees, 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 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. Regarding the
Strategic Income Fund, the Class B Plan for the Fund was approved on February 3,
1997 by the sole initial shareholder of the Fund. The Trustees of the Trust,
including a majority of the Independent Trustees, by vote cast in person at a
meeting called for the purpose of voting on such Plan, initially approved the
Class B Plan of the Fund on January 27, 1997.
On October 24, 1997, Class B shareholders for each of the Funds, other than
the Equity Index Fund, Money Market Fund and
B-115
<PAGE>
Strategic Income Fund, approved a revision to the Class B Plans of each Fund to
revise the method of calculation of the distribution fee. The Trustees,
including a majority of the Independent Trustees, approved the revision at an
in-person meeting held July 28, 1997.
Under the amended 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 average daily net assets attributable to the Fund's Class B
shares. Pursuant to the Class B Plan, the Class B shares also pay a service fee
to the Distributor at the annual rate of 0.25% of the average daily net assets
of the Funds' 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 Independent Trustees, or by a vote of a
majority of the outstanding voting securities of the affected Fund (as defined
in the 1940 Act) on not more than 30 days' written notice to any other party to
the Plan. So long as any Plan is in effect, the selection and nomination of
Trustees who are not such interested persons has been committed to those
Trustees who are not such interested persons. The Trustees have determined that,
in their judgment, there is a reasonable likelihood that each Plan will benefit
the respective Fund and its shareholders. Pursuant to both the Class A and Class
B Plans, the Distributor shall provide the Trust for review by the Trustees, and
the Trustees shall review at least quarterly, a written report of the amounts
expended under each Plan and the purpose for which such expenditures were made.
In the Trustees' quarterly review of each Plan, they will consider its continued
appropriateness and the level of compensation provided therein.
Pursuant to a rule of the National Association of Securities Dealers, Inc.,
the amount which 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
B-116
<PAGE>
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:
<TABLE>
<CAPTION>
Amount of Fee Amount of Fee
Pursuant to Pursuant to
Class A Plan Class B Plan
------------- -------------
<S> <C> <C>
California Tax Free Fund+........ $ 46,788 $ 19,206
Capital Appreciation Fund+....... 212,203 8,346,723
Convertible Fund+................ 109,177 5,623,832
Equity Index Fund................ 409,463 N/A
Government Fund+................. 38,937 7,206,791
High Yield Corporate Bond Fund+.. 190,154 16,701,333
International Bond Fund+......... 29,310 141,984
International Equity Fund+....... 39,917 395,760
Money Market Fund................ N/A N/A
New York Tax Free Fund+.......... 42,333 14,072
Strategic Income Fund*........... N/A N/A
Tax Free Bond Fund+.............. 33,245 2,367,663
Total Return Fund+............... 122,644 7,048,842
Value Fund+...................... 114,102 6,604,450
</TABLE>
_______________________
* The Strategic Income Fund commenced operations on February 28, 1997.
+ Based on previous method of calculation under Class B Plans prior to
amendment in October 1977
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 amounts in sales charges for sales of Class
A shares of the Funds, as applicable:
B-117
<PAGE>
<TABLE>
<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....... $ 35,009 $ 57,181 $ 25,670
Capital Appreciation Fund(1). 1,430,417 718,806 --
Convertible Fund(1)............ 903,782 529,361 --
Equity Index Fund.............. 1,968,993 308,486 133,857
Government Fund(1)............. 96,545 95,975 --
High Yield Corporate Bond
Fund(1).................... 1,413,313 782,534 --
International Bond Fund+(1).... 54,586 10,984 --
International Equity Fund+(1) 91,571 63,684 --
Money Market Fund(1)........... N/A N/A N/A
New York Tax Free Fund......... 22,774 35,722 21,343
Strategic Income Fund++........ N/A N/A N/A
Tax Free Bond Fund(1).......... 51,345 62,656 --
Total Return Fund(1)........... 334,470 233,202 --
Value Fund(1).................. 574,807 413,692 --
- -----------------------
</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.
++ The Strategic Income Fund commenced operations on February 28, 1997.
(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:
B-118
<PAGE>
<TABLE>
<CAPTION>
Year Ended
December 31,
1996
------------
<S> <C>
California Tax Free Fund(2)..... $ 2,008
Capital Appreciation Fund....... 966,555
Convertible Fund................ 852,359
Equity Index Fund............... N/A
Government Fund................. 952,234
High Yield Corporate Bond Fund.. 1,482,294
International Bond Fund......... 27,332
International Equity Fund....... 48,979
Money Market Fund(1)............ 640,623
New York Tax Free Fund(2)....... 2,810
Strategic Income Fund (3)....... N/A
Tax Free Bond Fund.............. 605,386
Total Return Fund............... 745,382
Value Fund...................... 712,915
</TABLE>
_______________________
* 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.
(3) The Strategic Income Fund commenced operations on February 28, 1997.
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 $89,152 on compensation to dealers; Capital
Appreciation Fund spent $1,501,787 on compensation to dealers; Convertible Fund
spent $920,619 on compensation to dealers; Equity Index Fund spent $1,909,644 on
compensation to dealers; Government Fund spent $173,229 on compensation to
dealers; High Yield Corporate Bond Fund spent $1,466,889 on compensation to
dealers; International Bond Fund spent $186,704 on compensation to dealers;
International Equity Fund spent $105,124 on compensation to dealers; New York
Tax Free Bond Fund spent $19,981 on compensation to dealers; Tax Free Bond Fund
spent $128,691 on compensation to dealers; Total Return Fund spent $381,683 on
compensation to dealers; and Value Fund spent $645,363 on compensation to
dealers.
B-119
<PAGE>
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................... $ 73,801 $ 1,535 $ 189,852 $ 30,604 $ 44,742 $ 747,673 $ 1,088,207
Capital Appreciation
Fund................... 758,717 421,361 3,141,106 650,035 1,450,098 15,825,633 22,246,951
Convertible Fund........ 249,150 242,683 1,013,084 210,885 469,303 14,788,597 16,973,703
Government Fund......... 128,893 329,715 544,630 115,854 253,004 2,672,887 4,044,982
High Yield Corporate
Bond Fund.............. 933,969 756,839 3,917,489 810,212 1,813,951 29,791,670 38,024,130
International Bond
Fund................... 9,150 5,966 38,118 7,981 17,983 263,481 342,679
International Equity
Fund................... 34,089 15,940 152,765 33,208 75,613 896,403 1,208,020
New York Tax Free Fund.. 17,892 1,102 52,265 8,571 16,894 191,834 288,558
Strategic Income Fund*.. 0 0 0 0 0 0 0
Tax Free Bond Fund...... 57,743 196,491 273,828 58,731 130,519 1,314,695 2,032,007
Total Return Fund....... 304,008 360,068 1,360,199 290,227 658,192 6,647,325 9,620,019
Value Fund.............. 371,691 320,958 1,540,187 320,666 714,276 8,899,927 12,167,704
---------- ---------- ----------- ---------- ---------- ----------- ------------
Total................... 2,939,103 2,652,658 12,223,523 2,536,974 5,644,575 82,040,125 108,036,960
</TABLE>
- -----------------------
* The Strategic Income Fund commenced operations on February 28, 1997.
OTHER SERVICES
Pursuant to an Accounting Agreement with the Trust, dated October 24, 1997,
the Manager performs certain bookkeeping and pricing services for the Funds.
Each Fund will bear an allocable portion of the cost of providing these services
to the Trust.
For fiscal years ended December 31, 1996 and 1995, and the period
September 1, 1994 through December 31, 1994, the amount of recordkeeping fee
to NYLIFE Distributors, the previous Accounting Agent, paid by each Fund was
as follows:
B-120
<PAGE>
<TABLE>
<CAPTION>
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.... $ N/A $ N/A $ N/A
Capital Appreciation Fund... 145,721 95,042 24,684
Convertible Fund............ 81,568 57,184 13,603
Equity Index Fund N/A N/A N/A
Government Fund............. 114,622 128,798 42,333
High Yield Corporate Bond
Fund.................... 233,333 164,329 45,331
International Bond Fund+.... 12,511 12,000 3,600
International Equity Fund+.. 22,075 12,668 3,600
Money Market Fund........... 62,593 53,064 16,047
New York Tax Free Fund...... N/A N/A N/A
Strategic Income Fund++..... N/A N/A N/A
Tax Free Bond Fund.......... 80,430 79,801 24,274
Total Return Fund........... 126,154 103,032 29,600
Value Fund.................. 116,985 85,935 23,809
</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.
++ The Strategic Income Fund commenced operations on February 28, 1997.
In addition, each Fund may reimburse NYLIFE Securities, NYLIFE Distributors
and MainStay Shareholder Services for the cost of certain correspondence to
shareholders and the establishment of shareholder accounts.
EXPENSES BORNE BY THE TRUST
Except for the expenses to be paid by the Manager as described in the
Prospectus, the Trust, on behalf of each Fund, is responsible under its
Management Agreement for the payment of expenses related to each Fund's
operations, including (i) the fees payable to the Manager, (ii) the fees and
expenses of Trust ees who are not affiliated with the Manager or Sub-Advisers,
(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
B-121
<PAGE>
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.
Certain of the Funds have entered into a committed line of credit with The
Bank of New York as agent, and various other lenders from whom a Fund may borrow
up to 5% of its net assets in order to honor redemptions. The credit facility
is expected to be utilized in periods when the Funds experience unusually large
redemption requests.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Purchases and sales of securities on a securities exchange are effected by
brokers, and the Funds pay a brokerage commission for this service. In
transactions on stock exchanges in the United States, these commissions are
negotiated, whereas on many foreign stock exchanges these commissions are fixed.
In the over-the-counter markets, securities (i.e., Municipal Bonds and other
debt securities) are generally traded on a "net" basis with dealers acting as
principal for their own accounts without a stated commission, although the price
of the security usually includes a profit to the dealer. Transactions in
certain over-the-counter securities also may be effected on an agency basis,
when the total price paid (including commission) is equal to or better than the
best total prices available from other sources. In underwritten offerings,
securities are purchased at a fixed price which includes an amount of
compensation to the underwriter, generally referred to as the underwriter's
concession or discount. On occasion, certain money market instruments may be
purchased directly from an issuer, in which case no commissions or discounts are
paid.
B-122
<PAGE>
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 Sub-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 Conduct
Rules of the NASD and such other policies as the Trustees may determine,
the Sub-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 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 Sub-Advisory Agreement and as permitted by Section 28(e) of the
Securities Exchange Act of 1934 (the "1934 Act"), a Sub-Adviser may cause a Fund
to pay a broker-dealer (except the Affiliated Broker) which provides brokerage
and research services to the Sub-Adviser an amount of commission for effecting a
securities transaction for a Fund in excess of the amount other broker-dealers
would have charged for the
B-123
<PAGE>
transaction if the Sub-Adviser determines in good faith that the greater
commission is reasonable in relation to the value of the brokerage and research
services provided by the executing broker-dealer viewed in terms of either a
particular transaction or the Sub-Adviser's overall responsibilities to the
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
Sub-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 Sub-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 Sub-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 Sub-Adviser.
Research provided by brokers is used for the benefit of all of the Sub-Advisers'
clients and not solely or necessarily for the benefit of the Trust. The Sub-
Advisers' investment management personnel attempt to evaluate the quality of
Research provided by brokers. Results of this effort are sometimes used by the
Sub-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 Sub-Advisers. Investment decisions for a Fund and for the Sub-
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
B-124
<PAGE>
held by, or bought or sold for, other clients. Likewise, a particular security
may be bought for one or more clients when one or more other clients are selling
that same security. Some simultaneous transactions are inevitable when several
clients receive investment advice from the same investment adviser, particularly
when the same security is suitable for the investment objectives of more than
one client. When two or more clients are simultaneously engaged in the purchase
or sale of the same security, the securities are allocated among clients in a
manner believed to be equitable to each. It is recognized that in some cases
this system could have a detrimental effect on the price or volume of the
security in a particular transaction as far as a Fund is concerned. The Trust
believes that over time its ability to participate in volume transactions will
produce better executions for the Funds.
The Sub-Advisory fee that the Manager pays on behalf of each Fund to the
Sub-Advisers will not be reduced as a consequence of the Sub-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 Sub-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 Sub-Advisers in carrying out their obligations to the
Funds.
For the fiscal years ended December 31, 1996 and 1995 and the period
September 1, 1994 through December 31, 1994,* each of the following Funds paid
brokerage commissions as follows:
B-125
<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, 1994* Dec. 31, 1996 Dec. 31, 1995 Dec. 31, 1994*
------------- ---------------- --------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Capital Appreciation Fund.. $ 882,877 $ 681,250 $ 126,845 $ --- $ --- ---
Convertible Fund........... 1,952,991 674,139 151,524 --- --- ---
Equity Index Fund.......... 63,111 7,018 2,364 --- --- ---
Government Fund............ 20,809 71,818 27,123 --- --- ---
High Yield Corporate Bond
Fund..................... 1,187,150 1,207,587 333,548 --- 1,970(0%)(1) ---
International Equity Fund+. 215,696 135,267 54,215 --- --- ---
Strategic Income Fund++.... N/A N/A N/A N/A N/A N/A
Total Return Fund.......... 399,858 436,507 102,550 --- --- ---
Value Fund................. 1,354,707 1,055,169 246,712 --- 5,074(0%)(1) 1,540(1%)(1)
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.. $ 571,478,397(0.0%)(2) $391,017,677(0.0%)(2) $71,345,660(0.0%)(2) $880,764
Convertible Fund........... 1,296,465,108(0.0%)(2) 395,570,645(0.0%)(2) 81,374,040(0.0%)(2) 1,942,771
Equity Index Fund.......... 64,348,135(0.0%)(2) 5,863,505(0.0%)(2) 1,660,008 63,111
Government Fund............ 275,083,720(0.0%)(2) 712,117,650(0.0%)(2) 291,468,420(0.0%)(2) 20,809
High Yield Corporate Bond
Fund..................... 2,471,387,854(0.0%)(2) 1,414,045,455(0.0%)(2) 375,961,540(0.0%)(2) 1,084,021
International Equity Fund+. 49,098,906(0.0%)(2) 33,559,758(0.0%)(2) 12,781,223 215,696
Strategic Income Fund++.... N/A N/A N/A N/A
Total Return Fund.......... 271,187,968(0.0%)(2) 604,631,476(0.0%)(2) 153,671,710(0.0%)(2) 398,594
Value Fund................. 848,170,710(0.0%)(2) 544,224,812(0.0%)(2 ) 141,666,160(0.1%)(2) 1,347,479
</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 Strategic Income Fund commenced operations on February 28, 1997.
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.
Capital Appreciation Fund held common stock in Schwab (Charles) valued at
$14,480,000 and commercial paper of American Express Credit Corp. valued at
$22,585,000; Convertible Fund held commercial paper of American Express Credit
Corp. valued at $38,000,000; Total Return Fund held long-term bonds of Lehman
B-126
<PAGE>
Brothers Holdings Inc., 7.375%, due 5/15/07, valued at $2,623,462, long-term
bonds of Merrill Lynch & Co., Inc., 6.65%, due 1/15/99, valued at $4,016,442,
long-term bonds of PaineWebber Group Inc., 7.75%, due 9/1/02, valued at
$1,032,540, long-term bonds of Salomon Inc., 6.70%, due 12/1/98, valued at
$2,182,152, common stock in Schwab (Charles) valued at $7,472,000 and commercial
paper of American Express Credit Corp. valued at $15,285,000; Value Fund held
commercial paper of American Express Credit Corp. valued at $21,922,000.
Investors may, subject to the approval of the Trust, the Manager and the
Sub-Adviser, 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 Sub-Adviser intends to retain
the security in the Fund as an investment. The Trust reserves the right to
amend or terminate this practice at any time.
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.
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<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 Sub-Adviser if those prices
are deemed by the Sub-Adviser to be representative of market values at the first
close of business of the New York Stock Exchange, (e) by appraising debt
securities at prices supplied by a pricing agent selected by the Sub-Adviser,
which prices reflect broker-dealer-supplied valuations and electronic data
processing techniques if those prices are deemed by the Sub-Adviser to be
representative of market values at the first close of business of the New York
Stock Exchange, (f) by appraising exchange-traded options and futures contracts
at the last posted settlement price on the market where any such option or
futures contract is principally traded and (g) by appraising all other
securities and other assets, including over-the-counter common and preferred
stocks not quoted on the NASDAQ system, securities listed or traded on certain
foreign exchanges whose operations are similar to the U.S. over-the-counter
market and debt securities for which prices are supplied by a pricing agent but
are not deemed by the Sub-Adviser to be representative of market values, but
excluding money market instruments with a remaining maturity of 60 days or less
and including restricted securities and securities for which no market quotation
is available, at fair value in accordance with procedures approved by and
determined in good faith by the Trustees, although the actual calculation may be
done by others. Money market instruments held by the 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 cur rency 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-128
<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
recog nized 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 oc cur 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
Sub-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-129
<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-130
<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-131
<PAGE>
as an underlying investment for an IRA made available by NYLIFE Distributors.
For tax years beginning in 1997, only a traditional IRA is available. For tax
years beginning after 1997, two additional types of IRAs will be available --
the "Roth" IRA and the "Education" IRA.
An individual may contribute as much as $2,000 of his or her earned income
to a traditional IRA. A married individual filing a joint return may also
contribute to a traditional IRA for a nonworking spouse. The maximum deduction
allowed for a contribution to a spousal IRA is the lesser of (i) $2,000 or (ii)
the sum of (a) the compensation includible in the working spouse's gross income
plus (b) any compensation includible in the gross income of the nonworking
spouse, reduced by the amount of the deduction taken by the working spouse. The
maximum deduction for a IRA contribution by a married couple is $4,000.
An individual who has not attained age 70-1/2 may make a contribution to a
traditional IRA which is deductible for federal income tax purposes. For tax
years beginning before 1998, a contribution is deductible 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). These phase-out limits will gradually increase starting with tax
years beginning in 1998, eventually reaching $50,000 - $60,000 for single filers
in 2005 and thereafter ($80,000 - $100,000 if married filing jointly in 2007 and
thereafter). In addition, for tax years beginning after 1997, a married
individual may make a deductible IRA contribution even though the individual's
spouse is an active participant in a qualified employer's retirement plan,
subject to a phase-out for adjusted gross income between $150,000 -$160,000.
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 traditional IRAs are aggregated and treated as one
B-132
<PAGE>
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. For distributions made after 1997, the excise tax does not apply to
withdrawals up to a total of $10,000 for first-time homebuyer expenses or to
withdrawals used to pay "qualified higher education expenses" of the taxpayer or
his or her spouse, child or grandchild. 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.
Roth IRAs. Roth IRAs are a form of individual retirement account
---------
applicable for tax years beginning after 1997. Contributions to a Roth IRA are
not deductible but may be made even after the individual attains the age of
70-1/2. In certain cases, distributions from a Roth IRA may be tax free. The
Roth IRA, like the traditional IRA, is subject to a $2,000 ($4,000 for a married
couple) contribution limit (taking into account both Roth IRA and traditional
IRA contributions). The maximum contribution that can be made is phased-out for
taxpayers with adjusted gross income between $95,000 and $110,000 ($150,000 -
$160,000 if married filing jointly). If the Roth IRA has been in effect for five
years, and distributions are (1) made on or after the individual attains the age
of 59-1/2; (2) made after the individual's death; (3) attributable to
disability; or (4) used for "qualified first-time home buyer expenses," they are
not taxable. If these requirements are not met, distributions are treated first
as a return of contributions and then as taxable earnings. Taxable distributions
may be subject to the same excise tax described above with respect to
traditional IRAs. All Roth IRAs, like traditional IRAs, are treated as one IRA.
The minimum distribution requirements before death that apply to traditional
IRAs do not apply to Roth IRAs.
Education IRAs. After 1997, a taxpayer may make non-deductible
--------------
contributions of up to $500 per year per beneficiary to an Education IRA.
Contributions cannot be made after the beneficiary becomes 18 year old. The
maximum contribution is phased out for taxpayers with adjusted gross income
between $95,000 and $110,000 ($150,000 - $160,000 if married filing jointly).
Earnings are tax-deferred until a distribution is made. If a distribution does
not exceed the beneficiary's "qualified higher education expenses" for the year,
no part of the distribution is taxable. If a distribution is taxable, an excise
tax will generally apply as well. Any balance remaining in an Education IRA
when the beneficiary becomes 30 years old
B-133
<PAGE>
must be distributed and any earnings will be taxable and subject to an excise
tax upon distribution.
All income and capital gains deriving from IRA investments in the Fund are
reinvested and compounded tax-deferred until distributed from the IRA. The
combination of annual contributions to a traditional IRA, which may be
deductible, and tax-deferred compounding can lead to substantial retirement
savings. Similarly, the combination of tax free distributions from a Roth IRA
or Education IRA combined with tax-deferred compounding can lead to substantial
retirement and/or education savings.
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.
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 custodial agreements and forms provided by the Funds' Custodian and
Transfer Agent designate New York Life 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 New York Life Trust Company, tax consequences and
redemption information, see the specific documents for that plan.
B-134
<PAGE>
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 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 June 30, 1997 was
5.04% and 5.04%, 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) to the
365/7 power] - 1. The effective yield of the Class A and Class B shares of
the Money Market Fund for the seven-day period ended June 30, 1997 was
5.17% and 5.17%, 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
4.86% and 4.97%, respectively, for Class A shares and 4.86% and 4.97%,
respectively, for Class B shares for the seven-day period ended June 30,
1997.
B-135
<PAGE>
As described above, yield and effective yield are based on historical
earnings and are not intended to indicate future performance. The "effective
yield" will be slightly higher than the "yield" because of the compounding
effect of the assumed reinvestment of dividends. Yield and effective yield will
vary based on changes in market conditions and the level of expenses.
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 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
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, 1996 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) to the power of n = ERV
where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
B-136
<PAGE>
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)
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, five-year and ten-year periods ended
June 30, 1997 and the period from inception to June 30, 1997 were as follows:*
<TABLE>
<CAPTION>
Five Ten Average
Year Years Years Annual
Ended Ended Ended Total Inception
Fund 6/30/97 6/30/97 6/30/97 Return(a) Date
---- ------- ------- ------- -------- ---------
<S> <C> <C> <C> <C> <C>
California Tax Free Fund...... 2.30% 5.34% 5.67% 10/01/91
Capital Appreciation Fund(b).. 15.95% 19.52% 14.19% 14.84% 5/01/86
Convertible Fund(b)........... 6.19% 13.99% 10.65% 10.01% 5/01/86
Equity Index Fund............. 29.70% 17.91% 17.59% 12/20/90
Government Fund(b)............ 1.98% 4.18% 6.24% 6.24% 5/01/86
High Yield Corporate
Bond Fund(b)................. 10.61% 13.33% 10.95% 10.48% 5/01/86
International Bond Fund(b).... 3.78% 9.69% 9/13/94
International Equity Fund(b).. 8.21% 6.31% 9/13/94
New York Tax Free Fund........ 2.52% 5.48% 5.95% 10/01/91
Strategic Income Fund......... -1.66% -1.66% 2/28/97
Tax Free Bond Fund(b)......... 3.15% 4.79% 6.19% 5.93% 5/01/86
Total Return Fund(b).......... 11.31% 12.67% 12.30% 12/29/87
Value Fund(b)................. 18.97% 15.86% 12.99% 12.33% 5/01/86
</TABLE>
- -----------------
* Assumes the deduction of the maximum applicable initial sales charge.
(a) From inception to 6/30/97.
(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 and ten-year periods ended
June 30, 1997, were as follows:
B-137
<PAGE>
<TABLE>
<CAPTION>
Five Ten Average
Year Years Years Annual
Ended Ended Ended Total Inception
Fund 6/30/97 6/30/97 6/30/97 Return(a) Date
---- ------- ------- ------- ------- ---------
<S> <C> <C> <C> <C> <C>
California Tax Free Fund(b).. 2.00% 5.88% 6.29% 10/01/91
Capital Appreciation Fund.... 17.08% 20.39% 14.69% 15.10% 5/01/86
Convertible Fund............. 6.77% 14.72% 11.12% 10.43% 5/01/86
Government Fund.............. 1.17% 4.48% 6.57% 6.53% 5/01/86
High Yield Corporate
Bond Fund................... 9.95% 13.79% 11.30% 10.78% 5/01/86
International Bond Fund...... 3.06% 9.98% 9/13/94
International Equity Fund.... 8.63% 6.79% 9/13/94
New York Tax Free Fund(b).... 2.08% 6.03% 6.57% 10/01/91
Strategic Income Fund........ -2.32% -1.66% 2/28/97
Tax Free Bond Fund........... 2.81% 5.34% 6.64% 6.33% 5/01/86
Total Return Fund............ 12.25% 13.42% 12.82% 12/29/87
Value Fund................... 20.25% 16.64% 13.47% 12.76% 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 6/30/97.
(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:
<TABLE>
<CAPTION>
Five Ten Average
Year Years Years Annual
Ended Ended Ended Total Inception
Fund 6/30/97 6/30/97 6/30/97 Return(a) Date
---- ------- ------- ------- -------- ---------
<S> <C> <C> <C> <C> <C>
California Tax Free Fund...... 7.12% 6.32% 6.52% 10/01/91
Capital Appreciation Fund(b).. 22.69% 20.88% 14.83% 15.22% 5/01/86
Convertible Fund(b)........... 12.37% 15.29% 11.28% 10.57% 5/01/86
Equity Index Fund............. 33.71% 18.63% 18.14% 12/20/90
Government Fund(b)............ 6.78% 5.14% 6.74% 6.67% 5/01/86
High Yield Corporate
Bond Fund(b)................. 15.82% 14.38% 11.47% 10.93% 5/01/86
International Bond Fund(b).... 8.67% 11.51% 9/13/94
International Equity Fund(b).. 14 51% 8.48% 9/13/94
New York Tax Free Fund........ 7.35% 6.46% 6.80% 10/01/91
Strategic Income Fund......... 2.97% 2.97% 2/28/97
Tax Free Bond Fund(b)......... 8.01% 5.75% 6.66% 6.37% 5/01/86
Total Return Fund(b).......... 17.79% 13.95% 12.97% 12/29/87
Value Fund(b)................. 25.80% 17.18% 13.63% 12.90% 5/01/86
</TABLE>
-----------------
(a) From inception to 6/30/97.
(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:
B-138
<PAGE>
<TABLE>
<CAPTION>
Five Ten Average
Year Years Years Annual
Ended Ended Ended Total Inception
Fund 6/30/97 6/30/97 6/30/97 Return(a) Date
---- ------- ------- ------- ------- ---------
<S> <C> <C> <C> <C> <C>
California Tax Free Fund(b).. 7.00% 6.20% 6.42% 10/01/91
Capital Appreciation Fund.... 22.08% 20.58% 14.69% 15.10% 5/01/86
Convertible Fund............. 11.77% 14.95% 11.12% 10.43% 5/01/86
Government Fund.............. 6.17% 4.82% 6.57% 6.53% 5/01/86
High Yield Corporate
Bond Fund................... 14.95% 14.03% 11.30% 10.78% 5/01/86
International Bond Fund...... 8.06% 10.88% 9/13/94
International Equity Fund.... 13.63% 7.73% 9/13/94
New York Tax Free Fund(b).... 7.08% 6.34% 6.70% 10/01/91
Strategic Income Fund........ 2.68% 2.68% 2/28/97
Tax Free Bond Fund........... 7.81% 5.66% 6.64% 6.33% 5/01/86
Total Return Fund............ 17.25% 13.66% 12.82% 12/29/87
Value Fund................... 25.25% 16.65% 13.47% 12.76% 5/01/86
</TABLE>
- -----------------
(a) From inception to 6/30/97.
(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 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:
B-139
<PAGE>
Yield = 2[(a-b +1) to the power of 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 June 30, 1997, the yield of each of the
following Funds was:
30-Day
Period Ended
June 30,
1997
----
Fund Class A Class B
---- -------- -------
California Tax Free Fund........ 4.88% 4.85%
Government Fund................. 5.47% 5.22%
High Yield Corporate Bond Fund.. 6.83% 6.65%
International Bond Fund......... 4.57% 4.13%
New York Tax Free Fund.......... 4.88% 4.85%
Strategic Income Fund........... 6.16% 5.67%
Tax Free Bond Fund.............. 5.13% 5.18%
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. 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.
B-140
<PAGE>
The table below illustrates the taxable yield equivalent to a tax-free
yield of 5.50%.*+
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% 6.47%
28.00% 7.64%
31.00% 7.97%
36.00% 8.59%
39.60% 9.11%
____________________
* 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.
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 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
B-141
<PAGE>
currently required for yield calculations. In addition, the current dividend
rate does not take into account the imposition of any contingent deferred sales
charge on the redemption of Fund shares. Any performance figure which does not
take into account the contingent deferred sales charge would be reduced to the
extent such charge is imposed upon a redemption.
Investors should note that the investment results of a Fund will fluctuate
over time, and any presentation of a Fund's yield, current dividend rate, total
return or tax-equivalent yield of any prior period should not be considered as a
representation of what an investment may earn or what an investor's yield,
current dividend rate, total return or tax-equivalent yield may be in any future
period.
In addition, advertising for a Fund may indicate that investors may
consider diversifying their investment portfolios in order to seek protection of
the value of their assets against inflation. From time to time, advertising
materials for a Fund may refer to or discuss current or past business,
political, economic or financial conditions, including events as they relate to
those conditions, such as any U.S. monetary or fiscal policies and the current
rate of inflation. In addition, from time to time, advertising materials for a
Fund may include information concerning retirement and investing for retirement
and may refer to the approximate number of then-current Fund shareholders,
shareholder accounts and Fund assets.
From time to time, advertising and sales literature for a Fund may discuss
the investment philosophy, personnel and assets under management of the Fund's
Manager and Sub-Adviser, and other 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, Kiplinger's
-------- ------------ -----------
Personal Finance, Financial World, Forbes, Money, Morningstar, Personal
- ---------------- --------------- ------ ----- ----------- --------
Investor, Sylvia Porter's Personal Finance, and The Wall Street Journal.
-------------------------------- -----------------------
In addition, performance information for a Fund may be compared, in
advertisements, sales literature, and reports to shareholders, to: (i)
unmanaged indexes, such as the Standard & Poor's 500 Composite Stock Price
Index, the Salomon Brothers Broad Investment Grade Bond Index, the Morgan
Stanley Capital International indexes; the Dow Jones Industrial Average,
Donoghue Money Market Institutional Averages, the Merrill Lynch 1 to 3
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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.
[SUBJECT TO REVIEW BY DECHERT]
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
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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) and the Strategic Income Fund and Strategic Value Fund, 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 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
unless such shares are deemed to have been held for at least 45 days. For
dividends received after August 5, 1997, this 45-day period must occur during
the 90-day period beginning 45 days before the date on which the shares become
x-dividend. 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
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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, 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.
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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 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.
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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 is treated
for federal income tax 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
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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 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
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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. Furthermore, the
use of options, futures contracts, notional principal contracts and short sales
- -- including short sales against the box -- to defer recognition of gain with
respect to an "appreciated position" in certain financial instruments may be
deemed a constructive sale of the appreciated position, requiring the immediate
recognition of gain as if the appreciated position were sold. Because only a
few regulations implementing the straddle rules have been promulgated, and
regulations relating to constructive sales of appreciated positions have yet to
be 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 substantially as compared to a
Fund that did not engage in such hedging transactions.
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'
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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, International Equity Fund and
Strategic Income 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 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,
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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 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.
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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 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
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that income has been declared as a dividend may be disadvan tageous. 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 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
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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 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.
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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 Sub-Adviser and its affiliates, and the Funds' counsel make no review
of 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
B-155
<PAGE>
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 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
B-156
<PAGE>
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.
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
B-157
<PAGE>
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 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
B-158
<PAGE>
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 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. The Strategic Income Fund commenced operations on February
28, 1997. The organizational expenses of the Fund will be amortized and
deferred over a period not to exceed 60 months. The Declaration of Trust and
By-laws authorize the Trustees to establish additional series or "Funds" as well
as additional classes of shares.
B-159
<PAGE>
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
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 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
B-160
<PAGE>
have been so incorporated 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 December 8, 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>
Percentage of
Name and Address Shares Outstanding
Name of Fund of Shareholder Owned (1) Shares Owned
- ------------ ---------------- ------------ -------------
<S> <C> <C> <C>
California NYLIFE Distributors Inc.(2) 271,121 (Class A) 14.97% (Class A)
Tax Free Fund 260 Cherry Hill Road
Parsippany, NJ 07054
California Otto V. & Yvonne Louise-Ericksen 101,010 (Class A) 5.58% (Class A)
Tax Free Fund Tschudi Revoc. Living Trust
1805 St. Andrews Dr.
Morasa, Ca 94668
California William J. & Elinor Potikian 82,372 (Class B) 11.59% (Class B)
Tax Free Fund Family Revocable Trust
4475 N College
Fresno CA 93704
Capital- New York Life Trust Company 1,189,954 (Class A) 21.23% (Class A)
Appreciation Client Accounts
51 Madison Avenue, Rm 117A
New York, NY 10010-1603
Convertible New York Life Trust Company 505,836 (Class A) 11.43% (Class A)
Fund Client Accounts
51 Madison Avenue, Rm 117A
New York, NY 10010-1603
New York Tax NYLIFE Distributors Inc.(2) 499,488 (Class A) 36.82% (Class A)
Free Fund 260 Cherry Hill Road
Parsippany, NJ 07054
New York Tax Felice Brand 53,120 (Class B) 10.30% (Class B)
Free Fund 158 Wright Avenue
Deer Park, NY 11729-2224
New York Tax Henry Sheimann Irrevocable Trust 31,421 (Class B) 5.93% (Class B)
Free Fund 11-31 Jackson Avenue
Scarsdale, NY 10583
International NYLIFE Distributors Inc.(2) 750,150 (Class A) 64.61% (Class A)
Bond Fund 260 Cherry Hill Road
Parsippany, NJ 07054
Defined Benefit Pension Trust 74,304 (Class A) 6.40% (Class A)
of FMCNA
c/o The Free Methodist Foundation
8050 Spring Arbor Road
Spring Arbor, MI 49283
International NYLIFE Distributors Inc.(2) 625,089 (Class A) 37.77% (Class A)
Equity Fund 260 Cherry Hill Road
Parsippany, NJ 07054
International New York Life Trust Company 107,257 (Class A) 6.48% (Class A)
Equity Fund Clients Accounts
51 Madison Avenue, Room 117A
New York, NY 10010
Strategic Income NYLIFE Distributors Inc.(2) 520,912 (Class B) 12.69% (Class B)
Fund 260 Cherry Hill Road
Parsippany, NJ 07054
Strategic Income New York Life Insurance 1,115,285 (Class A) 49.15% (Class A)
Fund Company General Account
51 Madison Avenue
New York, NY 10010
Value New York Life Trust Company 1,065,019 (Class A) 21.73% (Class A)
Fund Client Accounts
51 Madison Avenue, Rm 117A
New York, NY 10010-1603
Government New York Life Trust Company 221,680 (Class A) 11.19% (Class A)
Fund Client Accounts
51 Madison Avenue, Rm 117A
New York, NY 10010-1603
Richland County Treasurer 176,959 (Class A) 8.93% (Class A)
50 Park Avenue East
Mansfield, OH 44902
Jane D. Keeling 103,115 (Class A) 5.21% (Class A)
Dec of Rev Trust
3209 Old Mallard Road
Enid, OK 73703
Tax Free Schmitt Family Trust 201,524 (Class A) 15.77% (Class A)
Bond Fund P.O. Box 1566
Savannah, GA 31402
BHC Securities Inc. 74,708 (Class A) 5.84% (Class A)
2005 Market Street
Philadelphia, PA 19103
Money Market New York Life Trust Company 5,970,580 (Class A) 7.54% (Class A)
Fund Clients Accounts
51 Madison Avenue, Room 117A
New York, NY 10010
Calvin Fayard 4,904,078 (Class A) 6.19% (Class A)
APLC Clearing Account
519 Florida Boulevard
Denham Springs, LA 70726
Total Return New York LIfe Trust Company 2,319,911 (Class A) 51.83% (Class A)
Fund Clients Accounts
51 Madison Avenue, Room 117A
New York, NY 10010
</TABLE>
B-161
<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 Sub-Adviser unless such power is the result of
their position with the Trust or Investment Sub-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 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, Equity Index
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, the Notes to the Financial Statements and the Reports of Independent
Accountants, all of which are included in the 1996 Annual Reports to the
Shareholders are hereby incorporated by reference into this Statement of
Additional Information. In addition, unaudited financial statements of each of
the Funds
B-162
<PAGE>
including the Portfolio of Investments as of June 30, 1997, the Statement of
Assets and Liabilities as of June 30, 1997, the Statement of Operations for the
six months ended June 30, 1997, the Statement of Changes in Net Assets for the
six months ended June 30, 1997 and the Notes to the Financial Statements, all of
which are included in the June 30, 1997 Semi- Annual Reports to Shareholders,
hereby incorporated by reference into the Statement of Additional Information.
Audited financial statements for NYLIFE Inc. and its subsidiaries as of
December 31, 1996, is included in this Statement of Additional Information.
B-163
<PAGE>
[LOGO]
NYLIFE INC. AND SUBSIDIARIES
(affiliates of
New York Life Insurance Company)
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
<PAGE>
1177 Avenue of the Americas Telephone 212 596 7000
New York, NY 10036 Facsimile 212 596 8910
[LOGO]
PRICE WATERHOUSE LLP
April 15, 1997
To the Board of Directors and
Stockholder of NYLIFE Inc.
REPORT OF INDEPENDENT ACCOUNTANTS
- ---------------------------------
We have audited the accompanying statutory basis consolidated statement of
financial position of NYLIFE Inc. and its subsidiaries (affiliates of New York
Life Insurance Company) as of December 31, 1996 and 1995, and the related
statutory basis consolidated statements of operations, of changes in
stockholder's equity and of cash flows for each of the three years in the period
ended December 31, 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
As described in Note 2, these financial statements were prepared in conformity
with accounting practices prescribed or permitted by the New York State
Insurance Department for valuing companies owned by an insurer, which is a
comprehensive basis of accounting other than generally accepted accounting
principles. The effects on the financial statements of the variances between
such practices and generally accepted accounting principles are described in
Note 2.
In our opinion, except for the effects of the matters described in the preceding
paragraph, the financial statements referred to above present fairly, in all
material respects, the financial position of NYLIFE Inc. and its subsidiaries at
December 31, 1996 and 1995, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles.
<PAGE>
To the Board of Directors and
Stockholder of NYLIFE Inc.
Page 2
April 15, 1997
Also, in our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of NYLIFE Inc. and its
subsidiaries at December 31, 1996 and 1995, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1996, on the basis of the accounting described in Note 2.
As described in Note 1, on January 1, 1996, New York Life Insurance Company
combined certain of its group life and health indemnity insurance operations
with a subsidiary of the Company. The combination has been treated as a
transaction between entities under common control and, accordingly, the
consolidated financial statements presented herein for periods prior to January
1, 1996 have been restated to reflect the combination as if it had occurred on
January 1, 1994.
/s/ Price Waterhouse LLP
<PAGE>
NYLIFE INC. AND SUBSIDIARIES
----------------------------
(affiliates of New York Life Insurance Company)
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
--------------------------------------------
<TABLE>
<CAPTION>
December 31,
-----------------------------
(Restated)
1996 1995
---- ----
(in thousands)
ASSETS
------
<S> <C> <C>
Cash and cash equivalents $ 369,810 $ 302,780
Short-term investments 25 9,925
Premiums and accounts receivable less allowance for doubtful
accounts of $4,042 and $5,642, respectively 477,317 303,843
Liquidation advance recoverable 64,431 -
Interest and other receivables 60,318 74,580
Deferred distribution costs (net of accumulated amortization
of $229,711 and $172,254, respectively) 224,752 174,055
Investments:
Common stocks 7,042 5,520
Available for sale - bonds 200,442 611,644
Held to maturity - bonds 2,311 33,763
Insurance operations - bonds 32,411 29,201
Mortgage loans 6,769 116,963
Real estate 100,374 108,664
MainStay funds at fair value 47,263 33,762
Security alarm monitoring contracts held for sale 38,455 -
Security alarm monitoring contracts (net of accumulated amortization
of $22,499) - 48,425
Other investments and advances to affiliates 106,831 114,433
Statutory valuation of subsidiary in excess of GAAP net equity 99,527 406,834
Fixed assets (net of accumulated depreciation of $25,235 and
$59,044, respectively) 89,371 72,925
Income taxes receivable 11,345 2,412
Receivable from New York Life Insurance Company - 82,172
Net deferred tax asset and other assets 126,282 241,699
---------- ----------
Total assets $2,065,076 $2,773,600
========== ==========
LIABILITIES and STOCKHOLDER'S EQUITY
------------------------------------
Accrued HMO claims payable $ 229,802 $ 290,734
Policy and claim reserves - accident and health 127,722 225,000
Policy and claim reserves - life 67,657 95,885
Policyholder account balances and deposit funds - 304,214
Dividends payable to policyholders 30,100 28,926
Payable to New York Life Insurance Company 47,699 -
Accrued expenses and other payables 152,684 204,021
Payable on reinsurance assumed 26,507 -
Medical group risk sharing and unearned premiums 54,270 53,626
Notes payable 183,196 141,081
Net deferred tax liability and other liabilities 147,236 133,882
Accrued costs for liquidation of Limited Partnerships 10,404 137,000
---------- ----------
Total liabilities 1,077,277 1,614,369
---------- ----------
Minority interest 89,533 26,252
Stockholder's equity:
Common stock, par value $.10 per share (20,000 shares authorized,
3,850 shares issued and outstanding) and additional paid-in capital 1,066,921 946,546
Accumulated deficit (270,817) (240,623)
Investment valuation account 99,527 406,834
Net unrealized (losses) gains on available for sale investments (net of
taxes of $(764) and $8,832, respectively) (1,215) 19,099
Cumulative translation adjustment 3,850 1,123
---------- ----------
Total stockholder's equity 898,266 1,132,979
---------- ----------
Total liabilities and stockholder's equity $2,065,076 $2,773,600
========== ==========
The accompanying notes are an integral part of these financial statments
</TABLE>
<PAGE>
NYLIFE INC. AND SUBSIDIARIES
----------------------------
(affiliates of New York Life Insurance Company)
CONSOLIDATED STATEMENT OF OPERATIONS
------------------------------------
<TABLE>
<CAPTION>
For the Years ended December 31,
-------------------------------
(Restated)
----------
1996 1995 1994
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Revenues:
Premium revenue - net $2,363,290 $2,146,107 $1,989,309
Initial premiums on reinsurance assumed 478,145 - -
Fee income 988,957 762,149 541,101
Interest and dividend income 57,187 111,048 167,071
Commission income 95,858 50,378 26,068
Net realized and unrealized (losses) gains on investments (2,869) (7,418) 43,928
Realized gain on sale of interest in subsidiary 121,741 - 34,574
Equity in (loss) earnings of affiliates (699) 155 1,769
Gain on issuance of additional shares by public subsidiary 21,633 - -
Other income 20,936 12,282 3,708
---------- ---------- ----------
Total revenues 4,144,179 3,074,701 2,807,528
---------- ---------- ----------
Expenses:
HMO claims and capitation costs 1,402,025 1,184,977 1,034,071
Health, disability and death benefit claims 567,394 567,989 544,850
Cost of prescription sales 618,022 437,223 299,285
Initial reserve transfer on reinsurance assumed 478,147 - -
Increase in policy reserves - life 11,748 14,237 58,126
Employee compensation 339,974 286,811 259,850
Depreciation and amortization 112,794 103,779 70,764
Administrative charge from New York Life Insurance Company 64,605 40,848 41,956
Impairment of intangible asset 28,830 - -
Interest 15,594 29,784 46,719
Professional fees 38,407 32,822 26,792
Selling expenses 123,413 118,637 162,001
Rent expense 34,943 32,848 28,315
Interest crediting expense - 17,472 13,642
Administrative and other expenses 152,937 186,050 146,061
Provision for liquidation of Limited Partnerships - 137,000 -
---------- ---------- -----------
Total expenses 3,988,833 3,190,477 2,732,432
---------- ---------- -----------
Income (loss) before income taxes and minority
interest 155,346 (115,776) 75,096
Income tax expense (benefit) 76,325 (24,441) 22,435
---------- ---------- -----------
Income (loss) before minority interest 79,021 (91,335) 52,661
Minority interest 14,188 4,598 4,189
----------- ----------- -----------
Net income (loss) $ 64,833 $ (95,933) $ 48,472
=========== ============ ===========
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
NYLIFE INC. AND SUBSIDIARIES
----------------------------
(affiliates of New York Life Insurance Company)
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY
---------------------------------------------------------
For the years ended December 31, 1996, 1995 (Restated) and 1994 (Restated)
<TABLE>
<CAPTION>
Common Net Unrealized
Stock & Gains (Losses)
Additional Investment on Available Cumulative Total
Paid-In Accumulated Valuation for Sale Translation Stockholder's
Capital Deficit Account Investments Adjustment Equity
---------- ----------- ---------- -------------- ----------- -------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993
as previously reported $482,390 $(122,303) $180,818 $ - $3,880 $544,785
Effect of business combination
(Note 1) - 55,376 - - - 55,376
---------- ----------- ---------- ----------- --------- -----------
Balance at December 31, 1993
as restated 482,390 (66,927) 180,818 - 3,880 600,161
Capital contributions 127,913 - - - - 127,913
Return of capital (11,230) - - - - (11,230)
Dividends - (72,946) - - (72,946)
Cumulative translation
adjustment - - - - (1,917) (1,917)
Statutory valuation of subsidiary
in excess of GAAP net equity - - 108,895 - - 108,895
Other equity adjustments - (10,768) (10,768)
Net unrealized losses on available
for sale investments - - - (26,213) - (26,213)
Net income - 48,472 - - - 48,472
---------- ---------- ------------ ------------ --------- ----------
Balance at December 31, 1994 599,073 (102,169) 289,713 (26,213) 1,963 762,367
Capital contributions 347,473 - - - - 347,473
Dividends - (41,900) - - - (41,900)
Cumulative translation adjustment - - - - (840) (840)
Statutory valuation of subsidiary
in excess of GAAP net equity - - 117,121 - - 117,121
Other equity adjustments - (621) - - - (621)
Net unrealized gains on available
for sale investments - - - 45,312 - 45,312
Net loss - (95,933) - - - (95,933)
---------- ---------- ------------ --------- ---------- ----------
Balance at December 31, 1995 946,546 (240,623) 406,834 19,099 1,123 1,132,979
Effect of business combination
(Note 1) - (88,130) - (17,375) - (105,505)
Capital contributions 120,375 - - - - 120,375
Change in prior year's retained
earnings - (7,102) - - - (7,102)
Cumulative translation adjustment - - - - 2,727 2,727
Statutory valuation of subsidiary
in excess of GAAP net equity - - (307,307) - - (307,307)
Other equity adjustments - 205 - - - 205
Net unrealized losses on available
for sale investments - - - (2,939) - (2,939)
Net income - 64,833 - - - 64,833
---------- ---------- ----------- ----------- ---------- -----------
Balance at December 31, 1996 $1,066,921 $(270,817) $ 99,527 $ (1,215) $ 3,850 $ 898,266
========== ========== ======== ========= ======= =========
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
NYLIFE INC. AND SUBSIDIARIES
----------------------------
(affiliates of New York Life Insurance Company)
CONSOLIDATED STATEMENT OF CASH FLOWS
------------------------------------
Increase in Cash and Cash Equivalents
<TABLE>
<CAPTION>
For the Years ended December 31,
--------------------------------
(Restated)
1996 1995 1994
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Cash flow from operating activities:
Net income (loss) $ 64,833 $ (95,933) $ 48,472
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 112,794 104,679 70,889
Impairment of intangible assets 28,830 - -
Insurance reserves 11,748 24,370 69,912
Gain on sale of shares of subsidiary (121,741) - (27,788)
Net realized and unrealized losses (gains) 2,869 9,870 (43,608)
Equity in loss (earnings) of affiliates 699 (155) (1,769)
Provision for deferred income tax expense (benefit) 87,295 (41,969) (494)
Minority interest 14,188 4,598 4,189
Gain on issuance of additional shares by public subsidiary (21,633) - -
Other 1,467 50 5,821
Change in assets and liabilities:
(Decrease) increase in bank overdrafts - (53,538) 53,538
Increase in premiums and accounts receivable (206,586) (95,884) (11,628)
(Increase) decrease in interest and other receivables (67,627) 3,632 (2,750)
Increase in liquidation advance recoverable (64,431) - -
Increase in deferred distribution costs and other assets (141,565) (93,479) (89,960)
Increase in accrued expenses and other payables 170,133 11,457 74,458
(Decrease) increase in accrued costs for liquidation of Limited
Partnership (126,596) 137,000 -
Increase (decrease) in payable to New York Life Insurance Company 28,970 (19,266) 12,249
Increase (decrease) in policy and claim reserves 143,096 (6,194) 1,707
Increase (decrease) in interest payable 211 (3,218) (9)
(Increase) decrease in income taxes receivable (57,330) 307 (30,551)
---------- ----------- ----------
Net cash (used in) provided by operating activities (140,376) (113,673) 132,678
---------- ----------- ----------
Cash flow from investing activities:
Capital expenditures (51,450) (44,854) (30,669)
Proceeds from sale of investments 209,383 857,479 1,252,103
Purchase of investments (229,664) (534,761) (1,381,194)
Sale of interest in subsidiaries, net of cash sold 138,497 - 34,574
Acquisition of subsidiaries, net of cash acquired (14,843) (15,765) (59,934)
Payments received on investments 46,423 6,992 45,231
Other 3,552 3,121 (3,373)
---------- --------- ------------
Net cash provided by (used in) investing activities $ 101,898 $ 272,212 $ (143,262)
---------- --------- ------------
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
NYLIFE INC. AND SUBSIDIARIES
----------------------------
(affiliates of New York Life Insurance Company)
CONSOLIDATED STATEMENT OF CASH FLOWS (cont.)
--------------------------------------------
Increase in Cash and Cash Equivalents
<TABLE>
<CAPTION>
For the Years ended Daecember 31,
---------------------------------
(Restated)
----------
1996 1995 1994
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Cash flow from financing activities:
Capital contributions $97,784 $160,752 $114,226
Dividends paid (35,250) (32,584) (23,002)
Borrowings net of repayments under line of credit agreements 53,378 20,342 (72,896)
Payments applied against capital leases (779) (1,107) (1,251)
Proceeds from issuance of debt - 24,521 104,730
Principal repayment of debt (12,536) (310,644) (32,251)
Proceeds from issuance of shares by public subsidiary 52,592 - (3,499)
Other (Note 16) (52,839) 21,309 (36,459)
-------- --------- --------
Net cash provided by (used in) financing activities 102,350 (117,411) 49,598
-------- --------- --------
Effect of exchange rates on cash 3,158 (339) 4,997
-------- --------- --------
Net increase in cash and cash equivalents 67,030 40,789 44,011
Cash and cash equivalents at beginning of period 302,780 261,991 217,980
-------- --------- --------
Cash and cash equivalents at end of period $369,810 $ 302,780 $261,991
======== ========= ========
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
NYLIFE INC. AND SUBSIDIARIES
----------------------------
(AFFILIATES OF NEW YORK LIFE INSURANCE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
DECEMBER 31, 1996, 1995 AND 1994
NOTE 1 - ORGANIZATION AND DESCRIPTION OF BUSINESS
- -------------------------------------------------
The accompanying financial statements reflect the consolidation of NYLIFE Inc.
("NYLIFE" or the "Company"), a wholly-owned subsidiary of New York Life
Insurance Company ("New York Life"), and its subsidiaries, each of which is
wholly-owned, except as noted:
Aegis Technologies, Inc. ("Aegis"), 94% owned
Eagle Strategies Corp. ("Eagle")
Greystone Realty Corporation ("Greystone")
MacKay-Shields Financial Corporation ("MacKay-Shields")
Monitor Capital Advisors, Inc.
MSC Holding, Inc. ("MSC"), 85% owned
New York Life Benefit Services Company, Inc. ("Benefit Services")
New York Life Capital Corporation ("Capital Corp.")
New York Life International Investment Inc. ("NYL International")
NYL Management Limited, formerly Quorum Capital Management
Monetary Research Limited ("MRL")
New York Life Irrevocable Trust of 1996 ("Trust")
New York Life Settlement Corporation ("NYLSET")
New York Life Worldwide Holding, Inc. ("Worldwide")
NYLCO, Inc.
NYLICO, Inc. ("NYLICO")
NYLIFE Administration Corp. ("NYLACOR")
NYL Trust Company ("NYL Trust")
NYLIFE Depositary Corporation ("Depositary")
NYLIFE Distributors Inc. ("NYLIFE Distributors")
NYLIFE Equity Inc. ("NYLIFE Equity")
NYLIFE Funding Inc. ("NYLIFE Funding")
NYLIFE HealthCare Management Inc. ("NYLIFE HealthCare"),
NYLCare Health Plans ("NYLCare"), formerly Sanus Corp. Health
Systems Express Scripts Inc. ("ESI"), 46% owned
NYLIFE Realty Inc. ("NYLIFE Realty")
NYLIFE Refinery Inc. ("NYLIFE Refinery")
NYLIFE Resources Inc. ("NYLIFE Resources")
NYLIFE Securities Inc. ("NYLIFE Securities")
NYLIFE SFD Holding, Inc.("SFD Holding"), formerly NAFCO, Inc. Auto
Funding II, LP, formerly NAFCO Auto Funding, LP
NYLINK Insurance Agency Corporation ("NYLINK")
NYLTemps Inc.
NYLIFE Inc., through its subsidiaries, offers health insurance, managed care and
related products and services, life insurance in certain international markets
and investment management, mutual fund, securities brokerage and pension
products and services. Through its health care related subsidiaries, primarily
NYLCare and ESI, the company develops and manages health maintenance
organizations ("HMOs"), markets mail order prescriptions and provides pharmacy
claims processing
<PAGE>
-2-
services and offers indemnity health insurance products and ancillary coverages
such as group life and disability insurance. HMO's are established under the
individual practice association model and provide comprehensive health care to
their members for a fixed monthly fee. Although indemnity products are offered
throughout the United States through the Company's group sales offices, HMO's
are centered in Texas, Washington, D.C., New York, New Jersey and Illinois.
International operations are conducted through Worldwide, which markets life
insurance and related products and services through joint ventures and equity
investments in Hong Kong, Korea, Indonesia, Mexico, Argentina, Bermuda and the
United Kingdom. Asset management operations primarily consist of institutional
asset management and mutual fund related products and services offered through
MacKay-Shields and the Mainstay Funds. Securities brokerage and mutual fund
distribution and administration services are conducted through NYLIFE Securities
and NYLIFE Distributors and pension and 401(k) products and services are offered
through Benefit Services and NYL Trust.
BUSINESS COMBINATION:
NYLCare was established on January 1, 1996 when New York Life combined certain
of its existing group life and health indemnity insurance operations with those
of Sanus Corp. Health Systems, an indirect wholly-owned managed care subsidiary
of New York Life, and renamed the company. Concurrently, New York Life also
transferred its ownership in New York Life and Health Insurance Company
(NYLHIC), a wholly-owned life insurance subsidiary, to NYLCare.
Also on January 1, 1996, NYLHIC entered into a modified coinsurance agreement
through which it assumed the risk on 90% of New York Life's group life and
health indemnity insurance business. Under the terms of the agreement, NYLHIC
assumes the risk for group life and health policies issued by New York Life;
however, New York Life retains the claim and policy reserves as well as the
related assets. The group life and health indemnity business will continue to be
written by New York Life and reinsured to NYLHIC until approval is granted by
various state insurance departments for NYLHIC to directly market such business.
For purposes of these financial statements, the combination has been treated as
a transaction between entities under common control and, accordingly, financial
statements presented for periods prior to January 1, 1996 have been restated to
include the assets, liabilities and operations of New York Life's group life and
health indemnity business during these periods. The approximate effects of
restatement are as follows: an increase in net income of $14,175,000 and
$18,579,000 for the years ended December 31, 1995 and 1994, respectively, and an
increase in total assets of $877,013,000 and an increase in stockholder's equity
of $105,505,000 as of December 31, 1995.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
- ----------------------------------------
The accompanying statutory basis consolidated financial statements have been
prepared on the basis of accounting practices prescribed or permitted by the New
York State Insurance Department for valuing common stocks of subsidiaries (New
York statutory basis of accounting), which is a comprehensive basis of
accounting other than generally accepted accounting principles ("GAAP").
Prior to 1996 the New York statutory basis of accounting was considered GAAP for
mutual life insurance companies and their wholly-owned subsidiaries.
Accordingly, the Company's life insurance operations, which were presented on
the New York statutory basis of accounting, were
<PAGE>
-3-
described as presented in accordance with GAAP. However, in April 1995, the
Financial Accounting Standards Board issued Interpretation No. 40,
"Applicability of Generally Accepted Accounting Principles to Mutual Life
Insurance and Other Enterprises", which established a different definition of
GAAP for mutual life insurance companies and their subsidiaries. Under this
Interpretation, financial statements for mutual life insurance companies and
their subsidiaries, which are presented on the statutory basis of accounting,
can no longer be characterized as in conformity with GAAP.
The New York statutory basis of accounting for insurance subsidiaries varies
from those prepared under GAAP primarily as follows: (1) the costs relating to
acquiring business, principally commissions and certain policy issuance
expenses, are charged to income in the year incurred, whereas under GAAP, they
would be deferred and amortized over the periods benefited; (2) policy reserves
are based on different assumptions than under GAAP and dividends on
participating policies are provided when approved by the Board of Directors,
whereas under GAAP, they are provided when credited to the policies; (3) policy
reserves are recorded net of reinsurance, whereas under GAAP, such amounts are
reported gross; (4) the excess of purchase price over statutory net assets
acquired is charged to stockholder's equity in the year of acquisition, whereas
under GAAP, an intangible asset is established and amortized over a period of 15
to 25 years; (5) investments in bonds are generally carried at amortized cost,
whereas under GAAP, investments in bonds which are considered available for sale
or held for trading are generally carried at market value, with changes in
market value charged against equity or reflected in earnings; (6) certain assets
are considered 'non-admitted' and excluded from the statement of financial
position, whereas they are included under GAAP; (7) joint ventures and minority
stock investments are stated at the value of their underlying statutory net
assets, whereas under GAAP, such investments are stated on the equity basis; and
(8) deferred federal income taxes are not provided for as they are under GAAP.
In addition, goodwill arising from the purchase of non-insurance subsidiaries is
amortized over a period not to exceed ten years. Under GAAP, this goodwill would
be amortized over a period of 15 to 25 years. In 1993, New York Life received
authorization from the New York State Insurance Department to adopt approximate
market value as the carrying value for its investment in Express Scripts Inc., a
publicly traded 46% owned subsidiary of NYLIFE HealthCare. This practice is not
recognized under GAAP.
The approximate effects on the financial statements of the variances between the
practices described in the preceding paragraphs and generally accepted
accounting principles are as follows: a decrease in net income of $17,000,000,
$2,000,000 and $46,000,000 for the years ending December 31, 1996, 1995 and
1994, respectively, and an increase in total assets of $4,000,000 and a decrease
in total assets of $300,000,000, and a decrease in stockholder's equity of
$4,000,000 and $320,000,000 as of December 31, 1996 and 1995, respectively.
The consolidated statement of operations reflects the activities of purchased
subsidiaries from the acquisition date through the respective year-end date.
Intercompany accounts and transactions have been eliminated.
FEE INCOME:
The Company through its subsidiaries receives fees for services provided under
agreements with its clients. The Company accrues fee income when earned.
Additionally, the Company derives monitoring revenues from customer payments for
alarm monitoring services. The Company recognizes revenue as the monitoring
services are provided.
<PAGE>
-4-
FOREIGN CURRENCY TRANSLATION:
Assets and liabilities denominated in foreign currency have been translated into
U.S. dollars at the respective year end exchange rates. Operating results are
translated at the average exchange rates for the year. Foreign currency
translation gains and losses are credited or charged directly to the Cumulative
Translation Adjustment account in stockholder's equity. The change in the
Cumulative Translation Adjustment account is due to the current year effect of
the translation adjustment. Foreign currency transaction gains and losses are
included in net income.
CASH AND CASH EQUIVALENTS:
Cash equivalents are short-term, highly liquid investments that are readily
convertible to known amounts of cash and have original maturities at purchase of
three months or less. The carrying value of cash and cash equivalents
approximates fair value.
ACCOUNTS RECEIVABLE:
The carrying value of accounts receivable at December 31, 1996 and 1995
approximates fair value.
DEFERRED DISTRIBUTION COSTS:
Deferred distribution costs relate to commission expenses and certain other
costs related to the distribution of MainStay Funds which have a contingent
deferred sales charge, and are deferred and amortized over a six year period on
a straight-line basis, adjusted for related contingent deferred sales charge
income earned.
INVESTMENTS:
Short-term investments are carried at cost which approximates fair value. Common
stocks are stated at market value. At December 31, 1996 and 1995, bonds, other
than those associated with insurance operations, are either classified as held
to maturity and are reported at amortized cost or classified as available for
sale and are reported at estimated fair value, with unrealized gains and losses
reported as a separate component of stockholder's equity, net of deferred tax.
The investment in the MainStay Funds is primarily held by NYLIFE Securities and
NYLIFE Distributors, broker-dealers, and in accordance with specialized
accounting practices in their industry, is recorded at fair value, with
unrealized gains and losses included in income.
Mortgage loans are generally stated at the aggregate principal balance due,
except when in management's opinion collection of the loan is doubtful, in which
case the loan is written down to the appraised value of the underlying property.
Such writedowns are recorded as net losses on investments. Interest income is
recorded on the accrual basis, except where collection is 90 days past due or is
considered uncertain. Real estate acquired through foreclosure is valued at the
lower of the mortgage loan carrying value or the appraised (fair market) value
of the property at the time of foreclosure plus certain directly related
expenses. Any excess of the carrying value of the loan over the appraised value
is recorded as a realized loss. Prior to December 30, 1996, alarm monitoring
contracts were recorded at cost net of accumulated amortization. Effective on
this date, such contracts are recorded at the lower of carrying value or fair
value less cost to sell and the amortization of the contracts has been
discontinued (see Note 4). Investments in limited partnerships are generally
accounted for under the equity method of accounting. Under this method, net
earnings or losses are included in income currently.
FAIR VALUES OF FINANCIAL INSTRUMENTS:
Fair values of various assets and liabilities are included throughout the notes
to financial statements. Specifically, fair value disclosure of bonds, mortgage
loans, real estate and the investment in the
<PAGE>
-5-
MainStay Funds is reported in Note 6, and fair value disclosure of notes payable
is reported in Note 9. Fair values of bonds and the investment in the MainStay
Funds are based on published or quoted market values, respectively. Fair value
of mortgage loans is estimated based on discounted cash flow analyses prepared
for each loan using interest rates approximating the current rates for new
mortgages with similar remaining maturities.
FIXED ASSETS:
Fixed assets are recorded at cost and are depreciated over the estimated useful
lives of the assets, generally 3 to 10 years, using the double-declining balance
and straight-line methods of depreciation.
INTANGIBLE ASSETS:
Intangible assets primarily consist of goodwill arising from acquisitions.
Goodwill, which represents the cost in excess of the value assigned to net
assets acquired in connection with acquisitions, is being amortized over 10
years, unless deemed to be impaired, in which case it is written off to the
extent considered unrecoverable (see Note 4).
PREMIUM REVENUE RECOGNITION:
Premium revenue for indemnity health insurance and managed health care and other
ancillary coverage is recorded as income over the premium paying period of the
policies. Revenue on premiums collected in advance is deferred.
Revenues from dispensing prescription and non-prescription medical products from
ESI's mail service pharmacies are recorded upon shipment. Revenue from sales of
prescription drugs by pharmacies in ESI's nationwide network and pharmacy claims
processing revenues are recognized when the claims are processed. When ESI has
an independent contractual obligation to pay its network pharmacy providers for
benefits provided to members of its clients' pharmacy benefit plans, ESI
includes payments from plan sponsors for these benefits as prescription sales
and fees and payments to these pharmacy providers in cost of prescription sales.
If ESI is only administering the plan sponsors' network pharmacy contracts, ESI
records fees derived from ESI's contracts with plan sponsors as net revenue.
CLAIMS, BENEFITS AND CAPITATION COSTS:
Claims and benefits include estimates of payments to be made on individual
claims for medical and ancillary services and for death benefits. The cost of
claims incurred but not reported is estimated using actuarial techniques based
on current membership statistics, current utilization and historical claims data
and trends. These estimates are continually reviewed and revised as changes in
these factors occur and revisions are reflected in the current year's statement
of income. Capitation costs represent monthly charges paid to participating
physicians as compensation for providing continuing medical care.
COST OF PRESCRIPTION SALES:
Costs of prescription sales includes product costs, pharmacy claims payments and
other direct costs associated with dispensing prescription and non-prescription
medical products and claims processing operations, offset by fees received from
pharmaceutical manufacturers in connection with ESI's drug purchasing and
formulary management programs.
POLICYHOLDER ACCOUNT BALANCES AND DEPOSIT FUNDS:
Policyholders' account balances for investment-type contracts and dividends and
policy proceeds deposited with the Company are equal to the policy account
values. The policy account values
<PAGE>
-6-
represent an accumulation of gross premium payments plus credited interest less
expense and mortality charges and withdrawals. Dividends and policy proceeds
deposited with the Company consist of dividend accumulations and supplementary
contracts without life contingencies. The statement value for these liabilities
approximates fair value.
DIVIDENDS PAYABLE TO POLICYHOLDERS:
The liability for dividends payable to policyowners consists principally of
dividends earned as of the statement date. The allocation of dividends is
determined by means of formulas which reflect the relative contribution of each
group of policies to the results of operations.
ACCRUED EXPENSES AND OTHER PAYABLES:
The carrying value of accrued expenses and other payables at December 31, 1996
and 1995 approximates fair value.
MEDICAL GROUPS' RISK SHARING:
NYLCare compensates primary care physicians on a capitation basis. NYLCare has
in place an incentive program whereby primary care physicians are eligible to
receive a bonus based on quality and cost utilization criteria. An accrual is
made for the estimate of the amount of bonus which will be paid to medical care
providers based upon quality cost utilization criteria.
NYLCare also has risk contracts with provider groups covering certain medical
services. To the extent medical expenses differ from budget, NYLCare and the
providers share any savings or deficit as defined in the contracts.
NOTE 3 - BUSINESS RISKS AND UNCERTAINTIES:
- -----------------------------------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
At December 31, 1996, the Company's investments were comprised of common stock,
bonds, real estate properties and mortgage loans. Significant changes in
prevailing interest rates and geographic conditions may adversely affect the
timing and amount of cash flows on such investments, as well as their related
values. In addition, the value of these investments is often derived from an
appraisal, an estimate or opinion of value. A significant decline in the market
value of these investments could have an adverse affect on the Company's balance
sheet.
During 1993, New York Life received authorization from the New York State
Insurance Department to adopt approximate market value as the carrying value for
its investment in ESI. Accordingly, the Company recorded adjustments of
$99,527,000 and $406,834,000 for the statutory valuation of ESI in excess of its
GAAP net equity at December 31, 1996 and 1995, respectively. These adjustments
are included as a component of stockholder's equity. Based upon the market value
of ESI's common stock at April 11, 1997, the amount of the statutory valuation
of subsidiary in excess of GAAP net equity was approximately $94,036,000. A
significant decline in the value of this stock could have an adverse effect on
the Company's stockholder's equity.
<PAGE>
-7-
As providers of life and health insurance products, the operating results of
certain subsidiaries in any given period depend upon estimates of policy
reserves required to provide for future policyholder benefits. The development
of policy reserves for the products of these companies requires management to
make estimates and assumptions regarding mortality, morbidity, health care
costs, lapses, expenses and investment experience. Such estimates, including
provisions for incurred but not reported claims, are primarily based on
historical experience and, at times, the specific requirements of local
insurance regulators. Actual results could differ from these estimates.
Management monitors actual experience, and, where circumstances warrant, revises
its assumptions and the related estimates of policy reserves and claim
liabilities.
As substantially all of the net assets of Worldwide's subsidiaries are held in
foreign countries, there is a potential for adverse impact on net assets arising
from economic and political changes in these countries.
NOTE 4 - CHANGES IN ACCOUNTING PRINCIPLES
- -----------------------------------------
NYLCARE:
During 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 121 ("SFAS 121"), "Accounting for the
Impairment of Long-lived Assets to be Disposed Of," which is effective for the
fiscal years beginning after December 15, 1995. SFAS 121 establishes accounting
standards for the impairment of long-lived assets, certain identifiable
intangibles and goodwill related to those assets to be held and used and for
long-lived assets and certain identifiable intangibles to be disposed of.
In connection with the adoption of SFAS 121 in 1996, NYLCare determined that
continuing operating losses of certain subsidiaries which perform administrative
services for physician groups, were indicators of potential impairment. The
estimated undiscounted cash flows anticipated from these subsidiaries indicated
that a write-down of the goodwill related to these subsidiaries was required
under SFAS 121. As a result of the above, approximately $28,830,000 of goodwill
and other intangibles was written off in 1996.
SFD HOLDING AND DEPOSITARY:
On December 30, 1996, Westinghouse Electric Corporation ("Westinghouse") (the
servicer of the security alarm contracts) sold its security alarm business to
WestSec Inc. As part of this transaction, NYLIFE Structured Asset Management
Company Ltd. ("SAMCO", a subsidiary of SFD Holding - 83% and Depositary -17%),
Westinghouse, WestSec Inc. and an affiliate of WestSec Inc. entered into a
Consent, Assignment, Assumption, and Modification Agreement ("the Consent
Agreement"). In connection with the Consent Agreement, WestSec has committed to
purchase, and SAMCO has committed to sell, the security alarm contracts ("the
Contracts") securing each series of notes used to finance the acquisition of the
Contracts at fixed dates in the future for a determinable price. In accordance
with SFAS 121, SAMCO has reported such Contracts at the lower of carrying amount
or fair value less cost to sell and has discontinued amortization of the
Contracts effective December 30, 1996.
ESI
CONTRACTUAL AGREEMENTS:
ESI enters into corporate alliances with certain of its clients whereby shares
of ESI's class A common stock are awarded as advance discounts to the client.
Prior to December 15, 1995, the stock is valued utilizing the quoted market
value at the date the agreement is consummated if the number
<PAGE>
-8-
of shares to be issued is known. If the number of shares to be issued is
contingent upon the occurrence of future events, the stock is valued utilizing
the quoted market value at the date the contingency is satisfied and the number
of shares is determinable. The value of the shares of stock awarded as advance
discounts is recorded as a deferred cost and included in other assets. The
deferred cost is recognized in selling, administrative and other expenses over
the period of the contract.
In October 1995, the Financial Accounting Standards Board issued Statement 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"), effective for all stock
issued to non-employees subsequent to December 15, 1995. SFAS 123 requires that
all stock issued to non-employees be accounted for based on the fair value of
the consideration received or the fair value of the equity instruments issued
instead of the intrinsic value method utilized for stock issued or to be issued
under alliances entered into prior to December 15, 1995. ESI has adopted SFAS
123 as it relates to stock issued under alliances consummated subsequent to
December 15, 1995, based on fair value at the date the agreement is consummated.
ACCOUNTING FOR STOCK-BASED COMPENSATION:
ESI accounts for employee stock options in accordance with Accounting Principles
Board No. 25 (APB 25), "Accounting for Stock Issued to Employees." Under APB 25,
ESI applies the intrinsic value method of accounting and, therefore, does not
recognize compensation expense for options granted, because options are only
granted at a price equal to market value at the time of grant. SFAS 123
prescribes the recognition of compensation expense based on the fair value of
options determined on the grant date. However, SFAS 123 grants an exception that
allows companies currently applying APB 25 to continue using that method. ESI
has, therefore, elected to continue applying the intrinsic value method under
APB 25.
NOTE 5 - ACQUISITIONS AND DISPOSITIONS
- --------------------------------------
NYLIFE HEALTHCARE:
During 1996 and 1995, NYLIFE Inc. paid $7,076,000 and $10,800,000, respectively,
to the three original Founders of NYLIFE HealthCare to purchase their remaining
NYLIFE HealthCare shares in accordance with their Termination, Severance and
Stock Buyback Agreements. Subsequent to the purchase of these shares, NYLIFE's
ownership of NYLIFE HealthCare increased to 100%.
During 1995 and 1994, NYLCare completed four acquisitions for cash, as described
below. Each transaction was accounted for as a purchase and accordingly, the
purchase price was allocated to the fair values of assets acquired and
liabilities assumed. The remaining excess of the purchase price over such fair
values was allocated to goodwill. The operating results of each acquisition have
been included in consolidated net income of the Company from the date of
acquisition.
In July 1995, NYLCare acquired the minority shareholder's interest in
Lonestar Holding Company for approximately $4,100,000 in cash. As a
result of the transaction, the Houston HMO became a wholly-owned
subsidiary of NYLCare. Goodwill related to the purchase of
approximately $2,700,000 is being amortized over an estimated useful
life of 10 years.
In November 1994, NYLCare purchased 100% of the outstanding stock of
The Ethix Corporation, which included 13% owned by NYLIFE, for a
purchase price of approximately $32,900,000. The fair values of
assets acquired and liabilities assumed were $25,800,000
<PAGE>
-9-
and $16,200,000, respectively. Goodwill of approximately $23,300,000
related to the purchase is being amortized over an estimated useful
life of 10 years. The acquisition agreement provides for additional
consideration to be paid based on membership increases over the five
year period ending November 1999. No such amounts were incurred
through 1996.
In June 1994, NYLCare acquired certain assets and assumed certain
liabilities of two partnerships which performed administrative
services for a physician group in the New York City metropolitan
area. Cash paid totaled $10,000,000 plus the assumption of an excess
of the fair value of liabilities over assets acquired of $17,200,000.
Goodwill associated with the acquisition of $27,200,000 is being
amortized over an estimated useful life of 10 years.
In May 1994, NYLCare purchased the remaining 12% minority interest in
Avanti Health Systems. The entire purchase price of $10,000,000 was
allocated to goodwill, which was being amortized over an estimated
useful life of 10 years, but was written off in 1996 under SFAS 121.
In April 1996, ESI completed a public offering of 1,150,000 shares of Class A
common stock and received $52,592,000 in net proceeds. NYLIFE HealthCare
recognized a pre-tax gain of $21,633,000, representing the difference between
NYLIFE HealthCare's interest in the net assets of ESI immediately after the
public offering and the historical book value of its investment in ESI. As part
of the same stock offering, NYLIFE HealthCare converted 2,990,000 shares of ESI
Class B Common Stock to Class A Common Stock. Net proceeds from the sale totaled
$138,497,000 and a pre-tax gain of approximately $121,741,000 was recognized. As
a result of these transactions, NYLIFE HealthCare's ownership of ESI decreased
from 70% to 46% and its voting stock from 96% to 90%.
WORLDWIDE HOLDING
UNITED KINGDOM:
On December 22, 1994, New York Life UK Limited ("NYLUK"), a wholly-owned
subsidiary of New York Life Worldwide Holding, Inc., sold 68.75% of the common
stock of its wholly-owned subsidiary, Windsor Life Assurance Company Ltd., to
outside investors. Also during December, 1994, NYLUK and the new stockholders of
Windsor Life exchanged all of their common stock of Windsor Life for common
stock of Life Assurance Holding Corporation Limited ("LAHC"), a new holding
company. NYLUK is party to the Warranty Indemnity Deed (guaranteed by Worldwide)
relating to the sale of the common stock of Windsor Life. Under the terms of
this deed, NYLUK has undertaken to indemnify the outside investors against
liabilities, costs and expenses incurred with regard to specified matters. Any
claims under the deed require NYLUK to subscribe for deferred shares in LAHC at
par value. Management believes that adequate provision has been made for
potential claims that may arise.
The total income, total benefits and expenses and realized gains on investments
of Windsor Life presented in the Consolidated Statement of Operations during
1994 amounted to $212,326,000, $259,151,000 and $58,617,000, respectively.
Dividend income earned by NYLUK on it's investment in LAHC during the year ended
December 31, 1996, amounted to $3,673,000.
<PAGE>
-10-
NYL BENEFIT SERVICES COMPANY, INC.
Effective June 6, 1994, NYLIFE acquired Benefit Services, a provider of
consulting, administrative, actuarial, communications and investment advisory
services for employee benefit plan sponsors, with an initial cash payment of
$8,000,000, plus a series of future cash payments, exercisable from the fifth to
tenth year. The future cash payments are based on the joint assets of New York
Life and its affiliates related to the Company's 401(k) Complete product.
Approximately $6,640,000 of the original purchase price plus $1,800,000 of the
estimated future cash payments has been allocated to goodwill, which is being
amortized over an estimated useful life of 10 years.
MSC HOLDING, INC.
During 1995, the assets of the Health and Investment Divisions were sold to
Meritech, a subsidiary of Summit Technologies and Melson Technologies, an
indirect subsidiary of Aegon Insurance, respectively. Meritech purchased the
Health Division assets for approximately $750,000 which included contracts,
licenses, equipment and various receivables. Melson Technologies purchased the
Investment Division assets for a contingent purchase price of $3,500,000.
$1,000,000 of the purchase price is guaranteed and is expected to be received by
MSC within three years. As of December 31, 1996, $77,000 has been received. The
remaining $2,500,000 is contingent upon the amount of licensing fees the buyers
receive over the next 10 years relating to the SMS Investment System, which is
currently under development. A total gain of approximately $1,695,000 was
recognized on these transactions.
NEW YORK LIFE CAPITAL CORP.
New York Life Capital Corp. was incorporated in Delaware in June 1995. Capital
Corp's activities will primarily consist of issuing commercial paper and
borrowing from other sources for the purpose of making loans to New York Life
and its affiliates. Capital Corp. has not yet commenced operations.
NYLINK INSURANCE AGENCY CORPORATION
NYLINK Insurance Agency Corporation was incorporated in Delaware in November
1996. NYLINK's activities will primarily consist of the facilitation of sales of
non-proprietary insurance products by New York Life registered representatives.
NYLINK has not yet commenced operations.
NYL TRUST COMPANY
NYL Trust was incorporated in New York on February 2, 1995 as a limited purpose
trust company chartered by the New York State Banking Department to act as a
fiduciary for pension, profit sharing and other employee benefit plans. NYL
Trust's responsibilities include acting as a trustee or custodian for 401(k)
plans and Individual Retirement Accounts.
NYL MANAGEMENT LTD.
On June 18, 1996, Quorum Capital Management Ltd. ("Quorum") transferred its
assets and business operations to Westdeutsche LandesBank (West LB) for
approximately $1,125,000. A gain of approximately $969,000 has been recognized
on this transaction. Quorum subsequently changed its name to NYL Management Ltd.
and substantially ceased on-going operations.
AUTO FUNDING II, LP
NAFCO Auto Funding L.P. ("Funding") was organized as a limited partnership in
1993. Depositary was the general partner and SFD Holding was the limited
partner. On August 15, 1996, Funding assigned all of its financial assets and
liabilities to Auto Funding II L.P. ("Funding II"), a limited partnership with
an ownership structure identical to Funding. Subsequent to the assignment of
assets
<PAGE>
-11-
to Funding II, Depositary and SFD Holding sold their interests in Funding to an
unaffiliated third party. Consideration for the sale of Funding included
$200,000 in cash and $2,000,000 of 6% cumulative preferred stock and 10% of the
common stock of NAFCO Holding Company, Inc., a subsidiary of the purchaser. The
cumulative preferred stock is redeemable under various circumstances, but in any
event within 10 years.
NYLIFE EQUITY AND NYLIFE REALTY
In 1995, New York Life, NYLIFE, and certain other affiliated and unaffiliated
entities, entered into a Stipulation of Settlement (the "Settlement Agreement")
of a class action lawsuit related to the sale of units in, and the operation of,
the Company's proprietary limited partnership programs. In connection with the
Settlement Agreement, New York Life announced a plan to dissolve the partnership
programs (the "Plan"), contingent upon the consent of the Limited Partnership
Investors (the "Investors"). In 1995, NYLIFE recorded a provision of
$137,000,000 to reflect the estimated costs of discontinuing the partnership
operations and certain claims in connection therewith, including settlement of
the class action lawsuit. Both the Settlement Agreement and the Plan were
approved during 1996.
Pursuant to the Plan, NYLIFE Equity and NYLIFE Realty, as liquidators, have
commenced the process of winding up the partnership programs. Substantially all
of the property interests of the partnership programs were sold prior to
December 31, 1996. As of December 31, 1996, pursuant to the Settlement
Agreement, NYLIFE has advanced $174,000,000 to the Investors and has paid
$35,397,000 to other unaffiliated entities for costs of the liquidation,
primarily from proceeds from a $200,000,000 line of credit with New York Life.
In exchange for advances received under the Settlement Agreement, each Investor
granted a security interest to NYLIFE (up to the amount of advances) in any
future distributions from liquidation of the partnerships. Through December 31,
1996, the Company has recovered $18,734,000 from liquidating dividends and has a
liquidation advance recoverable of $64,431,000 as of December 31, 1996.
NEW YORK LIFE IRREVOCABLE TRUST
On February 13, 1996, The New York Life Irrevocable Trust of 1996, (the "Trust")
was created to hold the stock of NYLSET. NYLIFE, as Grantor of the Trust,
transferred its 100% ownership of NYLSET to the Trust, making NYLIFE the
beneficiary.
AEGIS TECHNOLOGIES
In December 1995, the Aegis Technologies' Board of Directors approved a plan to
close the business and dissolve Aegis in the event a suitable buyer could not be
found. On March 5, 1996, the decision to dissolve Aegis and its subsidiary,
Personal Financial Assistant Financial Centers was announced.
The assets were liquidated and a loss of $5,420,000 was recognized.
NYLIFE RESOURCES
In December 1993, NYLIFE Resources became a limited partner in the Ancon
Partnership Limited ("Ancon"). The partnership was formed to acquire, explore,
develop, and operate oil and gas properties.
<PAGE>
-12-
In December 1996, NYLIFE Resources, along with New York Life and New York Life
Insurance and Annuity Corporation (a wholly owned subsidiary of New York Life)
entered into a purchase and sale agreement with American Exploration Company,
the general partner. NYLIFE Resources sold its remaining 11.23% in Ancon for
$1,813,000 in cash. The estimated investment value was $2,173,000, resulting in
a loss of $360,000.
NOTE 6 - INVESTMENTS
- --------------------
COMMON STOCK:
The common stock portfolio, which is stated at market value, primarily consists
of securities issued in the United Kingdom which are denominated in British
Pounds Sterling at December 31, 1996 and 1995.
BONDS:
At December 31, 1996, the maturity distribution of bonds was as follows (in
thousands):
<TABLE>
<CAPTION>
Available for Sale Held to Maturity Life Insurance Operations
------------------ ---------------- -------------------------
Amortized Estimated Amortized Estimated Statement Estimated
Cost Fair Value Cost Fair Value Value Fair Value
--------- ---------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Due in one year or less $ 39,797 $ 39,830 $ - $ - $ 716 $ 716
Due in years two through five 85,322 85,670 - - 6,572 6,703
Due in years six through ten 59,969 58,908 - - 17,595 19,107
Due after ten years 13,088 12,399 2,311 2,431 7,528 8,274
--------- --------- --------- --------- --------- ----------
Sub-total 198,176 196,807 2,311 2,431 32,411 34,800
Asset-backed securities 3,658 3,635 - - - -
--------- ---------- --------- --------- -------- ---------
Total $201,834 $200,442 $ 2,311 $ 2,431 $ 32,411 $ 34,800
======== ======== ========= ========= ======== =========
</TABLE>
At December 31, 1996 and 1995, the distribution of unrealized gains and losses
on bonds was as follows (in thousands):
DECEMBER 31, 1996
<TABLE>
<CAPTION>
Amortized Unrealized Unrealized Estimated
Available for sale Cost Gains Losses Fair Value
- ------------------ --------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. Treasury and other
U.S. Governmental Agencies $ 97,430 $ 256 $ 880 $ 96,806
Commercial paper and Corporate notes 99,983 682 1,450 99,215
Other 4,223 - - 4,223
Certificates of deposit 198 - - 198
-------- ------ ------- --------
Total $201,834 $ 938 $ 2,330 $200,442
======== ====== ======= ========
<CAPTION>
Amortized Unrealized Unrealized Estimated
Held to maturity Cost Gains Losses Fair Value
- ---------------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. Treasury and other
U.S. Governmental Agencies $2,311 $ 120 $ - $2,431
====== ======= ============ ======
</TABLE>
<PAGE>
-13-
<TABLE>
<CAPTION>
Statement Unrealized Unrealized Estimated
Insurance Operations: Value Gains Losses Fair Value
- -------------------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Foreign Governments $ 10,782 $ 1,281 $ - $12,063
Corporate 15,520 951 190 16,281
Other 6,109 384 37 6,456
-------- ---------- --------- -------
Total $ 32,411 $ 2,616 $ 227 $34,800
======== ========== ========= =======
<CAPTION>
DECEMBER 31, 1995
Amortized Unrealized Unrealized Estimated
Available for sale Cost Gains Losses Fair Value
- ------------------ --------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. Treasury and other
U.S. Governmental Agencies $318,830 $12,101 $ 224 $ 330,707
Commercial paper and Corporate notes 265,170 16,455 1,039 280,586
Certificates of deposit 337 14 - 351
-------- ------- ------ ---------
Total $584,337 $28,570 $1,263 $611,644\
======== ======= ====== =========
<CAPTION>
Amortized Unrealized Unrealized Estimated
Held to Maturity Cost Gains Losses Fair Value
- ------------------ --------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Commercial paper and Corporate notes $33,763 $3,397 $ - $37,160
======= ====== ========== =======
<CAPTION>
Statement Unrealized Unrealized Estimated
Insurance Operations: Value Gains Losses Fair Value
- ------------------ --------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Foreign Governments $ 12,240 $ 869 $ 4 $ 13,105
Corporate 16,961 1,548 358 18,151
-------- ---------- -------- ---------
Total $ 29,201 $ 2,417 $ 362 $ 31,256
======== ========== ======== =========
</TABLE>
Proceeds from investments in bonds sold, matured, or repaid were $182,786,000,
$624,801,000, and $651,365,000 for 1996, 1995 and 1994, respectively. Realized
gains from investments in bonds sold, matured, or repaid were $705,000,
$10,164,000 and $6,551,000 for 1996, 1995 and 1994, respectively, and realized
losses were $12,000, $3,844,000 and $3,796,000 for 1996, 1995 and 1994
respectively.
Investment in bonds include $65,610,000 and $58,585,000 of restricted securities
on deposit to meet statutory solvency requirements, for 1996 and 1995,
respectively.
<PAGE>
-14-
MORTGAGE LOANS:
At December 31, 1996 and 1995 the geographic diversification of the mortgage
loan portfolio was as follows (in millions):
1996 1995
---- ----
United States:
Pacific $6.8 $33.8
Central - 20.8
Middle Atlantic - 36.6
South Atlantic - 20.2
New England - .5
Mountain - 2.8
Other - 2.3
---- ------
Total $6.8 $117.0
==== ======
Mortgage loans are secured by first liens on all properties. The mortgage loan
portfolio consisted of one loan at December 31, 1996 is summarized below (in
thousands):
Statement
Property Type State Loan Period Interest Rate Value
- ------------- ----- ----------- ------------- ---------
Shopping Center CA 1993 - 1998 8.750% $6,769
The fair value of the mortgage loan portfolio was $6,769,000 and $116,488,000 at
December 31, 1996 and 1995, respectively, estimated based on discounted cash
flow analyses prepared for each loan using interest rates approximating the
current rates for new mortgages with similar remaining maturities. Fair values
do not necessarily represent the values for which these loans could have been
sold at December 31, 1996 or 1995; therefore, care should be exercised in
drawing any conclusions from these fair values.
Write downs related to declines in the appraised value of properties underlying
mortgage loans totaled $0 and $9,335,000 in 1996 and 1995, respectively.
During 1996, Funding foreclosed on two mortgage loans and collected a prepayment
on one mortgage loan. Funding recorded a realized loss of $929,000 as a result
of these transactions.
During 1995, fourteen loans were sold to New York Life (see note 11).
<PAGE>
-15-
REAL ESTATE:
At December 31, 1996 and 1995, real estate included the following properties
which were acquired through foreclosure (in millions):
Carrying Value
Year ----------------
Property Type State Acquired 1996 1995
- ------------- ----- -------- ---- ----
Office MD 1991 $75.8 $ 74.5
Shopping Center FL 1991 3.5 -
Office NY 1992 18.8 17.6
Office TX 1933 - 3.0
Office MI 1994 - 4.0
Office CT 1994 - 5.0
Office NJ 1995 - 2.5
----- -------
Total $98.1 $106.6
----- ===== ======
At December 31, 1996 and 1995, real estate also included $2,300,000 and
$2,100,000 associated with Worldwide operations.
During 1996, Funding foreclosed on two delinquent mortgage loans and transferred
them at their appraisal value to real estate. Funding recorded a realized gain
of $773,000 as a result of these transactions.
In January 1995, a previously acquired apartment property was sold to New York
Life for cash (see Note 11).
MAINSTAY FUNDS:
At December 31, 1996 the total investment in the MainStay Funds includes
investments in individual funds as follows (in thousands):
Fund Cost Fair Value
- ------------------------ ---- -----------
California Tax Free $ 3,867 $ 3,751
Capital Appreciation 56 137
Convertible 81 115
Corporate Bond 539 521
Equity Index 122 234
Institutional Growth 1,124 1,106
International Equity 8,428 8,806
International Bond 8,578 9,353
High Yield Corporate Bond 91 112
Short-Term Bond 15,859 15,130
New York Tax Free 6,232 6,049
Total Return 55 90
Value 1,830 1,859
------- --------
Total 1996 $46,862 $47,263
======= =======
Total 1995 $33,084 $33,762
======= =======
<PAGE>
-16-
SECURITY ALARM CONTRACTS:
At December 31, 1996, the carrying amount of security alarm monitoring contracts
held for sale includes Contracts collateralizing Series A, B and C Notes (see
Note 7) as follows (in thousands):
Series A Series B Series C Total
Carrying amount $9,112 $3,711 $25,632 $38,455
Investment in security alarm monitoring contracts at December 31, 1995 includes
Contracts collateralizing Series A, B and C Notes as follows (in thousands):
<TABLE>
<CAPTION>
Series A Series B Series C Total
-------- -------- -------- -----
<S> <C> <C> <C> <C>
Investment in security alarm monitoring contracts $23,000 $8,665 $44,604 $76,269
Less: Purchase Price Refunds 2,234 890 2,221 5,345
Accumulated Amortization 9,322 3,187 9,990 22,499
------------ ------- --------- --------
Net investment $11,444 $4,588 $32,393 $48,425
============ ====== ======= =======
</TABLE>
Prior to the reclassification of the Contracts as held for sale effective
December 30, 1996, the Contracts were being amortized over an estimated life of
12 years, as adjusted for attrited Contracts. Amortization expense for the
period January 1, 1996 to December 30, 1996 for Series A, B and C Contracts was
$9,924,000. Amortization expense for the years ended 1995 and 1994 was
$10,292,000 and $7,573,000, respectively.
TIME DEPOSITS:
Time deposits, included in cash and cash equivalents, at December 31, 1996 and
1995 amounted to $11,889,000 and $8,155,000, respectively.
OTHER INVESTMENTS:
Other investments include interests in limited partnerships which consist
primarily of an oil refinery and oil and gas producing properties valued at
$32,403,000 and $38,966,000 at December 31, 1996 and 1995, respectively.
As described in Note 5, in connection with the Settlement Agreement, the
Investors approved a plan to dissolve the partnership programs in which NYLIFE
Equity and NYLIFE Realty have interests in. Substantially all of the property
interests of these partnership programs have been sold prior to December 31,
1996. Accordingly, NYLIFE Equity's and NYLIFE Realty's interests in the
partnership programs at December 31, 1996 are comprised principally of cash
received from the sales and other miscellaneous assets and liabilities.
<PAGE>
-17-
NOTE 7 - FIXED ASSETS
- ---------------------
At December 31, 1996 and 1995 fixed assets, at cost, are comprised of the
following (in thousands):
1996 1995
---- ----
Furniture $ 7,825 $ 22,021
Equipment 73,481 41,737
Computer hardware 7,725 30,315
Computer software 7,275 7,646
Leasehold improvements 5,687 19,084
Other 12,613 11,166
-------- --------
114,606 131,969
Less accumulated depreciation and amortization 25,235 59,044
-------- --------
Total $ 89,371 $ 72,925
======== ========
NOTE 8 - POLICY AND CLAIM RESERVES - ACCIDENT AND HEALTH
- --------------------------------------------------------
Activity in the liability for policy and claim reserves for accident and health
insurance for 1996 and 1995 is summarized as follows (in millions):
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Gross balance at January 1 $225 $199
Effect of business combination (Note 1) (225) -
---- ----
Gross balance at January 1, as adjusted - $199
---- ----
Gross incurred related to:
Current year 459 465
Prior years - 6
Initial transfer for reserves under the modco reinsurance
agreement 478 -
----- ----
Total gross incurred 937 471
----- ----
Gross paid related to:
Current year 331 342
Prior years - 103
Retransfer of reserves under the modco reinsurance
agreement 478 -
----- ----
Total gross paid 809 445
----- ----
Gross balance at December 31 $ 128 $225
===== ====
</TABLE>
On January 1, 1996, in accordance with the terms of the initial settlement of
the modified coinsurance agreement, New York Life transferred $478,149,000 to
NYLHIC representing reserves and an equal amount of premiums on existing
business. NYLHIC immediately retransferred the reserves back to New York Life.
As a result of the above transactions, NYLHIC recorded premiums assumed and an
increase in policy reserves on the initial settlement of $478,149,000 in the
statement of operations.
<PAGE>
-18-
The modified coinsurance reserve retained by New York Life related to the
reinsured group life and health indemnity business is $498,255,000 at December
31, 1996.
NOTE 9 - NOTES PAYABLE
- ----------------------
Notes payable, generally carried at the unpaid principal balance, consisted of
the following at December 31, 1996 and 1995 (in thousands):
<TABLE>
<CAPTION>
1996 1995
---------- -------
<S> <C> <C>
Worldwide-Loan from Windsor Life $ 6,103 $ 6,434
Series A and B, Floating Rate Secured Five Year Notes 17,146 20,628
Series C 9% Fixed Rate Secured Five Year Notes 26,596 32,218
Loans payable to New York Life 113,220 59,842
Bank borrowings and revolving line of credit with financial institutions 14,222 15,732
Other (including current portion) 5,909 6,227
-------- --------
$183,196 $141,081
======== ========
</TABLE>
The carrying value of notes payable approximates fair value.
The $17,146,000 of Series A and B Floating Rate Secured Five Year Notes are
collateralized by security alarm monitoring contracts, and pay interest
quarterly at a per annum floating rate based on the minimum denomination
five-year certificate of deposit average rate as reported by Bank Rate Monitor.
Principal is paid down on a quarterly basis. At December 31, 1996, the rate on
these Notes was 9%. In addition, $1,720,000 of these notes are payable during
1997.
The $26,596,000 of Series C 9% Fixed Rate Secured Five Year Notes are
collateralized by security alarm monitoring contracts, and pay interest
quarterly at the fixed rate. Principal is paid down on a quarterly basis. In
addition, $2,250,000 of these notes are payable during 1997.
In January 1995, NYLIFE entered into a credit agreement, expiring January 1,
1997, with New York Life whereby NYLIFE can borrow up to an aggregate principal
amount of $200,000,000 at any one time. This agreement and any loans made shall
be automatically extended and renewed for additional one year periods, unless
either NYLIFE or New York Life notifies the other of its desire to terminate the
agreement. At December 31, 1996 the total principal borrowed under this
agreement was $91,131,000. Interest expense amounted to $2,598,000.
On November 1, 1993, SFD Holding entered into a loan agreement with New York
Life. The agreement allows SFD Holding to borrow money pursuant to one or more
master notes (individually, a "Master Note", collectively, "Master Notes") each
of which will not exceed one year in maturity and for amounts, in aggregate, not
to exceed $35,000,000 at any one time. Interest on any Master Note borrowings
accrues at the rate which is the annual simple interest equivalent (computed on
the actual daily principal balance based on a 360 day year of 12 30-day months)
of 225 basis points above the one month LIBOR published in the Wall Street
Journal on the 15th day of the proceeding calendar month (or if such day is not
a day on which such newspaper is published, the next succeeding day of such
publication). In 1995, the loan agreement between SFD Holding and New York Life
was amended to accommodate the acquisition of prime auto loans. The amendment
provides for the following: (i) an increase in the maximum borrowings to
$70,000,000, (ii) an interest rate of 200 basis points above the one month LIBOR
for borrowings related to prime auto
<PAGE>
-19-
loan acquisitions, and (iii) a change in the monthly interest payment date to
the 20th of each month. During 1996 and 1995, SFD Holding made interest payments
totaling $2,805,000 and $2,636,000, respectively, to New York Life pursuant to
the Master Notes. At December 31, 1996 and 1995, the amounts outstanding under
the Master Notes are $22,089,000 and $32,484,000, respectively. Accrued interest
at December 31, 1996 and 1995 is $145,000 and $278,000, respectively.
On December 11, 1992, SFD Holding entered into a revolving credit agreement (the
"Credit Agreement") with Barclays Bank PLC ("Barclays"). The Credit Agreement
allows SFD Holding to borrow an aggregate principal amount not to exceed
$15,000,000 at any one time. Interest on any borrowing accrues at a rate equal
to either (i) the rate of interest per annum declared by Barclays as its prime
rate in effect at its branch in New York City or (ii) LIBOR plus 1%. During 1996
and 1995, SFD Holding recorded interest expense of approximately $980,000 and
$138,000, respectively, to Barclays pursuant to the Credit Agreement. At
December 31, 1996, borrowings under the credit agreement are $13,700,000. At
December 31, 1995, borrowings under the credit agreement were $15,000,000. All
borrowings under the credit agreement are guaranteed by NYLIFE.
Along with New York Life, Capital Corp. is party to a credit agreement with a
consortium of banks. The credit agreement consists of a $150,000,000, 364 day
revolving credit facility ("Facility A"), and a $350,000,000, 5 year revolving
credit facility ("Facility B"). Annual facility fees are .04% and .06%, for
Facility A and B, respectively, and borrowing rates are capped at spreads of
.16% and .14% over LIBOR, respectively. In addition, the credit agreement
contains various covenants pertaining to allowable activities of Capital Corp.
Neither Capital Corp. nor New York Life have utilized the credit facility to
date.
ESI maintains two $25,000,000 unsecured lines of credit with two separate
financial institutions. One agreement will expire on May 29, 1997 and the other
on October 30, 1997. Terms of both lines are essentially the same and are as
follows: interest is charged on the principal amount outstanding at a rate equal
to any of the following options which ESI, at its option shall select: (i) the
bank's "prime rate", (ii) a floating rate equal to the Bank's cost of funds rate
plus 50 basis points, or (iii) a fixed rate for periods of 30, 60, 90 or 180
days equal to the LIBOR rate plus 50 basis points. Fees under these agreements
on any unused portion are charged at ten hundredths of one percent per year. At
December 31, 1996 and 1995, ESI had no outstanding borrowings under these
agreements, nor did it borrow any amounts under these agreements during 1996.
NYLCare had a loan agreement with New York Life under which NYLCare borrowed
amounts as mutually agreed. Under the provisions of this agreement, interest was
payable at the end of each calendar quarter at a rate of 1% over the prime rate
as announced by a specified New York money center bank. The applicable interest
rates during 1995 ranged from 9.5% to 10.0% and 1994 ranged from 7.0% to 9.5%.
NYLCare borrowed $4,000,000 during 1995 and $57,889,000 during 1994, primarily
to finance acquisitions. Effective December 31, 1995 the loan balance, along
with accrued interest, in the total amount of $82,898,000 was contributed to
NYLCare as additional paid-in-capital and the loan agreement, which was to
mature on October 1, 1997, was terminated. Interest expense on such borrowings
during 1995 was $7,854,000.
On May 15, 1995, NYLIFE Funding repaid the principal and remaining interest on
9.25% Guaranteed Notes which totaled $300,000,000 and $9,250,000, respectively.
<PAGE>
-20-
NOTE 10 - REINSURANCE
- ---------------------
MODIFIED COINSURANCE:
As described in Note 1, in 1996, NYLHIC entered into a modified coinsurance
reinsurance agreement with New York Life, whereby 90% of New York Life's group
life and health indemnity insurance business was reinsured with NYLHIC. In 1996,
NYLHIC assumed $613,632,000 in premiums under this agreement. In addition, in
1996 NYLHIC recorded a commission and expense allowance of $142,725,000, a modco
reserve adjustment of $13,135,000, and benefit payments of $507,055,000 under
this agreement. Settlement on the net amount due is made 90 days after the end
of each quarter. At December 31, 1996, premiums receivable were $191,922,000,
claims payable were $143,096,000, commission and expense allowances payable were
$34,191,000, dividends payable were $27,777,000 and payable on reinsurance
assumed was $26,507,000.
OTHER REINSURANCE:
Certain subsidiaries enter into reinsurance agreements in the normal course of
their insurance business. Reinsurance on certain individual lives is ceded to
reduce the risk on any one life. These subsidiaries remain liable for the
reinsurance ceded, if the reinsurer fails to meet its obligations. Premiums
ceded by these subsidiaries for the years ended December 31, 1996, 1995 and 1994
in connection with reinsurance agreements totaled $29,434,000, $3,201,000 and
$75,971,000, respectively. Policy reserves are recorded net of reinsurance
receivables of $7,709,000 and $649,000 at December 31, 1996 and 1995,
respectively.
NOTE 11 - RELATED PARTY TRANSACTIONS
- ------------------------------------
NYLIFE and several of its subsidiaries are party to a service agreement with New
York Life, whereby New York Life provides services to NYLIFE and such
subsidiaries, including office space, legal, accounting, administrative,
personnel and other services for which NYLIFE and its subsidiaries are billed.
NYLIFE and its subsidiaries are charged for these services based upon (a) actual
costs incurred, where they are separately identifiable and (b) allocation of
costs incurred by New York Life developed through analyses of time spent on
matters relating to NYLIFE and its subsidiaries.
Investment management fees of $40,864,000, $35,089,000, and $32,684,000 were
received from New York Life and certain of its affiliates during the years ended
December 31, 1996, 1995 and 1994, respectively.
Certain subsidiaries earned premiums and fees related to health care services
provided to New York Life of $14,447,000, $14,301,000 and $14,137,000 in 1996,
1995 and 1994, respectively.
During 1995, one of NYLCare's HMO subsidiaries paid hospital service claims of
approximately $7,000,000, respectively, to its minority shareholders.
NYLACOR has eight offices which market the New York Life long-term care product.
Beginning in 1995, all the expenses incurred by New York Life sales agents to
market the New York Life long-term care product are paid by NYLACOR and
reimbursed by New York Life. These expenses and the associated reimbursements
totaled $5,859,000 and $3,266,000, respectively, for the year ended December 31,
1996 and 1995.
<PAGE>
-21-
At December 31, 1996 and 1995, New York Life owned approximately 3.5% and 8.7%,
respectively, of the outstanding common stock of American Exploration Company
("American"), the parent of NYLIFE Equity's co-general partner (American
Exploration Production Company) and had invested approximately $18,954,000 in
partnerships it managed in 1995. During 1996, such investments were sold to
American. In addition, New York Life provided a $40,000,000 bridge facility for
American through February 1995 to finance the consolidation of its institutional
oil and gas limited partnerships.
As distributor, NYLIFE Distributors has entered into agreements with the
MainStay Funds, pursuant to Rule 12b-1 under the Investment Act of 1940, to
compensate it for the distribution expenses it incurs. Although the plans are
required to be approved annually by the Trustees of the board of NYLIFE
Distributors, the management of NYLIFE Distributors believes that such annual
approval will continue indefinitely. Distribution fee income for 1996 was
$36,826,000. At December 31, 1996 and 1995 receivables from the MainStay Funds
approximated $8,539,000 and $6,493,000, respectively for distribution, services
and administration fees.
NYLIFE Securities earned commission revenue of approximately $61,438,000,
$29,910,000 and $16,855,000 on transactions with affiliates during 1996, 1995
and 1994, respectively.
At December 31, 1995, Greystone had an intercompany payable to New York Life of
$3,387,000 which requires minimum annual installments of $250,000 until the
balance of the account is liquidated. Greystone paid installments of $750,000
and $1,279,000 in 1996 and 1995, respectively.
Such liability is non-interest bearing.
During 1995, NYLIFE Funding sold fourteen mortgage loans and one foreclosed
property with a total statement value of $119,314,000 to New York Life and
received a capital infusion of $115,000,000 from New York Life through NYLIFE.
The cash received in these two transactions was used to repay the principal and
interest obligations on the 9.25% Guaranteed Notes.
<PAGE>
-22-
NOTE 12 - FOREIGN OPERATIONS
- ----------------------------
NYLIFE subsidiaries conduct insurance and investment management operations in
the United Kingdom, Argentina, Bermuda, Hong Kong, Japan, Korea, Indonesia and
Mexico. The assets, liabilities, and net income of these foreign operations at
December 31, 1996 and 1995 and for the years then ended are as follows (in
thousands):
CONSOLIDATED SUBSIDIARIES:
1996 1995
---- ----
Assets $128,526 $90,614
Liabilities 98,180 70,326
Revenue 43,760 29,854
Net Loss (20,735) (14,384)
NON-CONSOLIDATED SUBSIDIARIES
1996 1995
---- ----
Assets $3,961,499 $3,261,163
Liabilities 3,807,416 3,178,398
Revenue 330,529 352,057
Net Income 25,852 3,231
The cumulative translation adjustment for 1996 is $3,850,000.
NOTE 13 - INCOME TAXES
- ----------------------
NYLIFE and its subsidiaries are members of an affiliated group which joins in
the filing of a consolidated federal income tax return with New York Life. The
consolidated income tax provision or benefit is allocated among the members of
the group in accordance with a tax allocation agreement. The tax allocation
agreement provides that each member of the group is allocated its share of the
consolidated tax provision or benefit determined generally on a separate return
basis, but may, where applicable, recognize the tax benefits of net operating
losses or capital losses utilizable in the consolidated group. Estimated
payments for taxes are made between the members of the consolidated group during
the year. State, local, and foreign tax returns are filed separately. The income
tax receivable included $14,481,000 and $5,141,000 due from New York Life as of
December 31, 1996 and 1995, respectively pursuant to the tax allocation
agreement.
<PAGE>
-23-
The components of income tax expense (benefit) for each year are as follows:
1996 1995 1994
------ ------ ------
(in thousands)
Current
Federal $ (20,135) $ 9,119 $12,275
State 8,973 8,771 8,366
Foreign 190 (363) 2,570
------- -------- -------
Total Current (10,972) 17,527 23,211
------- -------- -------
Deferred
Federal 86,686 (41,370) 3,040
State 611 (598) (3,816)
------- ------- -------
Total Deferred 87,297 (41,968) (776)
------- ------- -------
Total $76,325 $(24,441) $22,435
======= ======== =======
Total income tax expense (benefit) is different from the amount computed using
the statutory federal tax rate of 35% in 1996, 1995 and 1994 for the following
reasons:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Income tax expense (benefit) at statutory rate $54,371 $ (40,522) $26,284
Tax exempt investment income and capital gains (216) (231) (136)
State and local taxes, net of federal income tax benefit 6,256 5,288 2,952
Amortization of goodwill 6,155 6,219 913
Net foreign taxes 183 (1,904) (2,642)
Equity in non-consolidated affiliates 6,447 4,518 (6,100)
Non-deductible losses with respect to foreign operations 349 1,378 -
Undistributed earnings of subsidiaries 1,237 896 634
Issuance of additional shares by public subsidiary 2,689 - -
Provision to return reconciliation 217 (1,126) (23)
Other (1,363) 1,043 553
------- --------- -------
Total income tax expense (benefit) $76,325 $ (24,441) $22,435
======= ======== =======
</TABLE>
<PAGE>
-24-
The net deferred tax asset (liability) as of December 31, 1996 and 1995,
respectively is attributable to the following temporary differences (in
thousands):
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Deferred tax asset:
Non-deductible reserves $ 14,389 $ 71,022
Net operating losses 4,448 6,244
Deferred compensation 13,417 17,267
Impairments 2,133 5,787
Investments in affiliates and partnerships 652 735
Leasehold improvements 2,607 1,935
Deferred rent 2,365 2,943
Depreciation 912 1,046
Unrealized investment losses 764 -
Employee benefits 4,867 -
Deferred tax on sale of shares of subsidiary stock 2,614 -
Other 2,212 1,519
-------- ---------
Gross deferred tax asset 51,380 108,498
Deferred tax liability:
Deferred distribution costs (78,663) (60,919)
Unrealized appreciation of subsidiary (11,456) (1,713)
Investments in affiliates and partnerships (5,204) (6,736)
Depreciation (1,729) (1,363)
Unrealized net appreciation (9,102) (7,780)
Software development costs - (322)
Unrealized investment gains - (8,832)
Forgiveness of subsidiary loan (4,340) -
Other (492) (615)
--------- --------
Gross deferred tax (liability) (110,986) (88,280)
Valuation allowance (4,445) (6,236)
--------- --------
Net deferred tax (liability) asset $ (64,051) $ 13,982
========= ========
</TABLE>
The December 31, 1995 valuation allowance principally relates to foreign net
operating losses, the utilization of which is subject to limitations in the
United Kingdom, and net operating loss limitations.
NOTE 14 - COMMITMENTS AND CONTINGENCIES
- ---------------------------------------
LEASES:
The subsidiaries lease office space, a telephone system, and certain computer
and office equipment under agreements with various expiration dates. The leases
contain provisions for payment of real estate taxes, building maintenance,
electricity, and other escalations.
<PAGE>
-25-
Future minimum lease payments under capital and noncancelable operating leases
with original or remaining lease terms in excess of one year at December 31,
1996, are as follows (in thousands):
<TABLE>
<CAPTION>
Capital Leases Operating Leases
-------------- ----------------
<S> <C>
1997 $ 816 $ 27,959
1998 1,127 26,856
1999 1,206 25,817
2000 1,290 23,358
2001 1,380 19,880
2002 & thereafter 1,100 71,182
--------- --------
Total 6,919 195,052
--------- --------
Less future sublease rental receipts - 3,293
--------- --------
Present value of future minimum lease payments 6,919 191,759
--------- --------
Less amount due in one year 816 -
--------- --------
Total $ 6,103 $191,759
========= ========
</TABLE>
Assets recorded under capital leases and the related accumulated depreciation
are listed below. Amortization of these assets is included in depreciation and
amortization expense (in thousands):
December 31,
------------------------------
1996 1995
---- ----
Assets recorded under leases $12,286 $12,871
Accumulated depreciation (1,910) (2,794)
-------- --------
Total $10,376 $10,077
======= =======
Rent expense for the years ended December 31, 1996, 1995 and 1994 was
approximately $34,943,000, $32,848,000 and $28,315,000, respectively.
Windsor Construction Company Limited, a wholly owned subsidiary of NYLUK,
entered into two contracts with Balfour Beatty Limited on January 11, 1994, for
the construction of phases II and III of NYLUK's head office development in the
United Kingdom amounting to $3,945,000 for Phase II and $4,190,000 for Phase
III. The contract for Phase II must begin by January 8, 1997, and the contract
for Phase III must begin by December 31, 1999.
New York Life has a guarantee, dated December 19, 1995, on behalf of NYLCare for
the rents due by NYLCare to its landlord, Olympia & York OLP Company. New York
Life will only be responsible upon the occurrences of certain events. The total
remaining amount of rental payments for the five year lease is $20,000,000.
<PAGE>
-26-
INTEGRATION COSTS:
During 1995, NYLCare recorded a pretax charge of $10,000,000 relating to
expenses incurred for the integration of NYLCare operations and certain of New
York Life's group operations. Such costs related primarily to consulting, public
relations and relocation charges. A remaining liability of $5,000,000 is
included in accounts payable and accrued expenses as of December 31, 1995 and
the related charge was included in selling, administrative and other costs for
1995.
OTHER:
During 1990, NYLIFE entered into an agreement to provide a guarantee for the
benefit of the shareholders of the MainStay Equity Index Fund. The guarantee
provides that if, after ten years from date of purchase, the net asset value,
with all dividend and capital gains distributions reinvested, is less than the
original offering price, NYLIFE will reimburse the shareholders for their loss
of principal and restore the net asset value to the original offering price,
including the return of any front-end sales charge. If shares are redeemed prior
to or after the one day guarantee date, the investor loses the benefit of the
guarantee with respect to those shares.
New York Life and NYLIFE have an indemnification agreement dated September 29,
1995, on behalf of MacKay-Shields. Under this agreement, New York Life and
NYLIFE have agreed to indemnify a client of MacKay-Shields for any actions,
omissions, or liabilities that MacKay-Shields is unable to satisfy under an
investment management agreement, pursuant to which MacKay-Shields acts as an
investment manager for $431,000,000 of the clients assets.
The Company and its subsidiaries are also defendants in other individual and
alleged class actions arising from its operations. Most of these actions seek
substantial or unspecified compensatory and punitive damages. The Company is
also from time to time involved as a party in various governmental,
administrative and investigative proceedings and inquiries. Given the uncertain
nature of litigation and regulatory inquiries, the outcome of the above and
other actions pending against the Company cannot be predicted. The Company
nevertheless believes that the ultimate outcome of all pending litigation should
not have a material adverse effect on the Company's financial position; however,
it is possible that settlements or adverse determinations in one or more actions
or other proceedings in the future could have a material adverse effect on the
Company's operating results for a given year.
Additionally, certain subsidiaries are subject to minimum net worth restrictions
pursuant to regulatory requirements and the terms of limited partnership and
debt agreements. At December 31, 1996 and 1995, the net worth of these
subsidiaries exceeded the related requirements.
For the year ended December 31, 1996, approximately 79% of ESI's pharmaceutical
purchases were through one wholesaler. ESI believes that other alternative
sources are readily available.
<PAGE>
-27-
NOTE 15 - EMPLOYEE BENEFIT PLANS
- --------------------------------
LONG TERM PERFORMANCE PLAN:
MacKay-Shields adopted Long-Term Performance Plans ("the Plans") in 1988 and
1995. These Plans grant awards calculated based upon the attainment of specific
goals as set forth in each plan.
Payments under the 1988 plan commenced in 1996 and extend through 2000. In
accordance with the provisions of the 1988 Plan, participants are also entitled
to income on the unpaid amount of their award. For certain individuals, a
portion of this amount may be adjusted based upon the investment performance of
certain registered investment companies managed by MacKay-Shields. In 1996
MacKay-Shields recorded dividend and interest income in the amount of $1,678,000
on the cash and investments segregated to fund the Plan obligation.
Awards under the 1995 Plan are based on cumulative growth during the 1995 to
1997 time period, and are payable commencing in 1999 and extending through 2001.
An accrual was recorded as a liability based on asset growth through December
31, 1996.
The Plan is long-term in nature and requires participants to enter into
multi-year employment contracts.
OTHER:
Certain subsidiaries sponsor defined contribution retirement, 401(k) and profit
sharing plans for employees. Contributions to these plans during 1996, 1995 and
1994 totalled $9,011,000, $1,794,000 and $548,000, respectively.
NOTE 16 - SUPPLEMENTAL CASH FLOW INFORMATION
- --------------------------------------------
SUPPLEMENTAL NON-CASH ACTIVITY:
The terms of the modified coinsurance agreement between NYLHIC and New York Life
(see Note 1) effective January 1, 1996, specify that NYLHIC assumes the risk for
group life and health policies issued by New York Life; however, New York Life
retains the claim and policy reserves as well as the related assets. As such,
the assets and liabilities of New York Life's group life and health operations
included in the Company's restated consolidated statement of financial position
at December 31, 1995 are not reflected in the Company's December 31, 1996
accounts. The change in the related assets and liabilities between 1995 and 1996
had no impact on the Company's 1996 cash flows other than a reduction in
reported cash balances of $50,140,000 reflected as other financing activities.
New York Life made net non-cash capital contributions of $21,798,000 and
$82,898,000, respectively, during 1996 and 1995.
OTHER:
Net cash paid for income tax expense was $50,245,000, $16,234,000 and
$26,752,000 during 1996, 1995 and 1994, respectively.
<PAGE>
-28-
Interest paid during 1996, 1995 and 1994 was $15,075,000, $18,931,000 and
$43,675,000, respectively.
NYLUK sold 68.75% of the common stock of Windsor Life, effective December 22,
1994, for $77,596,000. The statement value of the cash and cash equivalents of
Windsor Life at the date of sale was $43,022,000.
NOTE 17 - SUBSEQUENT EVENTS
- ---------------------------
On February 15, 1997 SAMCO distributed $2,886,000 to the Series A, B and C note
holders, which included interest, quarterly principal repayment and additional
principal repayment.
On February 20, 1997, SFD Holding borrowed $12,833,000 under the Master Note
Agreement with New York Life. Those funds were used to repay all amounts then
outstanding under the Credit Agreement with Barclays Bank PLC. Concurrent with
the repayment, the Credit Agreement was terminated.
On March 4, 1997, MainStay Shareholder Services Inc. ("MSS") was created to
assume certain shareholder servicing functions currently handled by NYLIFE
Distributors. MSS was funded with a $2,000,000 cash contribution and $973,000 of
furniture and equipment. Operations have not yet commenced.
As of April 11, 1997, NYLIFE has received $29,000,000 of cash contributions from
New York Life.
<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:
(1) Capital Appreciation Fund, Convertible Fund, Government Fund, High
Yield Corporate Bond Fund, Money Market Fund, Tax Free Fund, Total
Return Fund, Value Fund:
Financial Highlights for the years ended August 31, 1987, August 31,
1988, August 31, 1989, August 31, 1990, August 31, 1991, August 31,
1992, August 31, 1993 and August 31, 1994; the period September 1,
1994 through December 31, 1994; the years ended December 31, 1995 and
December 31, 1996; and the six months ended June 30, 1997 (unaudited).
(2) Equity Index Fund:
Financial Highlights for the period December 2, 1990 (commencement of
operations) to August 31, 1991; the fiscal years ended August 31,
1992, August 31, 1993 and August 31, 1994; the period September 1,
1994 through December 31, 1994; the years ended December 31, 1995 to
December 31, 1996; and the six months ended June 30, 1997 (unaudited).
(3) California Tax Free Fund and New York Tax Free Fund:
Financial Highlights for the period October 1, 1991 (commencement of
operations) through August 31, 1992; the years ended August 31, 1993
and August 31, 1994; the period September 1, 1994 through December 31,
1994; the years ended December 31, 1995 and December 31, 1996; and the
six months ended June 30, 1997 (unaudited).
(4) International Equity Fund and International Bond Fund:
Financial Highlights for the period September 13, 1994 (commencement
of operations) through December 31, 1994; the years ended December 31,
1995 and December 31, 1996; and the six months ended June 30, 1997
(unaudited).
<PAGE>
(5) Strategic Income Fund:
Financial Highlights for the period February 28, 1997 (commencement of
operations) through June 30, 1997 (unaudited).
Included in Part B of this Registration Statement:
Financial statements for NYLIFE Inc. as of December 31, 1996.
Incorporated by reference in Part B of this Registration Statement:
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 Fund, Total Return Fund, Value Fund:
Statement of Assets and Liabilities as of December 31, 1996 and as of
June 30, 1997 (unaudited);
Statement of Operations for the year ended December 31, 1996 and six
months ended June 30, 1997 (unaudited);
Statement of Changes in net Assets for the years ended December 31,
1995 and December 31, 1996 and six months ended June 30, 1997
(unaudited);
Notes to Financial Statements;
Portfolio of Investments at December 31, 1996 and at June 30, 1997
(unaudited).
Strategic Income Fund:
Statement of Assets and Liabilities as of June 30, 1997 (unaudited);
Statement of Operations for the period February 28, 1997 (commencement
of operations) through June 30, 1997 (unaudited);
Statement of Changes in Net Assets for the period ended June 30, 1997
(unaudited);
Notes to Financial Statements;
C-2
<PAGE>
Portfolio of Investments at June 30, 1997 (unaudited); and
Statements, schedules and historical information other than those
listed above have been omitted since they are either not applicable or
are not required.
b. Exhibits:
1. (a) Amended and Restated Declaration of Trust dated August 30,
1991 -- Previously filed as Exhibit 1(a) to Post-Effective
Amendment No. 13*
(b) Fifth Amended and Restated Establishment and Designation of
Series of Shares of Beneficial Interest, Par Value $.01 Per Share
dated October 26, 1992 -- Previously filed as Exhibit 1(b) to
Post-Effective Amendment No. 16*
(c) Establishment and Designation of Additional Series of Shares of
Beneficial Interest, Par Value $.01 Per Share -- Previously filed
as Exhibit 1(b) to Post-Effective Amendment No. 11*
(d) Form of Establishment and Designation of Additional Series of
Shares of Beneficial Interest, Par Value $.01 Per Share --
Previously filed as Exhibit 1(b) to Post-Effective Amendment No.
23*
(e) Form of Declaration of Trust as Amended and Restated December 31,
1994 -- Previously filed as Exhibit 1(e) to Post-Effective
Amendment No. 27*
(f) Form of Establishment and Designation of Additional Series of
Shares of Beneficial Interest, Par Value $.01 Per Share --
Previously filed as Exhibit 1(e) to Post-Effective Amendment No.
28*
(g) Form of Establishment and Designation of an Additional Series of
Shares of Beneficial Interest, Par Value $.01 Per Share --
Previously filed as Exhibit 1(g) to Post-Effective Amendment No.
35*
(h) Establishment and Designation of an Additional Series of Shares
of Beneficial Interest, Par Value $.01 Per Share -- Previously
filed as Exhibit 1(h) to Post-Effective Amendment No. 38*
____________________
* Previously filed as part of this Registration Statement and incorporated
herein by reference.
C-3
<PAGE>
2. (a) Amended and Restated By-laws dated August 30, 1991-- Previously
filed as Exhibit 2 to Post-Effective Amendment No. 13*
(b) Amended and Restated By-Laws dated December 31, 1994 --
Previously filed as Exhibit 2(b) to Post-Effective Amendment No.
32*
3. Inapplicable
4. Specimen Share Certificate -- Previously filed as Exhibit 4 to
Pre-Effective Amendment No. 2*
5. (a)(1) Revised Form of Investment Advisory Agreement --
Capital Appreciation Fund -- Previously filed as Exhibit
5(a)(1) to Pre-Effective Amendment No. 2*
(2) Revised Form of Investment Advisory Agreement -- Value Fund
-- Previously filed as Exhibit 5(a)(2) to Pre-Effective
Amendment No. 2*
(3) Revised Form of Investment Advisory Agreement -- Convertible
Fund -- Previously filed as Exhibit 5(a)(3) to Pre-Effective
Amendment No. 2*
(4) Revised Form of Investment Advisory Agreement -- High Yield
Corporate Bond Fund --Previously filed as Exhibit 5(a)(4) to
Pre-Effective Amendment No. 2*
(5) Revised Form of Investment Advisory Agreement -- Government
Fund -- Previously filed as Exhibit 5(a)(5) to Pre-Effective
Amendment No. 2*
(6) Revised Form of Investment Advisory Agreement -- Money
Market Fund -- Previously filed as Exhibit 5(a)(6) to Pre-
Effective Amendment No. 2*
(7) Form of Investment Advisory Agreement -- Tax Free Bond Fund
-- Previously filed as Exhibit 5(a)(7) to Post-Effective
Amendment No. 2*
(8) Revised Form of Investment Advisory Agreement -- Total
Return Fund -- Previously filed as Exhibit 5(a)(9) to Post-
Effective Amendment No. 4*
(9) Form of Investment Advisory Agreement --Equity Index Fund --
Previously filed as Exhibit 5(a) to Post-Effective Amendment
No. 7*
____________________
* Previously filed as part of this Registration Statement and incorporated
herein by reference.
C-4
<PAGE>
(10) Form of Investment Advisory Agreement --California Tax Free
Fund and New York Tax Free Fund -- Previously filed as
Exhibit 5(a) to Post-Effective Amendment No. 11*
(11) Form of Investment Advisory Agreement --International Equity
Fund and International Bond Fund -- Previously filed as
Exhibit 5 to Post-Effective Amendment No. 23*
(12) Form of Investment Advisory Agreement--Strategic Income Fund
-- Previously filed as Exhibit 5(a)(12) to Post-Effective
Amendment No. 35*
(13) Form of Management Agreement -- Strategic Value Fund --
Previously filed as Exhibit 5(a)(13) to Post Effective
Amendment No. 38*
(14) Form of Composite Management Agreement
(b)(1) Form of Sub-Advisory Agreement -- Strategic Value Fund --
Previously filed as Exhibit 5(b)(1) to Post-Effective
Amendment No. 38*
(b)(2) Form of Composite Sub-Advisory Agreement -- Previously
filed as Exhibit 5(b)(2) to Post-Effective Amendment
No. 42*
6.(a)(1) Form of Distribution Agreement -- Previously filed as Exhibit
6(a) to Post-Effective Amendment No. 22*
(b) Form of Soliciting Dealer Agreement -- Previously filed as
Exhibit 6(b) to Pre-Effective Amendment No. 1*
7. Inapplicable
8.(a) Custodian Contract with State Street Bank and Trust Company --
Previously filed as Exhibit 8(a) to Pre-Effective Amendment No.
1*
(b) Fee schedule for Exhibit 8(a) -- Previously filed as Exhibit 8(b)
to Pre-Effective Amendment No. 2*
(c) Custodian Contract with The Bank of New York --Previously filed
as Exhibit 8(a) to Post-Effective Amendment No. 7*
9.(a)(1) Form of Transfer Agency Agreement -- Previously filed as Exhibit
9(a)(1) to Post-Effective Amendment No. 37*
____________________
* Previously filed as part of this Registration Statement and incorporated
herein by reference.
C-5
<PAGE>
(2) Form of Subtransfer Agency Agreement -- Previously filed as
Exhibit 9(a)(2) to Post-Effective Amendment No. 37*
(b)(1) Form of Administration Agreement -- Equity Index Fund --
Previously filed as Exhibit 9(b) to Post Effective Amendment No.
20*
(2) Form of Administration Agreement -- California Tax Free Fund and
New York Tax Free Fund -- Previously filed as Exhibit 9(b) to
Post-Effective Amendment No. 21*
(3) Form of Composite Administration Agreement --Capital Appreciation
Fund, Value Fund, Convertible Fund, Total Return Fund, High Yield
Corporate Bond Fund, Government Fund and Tax Free Bond Fund --
Previously filed as Exhibit 9(b) to Post-Effective Amendment No.
22*
(4) Form of Administration Agreement -- International Equity Fund and
International Bond Fund --Previously filed as Exhibit 9(b) to
Post-Effective Amendment No. 23*
(5) Form of Administration Agreement -- Strategic Income Fund --
Previously filed as Exhibit 9(b)(5) to Post-Effective Amendment
No. 35*
(c) Form of Fund Accounting Service Agreement --Previously filed as
Exhibit 9(11) to Post-Effective Amendment No. 6*
(d) Form of Guaranty Agreement -- Equity Index Fund --Previously
filed as Exhibit 9(c) to Post-Effective Amendment No. 7*
(e) Form of Services Agreement between The MainStay Funds and NYLIFE
Distributors Inc. -- Previously filed as Exhibit 9(b) to Post-
Effective Amendment No. 25*
(f) Form of Service Agreement -- Previously filed as Exhibit 9(g) to
Post-Effective Amendment No. 33*
(g) Form of Service Agreement with New York Life Benefit Services,
Inc. -- Previously filed as Exhibit 9(g) to Post-Effective
Amendment No. 37*
10. Opinion and consent of counsel**
11.(a) Consent of independent accountants
(b) Power of Attorney
____________________
* 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.
C-6
<PAGE>
12. Inapplicable
13. Investment representation letter relating to initial capital --
Previously filed as Exhibit 13 to Pre-Effective Amendment No. 1*
14.(a)(1) Revised Form of 403(b) Account Application --Previously filed as
Exhibit 14(a)(1) to Post-Effective Amendment No. 3*
(2) Revised Form of 403(b) Custodial Agreement --Previously filed as
Exhibit 14(a)(2) to Post-Effective Amendment No. 3*
(b)(1) Form of 401(k) Adoption Agreement -- Previously filed as Exhibit
14(b)(1) to Pre-Effective Amendment No. 2*
(2) Form of 401(k) Plan and Trust -- Previously filed as Exhibit
14(b)(2) to Pre-Effective Amendment No. 2*
(c)(1) Form of IRS Form 5305-A -- Previously filed as Exhibit 14(c)(1)
to Pre-Effective Amendment No. 2*
(2) Revised Form of IRS Adoption Agreement and Custodian Disclosure
Statement*
(3) Form of MainStay Funds Individual Retirement Account Application
and Transfer Request*
15.(a)(1) Form of Composite Plan of Distribution pursuant to Rule 12b-1
(Class A shares) as approved October 30, 1995 -- Capital
Appreciation Fund, Value Fund, Convertible Fund, Total Return
Fund, High Yield Corporate Bond Fund, Government Fund and Tax
Free Bond Fund -- Previously filed as Exhibit 15(a)(1) to Post-
Effective Amendment No. 32*
(2) Form of Composite Plan of Distribution pursuant to Rule 12b-1
(Class B Shares) as approved October 30, 1995 -- Capital
Appreciation Fund, Value Fund, Convertible Fund, Global Fund,
Total Return Fund, Natural Resources/Gold Fund, High Yield
Corporate Bond Fund, Government Fund and Tax Free Bond Fund --
Previously filed as Exhibit 15(a)(2) to Post-Effective Amendment
No. 32*
____________________
* Previously filed as part of this Registration Statement and incorporated
herein by reference.
C-7
<PAGE>
(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 filed
as Exhibit 15(a)(5) to Post-Effective Amendment No. 33*
(6) Form of Plan of Distribution pursuant to Rule 12b-1 (Class B
Shares) as approved October 30, 1995 -- California Tax Free Fund
and New York Tax Free Fund -- Previously filed as Exhibit
15(a)(6) to Post-Effective Amendment No. 33*
(7) Form of Plan of Distribution pursuant to Rule 12b-1 (Class A
Shares) -- MainStay Strategic Income Fund -- Previously filed as
Exhibit 15(a)(7) to Post-Effective Amendment No. 34*
(8) Form of Plan of Distribution pursuant to Rule 12b-1 (Class B
Shares) -- MainStay Strategic Income Fund -- Previously filed as
Exhibit 15(a)(8) to Post-Effective Amendment No. 34*
(9) Form of Plan of Distribution pursuant to Rule 12b-1 (Class A
shares) -- MainStay Strategic Value Fund -- Previously filed as
Exhibit 15(a)(9) to Post-Effective Amendment No. 38*
(10) Form of Plan of Distribution pursuant to Rule 12b-1 (Class B
shares) -- MainStay Strategic Value Fund -- Previously filed as
Exhibit 15(a)(10) to Post-Effective Amendment No. 38*
(11) Form of Composite Plan of Distribution pursuant to Rule 12b-1 as
approved October 24, 1997*
____________________
* Previously filed as part of this Registration Statement and incorporated
herein by reference.
C-8
<PAGE>
16. Inapplicable
17. Financial Data Schedules
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-9
<PAGE>
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
The following chart indicates the persons controlled by New York Life:
<TABLE>
<CAPTION>
Jurisdiction of Percent of Voting
Name+ Organization Securities Owned
---- --------------- -----------------
<S> <C> <C>
Eagle Strategies Corporation Arizona 100%
Greystone Realty Corporation which owns 100% Delaware 100%
of the shares of:
Greystone Realty Management, Inc. Delaware
NYLIFE Administration Corp. Texas 100%
MacKay-Shields Financial Corporation Delaware 100%
MSC Holding, Inc. (formerly Magnus Software Georgia 85.43%
Corporation, Inc.)
Madison Square Advisors, Inc. Delaware 100%
MainStay Institutional Funds Inc. Maryland ***
MainStay Management, Inc. Delaware 100%
MainStay Shareholder Services, Inc. Delaware 100%
Monitor Capital Advisors, Inc. Delaware 100%
NYLIFE SFD Holding, Inc. Delaware 100%
which owns 83.33% of NYLIFE
Structured Asset Management Company Ltd. Texas
New York Life Capital Corporation Delaware 100%
New York Life Fund, Inc. New York *
New York Life Insurance and Annuity Delaware 100%
Corporation
New York Life International Investment Inc. Delaware 100%
which owns 100% of the shares of:
Monetary Research Ltd. Bermuda
and 100% of the shares of:
NYL Management Limited United Kingdom
MainStay VP Series Fund, Inc. Maryland *
New York Life Worldwide Holding, Inc., which Delaware 100%
owns 100% of the shares of:
</TABLE>
C-10
<PAGE>
<TABLE>
<CAPTION>
Jurisdiction of Percent of Voting
Name+ Organization Securities Owned
---- --------------- -----------------
<S> <C> <C>
New York Life Worldwide Capital, Inc. Delaware
New York Life Worldwide Development, Inc. Delaware
New York Life Worldwide (Bermuda) Ltd. Bermuda
New York Life Insurance Worldwide Ltd. Bermuda
and owns 99.97% of the shares of
New York Life (U.K.) Ltd., which owns England
100% of the shares of:
Windsor Construction Company Limited
and 33.3% of Japan Gamma Asset Japan
Management Limited and 31.3% of the
shares of:
Life Assurance Holding Corporation
Limited, which owns 100% of the shares
of:
Windsor Life Assurance Company
Limited and which owns 51% of the
shares of:
KOHAP New York Life Insurance Ltd.
and owns 50.2% of the shares of: South Korea
P.T. Asuransi Jiwa Sewu-New York
and owns 49% of the shares of: Indonesia
GEO New York Life, S.A.
NYLIFE Depositary Corporation which owns Delaware 100%
16.67% of NYLIFE Structured Asset Management Texas
Company Ltd.
New York Life Benefit Services, Inc. which owns Massachusetts 100%
100% of ADQ Insurance Agency Inc. Massachusetts
New York Life Trust Company New York 100%
NYLIFE Distributors Inc. Delaware 100%
NYLIFE Equity Inc. Delaware 100%
NYLIFE Funding Inc. Delaware 100%
</TABLE>
C-11
<PAGE>
<TABLE>
<CAPTION>
Jurisdiction of Percent of Voting
Name+ Organization Securities Owned
---- --------------- -----------------
<S> <C>
NYLIFE Healthcare Management Inc., which owns Delaware
54.3% of total combined stock and 89.6% of the
voting rights of:
Express Scripts, Inc., which owns 100% of the Delaware
shares of:
Great Plains Reinsurance Company Canada
Practice Patterns Science, Inc.
ESI Canada Holdings, Inc., which owns Canada
100% of the shares of:
ESI Canada, Inc. Canada
IVTx of Houston, Inc. Texas
IVTx of Dallas, Inc. Texas
PhyNet, Inc. Delaware
Express Scripts Vision Corporation Delaware
NYLCare Health Plans, Inc. Delaware
(formerly Sanus Corp. Health Systems), which
owns 100% of the shares of:
New York Life and Health Insurance Delaware
Company
Avanti Corporate Health Systems Inc. Delaware
Avanti Health Systems, Inc., which owns Texas
100% of the shares of:
Avanti of the District, Inc. Maryland
Avanti of Illinois, Inc. Illinois
Avanti of New York, Inc. New York
Avanti of New Jersey, Inc. New Jersey
and owns 80% of the shares of:
NYLCare Health Plans of the Mid- Maryland
Atlantic, Inc., which owns 100% of the
shares of:
Physicians Health Services Maryland
Foundation, Inc.
Lonestar Holding Co., which owns 90% Delaware
of the shares of:
Lone Star Health Plan, Inc., which New York
owns 100% of the shares of:
NYLCare Health Plans of the Texas
Gulf Coast, Inc.
Prime Provider Corp., which owns 100% New York
of the shares of:
Prime Provider Corp. of Texas Texas
NYLCare Health Plans of Connecticut, Inc. Connecticut
Sanus Dental Plan of N.J. Inc. New Jersey
NYLCare Dental Plans of the Southwest,
Inc. Texas
NYLCare Health Plans of New York, Inc. New York
</TABLE>
C-12
<PAGE>
<TABLE>
<CAPTION>
Jurisdiction of Percent of Voting
Name+ Organization Securities Owned
- ---- --------------- -----------------
<S> <C>
NYLCare Health Plans of Connecticut, Connecticut
Inc.
NYLCare Health Plans of the Midwest, Illinois
Inc.
NYLCare Health Plans of New Jersey, New Jersey
Inc.
NYLCare of Texas, Inc., which owns Texas
100% of the shares of:
NYLCare Passport PPO of the Texas
Southwest, Inc.
NYLCare Preference Services, Inc. Maryland
Sanus Preferred Providers West, Inc. California
Sanus Preferred Services of Illinois, Inc. Illinois
NYLCare Health Plans of the Southwest, Texas
Inc.
WellPath of Arizona Reinsurance Arizona
Company
NYLCare Health Plans of Louisiana, Inc. Louisiana
NYLCare of New England, Inc. Delaware
Sanus - Northeast, Inc. Delaware
NYLCare Health Plans of Maine, Inc. Maine
NYLCare NC Holdings, Inc. which owns 50% of the
shares of: Delaware
WellPath Community Health Plan North Carolina
Holdings, L.L.C.
which owns 100% of WPCHP Holdings, Delaware
Inc. and 99% of:
WellPath Preferred Services, L.L.C. North Carolina
and
WellPath Select Holdings, L.L.C. which owns
100% of: North Carolina
WellPath Select, Inc. North Carolina
WellPath of Carolina, Inc. North Carolina
Sanus of New York and New Jersey, Inc. New York
NYLCare Health Plans of Pennsylvania, Pennsylvania
Inc.
Docservo, Inc. New York
The ETHIX Corporation, which owns Delaware
100% of the shares of:
ETHIX Great Lakes, Inc. Michigan
ETHIX Mid-Atlantic, Inc., Pennsylvania
ETHIX Midlands, Inc. Delaware
ETHIX Mid-Rivers, Inc. Missouri
ETHIX Northwest Public Services, Washington
Inc.
ETHIX Northwest, Inc., Washington
which owns 100% of:
</TABLE>
C-13
<PAGE>
<TABLE>
<CAPTION>
Jurisdiction of Percent of Voting
Name+ Organization Securities Owned
---- --------------- -----------------
<S> <C> <C>
NYLCare Health Plans Northwest, Washington
Inc.
ETHIX Pacific, Inc. Oregon
ETHIX Risk Management, Inc. Oregon
ETHIX Southeast, Inc. North Carolina
ETHIX Southwest, Inc. Texas
Benefit Panel Services which owns 100% of the California
shares of VivaHealth, Incorporated and BPS California
Health Plan Administration
One Liberty Plaza Holdings, Inc. Delaware
NYLIFE Inc. New York 100%
NYLIFE Insurance Company of Arizona Arizona 100%
NYLIFE Realty Inc. which owns 100% of the Delaware 100%
shares of: CNP Realty Investments, Inc. Delaware
NYLIFE Refinery, Inc. Delaware 100%
NYLIFE Resources Inc. Delaware 100%
NYLIFE Securities Inc. New York 100%
NYLINK Insurance Agency Incorporated Delaware 100%
which owns 100% of the shares of:
NYLINK Insurance Agency of Alabama, Incorporated Alabama
NYLINK Insurance Agency of New Mexico, Incorporated New Mexico
NYLINK Insurance Agency of Hawaii, Incorporated Hawaii
NYLINK Insurance Agency of Massachusetts,
Incorporated Massachusetts
NYLTEMPS Inc. Delaware 100%
</TABLE>
_____________________
+ By including the indicated corporations in this list, New York Life is not
stating or admitting that said corporations are under its actual control;
rather, these corporations are listed here to ensure full compliance with
the requirements of this Form N-1A.
* New York Life serves as investment adviser to these entities, the shares of
which are held of record by separate accounts of New York Life (for the New
York Life Fund, Inc.) and NYLIAC (for the MainStay VP Series Fund, Inc.).
New York Life disclaims any beneficial ownership and control of these
entities.
** New York Life Foundation does not issue voting securities.
*** MacKay-Shields Financial Corporation and Monitor Capital Advisors, Inc.
serve as sub-advisers to this entity.
C-14
<PAGE>
Item 26. Number of Holders of Securities (as of September 30, 1997)
<TABLE>
<CAPTION>
(2)
(1) NUMBER OF
TITLE OF CLASS RECORD HOLDERS
-------------- --------------
Shares of Common Stock: Class A Class B
------- -------
<S> <C> <C>
Shares of beneficial interest,
Capital Appreciation Fund 14,890 127,990
Shares of beneficial interest,
Value Fund 6,717 89,283
Shares of beneficial interest,
Convertible Fund 3,366 44,005
Shares of beneficial interest,
High Yield Corporate Bond Fund 5,428 97,701
Shares of beneficial interest,
Government Fund 726 42,191
Shares of beneficial interest,
Tax Free Bond Fund 388 16,102
Shares of beneficial interest,
Money Market Fund 3,968 32,172
Shares of beneficial interest,
Total Return Fund 4,327 87,008
Shares of beneficial interest,
Equity Index Fund 14,797 N/A
Shares of beneficial interest,
California Tax Free Fund 422 205
Shares of beneficial interest,
New York Tax Free Fund 423 135
Shares of beneficial interest,
International Equity Fund 1,370 8,891
Shares of beneficial interest,
International Bond Fund 297 2,410
Shares of beneficial interest,
Strategic Income Fund 253 1,298
Shares of beneficial interest,
Strategic Value Fund ------ ------
</TABLE>
ITEM 27. INDEMNIFICATION
New York Life Insurance Company maintains Directors & Officers Liability
insurance coverage totaling $100 million. The coverage limit applies each year
and has been extended to cover Directors, Trustees and Officers of the Trust,
and subsidiaries and certain affiliates of New York Life. Subject to the
policies' terms, conditions, deductible and retentions, Directors, Officers and
Trustees are covered for claims,
C-15
<PAGE>
including related expenses, made against them while acting in their capacities
as such. The primary policy in the amount of $25 million is issued by National
Union Fire Insurance Company of Pittsburgh, PA, and the excess policies in the
amount at $75 million are issued by various insurance companies. The issuing
insurance companies may be changed from time to time and there is no assurance
that any or all of the current coverage will be maintained by New York Life.
Article IV of Registrant's Declaration of Trust states as follows:
Section 4.3. Mandatory Indemnification.
(a) Subject to the exceptions and limitations contained in paragraph (b)
below:
(i) every person who is, or has been, a Trustee or officer of the Trust
shall be indemnified by the Trust, or by one or more Series thereof if the
claim arises from his or her conduct with respect to only such Series to
the fullest extent permitted by law against all liability and against all
expenses reasonably incurred or paid by him in connection with any claim,
action, suit or proceeding in which he becomes involved as a party or
otherwise by virtue of his being or having been a Trustee or officer and
against amounts paid or incurred by him in the settlement thereof;
(ii) the words "claim," "action," "suit," or "proceeding" shall apply
to all claims, actions, suits or proceedings (civil, criminal, or other,
including appeals), actual or threatened; and the words "liability" and
"expenses" shall include, without limitation, attorneys' fees, costs,
judgments, amounts paid in settlement, fines, penalties and other
liabilities.
(b) No indemnification shall be provided hereunder to a Trustee or
officer:
(i) against any liability to the Trust or a Series thereof or the
Shareholders by reason of a final adjudication by a court or other body
before which a proceeding was brought that he engaged in willful
misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of his office;
(ii) with respect to any matter as to which he shall have been finally
adjudicated not to have acted in good
C-16
<PAGE>
faith in the reasonable belief that his action was in the best interest of
the Trust or a Series thereof;
(iii) in the event of a settlement or other disposition not involving a
final adjudication as provided in paragraph (b)(i) or (b)(ii) resulting in
a payment by a Trustee or officer, unless there has been a determination
that such Trustee or officer did not engage in willful misfeasance, bad
faith, gross negligence or reckless disregard of the duties involved in the
conduct of his office;
(A) by the court or other body approving the settlement or other
disposition; or
(B) based upon a review of readily available facts (as opposed to
a full trial-type inquiry) by (x) vote of a majority of the
Disinterested Trustees acting on the matter (provided that a majority of
the Disinterested Trustees then in office act on the matter) or (y)
written opinion of independent legal counsel.
(c) The rights of indemnification herein provided may be insured against
by policies maintained by the Trust, shall be severable, shall not affect any
rights to which any Trustee or officer may now or hereafter be entitled, shall
continue as to a person who has ceased to be such Trustee or officer and shall
inure to the benefit of the heirs, executors, administrators and assigns of such
a person. Nothing contained herein shall affect any rights to indemnification
to which personnel of the Trust other than Trustees and officers may be entitled
by contract or otherwise under law.
(d) Expenses of preparation and presentation of a defense to any claim,
action, suit, or proceedings of the character described in paragraph (a) of this
Section 4.3 shall be advanced by the Trust or a Series thereof to final
disposition thereof upon receipt of an undertaking by or on behalf of the
recipient, to repay such amount if it is ultimately determined that he is not
entitled to indemnification under this Section 4.3, provided that either:
(i) such undertaking is secured by surety bond or some other
appropriate security provided by the recipient, or the Trust or a Series
thereof shall be insured against losses arising out of any such advances;
or
(ii) a majority of the Non-interested Trustees acting on the matter
(provided that a majority of the Disinterested Trustees acts on the matter)
or an
C-17
<PAGE>
independent legal counsel in a written opinion shall determine, based upon
a review of readily available facts (as opposed to a full trial-type
inquiry), that there is reason to believe that the recipient ultimately
will be found entitled to indemnification.
As used in this Section 4.3, a "Non-interested Trustee" is one who is not
(i) an "Interested Person" of the Trust (including anyone who has been exempted
from being an "Interested Person" by any rule, regulation or order of the
Commission), or (ii) involved in the claim, action, suit or proceeding.
Insofar as indemnification for liability arising under the Securities
Act of 1933 may be permitted to trustees, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against
public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the Registrant of expenses incurred or paid
by a trustee, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by
such trustee, officer or controlling person in connection with the
securities being registered, the Registrant will, unless in the opinion
of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act
and will be governed by the final adjudication of such issue.
ITEM 28. BUSINESS OR OTHER CONNECTIONS OF INVESTMENT ADVISER
The business of MainStay Management, Inc., MacKay-Shields Financial
Corporation and Monitor Capital Advisors, Inc. is summarized under "Know with
Whom You're Investing" in the Prospectus constituting Part A of this
Registration Statement, which summary is incorporated herein by reference.
The business or other connections of each director and officer of MainStay
Management, Inc. is currently listed in the investment adviser registration on
Form ADV for MainStay Management, Inc. (File No. 801-54912) and is hereby
incorporated herein by reference.
The business or other connections of each director and officer of MacKay-
Shields Financial Corporation is currently listed in the investment adviser
registration on Form ADV for MacKay-Shields Financial Corporation (File No. 801-
5594) and is hereby incorporated herein by reference.
The business or other connections of each director and officer of Monitor
Capital Advisors, Inc. is currently listed in the investment adviser
registration on Form ADV for Monitor Capital Advisors, Inc. (File No. 801-34412)
and is hereby incorporated herein by reference.
C-18
<PAGE>
ITEM 29. PRINCIPAL UNDERWRITERS
(a) None.
(b)
<TABLE>
<CAPTION>
(3)
(1) (2) Positions and
Name and Principal Position and Office with Offices with
Business Address NYLIFE Distributors Inc. Registrant
- ----------------------- ------------------------ ------------
<S> <C> <C>
Mistero, Frank Director, President and Chief None
260 Cherry Hill Road Executive Officer
Parsippany, NJ 07054
Davidson, Sheila Chief Compliance Officer None
51 Madison Avenue
New York, NY 10010
Boyce, Jefferson C. Director Senior Vice President
51 Madison Avenue
New York, NY 10010
Brady, Robert E. Director and Vice President None
260 Cherry Hill Road
Parsippany, NJ 07054
Boccio, Frank M. Director None
51 Madison Avenue
New York, NY 10010
Rock, Robert D. Director None
51 Madison Avenue
New York, NY 10010
Gallo, Michael G. Director None
51 Madison Avenue
New York, NY 10010
Hildebrand, Phillip J. Director None
51 Madison Avenue
New York, NY 10010
Roussin, Stephen Director President and Chief
Morris Corporate Center I Executive Officer
Building A
300 Interpace Parkway
Parsippany, NJ 07054
Polis, Anthony W. Vice President and Chief Chief Financial Officer
Morris Corporate Center I Financial Officer
Building A
300 Interpace Parkway
Parsippany, NJ 07054
Calhoun, Jay S. Vice President and Treasurer None
51 Madison Avenue
New York, NY 10010
Ubl, Walter W. Director and Senior Vice President Director
260 Cherry Hill Road
Parsippany, NJ 07054
Warga, Thomas J. Senior Vice President and General Auditor None
</TABLE>
C-19
<PAGE>
<TABLE>
<CAPTION>
(3)
(1) (2) Positions and
Name and Principal Position and Office with Offices with
Business Address NYLIFE Distributors Inc. Registrant
- ----------------------- ------------------------ ------------
<S> <C> <C>
51 Madison Avenue
New York, NY 10010
Livornese, Linda M. Vice President None
51 Madison Avenue
New York, NY 10010
Murray, Thomas J. Corporate Vice President None
51 Madison Avenue
New York, NY 10010
Zuccaro, Richard W. Tax Vice President Tax Vice
51 Madison Avenue President
New York, NY 10010
Krystel, David J. Vice President None
51 Madison Avenue
New York, NY 10010
O'Byrne, John H. Vice President and Chief None
51 Madison Avenue Compliance Officer
New York, NY 10010
Adasse, Louis H. Corporate Vice President None
51 Madison Avenue,
New York, NY 10010
Daoust, George R. Assistant Vice President None
Morris Corporate Center I
Building A
300 Interpace Parkway
Parsippany, NJ 07054
Arizmendi, Arphiela Assistant Vice President Assistant Treasurer
Morris Corporate Center I
Building A
300 Interpace Parkway
Parsippany, NJ 07054
Cirillo, Antoinette B. Assistant Vice President Assistant Treasurer
Morris Corporate Center I
Building A
300 Interpace Parkway
Parsippany, NJ 07054
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
</TABLE>
C-20
<PAGE>
<TABLE>
<CAPTION>
(3)
(1) (2) Positions and
Name and Principal Position and Office with Offices with
Business Address NYLIFE Distributors Inc. Registrant
- ----------------------- ------------------------ ------------
<S> <C> <C>
Brenner, Nancy Secretary None
51 Madison Avenue
New York, NY 10010
</TABLE>
(c) Inapplicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS.
Certain accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940 and the Rules promulgated
thereunder are maintained at the offices of the Registrant, the Manager and
NYLIFE Distributors Inc., Morris Corporate Center I, Building A, 300 Interpace
Parkway, Parsippany, NJ 07054, at MacKay-Shields Financial Corporation, 9 West
57th Street, New York, NY 10019; Monitor Capital Advisors, Inc., 504 Carnegie
Center, Princeton, New Jersey 08540. Records relating to the Registrant's
transfer agent are maintained by MainStay Shareholder Services Inc., 200 Cherry
Hill Road, Parsippany, NJ 07054. Records relating to the duties of the
Registrant's custodian for the Capital Appreciation Fund, Convertible Fund, High
Yield Corporate Bond Fund, Government Fund, Money Market Fund, Tax Free Fund,
Total Return Fund and Value Fund are maintained by State Street Bank and Trust
Company, 1776 Heritage Drive, Quincy, MA 02171; and records relating to
Registrant's custodian for the California Tax Free Fund, New York Tax Free Fund,
International Equity Fund, International Bond Fund, Equity Index Fund, Strategic
Income Fund and Strategic Value Fund are maintained by The Bank of New York, 110
Washington Street, New York, NY 10286.
ITEM 31. MANAGEMENT SERVICES.
Inapplicable.
ITEM 32. UNDERTAKINGS.
C-21
<PAGE>
The Registrant hereby undertakes to furnish each person to whom a
prospectus is delivered a copy of the Registrant's latest annual report to
shareholders upon request and without charge.
C-22
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Registration Statement pursuant to
Rule 485(b) under the Securities Act of 1933 and has duly caused this Post-
Effective Amendment to its Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Parsippany
and the State of New Jersey, on the 24th day of December, 1997.
THE MAINSTAY FUNDS
By: /s/ Stephen c. Roussin
-----------------------------
STEPHEN C. ROUSSIN, President
Pursuant to the requirements of the Securities Act of 1933, this Post-
Effective Amendment to the Registration Statement has been signed below
by the following persons in the capacities indicated on December 24, 1997.
<TABLE>
<CAPTION>
Signatures Title Date
---------- ----- -----
<S> <C>
/s/ Stephen C. Roussin President, Chief Executive
- --------------------------- Officer and Trustee
Stephen C. Roussin
(d) Trustee
- ---------------------------
WALTER W. UBL
/s/ Anthony W. Polis Chief Financial Officer
- --------------------------- (Principal Financial and
ANTHONY W. POLIS Accounting Officer)
(g) Trustee
- ---------------------------
HARRY G. HOHN
(f) Trustee
- ---------------------------
DONALD E. NICKELSON
(a) Trustee
- ---------------------------
NANCY M. KISSINGER
(c) Trustee
- ---------------------------
TERRY L. LIERMAN
(f) Trustee
- ---------------------------
RICHARD S. TRUTANIC
(c) Trustee
- ---------------------------
DONALD K. ROSS
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
(g) Trustee
- ---------------------------
EDWARD J. HOGAN
(h) Trustee
- ---------------------------
JOHN B. McGUCKIAN
</TABLE>
/s/Jeffrey L. Steele
- ---------------------------
JEFFREY L. STEELE
(a) 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.
(b) 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.
(c) 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.
(d) 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.
(e) 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.
(f) 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.
(g) Executed by Jeffrey L. Steele pursuant to a power of attorney filed
with Post-Effective Amendment No. 35 on February 26, 1997.
(h) Executed by Jeffrey L. Steele pursuant to a power of attorney filed
with Post-Effective Amendment No. 40 on August 28, 1997.
-2-
<PAGE>
EXHIBIT INDEX
EXHIBIT ITEM
------- ----
Consent of independent accountants 11(a)
Financial Data Schedules 17
<PAGE>
EXHIBIT 99.11(a)
Consent of Independent Accountants
We hereby consent to the use in the Statement of Additional Information
constituting part of this Post-Effective Amendment No. 43 to the registration
statement on Form N-1A (the "Registration Statement") of our report dated April
15, 1997, relating to the financial statements of NYLIFE Inc. and subsidiaries,
which appears in such Statement of Additional Information, and to the
incorporation by reference of our report into the Prospectus which constitutes
part of this Registration Statement. We also consent to the incorporation by
reference in the Prospectus and Statement of Additional Information of our
reports dated February 19, 1997, relating to the December 31, 1996 financial
statements and financial highlights of The MainStay Funds, which financial
statements are also incorporated by reference into the Registration Statement.
We also consent to the references to us under the heading "Financial Highlights"
in the Prospectus and under the heading "Other Information--Independent
Accountants" in the Statement of Additional Information.
Price Waterhouse LLP
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York
December 23, 1997
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<ACCUMULATED-NII-PRIOR> 823,169
<ACCUMULATED-GAINS-PRIOR> 11,950,221
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<PER-SHARE-NAV-BEGIN> 8.260
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<AVG-DEBT-PER-SHARE> 0
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<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000787441
<NAME> THE MAINSTAY FUNDS
<SERIES>
<NUMBER> 051
<NAME> MAINSTAY GOVERNMENT FUND-CLASS A
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<INVESTMENTS-AT-COST> 760,507,438
<INVESTMENTS-AT-VALUE> 763,296,467
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<PAID-IN-CAPITAL-COMMON> 838,616,822
<SHARES-COMMON-STOCK> 2,162,322
<SHARES-COMMON-PRIOR> 2,037,511
<ACCUMULATED-NII-CURRENT> 1,854,909
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<OVERDISTRIBUTION-GAINS> (148,472,436)
<ACCUM-APPREC-OR-DEPREC> 2,789,029
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<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 27,690,261
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<EXPENSES-NET> (5,936,380)
<NET-INVESTMENT-INCOME> 21,753,881
<REALIZED-GAINS-CURRENT> (6,478,017)
<APPREC-INCREASE-CURRENT> (253,247)
<NET-CHANGE-FROM-OPS> 15,022,617
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<DISTRIBUTIONS-OF-INCOME> (517,857)
<DISTRIBUTIONS-OF-GAINS> 0
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<NUMBER-OF-SHARES-SOLD> 642,345
<NUMBER-OF-SHARES-REDEEMED> (554,637)
<SHARES-REINVESTED> 37,103
<NET-CHANGE-IN-ASSETS> 15,491,887
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<PER-SHARE-NAV-BEGIN> 8.060
<PER-SHARE-NII> 0.260
<PER-SHARE-GAIN-APPREC> (0.070)
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<EXPENSE-RATIO> 1.09
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</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000787441
<NAME> THE MAINSTAY FUNDS
<SERIES>
<NUMBER> 052
<NAME> MAINSTAY GOVERNMENT FUND-CLASS B
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<INVESTMENTS-AT-COST> 760,507,438
<INVESTMENTS-AT-VALUE> 763,296,467
<RECEIVABLES> 23,943,794
<ASSETS-OTHER> 3,389
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<TOTAL-LIABILITIES> 92,455,326
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 838,616,822
<SHARES-COMMON-STOCK> 84,752,739
<SHARES-COMMON-PRIOR> 97,390,018
<ACCUMULATED-NII-CURRENT> 1,854,909
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<OVERDISTRIBUTION-GAINS> (148,472,436)
<ACCUM-APPREC-OR-DEPREC> 2,789,029
<NET-ASSETS> 694,788,324
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 27,690,261
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<EXPENSES-NET> (5,936,380)
<NET-INVESTMENT-INCOME> 21,753,881
<REALIZED-GAINS-CURRENT> (6,478,017)
<APPREC-INCREASE-CURRENT> (253,247)
<NET-CHANGE-FROM-OPS> 15,022,617
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (19,381,115)
<DISTRIBUTIONS-OF-GAINS> 0
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<NUMBER-OF-SHARES-SOLD> 2,980,928
<NUMBER-OF-SHARES-REDEEMED> (17,153,899)
<SHARES-REINVESTED> 1,535,692
<NET-CHANGE-IN-ASSETS> (105,064,289)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> (141,994,419)
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<GROSS-EXPENSE> 5,936,000
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<PER-SHARE-NAV-BEGIN> 8.040
<PER-SHARE-NII> 0.240
<PER-SHARE-GAIN-APPREC> (0.070)
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<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 7.990
<EXPENSE-RATIO> 1.63
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000787441
<NAME> THE MAINSTAY FUNDS
<SERIES>
<NUMBER> 061
<NAME> MAINSTAY MONEY MARKET FUND - CLASS A
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<INVESTMENTS-AT-COST> 410,870,975
<INVESTMENTS-AT-VALUE> 410,870,975
<RECEIVABLES> 1,680,793
<ASSETS-OTHER> 328,731
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 412,880,499
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 2,996,202
<TOTAL-LIABILITIES> 2,996,202
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 409,895,774
<SHARES-COMMON-STOCK> 70,391,861
<SHARES-COMMON-PRIOR> 58,890,270
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (11,477)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 409,884,297
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 11,181,767
<OTHER-INCOME> 0
<EXPENSES-NET> (1,394,164)
<NET-INVESTMENT-INCOME> 9,787,603
<REALIZED-GAINS-CURRENT> 3,024
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 9,790,627
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (1,607,950)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 124,177,809
<NUMBER-OF-SHARES-REDEEMED> (109,119,050)
<SHARES-REINVESTED> 1,442,832
<NET-CHANGE-IN-ASSETS> 24,684,268
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (14,501)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 485,000
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,906,000
<AVERAGE-NET-ASSETS> 401,634,000
<PER-SHARE-NAV-BEGIN> 1.000
<PER-SHARE-NII> 0.024
<PER-SHARE-GAIN-APPREC> 0.000
<PER-SHARE-DIVIDEND> (0.024)
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<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 1.000
<EXPENSE-RATIO> 0.7
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000787441
<NAME> THE MAINSTAY FUNDS
<SERIES>
<NUMBER> 062
<NAME> MAINSTAY MONEY MARKET FUND - CLASS B
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<INVESTMENTS-AT-COST> 410,870,975
<INVESTMENTS-AT-VALUE> 410,870,975
<RECEIVABLES> 1,680,793
<ASSETS-OTHER> 328,731
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 412,880,499
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 2,996,202
<TOTAL-LIABILITIES> 2,996,202
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 409,895,774
<SHARES-COMMON-STOCK> 339,503,916
<SHARES-COMMON-PRIOR> 317,497,716
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (11,477)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 409,884,297
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 11,181,767
<OTHER-INCOME> 0
<EXPENSES-NET> (1,394,154)
<NET-INVESTMENT-INCOME> 9,787,603
<REALIZED-GAINS-CURRENT> 3,024
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 9,790,627
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (8,179,653)
<DISTRIBUTIONS-OF-GAINS> 0
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<NUMBER-OF-SHARES-SOLD> 308,373,833
<NUMBER-OF-SHARES-REDEEMED> (293,953,016)
<SHARES-REINVESTED> 7,585,383
<NET-CHANGE-IN-ASSETS> 23,617,174
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (14,501)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 485,000
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,906,000
<AVERAGE-NET-ASSETS> 401,634,000
<PER-SHARE-NAV-BEGIN> 1.000
<PER-SHARE-NII> 0.024
<PER-SHARE-GAIN-APPREC> 0.000
<PER-SHARE-DIVIDEND> (0.024)
<PER-SHARE-DISTRIBUTIONS> 0.000
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<PER-SHARE-NAV-END> 1.000
<EXPENSE-RATIO> 0.7
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000787441
<NAME> THE MAINSTAY FUNDS
<SERIES>
<NUMBER> 071
<NAME> MAINSTAY TAX FREE BOND FUND - CLASS A
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<INVESTMENTS-AT-COST> 503,194,487
<INVESTMENTS-AT-VALUE> 508,615,162
<RECEIVABLES> 20,084,555
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<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 528,778,073
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<OTHER-ITEMS-LIABILITIES> 2,800,004
<TOTAL-LIABILITIES> 37,593,894
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 500,427,059
<SHARES-COMMON-STOCK> 1,260,446
<SHARES-COMMON-PRIOR> 1,676,249
<ACCUMULATED-NII-CURRENT> 603,867
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> (15,267,422)
<ACCUM-APPREC-OR-DEPREC> 5,420,675
<NET-ASSETS> 491,184,179
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 15,665,434
<OTHER-INCOME> 0
<EXPENSES-NET> (2,954,262)
<NET-INVESTMENT-INCOME> 12,711,172
<REALIZED-GAINS-CURRENT> 525,033
<APPREC-INCREASE-CURRENT> 678,457
<NET-CHANGE-FROM-OPS> 13,914,662
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (329,693)
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<NUMBER-OF-SHARES-SOLD> 224,080
<NUMBER-OF-SHARES-REDEEMED> (660,891)
<SHARES-REINVESTED> 21,008
<NET-CHANGE-IN-ASSETS> 9,469,610
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> (245)
<OVERDIST-NET-GAINS-PRIOR> (15,792,455)
<GROSS-ADVISORY-FEES> 737,000
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2,954,000
<AVERAGE-NET-ASSETS> 495,502,000
<PER-SHARE-NAV-BEGIN> 9.840
<PER-SHARE-NII> 0.260
<PER-SHARE-GAIN-APPREC> 0.020
<PER-SHARE-DIVIDEND> (0.250)
<PER-SHARE-DISTRIBUTIONS> 0.000
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 9.870
<EXPENSE-RATIO> 1.010
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000787441
<NAME> THE MAINSTAY FUNDS
<SERIES>
<NUMBER> 072
<NAME> MAINSTAY TAX FREE BOND FUND - CLASS B
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<INVESTMENTS-AT-COST> 503,194,487
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<RECEIVABLES> 20,084,555
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<TOTAL-ASSETS> 528,778,073
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<PAID-IN-CAPITAL-COMMON> 500,427,059
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<SHARES-COMMON-PRIOR> 50,420,942
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<OVERDISTRIBUTION-GAINS> (15,267,422)
<ACCUM-APPREC-OR-DEPREC> 5,420,675
<NET-ASSETS> 491,184,179
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 15,665,434
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<EXPENSES-NET> (2,954,262)
<NET-INVESTMENT-INCOME> 12,711,172
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<DISTRIBUTIONS-OF-INCOME> (11,777,367)
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<NUMBER-OF-SHARES-SOLD> 1,782,251
<NUMBER-OF-SHARES-REDEEMED> (4,373,904)
<SHARES-REINVESTED> 631,557
<NET-CHANGE-IN-ASSETS> (17,087,671)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> (245)
<OVERDIST-NET-GAINS-PRIOR> (15,792,455)
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<GROSS-EXPENSE> 2,954,000
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<PER-SHARE-NAV-BEGIN> 9.840
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<PER-SHARE-DIVIDEND> (0.240)
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<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 9.880
<EXPENSE-RATIO> 1.210
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000787441
<NAME> THE MAINSTAY FUNDS
<SERIES>
<NUMBER> 091
<NAME> MAINSTAY TOTAL RETURN FUND - CLASS A
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
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<INVESTMENTS-AT-COST> 901,333,831
<INVESTMENTS-AT-VALUE> 1,242,028,575
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<PAID-IN-CAPITAL-COMMON> 831,480,479
<SHARES-COMMON-STOCK> 4,229,846
<SHARES-COMMON-PRIOR> 3,433,467
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<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 340,694,744
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<EXPENSES-NET> (8,900,575)
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<NUMBER-OF-SHARES-SOLD> 1,188,681
<NUMBER-OF-SHARES-REDEEMED> (411,643)
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<ACCUMULATED-NII-PRIOR> 0
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<GROSS-ADVISORY-FEES> 1,747,000
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<GROSS-EXPENSE> 8,901,000
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<PER-SHARE-NAV-BEGIN> 20.090
<PER-SHARE-NII> 0.190
<PER-SHARE-GAIN-APPREC> 1.720
<PER-SHARE-DIVIDEND> (0.190)
<PER-SHARE-DISTRIBUTIONS> 0.000
<RETURNS-OF-CAPITAL> 0.000
<PER-SHARE-NAV-END> 21.810
<EXPENSE-RATIO> 1.150
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000787441
<NAME> THE MAINSTAY FUNDS
<SERIES>
<NUMBER> 092
<NAME> MAINSTAY TOTAL RETURN FUND - CLASS B
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<INVESTMENTS-AT-COST> 901,333,831
<INVESTMENTS-AT-VALUE> 1,242,028,575
<RECEIVABLES> 85,545,722
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<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1,327,576,950
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<OTHER-ITEMS-LIABILITIES> 6,174,828
<TOTAL-LIABILITIES> 117,362,881
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 831,480,479
<SHARES-COMMON-STOCK> 51,249,344
<SHARES-COMMON-PRIOR> 51,247,218
<ACCUMULATED-NII-CURRENT> 142,614
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 37,896,232
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 340,694,744
<NET-ASSETS> 1,210,214,069
<DIVIDEND-INCOME> 1,779,021
<INTEREST-INCOME> 15,380,168
<OTHER-INCOME> 0
<EXPENSES-NET> (8,900,575)
<NET-INVESTMENT-INCOME> 8,258,614
<REALIZED-GAINS-CURRENT> 33,930,403
<APPREC-INCREASE-CURRENT> 61,381,356
<NET-CHANGE-FROM-OPS> 103,570,373
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 7,349,084
<DISTRIBUTIONS-OF-GAINS> 0
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<NUMBER-OF-SHARES-SOLD> 3,794,594
<NUMBER-OF-SHARES-REDEEMED> (3,984,718)
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<NAME> THE MAINSTAY FUNDS
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<NUMBER> 111
<NAME> MAINSTAY EQUITY INDEX FUND - CLASS A
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<CIK> 0000787441
<NAME> THE MAINSTAY FUNDS
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<NUMBER> 121
<NAME> MAINSTAY CALIFORNIA TAX FREE FUND - CLASS A
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<CIK> 0000787441
<NAME> THE MAINSTAY FUNDS
<SERIES>
<NUMBER> 122
<NAME> MAINSTAY CALIFORNIA TAX FREE FUND - CLASS B
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<S> <C>
<PERIOD-TYPE> 6-MOS
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<CIK> 0000787441
<NAME> THE MAINSTAY FUNDS
<SERIES>
<NUMBER> 131
<NAME> MAINSTAY NEW YORK TAX FREE FUND - CLASS A
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<S> <C>
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<CIK> 0000787441
<NAME> THE MAINSTAY FUNDS
<SERIES>
<NUMBER> 132
<NAME> MAINSTAY NEW YORK TAX FREE FUND - CLASS B
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<S> <C>
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<PAGE>
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<CIK> 0000787441
<NAME> THE MAINSTAY FUNDS
<SERIES>
<NUMBER> 141
<NAME> MAINSTAY INTERNATIONAL BOND - CLASS A
<MULTIPLIER> 1
<S> <C>
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<FISCAL-YEAR-END> DEC-31-1997
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<PAGE>
<ARTICLE> 6
<CIK> 0000787441
<NAME> THE MAINSTAY FUNDS
<SERIES>
<NUMBER> 142
<NAME> MAINSTAY INTERNATIONAL BOND - CLASS B
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<S> <C>
<PERIOD-TYPE> 6-MOS
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<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000787441
<NAME> THE MAINSTAY FUNDS
<SERIES>
<NUMBER> 151
<NAME> INTERNATIONAL EQUITY FUND - CLASS A
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
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<NUMBER-OF-SHARES-SOLD> 503,767
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<NAME> INTERNATIONAL EQUITY FUND - CLASS B
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